(What’s Left of) Our Economy: Why Biden’s Trade Policies are Looking Trump-ier Than Ever

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America First, arbitrage, Biden, China, economic nationalism, environmental standards, global minimum tax, globalism, globalization, infrastructure, Jake Sullivan, Janet Yellen, labor rights, race to the bottom, subsidies, tariffs, tax policy, taxes, Trade, trade Deals, trade wars, {What's Left of) Our Economy

As the author of a book titled The Race to the Bottom, you can imagine how excited I was to learn that the main rationale of Treasury Secretary Janet Yellen’s new proposal for a global minimum tax on corporations is to prevent, or bring to an end, a…race to the bottom.

But this idea also raises a question with profound implications for U.S. trade and broader globalization policies: Why stop at tax policy? And it’s made all the more intriguing because (a) the Biden administration for which Yellen surprisingly seems aware that there’s no good reason to do so even though (b) the trade policy approach that could consequently emerge looks awfully Trump-y.

After all, the minimum tax idea reflects a determination to prevent companies from engaging in what’s known as arbitrage in this area. It’s like arbitrage in any situation – pitting providers and producers that boast little leverage into competition with one another to sell their goods and services at the lowest possible price, and usually triggering a series of ever more cut-rate offers.

These kinds of interactions differ from ordinary price competition because, as mentioned above, the buyer usually holds much more power than the seller. So the results are too often determined by considerations of raw power, not the kinds of overall value considerations that explain why market forces have been so successful throughout history.

When the arbitrage concerns policy, the results can be much more disturbing. It’s true that the ability of large corporations to seek the most favorable operating environments available can incentivize countries to substitute smart policies for dumb in fields such as regulation and of course taxation. But it’s also true, as my book and so many other studies have documented, that policy arbitrage can force countries to seek business with promises and proposals that can turn out to be harmful by any reasonable definition.

Some of the most obvious examples are regulations so meaningless that they permit inhumane working conditions to flourish and pollution to mount, and encourage tax rates to fall below levels needed to pay for public services responsibly. Not coincidentally, Yellen made clear that the latter is a major concern of hers. And the Biden administration says it will intensify enforcement of provisions in recent U.S. trade deals aimed at protecting workers and the environment – and make sure that any new agreements contain the same. I’ve been skeptical that many of these provisions can be enforced adequately (see, e.g., here), but that’s a separate issue. For now, the important point is that such arbitrage, and the lopsided trade flows and huge deficits they’ve generated, harm U.S.-based producers and their employees, too.

But as my book and many other studies have also documented, safety and environmental arbitrage aren’t the only instances of such corporate practices by a long shot. Businesses also hop around the world seeking currency arbitrage (in order to move jobs and production to countries that keep the value of their currencies artificially low, thereby giving goods and services turned out in these countries equally artificial, non-market-related advantages over the competition). Ditto for government subsidies – which also influence location decisions for reasons having nothing to do with free markets, let alone free trade. The victims of these versions of policy arbitrage, moreover, have been overwhelmingly American.

The Biden administration is unmistakably alert to currency and subsidy arbitrage. Indeed a major element of its infrastructure plan is providing massive support for the U.S. industry in general, and to specific sectors like semiconductors to lure jobs and production back home and keep it there. Revealingly, though, it’s decided for the time being to keep in place former President Trump’s steep, sweeping tariffs on China, and on steel and aluminum.

So it looks like the President has resolved to level these playing fields by cutting off corporate policy arbitrage opportunities of all types with a wide range of tools. And here’s where the outcome could start looking quintessentially Trump-y and America First-y. For it logically implies that the United States shouldn’t trade much – and even at all – with countries whose systems and policy priorities can’t promote results favorable to Americans.

Still skeptical? Mr. Biden and his leading advisers have also taken to talking about making sure that “Every action we take in our conduct abroad, we must take with American working families in mind.” More specifically, the President’s White House national security adviser, Jake Sullivan, wrote pointedly during the campaign that U.S. leaders

“must move beyond the received wisdom that every trade deal is a good trade deal and that more trade is always the answer. The details matter. Whatever one thinks of the TPP [the proposed Trans-Pacific Partnership trade deal], the national security community backed it unquestioningly without probing its actual contents. U.S. trade policy has suffered too many mistakes over the years to accept pro-deal arguments at face value.”

