Our So-Called Foreign Policy: Will the Foreign Policy Experts – Finally – Start Learning Some Geography?

Tags

Afghanistan, Biden, Blob, Bloomberg.com, CNN.com, Europe, geography, globalism, Jeremy Shapiro, Luke McGee, Mainstream Media, Marc Champion, Our So-Called Foreign Policy, Robert D. Kaplan, The Economist

I’m thrilled to report that I may have jumped the gun in my post last Wednesday in scoffing at the possibility of President Biden’s botched Afghanistan withdrawal – and the broader U.S. failure in that Forever War – would resulting in any major changes in America’s needlessly risky and costly globalist approach to foreign policy.

I’m not saying that the two-decade Afghanistan fiasco and its humiliating final chapter will spur a search for real alternatives in the foreseeable future, or even that significant new strategies will ever be put into effect – at least not without a much bigger disaster reflecting the same kinds of mistakes. But it’s nonetheless remarkable not only that any unconventional idea has appeared – especially given the determination of the strongly globalist Mainstream Media to suppress them – but that the one that has surfaced challenges the root assumption of globalism.

Specifically, some establishment voices are, inchoately to be sure, pointing out that for all the worries understandably expressed by Americans about new threats to their security appearing in Taliban-controlled Afghanistan, Europe faces much greater threats. The reason, moreover, is that it’s located much closer to Afghanistan than the United States.

In other words, geography counts, and America’s position halfway around the world from this troubled region and its utterly dysfunctional Middle East neighborhood, and separated from them and from its leading adversaries by wide oceans, is a leading contributor to its security that creates options enjoyed by no other major power.

Further, by implication – given that these points are being made in the context of the United States concluding that a Taliban victory in Afghanistan is acceptable after all – one of the most important of these options when many forms of trouble arise in any number of locales abroad is simple non-involvement.

The importance of America’s unique geography and its advantages may seem screamingly obvious. But as I’ve explained in detail (see, e.g., here and here), it has not only been ignored by generations of globalist American leaders and thinkers literally since Pearl Harbor. It’s been actively rejected.

Instead, the prevailing foreign policy conventional wisdom has consistently held that peace and security around the world make up a seamless whole, and that war and aggression and even instability anywhere across the globe are matters of urgent concern to the United States and must be squelched or resisted ASAP lest they mestastasize and directly endanger the American homeland.

Some of these “Geography matters”-type statements have been made by members of America’s most prominent and influential proponents of universal and open-ended foreign policy activism – the so-called Blob. This Washington, D.C.-centered bipartisan agglomeration of globalist former diplomats and Congressional aides, retired military officers, genuine academics, and think tank hacks shapes American diplomacy in two critical ways.

First, it represents the main personnel pool drawn on to staff presidential administrations and House and Senate offices on rotating bases, and also serves as key informal sources of advice for these politicians. In other words, it’s a central portion of what’s often called the “permanent bureaucracy” (and by some, the “Deep State”), whose combination of experience (which of course has unmistakable value), sheer staying power, and skill at projecting an air of authority (which clearly have much less intrinsic value) enables it often to steer policy independent of what elected officials favor – and especially to keep the status quo alive through inertia-reenforcing foot-dragging and even sabotage.

Second, the Blob powerfully influences what so many Americans read, hear, and see about foreign policy by dominating the list of sources used by Mainstream Media journalists (who are predominantly sympatico by virtue of shared elite educations and clubby intertwined social networks) to report and interpret the news. The resulting permeation of reporting and analysis with Blob-y globalist perspectives goes far toward defining for the public which foreign policy ideas are and aren’t legitimate to discuss.

That’s why I was so gobsmacked when Blob mainstay Robert D. Kaplan wrote in the (ardently globalist British magazine) The Economist that

“America is a vast and wealthy continent densely connected by navigable rivers and with an economy of scale, accessible to the main sea lines of communication, yet protected by oceans from the turmoil of the Old World.

“And that geography still matters, despite technology having shrunk the globe….”

As a result, Kaplan added that “geography helps explain why America can miscalculate and fail in successive wars, yet completely recover, unlike smaller and less well-situated countries which have little margin for error.” Moreover, logically speaking (and these are my views, not Kaplan’s), the very geography-grounded security that enables the United States to recover quickly from (at least most) foreign involvements that produce disastrous consequences means that it was never significantly vulnerable to the perceived threats that led to that involvement to begin with.

Similar opinions have been offered by former senior U.S. official Jeremy Shapiro, who argues that post-Afghanistan, the United States “can and will work effectively with allies, but only when its vital interests are at stake. It sees those interests in the competition with China. Increasingly, however, in places such as central Asia, the Sahel, and perhaps even Europe’s eastern neighbourhood, it does not.”

By contrast, he observed, “Europeans have more direct interests at stake in those places.”

Further, some Mainstream Media journalists have followed suit – providing further evidence that such once utterly heretical notions are now being bandied about in some Blob-y circles.

For example, Bloomberg.com‘s Marc Champion has contended that

“The U.S. left Afghanistan on Tuesday humbled and with few of its goals achieved after 20 years of war. For America’s European allies, the humiliation may just be starting.

“Connected to Afghanistan by land, unlike the U.S., for Europe the return of the Taliban presents more concrete threats. Those include not just terrorism but also mass migration and the heroin trade.”

