(What’s Left of) Our Economy: A Laughable Indictment of Trump’s World Bank Choice

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David Malpass, economic development, Financial Times, globalism, multilateralism, third world, Trump, World Bank, {What's Left of) Our Economy

I was going to post this morning on more implications of yesterday’s new monthly U.S. trade figures, but as so often happens, the Mainstream Media has just come out with an article whose mind-boggling cluelessness reveals such deep-seated biases that I had to switch gears. Special bonus – it didn’t even come from a mainstay of the establishmentarian U.S. foreign policy and globalization Blob. Instead, we have the Financial Times editorial board to thank.

What other conclusion can be reasonably drawn from the FT editorial slamming President Trump’s appointment of David Malpass to head the World Bank?

Not that Malpass has been God’s Gift to Economics or to the cause of third world economic development. But according to the FT, a big problem with Malpass is that he lacks the leadership experience as well as intellectual and often political heft of previous U.S. choices like – wait for it – Robert S. McNamara.

That’s right – the same Robert McNamara who deserves such blame for the American disaster in Vietnam. What’s next for the FT? Criticizing Mr. Trump for appointing a senior military adviser lacking the battlefield genius of George Armstrong Custer?

Almost as bad: What’s given the FT editorialists the idea that McNamara, or any of his pre-Malpass successors, was such a whiz at the Bank? Here’s an appraisal of McNamara’s tenure arguing that he unintentionally created “incentives for Bank staff and management to push money out the door, sometimes with relatively little regard for how it would be used—a practice that still bedevils the Bank’s work today.” And this was from an admirer.

A second major FT argument against Malpass looks more reasonable at first glance:

“His judgment even on economics, his supposed speciality, is wanting. Notoriously, as then chief economist at Bear Stearns, Mr Malpass was blithely confident about the strength of the US economy in 2007 — a year before the global financial crisis hit and his own employer went under.”

What the FT conveniently forgets, though, is that using this standard would rule out virtually every economist in the world as World Bank president.  

Considerably stronger is the FT‘s observation that “As early as 2011 [Malpass] suggested tightening monetary policy and driving up the dollar, a hard-money philosophy entirely at odds with the reality that the Fed had averted economic disaster.”

The problem with this school of thought is that, although the Federal Reserve’s flooding of the American economy with easy money may have been necessary to keep the nation (and world) afloat, it’s also arguably created a global addiction to super-cheap credit that’s kneecapped chances of restoring genuine long-run economic health.

As contended by no less an economic authority than Lawrence Summers (a former World Bank research chief), the result has been “secular stagnation” – the inability of the United States or other major countries to grow acceptably without inflating lending and spending bubbles that are doomed to burst disastrously.

As the editorial makes clear, the FT mainly objects to Malpass because he’s “deeply sceptical of multilateral institutions.” Which would be funny even if the FT itself didn’t describe the Bank as already “dysfunctional” – despite being led by McNamara and all his supposedly genius successors.

More fundamentally, all else equal, why should anyone lack skepticism about any means to an end? Worshiping multilateralism is like worshiping a hammer. Sometimes is the best tool to use; sometimes it’s not.

The FT reasonably argues that “With an increasing number of rival sources of development finance — not to mention private capital — the bank needs to think hard about where it can best add value.” The paper just as reasonably concludes that effecting change requires its president “to be a critical friend of multilateralism who recognises that its institutions need to be adapted to a changing world, not an instinctive ideological enemy.”

But given that these – and other – problems with the Bank have persisted for so long, it’s hard to imagine that a leader accepted by multilateral fetishists like the FT would generate the necessary push.

As a result, the Malpass nomination can just as reasonably be viewed as a Trump administration attempt to change the kind of losing game coddled for so long by diehard multilateralists like the FT editorial board. Such critics should exhibit a little more humility before writing him off as a sure failure. Not to mention minimal historical memory. 

Im-Politic: Elizabeth Warren, Nationalist?

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Elizabeth Warren, Emmanuel Macron, global poverty, globalization, Im-Politic, nationalism, progressives, Seattle WTO protests, third world, Trade, World Trade Organization, WTO

Whatever its historical roots, “nationalism” has recently become a dirty word. Among the dangers embodied by this concept, as determined by political correctness authorities such as France’s (politically besieged) President Emmanuel Macron, it’s “a betrayal of patriotism. By saying ‘Our interests first, who cares about the others,’ we erase what a nation holds dearest, what gives it life, what gives it grace, and what is essential: its moral values.”

How stunning, therefore, to read Elizabeth Warren’s recent speech on U.S. foreign policy. According to this definition, the Massachusetts Democratic Senator, progressive heroine, and likely 2020 presidential hopeful, is a card-carrying, selfish, immoral (amoral?) America First-style nationalist – at least when it comes to international trade and related globalization issues.