He even went so far as to note that “the idea that trade will necessarily make both parties better off so long as any losers could in principle be compensated is coming under well-deserved pressure within the field of economics.”

But no one should be confident that economic nationalism will ultimately triumph in Biden administration counsels. There’s no doubt that the U.S. allies that the President constantly touts as the keys to American foreign policy success find these views to be complete anathema. And since Yellen will surely turn out to be Mr. Biden’s most influential economic adviser, it’s crucial to mention that her recent speech several times repeated all the standard tropes mouthed for decades by globalization cheerleaders about U.S. prosperity depending totally on prosperity everywhere else in the world.

Whether she’s right or wrong (here I presented many reasons for concluding the latter), that’s clearly a recipe for returning trade policy back to its pre-Trump days – including the long-time willingness of Washington to accept what it described as short-term sacrifices (which of course fell most heavily on the nation’s working class) in order to build and maintain prosperity abroad that would benefit Americans eventually, but never seemed to pan out domestically.

Nor is Yellen the only potential powerful opponent of less doctrinaire, more populist Biden trade policies. Never, ever forget that Wall Street and Silicon Valley were major contributors to the President’s campaign coffers. Two greater American enthusiasts for pre-Trump trade policies you couldn’t possibly find.

And yet, here we are, more than two months into the Biden presidency, and key pieces of a Trump-y trade policy both in word and deed keep appearing.  No one’s more surprised than I am (see, e.g., here).  But as so often observed, it took a lifelong anti-communist hardliner like former President Richard M. Nixon to engineer America’s diplomatic opening to Mao-ist China. And it took super hard-line Zionist Menachem Begin, Israel’s former Prime Minister, to sign a piece treaty with long-time enemy Egypt. So maybe it’s not so outlandish to suppose that a died-in-the-wool globalist like Joe Biden will be the President establishing America First and economic nationalism as the nation’s new normals in trade and globalization policy.  

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(What’s Left of) Our Economy: Debt-Strapped America is Still the World’s Leading Growth Engine

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China, Congress, consumption, debt, export-led growth, exports, Financial Crisis, Information Technology Agreement, intermediate goods, Obama, offshoring, South Korea, TPP, Trade, trade Deals, Trade Deficits, Trans-Pacific Partnership, {What's Left of) Our Economy

Although I wasn’t planning on posting today, some data was released yesterday that underscores two major points about the nature of the world economy and the dangers it still face it that can’t be repeated often enough.is

The data seem pretty arcane – on South Korea’s exports. But that country’s trade patterns exemplify broader flows that have created a dangerously lopsided international economic system, that in fact set the stage for the last financial crisis, and that threaten to create a rerun.

The headline development is that Korea’s exports dropped sharply on a year-on-year basis in December – which in a conventional sense spells bad news for the U.S. and world economies. Korea’s, after all, is an economy heavily dependent on exporting. If its overseas sales are crumbling, that’s a strong indication that the economies of customer countries are too weak to buy much of what the Koreans sell.

But the real import of the new statistics concerns where the fall-offs have been biggest and smallest. Most important of all, virtually none of it took place in shipments to the United States. Specifically, Korea’s overall goods exports (no figures were provided on services exports) plunged by 13.80 percent from December, 2014 to this past December. But they dipped only 0.60 percent to America.

This disparity is the latest evidence that the United States is still playing its traditional contemporary role of global importer of last resort – even though its own growth is lagging. In fact, America’s overall goods imports have been growing much faster than its goods output (let alone its goods exports!) since the current economic recovery technically began back in the summer of 2009. That kind of growth can only be fueled by debt accumulation – which led to such misery in 2007 and 2008.

More broadly, because of the losses in real incomes resulting from years of the offshoring-friendly trade policies they pursued so avidly, U.S. leaders during the previous decade recognized that their ability to stay in power depended on one of two hopes materializing. First, against all odds and evidence, incomes in offshoring destination countries would rise so dramatically that Americans could increase their own earnings by supplying those new markets. Second, Washington could encourage the public to maintain its living standards by substituting borrowing for earnings. Since the first hope was dashed, the second was peddled – and like all houses of cards, ultimately collapsed.

But in addition to showing that the United States and its binge consuming remains the world’s import sponge – and thus growth engine – the Korea trade data make clear that China is not, as widely supposed, performing this function. Here’s why. China’s ostensible growth role stems from its status as the top export market for not only Korea, but most of East Asia. That, however, doesn’t mean that China is where most Korean or other Asian exports are finally consumed – which is what would be needed for China to deserve its growth leader title. After all, China’s economy is export-led itself. So what gives?