More vividly, a recent CNN.com post was headlined, “Europe left exposed as Biden walks America away from the world stage.” It seems reasonable to infer that if the headline writer – and his editors – regarded America as exposed, too, they’d have mentioned that danger explicitly. Indeed, correspondent Luke McGee went on to report that “Multiple European officials and diplomats told CNN of their shock at Biden’s assertion that the only US interest in Afghanistan was to neutralize the terrorists who attacked the US in 2001 and prevent further attacks on American soil.

“They now fear the humanitarian and political consequences of mass migration from a country run by militants who’ve historically harbored terrorists and that is connected to mainland Europe by land” – unlike, I’d remind again, the United States.

Again, I’m not saying that an intellectual revolution in U.S. foreign policy is on the horizon. But as suggested above, only a few weeks ago, I couldn’t have imagined seeing so many examples of any of the above in so short a timespan.

On balance, I’m still convinced that the Blob will wind up stamping out such dissent, at least within its own ranks – if only because at the end of the day, so few would be employable in a truly post-globalist America. But many Blob-ers are also savvy enough to recognize a potentially sinking ship. So I feel pretty confident in predicting that the longer lousy headlines and optics keep emanating from Afghanistan, the more of these globalists will start appreciating the virtues of America’s geography.

(What’s Left of) Our Economy: An Open Borders Mainstay Gets (Kind of) Woke on Immigration

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amnesty, automation, illegal aliens, immigrants, Immigration, Open Borders, productivity, technology, The Economist, wages, {What's Left of) Our Economy

I’ve always felt that one of the most convincing ways to win an argument is to  spotlight instances of sources that normally oppose one’s positions actually agreeing with them. And I just stumbled onto an especially startling example that appeared about a year ago in the The Economist.

It’s often valid to view such dated material as old and therefore irrelevant news. But in this case, The Economist‘s February, 2020 feature titled “Immigration to America is down. Wages are up. Are the two related?” really is a landmark still worth examining, and for at least three reasons.

First, if there’s a single set of policies identified with this British magazine it’s staunch support for free trade. In fact, The Economist was founded in the mid-19^th century precisely to convince the United Kingdom to dismantle its longstanding tariffs. Not surprisingly, the magazine has also always backed the freest possible immigration flows.

Second, February, 2020 was just before the CCP Virus and the massive economic shutdowns it triggered swept over the United States. So The Economist was commenting on trends when the economy was normal by most definitions, and after three years of Donald Trump’s presidency.

And third, of course, even though a substantial return to a pre-virus normal economic normality is now widely expected sometime this year (whether or not President Biden’s virus relief bill and other “Build Back Better” programs are fully enacted or not), the new U.S. administration clearly is determined to turn the immigration spigots back on.

So it really was pretty startling to come across an Economist article leading off with this paragraph:

“In both 2018 and 2019 [U.S.] nominal wages rose by more than 3%, the fastest growth since before the recession a decade ago. Americans at the bottom of the labour market are doing especially well. In the past year the wages of those without a high-school diploma have risen by nearly 10%. Intriguingly, this has come as America has turned considerably less friendly to immigrants, who are assumed by many to steal jobs from natives and lower the wages of less-educated folk. The two phenomena may be connected….”

Moreover, in recent years, “It appears instead that the overall decline in the foreign-born population is a result of falling numbers of low-skilled migrants…. That is probably a consequence of policies implemented by President Donald Trump, as well as the off-putting effects of his rhetoric on foreigners.”

Not that The Economist endorsed this proposition wholeheartedly. The article correctly notes that “many factors” lie behind these wage increases. Indeed, that’s true for most trends in the economy and elsewhere in our big, complicated world. But it turns out that most of the reasons for skepticism about immigration policy’s decisive role cited in the piece are pretty flimsy when examined closely.

For example, minimum wage increases – and their benefits – have by definition been enjoyed exclusively by lower-income workers overall in the United States. But the magazine also has found that average wages in occupations that are especially low-skill-immigrant-heavy (e.g., construction and landscaping work) “are rising considerably faster than wages in other low-paid jobs.”

In addition, The Economist cites findings from the Brookings Institution (hardly a restrictionist organization itself) that “five big metro areas saw absolute declines in their foreign-born populations in 2010-18” and its own research showing that “wages in those areas are now rising by 5% a year….”

Perhaps most important, the magazine’s initial conclusion about the connection between fewer low-skilled immigrants and higher wages for the established national low-skill workforce is qualified with the phrase “but only for a while.”

In this vein, The Economist points to research allegedly demonstrating that during and after past “occasions when America has clamped down on immigration,” the results “ultimately [offered] little benefit to native workers—and may even harm them.” Yet some of these historical episodes – e.g., the freeze and follow-on restrictions on immigration from China that began in the late-19^th century, and expulsions of Mexican workers during the Great Depression of the 1930s – seem  marginally relevant at best to the U.S. economy today.

Even odder, the overarching lesson drawn by The Economist from this and related studies supports a claim made by current-day restrictionists (like me) that wide-open immigration policies retard productivity growth by enabling many industries to use cheap labor as an earnings- and profit-making or boosting crutch, rather than innovate their way to greater success.

According to The Economist, “In the short term, native workers may well see a wage boost as labour supply falls. But businesses then reorient production towards less labour-intensive products; natives take jobs previously occupied by foreign-born folk, which may be worse paid; and bosses invest in labour-saving machinery, which can reduce the pay of remaining workers.”

