(What’s Left of) Our Economy: Recent Revisions Muddy the U.S. Manufacturing Picture Still Further

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Barack Obama, CCP Virus, China, Commerce Department, coronavirus, COVID 19, Donald Trump, Federal Reserve, inflation-adjusted output, manufacturing, manufacturing output, metals, real value-added, tariffs, Trade, trade policy, trade war, value added, Wuhan virus, {What's Left of) Our Economy

As if the CCP Virus pandemic and its aftermath haven’t made gauging the real health of the U.S. economy difficult enough, the Federal Reserve late last month came out with its latest long-term (“benchmark”) revision of its domestic manufacturing production data that confuse the picture of industry’s recent status still further.

These revisions cover the 2017-2019 period, and as such, they’re especially important in gauging how U.S.-based industry fared under President Trump and the trade policy revolution he launched versus their performance during the second term of Barack Obama’s presidency and his standard trade policies. (As known by RealityChek regulars, these two time periods provide the best basis for comparison, since they came closest together during the same – expansionary – business cycle.) Moreover, because the revisions create a different baselines, they also affect the post-2019 period’s growth results for manufacturing, which include the pandemic period.

The Fed’s summary makes clear that the revisions show the inflation-adjusted expansion of manufacturing output during that Trump period to have been significantly slower than previously reported. That finding indicates that far from boosting manufacturing production, and particularly compared with the Obama years, the Trump tariffs (on steel and sluminum, and on hundreds of billions of dollars worth of goods from China) actually held it back.

Indeed, the revisions are so substantial that the picture they draw is a mirror image of the predecessor data – which showed that, at least before the virus struck, Trump-era manufacturing growth in real terms considerably bested the Obama-era performance. For that matter, the previous Fed numbers showed that domestic industry fared relatively well under Trump even counting the pandemic-induced recession year 2020.

Here are the results side-by-side for after-inflation manufacturing production growth in percentage terms:

                                                                   pre-revision               with revision

last four Obama years:                                   +2.45                          +1.30

Trump years pre-pandemic:                           +3.60                           -0.41

all four Trump years:                                     +2.13                           +0.82

So when it comes to growth – an especially important metric, since it’s tough to imagine creating many jobs without it – the new Fed revisions show that the second Obama term was better for U.S. manufacturers than Trump’s single term, CCP Virus or no.

Or were they? As also known by RealityChek regulars, the constant dollar output figures used by the Fed aren’t the only way to measure growth in manufacturing (or any other sector of the economy). Another is value-added, which attempts to avoid the double counting built into the standard output numbers created by their failure to distinguish between the value of the parts and components of a final product, and that of the final product itself. That’s why economists generally view them as the more revealing statistics. And in the above-linked announcement describing the revision and its methodology, the Fed says that the new numbers incorporate insights gleaned from the latest value-added figures (which are reported by the Commerce Department).

But when the latest version of these statistics are examined, they still show that domestic manufacturing grew much faster during the Trump years than during the final four Obama years. Here are the results in percentage terms when value-added is adjusted for inflation:

last four Obama years:                                    +3.88

Trump years pre-pandemic:                            +7.56

all four Trump years:                                       +9.22

One especially interesting feature of the above – the real value-added numbers show that U.S. manufacturing output actually grew further during the pandemic. In fact, even the revised Fed growth numbers show that industry has fared a good deal better so far during the pandemic than previously reported – with after-inflation production shrinking by just 0.92 percent between February, 2020 and this past April, not 1.42 percent.

Tomorrow the Fed will publish its first read on real manufacturing output for May. It will of course shed some more light on the status of domestic industry. But never forget that, given how the results will be revised not only several times during the next several months, but also about two years from now, the degree of illumination may be relatively modest.

Those Stubborn Facts: A Trump China Trade Deal Scorecard Without the Hysteria

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China, China trade deal, Phase One, tariffs, Those Stubborn Facts, Trade, trade agreements, trade policy, trade war

China’s global imports, calendar year 2020 y/y: -1.1 percent

China’s imports from the U.S., calendar year 2020 y/y: +9.8 percent

 

“Thus [Trump’s] Phase 1 agreement appears to have contributed to 

some improved U.S. export performance to China, even if China is

far away from meeting the year one commitments.”