Skeptical? Just read the Warren transcript. On the one hand, she admitted that “The globalization of trade has opened up opportunity and lifted billions out of poverty around the world” – which by any standard is a pretty remarkable achievement. Yet on the other hand, Warren condemned the “trade and economic policies” behind this epic success for failing to deliver “the same kind of benefits for America’s middle class.”

In fact, she emphasized, “U.S. trade policy has delivered one punch in the gut after another to [U.S.] workers and to the unions that fight for them.”

It’s true that, elsewhere in her speech, Warren briefly referred to revamping American trade policy to ensure “that workers are meaningfully represented at the negotiating table and build trade agreements that strengthen labor standards worldwide.” But much more often, she lambasted agreements like the North American Free Trade Agreement (NAFTA) and its successor, the U.S.-Mexico-Canada Agreement (USMCA) for encouraging “outsourcing jobs to Mexico.”

In other words, either such outsourcing somehow failed to ameliorate poverty in Mexico (even though Warren credits it with uplifting the poor elsewhere), or she assigns little importance to achieving that goal. In either case, Warren has some major explaining to do.

Also fascinating about Warren’s speech: If it’s to be taken seriously (never a sure thing when it comes to politicians’ rhetoric), it would represent a significant, and in my view, welcome change in progressives’ take on trade, globalization, and what’s fundamentally wrong with them.

For since these issues became front-page news during the debate over NAFTA, at the start of the 1990s, critics to the left-of-center have proclaimed that U.S. trade and related policies would remain unacceptable unless they boosted living standards everywhere, not just in America – and that they had betrayed workers in developing countries as completely as their counterparts in the United States.

American progressives’ emphasis on the devastation created in the third world by U.S.-spearheaded trade arrangements came to a head during the Seattle World Trade Organization (WTO) protests in 1999 – as did the companion belief that win-win solutions for workers and consumers everywhere should be and could be the very raison d’etre of the global economy. And as indicated by this 2015 statement from the Congressional Progressive Caucus, it remains their party line today.

The point here is not that no conceivable form of globalization can ever produce globe-wide benefits. Instead, it’s that the road to mutual gain is unlikely to proceed in a straight, smooth, uninterrupted line, and that without recognizing that hard choices are likely for the foreseeable future, and that those global benefits may not be distributed evenly, the worst of all worlds is all too likely.

So here’s hoping that her speech is evidence that Warren is becoming aware of these at-least-likely complications, that she’ll start prompting such globalization realism on the American Left – and that she won’t be deterred by apologists for a failed status quo who, along with most of her fellow progressives, have been reduced to portraying nationalism as part of the problem, rather than potentially part of the solution.

(What’s Left of) Our Economy: America’s Third World Trade Pattern with China

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China, raw materials, third world, Trade, Trump, value added, {What's Left of) Our Economy

On Tuesday, I presented the latest data showing that its trade performance makes the United States look like a third world country, with raw materials sectors representing most of its biggest trade winners – and increasingly so.

Today, let’s look at America’s trade with China, which is a country with major first and third world characteristics, and see if U.S. producers perform any better. The answer? Only a little.

Here’s the list of the nation’s top ten export winners in China trade last year – the sectors of the economy that racked up the biggest trade surpluses with China:

1. Soybeans: $12.35 billion

2. Autos & light trucks: $8.24 billion

3. Waste and scrap: $5.49 billion

4. Crude oil & natural gas: $4.43 billion

5. Plastics materials & resins: $2.42 billion

6. Liquid natural gas: $2.42 billion

7. Pulp mill products: $1.69 billion

8. Sawmill products: $1.62 billion

9. Non-poultry meat products: $1.41 billion

10. Timber & logs: $0.97 billion

Four of these are considered commodities in the North American Industry Classification System (NAICS), the U.S. government’s main scheme for slicing and dicing the economy. Waste and scrap might as well be, and (processed) non-poultry meats seem pretty close. Further, the NAICS definition of sawmill products makes clear they add little value to the wood they work with.

As with the global list, the China list excludes aerospace products, since Washington has acceded to Boeing’s insistence that it not release information that distinguishes between final products on the one hand,, and their parts and components on the other.

Still, arguably, this China list is even less impressive than the list for the world at large in terms of containing items that have historically led to big productivity gains, rapid technological progress, and lofty living standards.

Now here’s the China list for 2007 (which can include disaggregated aerospace numbers):

1. Aircraft: $6.35 billion

2. Waste and scrap: $7.26 billion

3. Semiconductors: $4.37 billion

4. Soybeans: $4.10 billion

5. Plastics materials & resins: $2.28 billion

6. Cotton: $1.46 billion

7. Non-poultry meat products: $0.88 billion

8. Autos & light trucks: $0.63 billion

9. Pulp mill products: $0.59 billion

10. Prepared or preserved poultry: $0.57 billion

The NAICS system considers two of these export categories as raw materials. In terms of value creation, I’d add the separate meat and poultry sectors, along with waste and scrap. That actually produces fewer low-value sectors (six) than the 2017 list (seven).