As reported in a Bloomberg article on the new trade figures, two-thirds of Korea’s goods exports to China are intermediate goods. They’re the inputs for final products – parts, components, materials, and the like, along with machinery and equipment – that are assembled in the People’s Republic. Many of the final products are sold in China, whose own growth is slowing. But many others need to be exported from China. And a large share goes to the United States.

So U.S. growth is what really pulls along economic activity throughout throughout the string of countries that largely serve as its supply chain – which includes China itself. And lagging American growth is what sends this process into reverse, including in China, even though cheap credit continues enabling U.S. imports to grow much more than they should.

It would be great to report that Washington is on the case and working to diligently to prevent worsening trade imbalances from moving the nation and world closer to another near-financial collapse – and perhaps a bigger one. But in 2012, President Obama and Republican Congressional leaders cooperated to win approval of a U.S.-Korea trade deal practically formulated to supercharge America’s bilateral deficit. And this past year, they secured trade promotion authority for the president that greatly increases the odds of Congressional passage of a Pacific Rim trade deal (the Trans-Pacific Partnership, or TPP) structured in much the same way. Moreover, a less publicized global trade deal covering high tech products, the Information Technology Agreement, is likely to have similar effects. And you thought Charlie Brown letting Lucy hold for his place kicks had a shallow learning curve?

Those Stubborn Facts: Obama Trade Deals Target Countries with Slowing Growth

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IMF, Obama, Those Stubborn Facts, Trade, trade Deals, Trans-Pacific Partnership, Transatlantic Trade and Investment Partnership

Difference Between Latest and Previous IMF Growth Projections for Main Free Trade Partners Targeted by Obama:

                                                                             2015         2016

Eurozone (TTIP)                                                   -0.2%       -0.3%

United Kingdom (TTIP)                                          0%         -0.1%

Japan (TPP)                                                          -0.2%       -0.1%

Canada (TPP)                                                        -0.1%       -0.3%

Mexico (TPP)                                                         -0.3%       -0.3%

(Source: “Table 1. Overview of the World Economic Outlook Projections,” World Economic Outlook UPDATE, International Monetary Fund, January 19, 2015, http://www.imf.org/external/pubs/ft/weo/2015/update/01/pdf/0115.pdf)

Im-Politic: Why Elizabeth Warren Needs to Become a Real Trade Warrior

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Elizabeth Warren, Financial Crisis, financial regulation, Im-Politic, Jobs, Main Street economy, Mainstream Media, offshoring, One Percent, Trade, trade Deals, trickle down economics, Wall Street reform

One of the most heartening trade policy-related developments of recent months has been Senator Elizabeth Warren’s growing interest in the issue. In addition to expressing concern that President Obama’s Trans-Pacific Partnership (TPP) trade deal will undercut the Wall Street reforms she’s helped spearhead, she devoted some lines to trade in her recent economics speech to the AFL-CIO that were more than mere talking points.

Given the Massachusetts freshman’s burgeoning role in Democratic party politics – and signs of some appeal to populist conservatives – these remarks represent one more small sign that much of her party is moving beyond stale, narrow cliches when talking trade. Indeed, they encouragingly echo a previous speech by her New York colleague, Chuck Schumer, a member of the Democratic leadership as chair of the Democratic Policy and Communications Center.

Nonetheless, Warren and her colleagues have a ways to go before they develop a trade-related campaign pitch that both excites voters and yet isn’t completely trashed by the trade-liberalization-worshipping Mainstream Media.

That last point is worth elaborating on a bit. It’s not that voters will read in any detail the MSM’s descriptions of any candidates critical of trade and conclude that opposition to current policies disqualifies them from public office. It’s that constant MSM descriptions of such candidates as neanderthals and know-nothings and xenophobes and the like tend to saddle target politicians with a distinctive “fringe” or at best (hopeless) “protest candidate” label.  

In any event, it was good to see Warren, a la Schumer before her, in part blame the woes of the American middle and working classes in part on government decisions that “turned loose giant international corporations to…outsource more jobs.” Even better was Warren’s critique of “trade pacts and tax deals that let subsidized manufacturers around the globe sell here in America while good American jobs get shipped overseas.”