Yet logically, anyone supporting this position logically must also think that improving productivity and promoting technological progress doesn’t ultimately benefit entire economies – including workers initially displaced. Is The Economist really supporting such stick-in-the-mud-ism?

The answer, strangely, as readers learn in the very next paragraph, is “Of course not.” Because the article proceeds to claim that “Both low- and high-skilled migration are linked with higher productivity.” In other words, higher productivity is a long-run economic blessing after all, and it’s improved both by reducing and increasing low-skill immigration. Got that?

Of course, change at a single magazine, no matter how influential, is no guarantee of policy change.  But such publications aren’t often called opinion leaders for nothing.  And although rhetorically, the Biden administration seems as set as ever to supercharge U.S. immigration flows, maybe it’s no coincidence that its recent  stance on the southern border looks every bit as confused as this Economist take on immigration.       

(What’s Left of) Our Economy: For America’s Steel-Makers, No Good Deed Goes Unpunished

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aluminum, American Economic Review, durable goods, inflation-adjusted output, Jobs, manufacturing, Michael Mandel, multifactor productivity, productivity, steel, tariffs, The Economist, Trade, Trump, {What's Left of) Our Economy

One of the strangest aspects of the debate over the new Trump tariffs is the way analysts and reporters and pundits are now handling the issue of productivity in the American steel industry, which along with aluminum will receive the benefit of these levies.

Usually, industries like steel that win trade protection are described as economic losers – they supposedly need this government crutch because they’ve grown fat and lazy, or technologically obsolete, and as a result have lost whatever ability they’ve had to meet the challenge of global competition. Here’s a typical allegation along these lines made in 2002 by the globalization and free trade cheering Economist magazine – when President George W. Bush imposed tariffs on U.S. steel imports. The charge has been echoed much more recently by economist Michael Mandel.

Nowadays, though, tariff opponents have come up with a new twist: American steel-makers in particular don’t need protection precisely because they’ve become highly competitive. According to this perspective, the steel protectionists inside the outside the White House are overlooking how the major steel job losses they’re obsessing about have resulted overwhelmingly not from predatory foreign competition, but because steel companies have become so efficient that they can produce much more of the metal with a much smaller workforce.

There’s no doubt that the U.S. steel industry has dramatically boosted its competitiveness by introducing new technology and other forms of knowhow into its factories. The authors of the above Economist editorial clearly didn’t know about findings, published in the prestigious American Economic Review, that over the roughly 30 years preceding their leader, the sector’s “output per worker grew by a factor of five, while total factor productivity (TFP) increased by 38 percent. This [made] the steel sector one of the fastest growing of the manufacturing industries over the last three decades, behind only the computer software and equipment industries.”

Moreover, because virtually no American steel firms supply the domestic market with offshored production, virtually none of the labor productivity increase cited above has stemmed from the misleading upward bias to recorded labor productivity figures created by this practice.

But 2002 was then. What about now? Is Mandel right about steel as a latter day productivity growth laggard? Not according to data from the U.S. Bureau of Labor Statistics, which compiles and publishes the productivity data for the government. Its figures show that the American primary metals sector, which includes steel and aluminum, increased its multi-factor productivity by 5.52 percent between 2008 (when the last recession took hold) and 2015 (the latest figures).

Manufacturing overall, by comparison, saw its productivity actually worsen by this measure – considered the most accurate gauge of an admittedly elusive performance indicator – by five percent during this period. Moreover, durable goods manufacturing – the industrial super-sector containing primary metals – saw its multi-factor productivity shrink by 1.28 percent between 2008 and 2015.

So The Economist and Mandel plainly have given steel a wholly unjustified bad productivity rap. But does that mean that those who have recognized steel’s outstanding recent productivity growth are right to argue that the resulting job loss in no way warrants tariffs? Not exactly.

For even though steel and other primary metals have been productivity growth leaders, they’ve been laggards not only in job creation, but in output. Indeed, during that 2008-15 period, primary metals’ inflation-adjusted production sank by more than three times faster (15.98 percent) as overall manufacturing output (5.22 percent). The output gap was even wider between steel and durable goods in toto (-1.28 percent).

A highly productive industry facing a vast import tide that’s been shrinking in constant dollar terms doesn’t prove definitively that trade is central to steel’s problems. But it’s awfully suggestive – indicating in the process that, despite its good productivity deed, the U.S. steel industry is nonetheless being punished.

(What’s Left of) Our Economy: What Blue-Collar Pay Surge?

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benefits, blue-collar workers, Bureau of Labor Statistics, compensation, managers, minimum wage, professionals, salaries, The Economist, wages, White-collar workers, {What's Left of) Our Economy

That was some claim made by The Economist earlier this month about blue-collar wages in America: They “have begun to rocket. In the year to the third quarter, wage and salary growth for the likes of factory workers, builders and drivers easily outstripped that for professionals and managers.” Even better, these workers, whose pay stagnation has practically defined the so far weak U.S. economic recovery from the Great Recession, have been enjoying pace-setting compensation gains for the last five years, the magazine writes.

I’d be feeling awfully good about this development – except the article in question was a model of overly enthusiastic cheerleading. More specifically, it’s a great example of how failing to look at statistics in enough detail can produce seriously flawed pictures of the economy.

The heart of The Economist‘s case is this chart, which shows that overall compensation (wages, salaries, and benefits) for occupations that don’t involve managerial, executive, or high level administrative responsibilities, and that lie outside the professions, has been rising faster than compensation for occupations that do deal with these matters.