It’s also compelling evidence that as the Trump administration continues its efforts to try to fix America’s trade problems with China, it should focus at least as much on the composition of this trade as well as the size of the bilateral deficits.

Making News: Talking Trump, NAFTA, and Jobs Tonight with Thom Hartmann

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globalization, Jobs, Making News, NAFTA, North American Free Trade Agreement, offshoring, RT America, The Big Picture with Thom Hartmann, third world, Thom Hartmann, Trade, Trump

I’m pleased to announce that I’m scheduled to go back onto RT America’s The Big Picture with Thom Hartmann tonight. Our topics: Trump, automotive and other offshoring to Mexico, and whether win-win outcomes are possible for the United States and developing countries when it comes to international trade.

The segment is scheduled to start at 7 PM EST, and you can watch it live at this link. As always, for those who can’t tune in, I’ll post a link to the streaming video as soon as one’s available.

And keep checking back at RealityChek for news of upcoming and recent media appearances and other developments.

 

Making News: Boston Review Globalization Forum Essay – & More!

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Boston Review, China, Dean Baker, globalization, Lifezette.com, Making News, third world, Trade, Trump, Voice of America

I’m pleased to announce that my latest freelance article has just gone on-line.  It’s a contribution to a major forum on the economic effects of globalization organized by the Boston Review website.

The forum kicks off with a piece by economist Dean Baker of the Center for Economic and Policy Research that’s drawn from an important recent book of his on the subject.  My own contribution can be found here.  And the rest of the contributions – which include pieces from a very distinguished group – can be accessed by clicking here.

My own response countered Dean’s claim that win-win results for both American and third world workers can be created with substantially different U.S. trade and other globalization policies.  Although I strongly agree with some of Dean’s analysis and recommendations, my own conclusions, as you will see, are much more pessimistic.  They emphasize that strict curbs on U.S. imports are unavoidable to safeguard American – including worker – economic interests adequately.

In addition, I’ve quoted in two Lifezette.com articles on the newest (pretty grim) U.S. trade figures and their implications. You can find them here and here.

Finally, the U.S. government’s Voice of America news agency published this article today, which include some of my views, on the outlook for U.S.-China relations during the Trump administration.  This version is a Google translation from the original Mandarin Chinese, so the phrasing may be a little unusual, to put it kindly.

And keep checking back with RealityChek for news of recent and upcoming media appearances and other events. 

 

 

Our So-Called Foreign Policy: The Russia – and Broader – Reset That’s Urgently Needed

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China, Cold War, Europe, interest-based thinking, national interests, NATO, NATO expansion, nuclear war, Our So-Called Foreign Policy, Putin, Russia, Soviet Union, spheres of influence, third world, threat-based thinking, Vietnam

Even though American policy could take a significantly different turn after Donald Trump becomes president, it’s all too likely that U.S.-Russia relations will continue heating up to worrisome temperatures for the foreseeable future. And although much American rhetoric on the subject has veered into hysteria, there’s no shortage of real-world obstacles to any new White House hopes for a cool-off – mainly Moscow’s undeniable determination to expand its influence along in Europe, where it now directly borders the U.S.-led NATO alliance. There’s also abundant (though not yet conclusive) evidence that Russia’s government tried to interfere with the 2016 American presidential election.

Russian president Vladimir Putin is by no means solely to blame for rising bilateral tensions. As I’ve written previously, much and possibly most of the problem stems from the American decision – supported by presidents and Congresses of both parties – to expand NATO right up to Russia’s doorstep after the end of the Cold War. And facing up to this wholly unnecessary, gratuitous effort to capitalize on Russia’s post-1990 weakness looks to me like the key to a genuinely successful reset of bilateral ties.

But ultimately, just as important for the United States as dealing with this urgent short-term problem is learning a lesson about how to think about its national interests that sadly was missed after the decades-long superpower struggle ended. The lesson: The key to foreign policy success is basing actions on identifying overseas interests of intrinsic, material importance, rather than on assumptions about actual or potential adversaries.

During the Cold War, American foreign policymakers across the board used both sets of criteria as lodestars – and created big, unnecessary trouble for the nation as a result. Washington reasonably treated the security of, for example, Western Europe and Japan as vital interests of the United States – because these regions were reasonably judged to be centers of critical economic and therefore military capability and potential. Losing them to Soviet influence could indeed have tilted the balance of global power against the United States in genuinely damaging ways. Moreover, an equally reasonable determination was made that Western Europe and Japan could be defended at acceptable cost and risk to America.