But Warren oversimplifies.  As a result, she needlessly leaves herself and other trade policy critics needlessly vulnerable to charges of being anti-capitalist, and misses a chance to knit together her domestic and international positions into the strongest possible political force.

The main culprit behind offshoring isn’t the “trickle-down economics” she villifies in the AFL speech and more generally. It’s a more specific set of trade policies that inevitably slow U.S. growth and therefore hiring by encouraging American (and other foreign) companies to supply the lucrative American market from foreign production sites that are much lower cost, lightly regulated, still heavily protected by (difficult-to-identify) non-tariff trade barriers, and (yes) often subsidized.

Moreover, precisely because recent trade deals and related policies have offered this sugar-sweet deal to U.S. companies, they inevitably have increased the pressure in America to deregulate dramatically in order to compensate – including on Wall Street. And if restoring or even raising U.S. trade barriers made investing abroad much less attractive to the One Percent (because selling the output to American customers would be that much harder) much more of the wealthy’s wealth would indeed trickle down to the rest of Americans. In that trade policy environment, new financial regulations could genuinely ensure that most corporate investment benefits the real Main Street U.S. economy and strengthens its foundations, rather than underwrite unproductive and even reckless Wall Street shenanigans.

Just as important, Warren needs to connect trade-induced offshoring with the onset of the financial crisis. As I’ve pointed out previously, she’d have plenty of world-class academic company. But it’s imperative to popularize the idea that most of the gains from offshoring went to third world populations who were still left way too poor to buy much of what Americans could hope to export them. Most of the losses, meanwhile, went to Americans whose consumption was still vital to fueling the nation’s and the world’s growth. When Washington decided to offset those income losses with oceans of cheap credit, bubble inflation and then bursting was guaranteed. So if Warren is genuinely determined to improve the financial stability of the American economy – as seems the case – then she’ll concentrate more of her energies on a trade policy makeover.

Because of her skyrocketing profile, Warren will be influencing the next presidential campaign whether she runs or not. Let’s hope she uses the opportunity not only to stoke populist emotions that should be heated, but to raise the odds that they’ll generate the most constructive change.

(What’s Left of) Our Economy: Obama’s Trade Push is Anything but Progressive

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arbitrage, education, Obama, productivity, retraining, subsidies, TPP, Trade, trade Deals, {What's Left of) Our Economy

Although I know that the Washington Post has reported on a big Obama administration push for new trade deals because the White House wanted this message spread, I’m still somewhat skeptical. The President’s own party generally opposes these initiatives – at least if they lack the kinds of provisions, like effective measures against currency manipulation, that look to be deal-killers with the rest of the world. Higher priorities abound – like the budget, immigration, and tax reform. And if we’ve learned anything about Mr. Obama’s political style, it’s that he’s not a roll-up-his-sleeves-type operator with Congress. Let’s also not forget that the centerpiece trade deal – the Trans-Pacific Partnership – remains far from being concluded, and that every additional day of delay brings the intensification of the next presidential election cycle closer – which tends to make elected officials wary of trade expansion.

One big clue to the President’s real intentions – whether he speaks a great deal about trade in his upcoming State of the Union.

If I’m wrong, though, the Obama trade policies will present a stunning example of policy and philosophical disconnect. On the one hand, the President is a strong believer that government must play a crucial role in solving problems like the rich-poor gap whose growth he has decried. On the other hand, one of the main effects of new trade deals, at least for the last quarter century, has been the exponential increase in what economics and business types call transnational arbitrage opportunities.

In other words, by reducing barriers to the flows of goods, services, investment, and technology, trade liberalization agreements greatly expand business’ ability to capitalize on differences between countries’ regulatory and tax policies across the board – along with formal and informal trade barriers – in deciding where to build new facilities. And of course, countries with the lightest regulatory hands and lowest tax burdens – all else equal – tend to reap the greatest advantages.

Mr. Obama wants to square the circle in two main ways. First, he wants to improve Washington’s efforts to strengthen America’s human capital stock – i.e., upgrading the nation’s schools so that they’ll give more Americans the skills and knowledge to attract talent-conscious employers. Second, he wants to boost government support for developing new technologies and products in the United States, in order to create huge new domestic industries (notably, environmentally friendly products and services).