But even a glance should reveal a serious potential problem – the categories are awfully broad. In fact, they lump together lots of occupations that on their own seem awfully big. (To be sure, the source – the Bureau of Labor Statistics – uses these categories. But it presents narrower ones, too.] Further, the five-year period The Economist uses as its longest-run time frame is a period that’s economically meaningless. And in fact, disaggregating those occupational categories and using an economically meaningful long-term time frame (the duration of the current recovery) yields significantly different results.

For example, according to the chart, the big American compensation winner has been the “production, transportation, and material moving” cluster. Adjusted for inflation (which the magazine doesn’t do), here’s how its compensation (including for government workers in these occupations) has improved over the latest quarter year for which data are available, the latest year for which we have statistics, and since the recovery began:

2Q 2017-3Q 2017: +0.38 percent

3Q 2016-3Q2017: +1.06 percent

current recovery: +5.56 percent

This performance is indeed much better than the super-category covering white-collar workers – “management, professional, and related” workers:

2Q 2017-3Q 2017: -0.01 percent

3Q 2016-3Q 2017: +0.01 percent

current recovery: +2.86 percent

But look what happens when you separate production workers from the transportation and material moving workforce:

2Q 2017-3Q 2017: +0.49 percent

3Q 2016-3Q 2017: +0.79 percent

current recovery: +4.58 percent

The compensation gains are still better than those for the managers. But the gap is a good deal smaller.

Now let’s remove professional workers from the management cluster. The compensation increases for business and financial managers are:

2Q 2017-3Q 2017: -0.01 percent

3Q 2016-3Q 2017: +0.57 percent

current recovery: +4.48 percent

Except for the latest quarterly figure, they’re pretty comparable to the advances for the production workers.

Now let’s look at another blue-collar category – “office and administrative support.” Compensation increases for the relevant time frames are as follows:

2Q 2017-3Q 2017: -0.009 percent

3Q 2016-3Q 2017: +0.19 percent

current recovery: +4.63 percent

These increases over the short-term are actually somewhat weaker than for the business and financial managers. When it comes to “installation, maintenance, and repair,” the latest quarterly compensation gains were a bit better than those for the business and financial managers. But the latest yearly and recovery era increases for the installation category were worse than those for the business and financial managers.

2Q 2017-3Q 2017: +0.01 percent

3Q 2016-3Q 2017: +0.39 percent

current recovery: +4.40 percent

And we see the same kinds of numbers for the catch-all “service operations” category:

2Q17-3Q17: -0.01 percent

3Q16-3Q17: +0.38 percent

current recovery: +3.04 percent

So what’s really going on here is that compensation for some blue-collar workers has recently begun to rise faster than compensation for some white-collar workers, and that compensation for some white-collar workers continues to rise faster than compensation for some blue-collar workers. And let’s not forget how governments across the country have acted in the last few years to juice blue-collar pay – by raising the minimum wage. These actions, whatever their substantive merits or flaws, tell us nothing about underlying trends shaping the economy.

Yes, it’s hard to turn those observations into a catchy headline and an eye-opening story. But that’s why discerning readers have learned to distinguish journalism from clickbait.

(What’s Left of) Our Economy: With Friends Like This, Today’s World Trade System Doesn’t Need Enemies

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Bill Emmott, Chad Bown, dispute resolution, free trade agreements, Peterson Institute for International Economics, Project-Syndicate.org, The Economist, Trade, Trump, unilateralism, World Trade Organization, WTO, {What's Left of) Our Economy

One of the best pieces of advice I’ve ever received about analytical and opinion writing is “Let your adversaries hang themselves with their own words.” So on the eve of Thanksgiving, 2017, I’m especially grateful to Bill Emmott, the former editor-in-chief of The Economist magazine, for making clear why President Trump and other nationalist critics of U.S. trade policy have been exactly right in slamming as a huge mistake America’s decision to join the World Trade Organization (WTO) – the linchpin of the global trade order for the past two-plus decades.

Writing on the Project-Syndicate.org website, Emmott reports that the Trump administration has embarked on a campaign to cripple the operations of the WTO, which went into business at the beginning of 1995 and which possesses unprecedented internationally recognized authority not only to develop rules for governing many kinds of global commerce, but for enforcing them.

As with other efforts to subject countries to some legal-type checks, the ostensible purpose of the WTO was to remove power from the picture when countries negotiated trade arrangements, and especially when they dealt with the disputes over such arrangements that inevitably arise.

Many powerful critiques of the WTO have been advanced by trade policy critics across the spectrum, but I’ve always viewed two interlocking objections as supremely convincing. First, despite its lofty stated legalistic objectives, the WTO has always been as quintessentially a political organization as other international organizations, like the United Nations. Second, the politics of the WTO has always been decidedly anti-American – for the overwhelming majority of its members depended heavily on amassing big trade surpluses with the United States in order to generate adequate growth for themselves.

So Washington’s decision (backed by Democratic and Republican leaders alike of course) to spearhead the WTO’s creation and become a founding member achieved none of its promised major advantages for the U.S. economy (an impartial forum for handling trade disputes), and saddled the country with all of the major drawbacks of such a system (nullifying most of its ability to use its immense market power to resolve most of these disagreements favorably).