Tragically, however, this form of “interest-based” thinking was not applied to much of the developing world. In these regions of Latin America, Asia, and Africa, major defense commitments were taken on even though the countries in question were typically of little or no intrinsic interest to the United States – in terms of their actual or (realistically potential) wealth or military power, their raw materials, or even their location.

Instead, Washington based policy on the type of threat it concluded was posed by these countries, by ascendant forces within them, or by Soviet or Chinese designs on them or activity within their borders. Therefore, as I’ve written, Americans consumed themselves with debates over subjects like:

>whether rival superpowers’ activity in these areas was fundamentally offensive in nature or defensive;

>whether the relationships between these rival superpowers and local forces were simply alliances of convenience that meant little in the long run and could be easily broken up with appropriate U.S. overtures, or whether they were strongly ideological ties with real staying power; and similarly

>whether the local forces themselves should be seen simply as Soviet of Chinese pawns (and therefore needed to be fought on some level), or whether they were fundamentally nationalistic and on “the right side of history” (and therefore needed to be accepted and cooperated with).

These are all fascinating questions, and the resulting debate made fascinating reading – at least from an academicky or purely rhetorical standpoint. But they were dangerously off-base as fundamental determinants of American policy. The main reason: They all presented supposed answers to questions that are virtually unknowable – unless we imagine that certain foreign policy-makers and analysts are mind-readers or have highly reliable crystal balls. Disaster in Vietnam – a war never consistently, or even often, justified for intrinsically important reasons – reveals the price America can pay for indulging in these fantasies.

Defining specific, concrete U.S. interests is no science, either. But answers here are relatively knowable. Sure, subjectivity can’t be avoided. But Americans depend on our government to make judgments like this all the time. If the nation has decided otherwise, then it’s hard to make the case for any government at all.

How should this argument affect how Americans think about the new Russia challenges in Europe? Principally, they should stop focusing on whether Putin is a new version of the Soviet leaders who many thought aimed at worldwide dominion, or simply a nationalist feeling besieged by the West and seeking greater security along Russia’s frontiers. And they should start focusing on the intrinsic importance of the countries that Putin seems to be threatening.

In other words, how has Washington viewed Ukraine or Georgia or Moldova? What about new NATO members such as Poland or Hungary or the Baltic countries? Have they ever been placed in the category of vital interests, either from a national security or economic standpoint? Have U.S. leaders ever been willing to risk war on their behalf, even when the United States enjoyed a nuclear monopoly or overwhelming superiority? If the answers here are “No” (Spoiler alert: It is.), then has anything about these countries and their concrete and even perceived value changed since the end of the Cold War? In fact, has anything about them economically or strategically changed other than new NATO membership in some cases?

In my view, history makes obvious that the answer to those latter questions is “No” as well. Further, nothing has happened either in these parts of Europe, or in the American or Russian militaries, that has made them more easily defended by the West with conventional weapons alone than during the Cold War.

So it’s easy to see how more threat-based thinking can too easily lead Washington into a corner in which its only choice to defend all of its new treaty allies from some new form of Russian hegemony is to threaten nuclear war more loudly; and how interest-based thinking can lead to the alternative of offering to recognize how geography inevitably (however sadly) relegates these countries to a Russian sphere of influence, and seeking the best possible arrangement for them. And it’s even easier to see which alternative, however imperfect, is vastly superior.

Im-Politic: Why U.S. Progressives Need to Become Nationalists

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America First, Bernie Sanders, Democrats, Elizabeth Warren, free trade agreements, globalism, Im-Politic, Immigration, labor unions, nationalism, New Balance, offshoring, Populism, progressives, third world, Trade, Trump, white working class, working class

Tiny groups of individuals shouldn’t be mistaken for entire movements, or even significant factions of movements. Therefore, I don’t want to make too much of those Trump haters who burned their New Balance sneakers and/or slammed the company on social media because it stated that the election as president of a strong trade policy critic would be good for manufacturers seeking to make most of their products in the United States, like itself.

At the same time, the backlash against New Balance sheds lots of light on serious problems in the ranks of American progressivism that contributed to Trump’s triumph and that will need to be solved if the Left end of the country’s political spectrum is to win working class loyalties and convincingly claim populist chops.

Let me start with a little story (one of my father’s favorite phrases!). Back in the late-1990s, when President Clinton had requested new trade negotiating authority from Congress, I attended a meeting at AFL-CIO headquarters of activists seeking to block his ambitions. Early at the session, we agreed that we should explain to legislators and the public what kinds of trade policies we favored, not simply what we opposed, and someone (not me) suggested something along these lines as a unifying theme:

“The main purpose of U.S. trade policy should be to promote healthy growth for the American economy and higher living standards for the majority of the American people.”