Trouble is, neither strategy appears even remotely promising. Regarding education and retraining, American primary and secondary schools have been criticized for major shortcomings for decades, and analysts who see significant progress seem few and far between. Why does the President think he’s found the magic bullet that has eluded so many others?

Moreover, as I wrote in my book The Race to the Bottom, trainable potential workers exist in every country. It’s true that America’s overall levels of economic development, its entrepreneurial culture and traditions, its social dynamism, and so many other strengths, can give Americans major legs up on foreign competitors. But it’s also true, as I’ve written, that corporations have learned to transfer many of these keys to business success – along with the building blocks of high productivity – to countries where economy-wide cost levels (and taxes and regulatory burdens) are much lower. American workers are still waiting for their leaders to address this challenge seriously.

Regarding official aid for new technologies and industries, Washington’s historic record has actually been quite impressive. The nation’s continuing leadership in sectors from agriculture to aerospace is the proof. But even if the U.S. budget climate was more promising for renewed funding for such programs, the President doesn’t seem aware that major new global players are now on the scene, and that their own economic subsidies simply dwarf America’s. Case in point – China.

Another problem apparently off Mr. Obama’s screen – the internationalization of manufacturing activity in particular that’s been spurred by post-NAFTA trade policy in particular means that the benefits of U.S. subsidies are all too likely to leak abroad unless Washington takes proactive measures to keep them state-side. A depressing example of such leakage has already been provided by the ballyhooed “Cash for Clunkers” program to bolster the auto industry – which wound up subsidizing the purchase of much more foreign automotive than domestic automotive production.

Congress’ Republican leaders have consistently complained about President Obama’s supposed ambivalence about new trade deals and urged him to show more guts – especially when it comes to lobbying and challenging fellow Democrats. But as made clear by the rising deficits – and resulting output and job loss – that keep accompanying new agreements, American trade policy’s real problem is a shortage of brains.

(What’s Left of) Our Economy: The New U.S. Growth Speed-up Took Place Despite Trade

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export doubling, exports, GDP, growth, imports, Obama, recovery, Trade, trade Deals, {What's Left of) Our Economy

Today’s final (for now) revision of the third quarter GDP figures show that the increase in estimated growth from the second revision’s 3.90 percent on a real annualized basis to 5.00 percent stemmed entirely from domestic developments. The trade deficit for the quarter was pegged at $431.4 billion annualized – slightly higher than the $431.0 billion in the second estimate, as both inflation-adjusted imports and exports were revised down marginally (though the latter remained at a new quarterly record). The final third quarter figure still shows that trade’s recovery role changed from a subtraction in the second quarter to a contribution in the third. But overall, trade flows have slowed the recovery by nearly 3.40 percent, and President Obama’s export doubling goal receded even further into fantasy land.

Here are the trade highlights from this morning’s GDP report:

>The final revision to third quarter GDP figures show that the major speed-up in growth reported in compared with the last set of changes took place despite the nation’s trade performance.

>Although this morning’s new Commerce Department report revised annualized third quarter real growth up from 3.90 percent to 5.00 percent on an annualized basis, it also showed that the trade deficit actually worsened a bit – from $431.00 billion to $431.40 billion annualized.

>This final trade deficit figure is nonetheless better than the $460.40 billion reported for the second quarter, and means that rather than slowing sequential growth by 7.39 percent, as in the second quarter, American trade flows generated 15.60 percent of the third quarter’s inflation-adjusted expansion. (The previous third quarter revision tabbed the trade contribution to the lower growth level at 20.00 percent.)

>As in every period during which trade adds to real growth, it achieves this goal without a single dollar of new budget deficit-boosting tax cuts or spending hikes. Indeed, since nearly all of this debt-free growth comes from the private sector, trade-generated growth strengthens American finances by increasing the nation’s level of taxable activity and thus reducing the national debt.

>These better U.S. trade flows, however, are completely unrelated to American trade deals and other trade policies. Instead, they stem entirely from the turnaround in U.S. energy trade.

>According to the U.S. Census Bureau’s separate monthly trade figures, from the recovery’s beginning in mid-2009 through this past September, the real U.S. oil trade deficit is down by nearly 50 percent on a monthly basis – from $16.62 billion to $8.56 billion. Yet during this period, the non-oil goods deficit – which is heavily influenced by U.S. trade policy – has more than doubled on a monthly basis, from $20.05 billion to $48.40 billion in September. That’s only slightly below the all-time high of $49.09 billion in May.