And wouldn’t you know it? Emmott, whose former publication was created in the mid-19^th century precisely to advocate for so-called free trade principles, strongly agrees! As he wrote in an essay yesterday:

“With the WTO essentially out of the picture, the US will launch a new initiative to strike bilateral deals on trade rules – an approach that Trump advocated in his APEC [Asia Pacific Economic Cooperation forum] speech. Given that the US remains a vital market for most exporters, such an initiative will have clout.”

Even Emmott’s suggestion that these U.S. moves will fail unwittingly confirms the case that American leverage will secure the best possible outcomes for Americans. “Asian and European countries,” he writes, “should be preparing for the worst by negotiating their own trade agreements with one another to preempt American mercantilism. After all, taking the initiative to boost trade and other commercial contacts is the best way to resist a trade war.”

What the author apparently misses is that the United States is such “a vital market for most exporters” precisely because the latter countries simply don’t believe in opening their economies to others’ goods and services any more than is absolutely necessary. It’s entirely possible that the dramatically altered circumstances created by new unilateralist U.S. policies could imbue these mercantile economies with some free trade religion. But decades- – and in some cases, centuries- – old approaches generally don’t die so easily. Moreover, if such market-opening did indeed take place, and it could be adequately monitored and enforced, why wouldn’t the United States want to take part?

Until then, however, it would make the most possible sense for Washington to proceed along the unilateralist lines Emmott dreads. For thanks in large measure to its transparent political system and strong rule-of-law tradition, the reciprocal market-opening promises offered by America in bilateral trade diplomacy will be much more credible than those made by Japan, or China, or Germany, or other major protectionist economies. The days of selling the United States much more than they buy from it would come to an end. But genuinely intelligent foreign leaders will recognize that receiving a half a loaf from dealing with Washington on this new basis is the best trade bet they can realistically hope for.

As for countries that stubbornly refuse (possibly egged on by free trade zealots like Emmott) the United States – with its considerable present degree of self-sufficiency and matchless potential for much more – will be more than capable of shrugging its shoulders and moving on.

Incidentally, as RealityChek regulars may recall, Emmott isn’t the first globalization cheerleader unintentionally to reveal that the WTO was a pig in a poke for U.S. economic interests, and indeed was created expressly to neuter American power. Chad Bown, a former World Bank economist now with the Offshoring Lobby-funded Peterson Institute for International Economics, handed trade policy critics, and the American people, a similar gift just last August.

Im-Politic: A Surprising Source (Unwittingly) Explains Need to Keep Tight Immigration Curbs

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Im-Politic, immigrants, Immigration, labor costs, labor shortages, productivity, Ryan Avent, technology, The Economist

I’ve long argued that one of the main reasons for Americans to oppose mass immigration policies (including sweeping forms of amnesty for the current illegal population) is the devastating impact such labor inflows are likely to have on productivity growth. (Just FYI, here’s my latest take.) One of my main reasons? The relative scarcity of labor throughout American history deserves considerable credit for the nation’s emergence as a global productivity and technology leader. And since robustly improving productivity is a major key to boosting national living standards on a sustainable basis, that’s always struck me as a pretty strong argument to keep labor in short supply by limiting immigration – which of course brings in more workers. 

As a result, imagine my surprise to see that this view has just been supported by a leading writer for the British magazine The Economist – which has long loudly advocated for wider Open Borders.

The case for immigration as a productivity growth killer is solidly grounded in conventional economics. In that 2006 Congressional testimony linked above, I noted “When businesses conclude that the price of scarce labor has become excessive, powerful incentives emerge for them to substitute capital and technology for labor. And that means innovation.”

I then pointed out that “Our country owes much of its longstanding world leadership in most technology areas to this genuinely chronic scarcity and thus relatively high price of labor. Preventing shortages with immigration policy could weaken this proven spur to technological progress and all the benefits it brings.”

If you’re skeptical, here’s a link to the leading scholarly work connecting outstanding U.S. productivity performance and a chronically inadequate American labor supply. In fairness, not everyone agrees. Here’s a link to the most prominent rebuttal.

But I was understandably heartened to see the importance of scarce labor to productivity growth supported in this post by Ryan Avent, a senior editor and economics columnist for The Economist. According to Avent:

“Economic historians often explain divergences in patterns of industrialisation by pointing to differences in labour costs. British workers were expensive relative to workers on the continent and relative to British energy. British firms therefore had an incentive to develop and deploy new technologies that economised on labour and used a lot of energy: industrialisation! There’s more to the story than that, but that’s a pretty big component. Later something similar happened in America, where workers were even more expensive and resources even more abundant, and where the phenomenally productive ‘American system’ of manufacturing therefore emerged.”

Avent doesn’t explicitly make the immigration policy connection. But it’s glaringly obvious to all except the ideologically blinkered (or the hired guns of the American cheap labor lobby). Needless to say, I’ll be awaiting his next offering on the immigration policy debate with more than the usual interest. You should, too.

Following Up: Reexamining Obama’s Private Sector Jobs Legacy

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Following Up, Great Recession, healthcare, Jobs, Labor Department, Obama, private sector jobs, recovery, subsidized private sector, The Economist

This morning, we looked at some pretty glaring omissions in President Obama’s article for The Economist magazine on the state of the U.S. and world economies and their outlooks. But there’s one more that deserves mention, and it should be familiar to RealityChek regulars: his claim that during his watch, the American private sector has created 15 million net new jobs.