That didn’t seem terribly controversial to me. But several hands immediately rose in protest. A representative of the Maryknoll Sisters made clear the objection. Why, she asked, were we ignoring the well-being of the rest of the world?

To his credit, the American labor leader who was running the meeting tried to argue that, however much he sympathized with her point, it was axiomatic that the first obligation of the U.S. government was to promote and defend the interests of the American people. But he didn’t make the argument very emphatically, and many of the others around the table – who came from left-of-center organizations – were even more conflicted. I tried to shore up the first speaker, but quickly realized I was in the greatly outnumbered and spent the rest of the session listening.

I don’t remember what the final version said, and doubt it was ever made public, but the phrasing of that opening point was definitely watered down. On my way out, some folks who worked for labor union offices outside the Beltway came over to me and asked, as they were shaking their heads, “What the heck was that all about?” I replied, “You’ve just learned a valuable lesson about American liberals. Many don’t believe that American workers’ interests should come first.”

They’d actually gotten many such lessons throughout the 1990s. As the first Bush administration and especially the Clinton administration turned U.S. trade policy into an exercise in offshoring, not domestic growth, their progressive critics decided that the best way to resist was to spotlight the harm this new strategy would inflict on workers and peasants in the developing world as well as in the United States. In fact, the third world and its grievances turned into a prime focus of those who famously protested the 1999 meeting of the World Trade Organization in Seattle.

This approach made some tactical sense, as many liberals in Congress clearly were not constitutionally inclined to buy an America First trade policy. But although there are any number of ways in which U.S. trade policies could be changed to create more situations of mutual benefit between rich and poor countries (see this recent article for an example), the progressive stance also reflected a refusal to recognize that many hard choices have confronted – and still confront – the nation on trade.

In public policy trying to please everyone tends to wind up pleasing no one. So substantively, this wishful thinking was a formula for confusion at best. Politically, the impact was far worse: The progressives wound up muddying and therefore weakening the message trade critics were trying to send to the public.

Small wonder that even though the critics won some procedural trade fights during the 2000s, even after the financial crisis of 2007 and 2008, President Obama managed to secure Congressional passage of three new free trade agreements. Not until a major politician forthrightly vowed to prioritize American interests in trade policy making did the powerful globalization status quo meet its match – and then some.

Based on their initial post-election statements, it seems that progressive leaders realize that rejecting the option of working with Mr. Trump on trade policy would be the height of folly. That is, it seems that they’re implicitly rejecting the notion that the President-elect is so odious that a company that employs American workers despite powerful pressures to offshore should be condemned not for endorsing the whole of his candidacy, but simply for noting that his election would likely aid those efforts.  Therefore, big changes on the trade front seem inevitable above and beyond the collapse of the Trans-Pacific Partnership (TPP) agreement.

Yet even the progressives’ leaders still face a towering obstacle in their own quest to regain the votes of the millions of working class voters – probably like many of those New Balance workers – who deserted their party’s standard bearer last Tuesday night. They have no chance of succeeding if they continue describing all forms of common sense immigration policies as bigoted. And for those of you who think that I’m just talking about the white working class, keep in mind that the phrase “union household” also describes this constituency.

In other words, during the 2016 elections, progressives in part tried to convince Main Street America that they would gain from a massive increase in the nation’s supply of unskilled labor through both amnesty and the powerful magnet effect it would generate. And at the same time, if these working class voters worried about the resulting downward pressure on wages, along with the effects on the nation’s cohesion of surging bilingualism and its security of newcomers from the culturally medieval Middle East, they were condemned by the Left as nativists, racists, and even worse.

The pointed references to Mr. Trump’s alleged xenophobia by both Senators Bernie Sanders and Elizabeth Warren (earlier in the campaign) show that their faction of American politics has much to learn on this score. Until they understand that real U.S. populists can’t be globalists in this day and age, they’re likely to continue wandering the political wilderness.

(What’s Left of) Our Economy: Why Trump-ian Trade Policies Needn’t Doom the Third World

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China, David Cay Johnston, developing countries, Donald Trump, James Pethokoukis, Jobs, Kenneth Rogoff, poverty, progressives, protectionism, The Daily Beast, third world, Trade, wages, {What's Left of) Our Economy

A major test of a worthy journalist is whether he covers stories that clash dramatically with his own sympathies and/or those of his biggest fans, and David Cay Johnston’s latest piece – on the immense toll taken on third world economies by corrupt leaders – passes with flying colors. Moreover, Johnston’s work also strongly undermines a major emerging claim during this presidential campaign – that Trump-ian trade policies should be opposed largely because they would his close down a major growth engine for developing countries.