>Even including the gains from the energy revolution, U.S. trade flows have subtracted 3.40 percent from real U.S. growth since the recovery’s onset.

>Real U.S. exports for the third quarter were revised down for the second time this morning, but the new $2.1040 billion annualized figure is still a quarterly record. The previous estimate was $2.1057 billion.

>These exports are now 1.12 percent higher than the second quarter’s level, not the 1.90 percent initially reported for the third quarter.

>U.S. real exports, moreover, are up only 37.04 percent since the first quarter of 2009. As a result, they remain way short of President Obama’s commitment to double them by the end of 2014 – with only one data quarter left to achieve this goal.

>The new GDP figures pared third quarter GDP real import levels down from $2.5367 billion in the second estimate to $2.5353 billion – still just below the second quarter’s record annualized level of $2.5411 billion. Imports therefore fell sequentially by 0.23 percent in the third quarter, not the 0.43 percent first reported.

 

Im-Politic: Globalization and the Vanishing White Democratic Voter

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Clinton, Democrats, free trade agreements, illegal immigration, Im-Politic, immigration reform, Jobs, minorities, Obama, offshoring, Populism, Republicans, Trade, trade Deals, voters, wages, whites

Thomas Edsall of The New York Times is one of journalism’s most incisive writers about economics and political economy. (And no, that’s not a subtle put-down.) That’s why it’s so strange to review what he left out of his column today on “The Demise of the White Democratic Voter” and on Republican attempts to change this group’s long-time loyalties.

According to Edsall, one of the keys to understanding why Democratic office-seekers have done so poorly among white voters in recent elections is the Affordable Care Act. He does indeed do a good job of explaining how Obamacare “shifts health care benefits and tax burdens from upper-income Americans to lower-income Americans, and from largely white constituencies to beneficiaries disproportionately made up of racial and ethnic minorities.” The author also rightly noted the ever greater resentment of white voters about underwriting big government more generally with tax bills that seemingly never stop rising.

But what Edsall left out is important, too: First is the Democrats’ 20-year ambivalence on offshoring-friendly trade deals, and their dramatic shift to wholesale support for immigration reform proposals featuring sweeping amnesty proposals. Second is the Republicans’ nearly equally wholesale refusal to capitalize on voter anxiety stemming from the job- and wage-killing effects of recent U.S. trade policies.

Since the 1980s, it’s been clear that Democratic party ranks include a great many voters from union families in particular who closely identify with the so-called traditional social values typically pushed by Republicans (who candidate Barack Obama in 2008 condescendingly claimed were clinging “to guns or religion or antipathy to people who aren’t like them”). At the same time, this group still (rightly) associates the GOP with a business establishment that’s been happy to abandon Main Street for cheaper foreign workers (whether brought into the United States or working abroad) and fast-buck financial engineering-heavy business models.

Ronald Reagan successfully appealed to many of these voters by combining vigorous defense of traditional values (often only in rhetoric rather than with action) and a series of trade policy decisions that provided major protections to key industries like autos, steel, and machine tools with big blue-collar unionized workforces. But his GOP successors in the Oval Office, the Georges Bush, strongly rejected this political and policy formula.

Of course, so have Democratic Presidents like Bill Clinton and Barack Obama – even as many of the House and Senate members elected by Democrats have staunchly opposed the last two decades’ worth of trade agreements and related policy decisions like coddling China’s currency manipulation. Small wonder that white men in particular – many of whom still relied on a shrinking manufacturing sector for their earnings and pensions – moved rightward.

Most middle class whites in particular have not been directly threatened at the work place by ever greater flows of legal and illegal immigrants (with exceptions in high tech fields flooded with H-1B visa holders). But unquestionably they have been turned off by the challenge to the rule of law and national security posed by the tacit encouragement of illegal immigration, by the use of their tax dollars to fund public services for illegals (which feeds into the broader hostility to high taxes), by the related sense of entitlement projected by the mass illegals’ demonstrations of the mid-2000s (which also included many legal immigrants and other supporitve citizens and residents), and by the multi-culturalist arguments so often used by champions of Open Borders.