As I’ve been writing for years, many of those jobs don’t deserve the label “private sector” at all, because their strength (and therefore much of their ability to hire) depends heavily on government spending, not mainly on the market forces that we’re told are the best guarantors of sustainable prosperity. So I’ve been calling these jobs – which are found mainly in the healthcare industry – “subsidized private sector” jobs. Last Friday’s September U.S. jobs report conveniently enables an update of how big a role they’ve played in the nation’s employment recovery.

A single month’s data is almost never definitive, but the new figures provide a good introduction to the subject. According to the Labor Department, in September, the total American non-farm sector (Labor’s U.S. employment universe) saw its net payrolls rise by 156,000, and private sector jobs conventionally defined increased even more strongly – by 167,000. (The public sector lost 11,000 workers on net.)

If the private sector is defined more realistically, however, and the government-subsidized jobs are stripped out, its employment gains were only 138,000 – because those subsidized industries boosted employment by 29,000.

Although this difference looks pretty big, the subsidized sector actually played a fairly modest role that month in the hiring picture by recent standards. During the first nine months of this year, the subsidized private sector generated 26.36 percent of total 1.601 million net new non-farm jobs created in America, and 28.90 percent of the 1.460 million conventionally defined private sector jobs.

Breaking a recent pattern, the subsidized private sector’s share of total U.S. jobs created from January through September of last year was actually a little higher (26.96 percent). So was the subsidized industries’ share of conventionally defined private sector jobs (28.30 percent). But these figures were both much higher than they were in 2014 – when the subsidized private sector produced 17.03 percent of new total non-farm jobs during its first nine months, and 17.46 percent of employment increase in the conventionally defined private sector. And the numbers were even lower in 2013: 15.03 percent and 14.58 percent.

Another way to look at the subsidized private sector’s burgeoning role is to examine its share of employment on a standstill basis at various key points in recent economic history. Here’s the picture in December, 2007, when the Great Recession began:

 

Conventional private sector share of total non-farm jobs: 83.83%

Subsidized private sector share of total non-farm jobs: 13.63%

Subsidized private sector share of conventional private sector jobs: 16.26%

“Real” private sector share of total non-farms jobs: 70.19%

 

Here’s where matters stood in June, 2009, when the current recovery began:

 

Conventional private sector share of total non-farm jobs: 82.77%

Subsidized private sector share of total non-farm jobs: 14.97%

Subsidized private sector share of conventional private sector jobs: 18.09%

“Real” private sector share of total non-farms jobs: 67.88%

 

And here’s the situation as of last month:

 

Conventional private sector share of total non-farm jobs: 84.68%

Subsidized private sector share of total non-farm jobs: 15.75%

Subsidized private sector share of conventional private sector jobs: 18.60%

“Real” private sector share of total non-farms jobs: 69.05%

 

To me, the big takeaways are that (a) the real private sector share of total non-farm employment is still lower than it was when the recession broke out; (b) the subsidized private sector’s share is nearly five percentage points higher; and (c), the subsidized private sector’s share of the conventional private sector has continued to grow even as the latter’s share of the economy-wide total has expanded because government hiring is still depressed.

Again, Mr. Obama seems to view his major economic legacy as “a more durable, growing economy.” The outsized growth of the government subsidized private sector indicates that his successor might come to feel differently.

(What’s Left of) Our Economy: Establishment China Experts Who Can’t Shoot Straight

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China, China content levels, currency, currency manipulation, devaluation, Donald Trump, Eswar Prasad, exchange rates, exports, Matthew Slaughter, protectionism, The Economist, The Wall Street Journal, The Washington Post, Trade, yuan, {What's Left of) Our Economy

This last week has made clear that it’s not just China’s economy and leadership that have been cut loose from their moorings. It’s also the leading economists and Big Media journalists who pretend they know much more about Chinese economic policies – and how America should deal with them – than the rest of us know-nothings.

Indeed, within the last two days, no less than two economists and The Economist magazine have published pieces intended to show the folly of those who have long urged American crackdowns on predatory Chinese economic practices like currency manipulation (which makes Chinese-made goods and services artificially cheaper versus all foreign counterparts all over the world), intellectual property theft and technology extortion, and illegal subsidization and the dumping into foreign markets of the resulting surplus output at cut-rate prices. And as always, you can be sure that the prominent placement of these pro-status quo messages reflects their endorsement by the publications in question.

The first addle-brained attempt to assure Americans that their government’s do-nothing China policy is on the right course came in a Washington Post article by former senior World Bank China expert Eswar Prasad. One of his main goals – which is anything but weird for an establishment voice – is debunking Donald Trump’s claim that “China is killing us” when it comes to trade. But then the weirdness comes non-stop.

First, Prasad seems to think that the way to discredit the Republican presidential front-runner is to show that China’s growth has not been “driven primarily by cheap exports” – and especially by sales of “cheap consumer goods.” But that’s never been Trump’s main concern, or that of voters critical of America’s China trade policies. Instead, it’s been the destruction of family-wage American manufacturing jobs by predatory Chinese trade practices.

Second, Prasad joins the crowd of so-called experts who try to show that China’s trade surplus with the United States isn’t as big as the headline figure suggests. The reason: So much of what the Chinese sell to this country consists of U.S.-made parts, components, and other inputs. But as I’ve pointed out, the evidence Prasad cites is of no comfort to American workers whatever. The Apple iPhone he uses as an example of a semi-faux Chinese export turns out to be made not mainly of American parts, but of other (protectionist) countries’ parts. And as made clear by his criticisms of Washington’s approach to trade with countries like Mexico and Japan, Trump fully understands that China isn’t America’s only international economic challenge.