In his May 3 Daily Beast article, Johnston – a Pulitzer Prize-winner during his years at The New York Times – spotlights the work of “investigative economist” Jim Henry, whose research contends that, since 1970, crooked politicians have stolen just over $12 trillion from the third world countries they’ve ruled. As Johnston notes, this humongous figure represents about five cents of each dollar of total global wealth and about two-thirds of America’s current annual economic output. And he rightly observes that “Were all of the flight capital returned and invested smartly it would reduce human misery by raising living standards, especially by reducing child mortality while increasing both health status and life expectancy.”

According to Henry’s findings, almost a third of this stolen wealth has come from five countries – China, Malaysia, Mexico, Russia, Venezuela. The first has certainly made impressive progress reducing poverty largely via trade with the United States and other rich economies, and expanded trade with America in particular clearly has created a modern manufacturing complex – with all its wide-ranging benefits – in northern Mexico.

But if Henry’s work is on target, it means that some $9 trillion has been looted from much poorer regions – notably in sub-Saharan Africa – that have been left far behind as trade and investment have created ever more extensive economic integration between the world’s North and South. The political ramifications for the politics of American trade policy would be profound.

For during this presidential campaign in particular, Donald Trump’s rise to the threshold of the Republican nomination has prompted trade policy supporters to retreat into the argument that, whatever the harm they’ve done to the U.S. middle and working classes, recent trade deals and similar decisions deserve backing because they’ve achieved a major moral goal: reducing third world poverty.

In the words of James Pethokoukis of the conservative American Enterprise Institute, “Even knowing what we now know about the possible impact on U.S. jobs, should Washington have somehow limited trade and overseas investment with China — even at the cost of higher global poverty? Certainly the humanitarian answer is ‘No.'”

And according to Harvard professor Kenneth Rogoff, a former chief economist at the International Monetary Fund, “In the name of reducing U.S. inequality, presidential candidates in both parties would stymie the aspirations of hundreds of millions of desperately poor people in the developing world to join the middle class.”

Moreover, making explicit a point Rogoff left implicit, a writer from liberal website Vox.com used the same argument against Democratic presidential challenger Bernie Sanders: “Limiting trade with low-wage countries as severely as Sanders wants to would hurt the very poorest people on Earth. A lot.

“Free trade is one of the best tools we have for fighting extreme poverty. If Sanders wins, and is serious about implementing his trade agenda…he will impoverish millions of already-poor people.”

In fact, this position has long been an article of faith even among avowed progressives who have been highly critical of current trade policies – to the point of fingering American protectionism as a leading obstacle to third world economic progress.

Henry’s research makes clear that developing countries and their self-styled champions can adopt a poverty fighting strategy that doesn’t require shafting American and other developed country workers – cleaning up their acts. Johnston deserves great credit for reporting on these findings. Any chance that America’s political leaders throughout the spectrum will start paying attention?

(What’s Left of) Our Economy: Flint’s Water Crisis is Also a De-industrialization Story

Tags

automotive, Detroit, Flint, General Motors, healthcare services, Jobs, manufacturing, Mexico, municipal finance, poverty, Rust Belt, services, taxes, third world, wages, water pollution, {What's Left of) Our Economy

When I began reading about the water crisis in Flint, Michigan, my first thoughts were of the Mexican factory towns near the U.S. border, where rapid and unregulated industrialization driven by manufacturing for the American market had produced pollution nightmares – including dangerously poisoned drinking water.

The shameful situation in Flint has many causes, but one that’s been neglected has been a development that makes the city a depressing mirror image of much of northern Mexico – rapid de-industrialization, stemming from the plight of the U.S. automobile industry, that has robbed Flint of the ability to pay for the kinds of public services Americans for decades have come to expect in a financially sustainable way.

According to Flint’s auditors, the city has long provided its citizens with “ a full range of services, including police and fire protection, the construction and maintenance of streets and other infrastructures, recreational activities and cultural events, water and sewer services, and sanitation/garbage pickup services.” The water crisis has made sadly clear that this standard agenda was in fact unaffordable for Flint. But the gap between the city’s first-world ambitions and resources that are markedly below that level has been evident for years from its chronic budget deficits and its heavy reliance on state and federal aid.

The earliest Flint budget figures on-line are from 2002, and show a $7.4 million deficit on $457.7 million in expenses and $445.3 million in receipts. Only 10.13 percent of those receipts came from combined income and property taxes. More than three fourths of the city’s take was generated by the Hurley Medical Center’s revenues. Last year’s figures make the city’s finances and tax base look stronger. The city ran a $568 million surplus on spending of $147.3 million and revenues of $147.9 million. And taxes represented 22.85 percent of those total receipts.

Those overall numbers, however, should tell you that something’s a little fishy. In fact, in 2011, the hospital was in effect taken off the municipal budget – despite its profitability. For that last year it was on those books, Flint’s government spent $567.3 million and took in $523.2 million, for a $44.1 million shortfall that was much larger proportionately than 2002’s. And taxes were a mere 6.15 percent of city revenue.