Thus white voters face a choice nowadays that, if not entirely Hobson-ian, is decidedly uninspiring. On the one hand they can support a Democratic party that’s always taken the lead in creating the key economic protections crucial to creating a large, enduring middle class, but whose president is apparently determined to enact a mass amnesty by executive order, and only somewhat less determined to support more offshoring-friendly trade deals. On the other hand, they can continue defecting to a Republican party that, whatever its other perceived advantages, is only superficially united against looser immigration controls, and that’s even more enthusiastic than Mr. Obama about trade offshoring.

Some day, some national-level politician will figure out the advantages of fusing a populist economic platform with positions on social and cultural issues that can not only be called traditional, but that clearly emphasize the best of that tradition. Until then, however, it looks like winning the White House will depend heavily on whether the Democrats attract and retain enough non-white voters to offset continued loss of white supporters, and the converse for the Republicans – hardly a formula for a more harmonious and more unified nation.

(What’s Left of) Our Economy: Competitiveness Hasn’t Always Required Trade

Tags

Airbus, aircraft, anti-trust, Boeing, Bollywood, competitiveness, entertainment, finance, Hollywood, software, Trade, trade Deals, {What's Left of) Our Economy

Because the Mainstream Media consistently fronts for the economics establishment on the big issues, the appearance of this (evidence-free) post on The New York Times website Thursday indicates that a big official theme of upcoming months will be the inability of the United States to withstand a global slowdown.

This narrative is likely to be put in service of two related sets of policies that would unnecessarily slow an already woefully subpar U.S. recovery, and worsen the global trade and investment imbalances that helped trigger the financial crisis and all the misery that’s followed it.

The first, which I wrote about recently, is the reported decision to open American markets unilaterally in order to boost growth rates overseas in the mistaken belief that the U.S. economy is strong enough to afford this handout. The second is the continuing push to conclude huge trade deals with Europe and Pacific Rim countries that would produce the same harmful results because they’re modeled after a long string of agreements that have supercharged U.S. deficits.

So it seems timely to present some new reasons for concluding that America is amply capable of prospering amid global stagnation – and even worse – and that Washington should be seeking to enhance this capacity for self-reliance, not further degrade it.

A while back, I asked why the economics conventional wisdom – and the chattering class that parrots its every claim – assumes that the enormous U.S. economy couldn’t generate an adequate level of efficiency-enhancing competition all by itself, and that its integration with the larger (but not stupendously larger) world economy is needed to achieve this important goal. I’m still waiting for an answer.

Here’s some new evidence for doubting that international competition is crucial for ensuring satisfactory product quality, consumer choice, innovation, and the like – at least where American industries are concerned: Several major sectors of the U.S. economy that easily come to mind have risen to (deserved) world-leading status while facing virtually no foreign competition at all.

The first example: long-haul commercial aircraft. Boeing today is one of only two serious global players (the other being Airbus), but before the European Union’s heavily subsidized products appeared on the market, American-made long-distance craft were the only game in town. Yes, Britain produced the first commercial jet, which came into service in 1952. But a series of accidents effectively killed the Comet, and Britain’s civilian aircraft industry, and by 1958 Boeing entered the business never to look back. It would be joined by Lockheed and Douglas, but the Americans had the field completely to themselves until Airbus’ entry in 1972,  Among them, the U.S. firms manufactured generations of excellent products, along with some troubled jets like the DC-10.

I’ll be briefer on the other examples, just to get this post up sooner rather than later. But they are:

> computer software. As with commercial jets, American companies totally dominated the field for decades. Although significant foreign competition was absent, domestic competition was fierce;

> finance: Although individual European and Japanese banks and other financial institutions often dwarf their individual U.S. counterparts by various measures, collectively the American finance industry has long towered over all national rivals, and it’s the same situation for financial markets. When it comes to innovation (a mixed blessing, as the financial crisis should teach), the gap has been even wider. And again, fierce domestic competition has been the key – especially after post-1970s waves of deregulation; and

> motion pictures: Whether or not you prefer American to foreign films as a rule, there’s no doubt that the former have long ruled commercially all around the world. In fact, common features of recent and proposed trade agreements have been provisions permitting foreign governments to maintain various types of limitations on U.S. Films’ access to their domestic markets, for fear that the homegrown industry will be overwhelmed. Yes, I know there’s been a huge Bollywood industry in India for roughly 100 years. But with exceptions like Slumdog Millionaire, its offerings have limited appeal globally and simply have never come close to the box office racked up by American blockbusters.