Even weirder is that Prasad then goes on to point out that China’s manufacturing “has started moving up the value-added chain, shifting from a focus on low-cost, low-tech goods such as shoes and textiles to more sophisticated products with a higher technological content. “ He’s absolutely right. But does he think that none of these more advanced manufactures goes into China’s exports? If he does, he obviously isn’t familiar with findings from the World Bank and the International Monetary Fund – which show that the Chinese content of China’s exports has risen dramatically over the last 20 years.

No less bizarre was Matthew Slaughter’s Wall Street Journal op-ed yesterday arguing that “Movements in the yuan’s nominal exchange rate do not affect long-term trade flows or jobs in the U.S.” This Dartmouth economist is on reasonable ground in contending that “The exchange rate that matters for trade flows is the real exchange rate, i.e., the nominal exchange rate adjusted for local-currency prices in both countries,” and that this real exchange rate “in turn, reflects the deep forces of comparative advantage such as technology and endowments of labor and capital.”

What Slaughter seems to forget, however, is that China’s labor market is heavily repressed, and its government still tightly controls capital flows (although China has taken some steps towards liberalization). In other words, these determinants of comparative advantage are thoroughly manipulated by Beijing, and according to Slaughter, they do influence trade flows and their impact on national growth and employment. So by extension, China is manipulating that real exchange rate – and if the United States cares about the impact on its economy, it has no choice but to respond.

Just as odd – despite the author’s opposition to countering the trade effects of Chinese currency policy, he does acknowledge that China “has too many barriers to trade and investment, too much favor for local companies, too weak protection of intellectual property,” and that U.S. leaders need to “encourage China to overcome its policy shortfalls that truly do cost America good jobs at good wages.” Trump’s China trade position paper recognizes many of these “shortfalls.” But unlike Slaughter and other stand-patters, he understands that “encouragement” has failed for decades, and that stronger responses are needed.

The third example of China inanity comes from The Economist, which also seems determined to ease concerns about China’s currency manipulation even though it doesn’t mention the yuan’s recent slide. According to the magazine – which has always championed the cause of unfettered international flows of trade and other economist assets – currency devaluations are not nearly as big a deal as they once might have been because they’ve become less and less successful in artificially stimulating exports.

One big problem with this claim, however, is that it assumes devaluations are seen by trade policy critics as export boosters in all cases. And that’s a straw man. After all, export success depends on numerous factors, and if a national economy is otherwise a mess – as is the case with countries mentioned by The Economist like Russia and Brazil, cheaper currencies can’t possibly be panaceas. To some extent the article recognizes various complications. But they don’t come up until the piece is well underway.

And what’s also peculiar is that The Economist touts a method of calculating the appropriateness of exchange rates that pegs China’s yuan as – get this – nearly 50 percent undervalued. Does anyone seriously think that if Chinese exports became 50 percent more expensive, all else equal, they’d sell nearly as briskly?

Here’s a suggestion: How about Prasad, Slaughter, and The Economist writers get together, try to hash out their own differences, and see if they can produce a China article that’s halfway coherent? Almost anything has to be better than what they’ve done separately.

(What’s Left of) Our Economy: Has the Fed Gotten Savings Incentives Completely Wrong?

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Baby Boomers, banks, consumers, debt, deposit rates, federal funds rate, Federal Reserve, finance, Financial Crisis, housing, incomes, interest rates, recession, retirees, savings, savings rate, seniors, spending, The Economist, zero interest rate policy, {What's Left of) Our Economy

As many of you may know, the Federal Reserve yesterday raised the interest rate it directly controls above an effective zero level for the first time in seven years. So it’s especially interesting and important that a post from The Economist just before the rate hike made a strong case that one of the main rationales for keeping interest rates so low has backfired big-time on ordinary Americans and on the consumer spending still driving most U.S. economic activity.

Just after the height of the financial crisis, the Fed lowered its so-called funds rate to zero (actually, it was a range of zero to 0.25 percent) in part to make sure that the carnage that was spreading from housing to Wall Street and increasingly to the rest of the economy wouldn’t scare households into closing their wallets,and therefore choke off even more growth. The federal funds rate doesn’t directly set consumer borrowing rates – it’s the rate offered by the central bank to the country’s biggest banks. But the Fed was hoping that super-easy money would have twin stimulative effects.

First, when these banks’ borrowing costs fall, they can offer cheaper loans to both consumer and business borrowers and stay just as profitable. And the more affordable credit becomes, the more borrowers were expected to use. Second, the Fed was hoping that super-low rates would penalize saving. A rock-bottom federal funds rate would drive way down the returns on such popular consumer savings vehicles as money market funds and certificates of deposit and savings bonds, and convince Americans that they were better off spending existing savings and incoming income rather than receive literally no reward for thriftiness.

The Economist, though, has argued that the Fed’s penalize-savings strategy was misbegotten. And it looks like it should have been obvious even then. As the magazine points out, the biggest reason Americans save is to ensure a comfortable retirement. For any retirees or those nearing that age who already have substantial savings, even very low-yielding assets can together spin off enough income to ensure the golden years living standards they want.