Even more disturbing, that 2015 Flint budget also removed all of 2014’s $24 million worth of sewer expenses and some $23 million of that year’s $44.2 million in water expenses. So even these necessities had revealed themselves as completely beyond Flint’s means.

Why is Flint is such a fix? Bad government is surely a big part of the answer. But so is dramatic economic deterioration. As has been widely noted, the city’s population is disproportionately poor and African American. But it’s also crucial to understand that over the last decade alone, Flint has steadily lost much of the material wherewithal that any municipality needs to be functional by recent American standards. Let’s start with the broadest economic indicators and then examine the trends in greater detail.

It’s tough for any country or community to succeed without economic growth, and Flint is a long-time laggard. According to Commerce Department figures (available at this interactive data base), from 2001 (the year before those earliest on-line financial reports date from) through 2014, Flint’s economy actually shrank in inflation-adjusted terms – by 8.67 percent. By contrast, America’s urban areas as a whole grew by 24.30 percent.

Census Bureau data show that the city’s population actually dropped more steeply from – 124,943 in 2000 to just over 99,000 in 2014. So in theory, there was more wealth to share in Flint. But in practice, it hasn’t worked out that way. Between 2000 and the Census Bureau’s estimated 2010-2014 average, median household income in the city fell by nearly 12 percent – and that’s before adjusting for inflation. No doubt a veritable and ongoing employment depression deserves much blame. During this period, the number of employed Flint residents cratered by 37.63 percent – from 45,885 to 28,618. And the poverty rate surged from 26.4 percent to 41.6 percent. That’s nearly triple the national rate in 2014 (14.8 percent).

Leading the way down in Flint has been manufacturing. Its real output (as also shown in that Commerce data base) plunged by 29.10 percent during this period, compared with 26.67 percent real manufacturing growth for all of the nation’s metropolitan economies. As a result, this sector shrank from more than 22 percent of the city’s economy after inflation to just over 17 percent. In U.S. metro areas as a whole, manufacturing stayed at somewhat over 11 percent of real gross product.

Flint’s manufacturing’s woes, in turn, overwhelmingly stem from the troubles of the American automobile industry. Flint is nothing less than the birthplace of General Motors, and has long been known as “Vehicle City.” Back in 1978, GM employed more than 80,000 Flint-area residents. Production figures are harder to come by – the Commerce Department doesn’t break out automotive output for Flint for most years precisely because it has been so GM-dominated, and therefore publishing the numbers would release proprietary data. But as of 2013, the automotive sector is recorded as representing nearly 71 percent of the Flint metropolitan area’s inflation-adjusted manufacturing production.

The GM employment footprint, however, had shrunk to some 8,000 by 2006, and as this time-line makes clear, the company has closed down many more and larger facilities in the area since the 1980s than its opened or expanded. Just as important, the rest of Flint’s economy didn’t fill in nearly enough of the resulting gap.

The entire private sector service providing complex in the city grew in real terms by only 5.71 percent – versus 30.31 percent for American metro areas as a whole. Flint’s hospital apparently couldn’t the city’s economy, either. In Flint, health care services expanded their output by only 16.76 percent after inflation between 2001 and 2014 – much less than half the nation-wide rate in cities (42 percent). And where services growth in Flint was strong – as in the information sector – it remained far too small to make a major difference.

Flint’s de-industrialization of course changed the city’s job mix, too – and not for the better. In 2000, according Census figures, manufacturing accounted for 23.2 percent of the jobs held by city residents. During the 2010-2014 period, this share sank to 14.1 percent. The rest of Flint’s major employing sectors fared much better relatively speaking – especially, it seems, the healthcare industry. Its supersector – what I’ve called the government-subsidized private sector – boosted its share of Flint employment from 23.5 percent to 27.9 percent during this period. But Flint’s biggest job loser – manufacturing – pays better than average wages. Except for that subsidized private sector, most of Flint’s biggest job winners pay below average wages.

As a result of the growth and job-related setbacks, Flint’s tax base shriveled. And the damage was hardly limited to individual taxpayers. According to the city’s 2015 financial report, “Property values within the City are believed to have hit the bottom, declining from $1.804 billion in 2002 to $1.192 in 2011 and further declining to $969.13 million in 2012.” Only “slight increases are projected over the next few years.”

Because de-industrialization isn’t responsible for all of Flint’s predicament, it’s way too early to say that the city is doomed to third world status. Other so-called Rust Belt municipalities have fared considerably better, no doubt in part because they weren’t so heavily invested in a single industry like Flint – and its much larger, also wheezing neighbor, Detroit. But because of manufacturing’s matchless record of creating middle class jobs for working class Americans, and because so many former manufacturing centers continue to struggle, expect de-industrialization’s impact to keep threatening Flint’s ability to deliver first world-level services, and its claim to first world status, for years to come.