It’s easy to explain all the above narratives with “special circumstances.” For example, American finance has reigned supreme for so long largely because the United States began the post-World War II era with nearly all of the world’s available liquidity. It also began that period with one of only three major aircraft industries not bombed out of existence (along with Britain’s and the Soviet Union’s). But these sectors maintained predominance long after postwar recovery began around the world. And the U.S. software edge, which initially benefited from military investment, grew much bigger once the largely civilian personal computing and internet revolutions took off.

Moreover, the role of special circumstances strengthens rather than undermines this post’s main argument: Foreign competition’s role has been anything but all-important. And as I’d written bein that previous post, America’s immense economy could easily generate more domestic competition – and all its benefits – with serious enforcement of anti-trust and anti-monopoly laws. Could more trade strengthen the U.S. economy still further? Absolutely. But the acid test of new agreements now needs to be not simply how their net gains compare with the situation in the absence of such deals, but how they compare with alternatives within Washington’s grasp that are entirely domestic.

(What’s Left of) Our Economy: The Case for New Trade Policies Right Under a Reporter’s Nose

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inequality, Jobs, Trade, trade Deals, trade policy, wages, {What's Left of) Our Economy

The New York Times’ Thomas Edsall has been doing a terrific job of monitoring U.S. economic trends – especially in the labor markets – and of spotlighting the scholarly research that’s doing the most to keep clarifying the picture. He could do even better if he would take the next step and start recognizing the central role played by two decades of offshoring-happy trade policy decisions in pauperizing so much of the workforce and miring the U.S. and possibly world economies in a state of secular stagnation.

In his most recent article, evidence for focusing on trade policy as a wage-killer was staring him right in the face – albeit in the 31st paragraph. It came in the form of a 2013 Brookings study he cited reporting, “Our data yield one robust correlation: that declines in payroll shares are more severe in industries that face larger increases in competitive pressures from imports.” This accounts, the authors specified, for “3.3 percentage points of the 3.9 percentage-point decline in the U.S. payroll share over the past quarter century.”

That “payroll share” is American labor’s share of the country’s income. One study of course is hardly dispositive, but this figure is stunning nonetheless. For decades, it’s been a commonplace among economists that trade liberalization has been a best a minor contributor to America’s growing rich-poor gap (a different but closely related indicator). Now Brookings, which has long supported trade expansion, is publishing papers blaming it for the lion’s share of one measure of the typical U.S. workers’ plight. That’s a development worth at least much higher placement – if not a story in and of itself.

Edsall’s article, however, also made clear a likely reason for his failure to appreciate trade’s responsibility for wage lag, growing inequality, and the like: his portrayal of trade liberalization as a natural phenomenon that simply reflects historically unprecedented levels of foreign competition faced by U.S. workers. That heightened competition is all too real. But decisions in Washington and other governments have been central to determining its form – and which Americans would be the biggest winners and losers. Depicting the current version of globalization as a force of nature or an inevitable byproduct of technological advance and other forms of progress needlessly obscures the choices U.S. leaders have always had, not to mention the full-court-press lobbying campaigns by business’ offshoring lobby to shape them.

Even more important, since the state of globalization has resulted from human choices, it can be remade by these same choices. As a result here’s hoping Edsall – and other journalists – will start spending less time agonizing about (admittedly significant) abstractions like “the legitimacy of free-market capitalism” and more illuminating the concrete policy changes urgently needed to get the economy back on a productive, sustainable course.

Those Stubborn Facts: A Trade Rep Challenged by the Truth on Trade

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exports, Those Stubborn Facts, Trade, trade Deals, Trade Deficits

“[I]t’s been a great challenge to argue that because of our open trade regime, trade agreements are always in our favor – [that they] create rules and open up the economies of other countries for our exports.”
–Former U.S. Trade Representative Mickey Kantor

Growth of U.S. net exports since Mickey Kantor served as U.S. Trade Rep (1993-2013): -577.60%

(Sources: “Former US Trade Reps. Mickey Kantor and Susan Schwab: Make trade a priority,” by Anne Kim and Ed Gerwin, Republic 3.0, September, 2014, http://republic3-0.com/former-ustrs-mickey-kantor-susan-schwab-trade-must-priority/ and calculated from “U.S. Trade in Goods and Services – Balance of Payments (BOP) Basis, 1960 through 2013,” U.S. Census Bureau, http://www.census.gov/foreign-trade/statistics/historical/gands.pdf)