But then ask yourselves how many Americans were in this situation when the financial crisis and recession struck. Inflation-adjusted incomes for the typical household had been stagnating. Thrift became a forgotten virtue; in part because of those stagnant incomes and in part because perpetually rising home values were hyped as an acceptable substitute, the nation’s personal savings rate hit historic lows and in fact briefly fell below zero. Then, of course, home values began cratering and the stock market went into free fall. So safe but low-yielding assets looked like the only viable savings game in town.

Unfortunately, the lower the return, the bigger the pot needed to guarantee that comfortable retirement. As a result, more and more of the aging American population has felt greater and greater pressure to salt away any new income not needed to cover ongoing living expenses.

Nor do you need to take The Economist‘s analysis on faith. For nothing has been clearer during this weak economic recovery than the continued consumer caution so responsible for holding it back. Many analysts attribute this behavior to a simple – possibly excessive – “once burned-twice shy” fear. But The Economist‘s treatment at least points to another important factor: For Americans with stagnant incomes and meager liquid savings – along with continuing debt – returning to pre-crisis and recession-level spending simply hasn’t been an option. In fact, evidence is accumulating that growing numbers of seniors, including recently retired baby boomers, are feeling these pressures, too – especially on the debt front.

Not that the Fed’s quarter-point rate hike will change matters much. In fact, signs haven’t even appeared yet that it’s a step in the right direction, as those banks that have raised the rates they’re charging for borrowers haven’t raised those that they’re paying to depositors. Until rates rise high enough to reward savings significantly again, most Americans will have ample reason to view recent Fed policies as lose-lose propositions.

(What’s Left of) Our Economy: Will The Economist’s New Editor Bring More Intellectual Honesty on Trade?

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bubbles, consumers, Financial Crisis, free trade agreements, Global Imbalances, globalization, Great Recession, Jobs, John Micklethwaite, NAFTA, Obama, offshoring, producers, The Economist, Trade, {What's Left of) Our Economy

The editor of the London-based Economist is leaving, something I normally wouldn’t write about except the magazine is one of the world’s most influential, and it has been a leading voice for trade liberalization since its founding (in 1843!). Most of all, if its departing chief is any indication, the publication hasn’t learned a blessed thing about how the distinctive form of freeing trade spearheaded by the United States since the early 1990s was instrumental in triggering the worst global recession since the Great Depression, and how it continues threatening an even worse replay.

John Micklethwaite, who has edited The Economist since 2006, allows in a farewell essay that “Globalisation has indeed brought problems in its wake.” But he insists that those difficulties have been more than offset by freer trade’s record doing “an incredible job of reducing want” and, in particular, of lifting nearly 1 billion people out of extreme poverty since 1990.

Yet Micklethwaite makes no mention of the role played by policy-induced trade flows over the last two and a half decades in inflating the credit and housing bubbles in the United States and other high income countries, and thus ensuring that, without remedial action, they would at some point burst with disastrous consequences for the entire world.

As I’ve mentioned before, the argument that what are called “global imbalances” helped set the stage for the crisis and its painful aftermath is well established in the ranks of the world’s leading economists. Micklethwaite knows it backwards and forwards; his magazine has even covered it. But it’s never informed The Economist’s widely cited and enthusiastic editorial paeans to trade agreements and related policy decisions that unmistakably helped light and added fuel to the fire. And this narrative is nearly unheard of at the level of America’s chattering class, its Mainstream Media, and its elected politicians – many of whom either rely on The Economist for this type of deep analysis, or pretend to.

That’s pretty scary given that President Obama and the powerful offshoring lobby are pushing for some of the most ambitious trade liberalization deals in world history. At the same time, it’s at least partly understandable, since it’s a difficult argument to make. So let me try to express it as simply as I can.

Since the pursuit of the North American Free Trade Agreement (NAFTA), starting in the very late-1980s, American trade policy in particular has followed a strongly offshoring bent. Its main purpose has been not to promote more sales of American-made products and services overseas. If that were the case, its main targets would not have been very low-income countries like Mexico and China and Central America and the Andean countries of South America and sub-Saharan Africa and Jordan and Vietnam. Their populations have simply been too poor for their economies ever to have become significant buyers of what U.S. workers turn out – at least on a net basis.

Instead, the purpose was to enable U.S. businesses, primarily big multinational manufacturers, to take advantage of the super-low wages and other costs and light regulations, in these countries, and turn them into bases for supplying the American market – with factories and workforces once located in the United States.

Why was this so unwise? And how did it help bring on the financial crisis? Because all the offshoring enabled by these trade deals took income and income-earning opportunities from populations that the world economy relied on to consume (Americans and to a lesser extent West Europeans), and transferred them to those very low-income countries. That is, enough productive power was sent to the third world to undermine American and European consumption power significantly. But third world incomes started from such a low base that the new wealth could not possibly turn these populations into major net consumers.  Indeed, as with the role of global imbalances, this income shift is now no longer controversial among economists who actually know the subject.

As a result, the world’s main consumers no longer earned enough to enable their consumption to sustain adequate global growth, and the world’s new producers were still far from being able to fill the gap. Governments in the high-income countries, especially in Washington, tried to paper over the problem with unprecedented flows of cheap credit – which inflated the bubbles. But the underlying source of instability remained wholly unaddressed, as made clear not only by the bursting of those bubbles, but by the inability of the United States and most of Europe to grow satisfactorily without them.

Micklethwaite evidently decided to ignore this issue when preaching the (unalloyed) virtues of freer trade. Let’s hope his successor at The Economist displays more intellectual honesty.