(What’s Left of) Our Economy: The IMF (Unwittingly) Trashes the Case for Obama’s Pacific Trade Deal

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Christine LaGarde, developed countries, developing countries, emerging markets, free trade agreements, IMF, International Labor Organization, International Monetary Fund, Obama, Stolper-Samuelson theory, third world, TPP, Trade, Trans-Pacific Partnership, World Bank, {What's Left of) Our Economy

Whatever reputation the French have had for being master logicians has just been shredded by International Monetary Fund (IMF) chief Christine LaGarde.  Her take on emerging markets’ emerging role in the world economy is completely incoherent, and its fatal flaws have big implications for President Obama’s Trans-Pacific Partnership (TPP) and U.S. trade policy as a whole.

For decades, Washington has told Americans that the U.S. economy urgently needs new trade deals mainly because without them, the nation and its workers would be shut out of all the huge, rapidly expanding third world economies that would surely be the globe’s most powerful growth engine for the indefinite future. Moreover, both Democratic and Republican presidents and Congresses have followed through, as new U.S. trade deals since Mexico’s addition to the North American Free Trade Agreement (NAFTA) have focused tightly on developing countries.

Mr. Obama and other TPP supporters have used the same justification for the Pacific Rim trade agreement, repeating over and over again the mantra that “more than 95 percent of our potential customers live outside our borders….” Obviously, they haven’t been thinking mainly of developed markets like Europe and Japan.

On the level of both individuals and national economies, these claims have always been bogus. As I’ve shown, according to major international organizations like the World Bank and the International Labor Organization, the vast majority of third world populations still earn far too little to buy goods made in wealthier countries like the United States on anything close to a regular basis. Moreover, as my book The Race to the Bottom documented exhaustively, most major developing countries – ranging from Mexico to China and its low-income Asian neighbors – have achieved most of their growth by selling to America and the high-income world. Even the commodity producers that have profited by supplying China have remained dependent on U.S. and other developed markets indirectly, since they have been such important final customers for China’s output.

In a Tuesday speech in Paris, LaGarde echoed recent observations that developing countries are in the process of turning into global growth laggards from global growth leaders. As made clear above, their claim to that former status was dubious at best, but LaGarde’s outlook was also noteworthy for its profound pessimism. She not only warned that emerging economies that borrowed heavily in dollars were vulnerable to monetary tightening moves from the Federal Reserve. She also declared that “emerging and developing countries are now confronted with a new reality. Growth rates are down, and cyclical and structural forces have undermined the traditional growth paradigm.”

Indeed, LaGarde pointed to IMF research projecting that “the emerging world will converge to advanced economy income levels at less than two-thirds the pace we had predicted just a decade ago. This is cause for concern.” (What she failed to mention is that this convergence could also result in part from incomes in the developed world sinking closer to third world standards, as the Stolper-Samuelson theory of international trade’s impact first stipulated.) For good measure, LaGarde reminded her audience that “Clearly, emerging markets are benefiting from the fact that many central banks in many advanced economies still have a very easy policy stance.” In other words, historically easy credit in the wealthier countries had kept third world exports and growth much greater than they would have been otherwise.

Yet even though she made the case that emerging market economies’ prospects were deteriorating and had relied critically on the developed countries even after the financial crisis, LaGarde also mysteriously contended that the emerging world “contributed more than 80 percent of global growth since” the global economy seemed on the verge of collapse and that, consequently, “The economic health of the emerging world is of first-order importance for the advanced economies.”

And in the strangest statement of all, she proceeded to insist that the wealthy countries now need to deal with this situation by propping up emerging market performance with “a stronger global financial safety net” for these economies that expands their access to the swap lines of the richer countries’ central banks.

A respectable case can be made that emerging markets have always been the keys to future global growth. Equally respectable cases can be made for the propositions that they have been the main global growth drivers since the financial crisis; that they have never been the keys to global growth; that they will remain central to the wealthier countries’ well-being; that they are headed to a much gloomier “new normal;” and that they need new aid from the developed countries to avoid major future woes. But no case can be made for all these contentions at the same time – unless reason and logic are abandoned entirely.

Moreover, since the claim behind which LaGarde is putting her money is the one that’s downgrading the third world’s economic importance substantially, and the one conforming with past and future realities, it should be clear that the term “emerging markets” is likeliest to be an oxymoron going forward. As a result, although the United States and other wealthier countries could legitimately decide to lend them a hand for moral and humanitarian reasons, the argument from self-interest is looking ever more far-fetched. And tying America’s fortunes even more tightly to global economic losers via new trade deals like the TPP? That looks downright masochistic.