 

(Source: “U.S.-China Phase 1 Trade Agreement – Data Through December 2020; China has increased purchases of agricultural and energy products above 2017 levels but did not reach first year agreed purchases in 2020 and won’t reach the agreed level even if measured from March 2020-February 2021,” by Terence P. Stewart, Current Thoughts on Trade, February 6, 2021, https://currentthoughtsontrade.com/2021/02/06/u-s-china-phase-1-trade-agreement-data-through-december-2020-china-has-increased-purchases-of-agricultural-and-energy-products-above-2017-levels-but-did-not-reach-first-year-agreed-purchases-in/)

(What’s Left of) Our Economy: Biden Trade Policy’s Off to a Flying Stop

Tags

China, inflation, Joe Biden, Katherine Tai, National Foreign Trade Council, offshoring lobby, tariffs, Trade, trade policy, trade war, Trump, U.S. Trade Representative, USTR, {What's Left of) Our Economy

Any minimally intelligent discussion of the incoming Biden administration’s trade policy and the role of his pick for U.S. Trade Representative (USTR) needs to recognize at the start that Katherine Tai will make exactly none of the big calls on trade.

That’s not a knock on her specifically. But as nearly always the case (and the Trump administration was a major exception, as its trade envoy, Robert Lighthizer, was a prime author of specific, central initiatives), these decisions will be made way above her pay grade – almost certainly by the President himself or Treasury Secretary-designate Janet Yellen, or a combination of those two, along with the various special interests they need to please.

Even so, Tai will play an important message-bearing and policy defense role, especially in testimony before Congress, and in this vein, her first effort following her brief remarks following her nomination announcement got the Biden team’s record off to a start just ever so slightly above “same-old-stuff” level.

Most noteworthy, puzzling, and perhaps revealing was the choice of audience: the National Foreign Trade Council. For with its membership consisting of U.S. multinationals and big firms from highly protectionist economies like Germany and Japan, it’s long been a pillar of the corporate Offshoring Lobby.

Sure, many of these members have started to voice complaints about their China-related troubles in particular. But they’ve made equally clear that they have no clue as to realistic ways of solving them. In fact, their dogged opposition to unilateral, Trump-like U.S. tariffs as remedies (which have sharply curbed the access to the American market of their overseas production, and the availability of massively subsidized Chinese inputs for their domestic operations) has rendered them big obstacles to the remaining overhaul national trade policy needs.

It’s also true that everything known about Biden’s own long record on the matter, and his own statements during the campaign, makes clear the incoherence – and just as likely cynicism – of his own current stated approach (notably, stressing the imperative of working with – deeply conflicted and chronically fence-sitting — American allies to counter China’s trade and broader economic abuses).

Even so, given the pains Biden took to portray himself as “Middle Class Joe” whose trade initiatives and related decisions would prioritize American worker interests above all else, it needs to be asked why, from a purely political standpoint, his choice for trade negotiator chose an audience whose members have long pushed for exactly the opposite. Why not appear before a union audience?

Just as bizarre, Tai emphasized to these died-in-the-wool offshorers that “The President-Elect’s vision is to implement a worker-centered trade policy. What this means in practice is that U.S. trade policy must benefit regular Americans, communities, and workers.”

What did she and her superiors (who of course cleared her remarks) hope to accomplish with this declaration? Agreement? Or even the beginnings of theological conversion?

Weirder still: Her observation that “people are not just consumers — they are also workers, and wage earners” and, more pointedly, that when thinking about trade, it’s crucial to emphasize that “Americans don’t just benefit from lower prices and greater selection in shops and markets.” After all, her boss emphasized throughout the campaign that “President Trump may think he’s being tough on China. All that he’s delivered as a consequence of that is American farmers, manufacturers and consumers losing and paying more.”

It’s of course possible that Biden and his team could figure out a way to shield the entire U.S. domestic economy, from Chinese – and other countries’ – predatory practices without reducing the price competitiveness of these imports in the U.S. market. But it’s suggestive at the very least that after months on the campaign trail – and many decades in public life – the President-Elect has offered no specifics. And Tai’s speech did nothing to clear up this mystery.

(Not that there’s been any sign of noteworthy trade-related inflation during the “trade war” period – as shown, e.g., here – but one way greatly to boost the odds that tariffs don’t send prices upward would be to accompany trade restrictions with greater anti-trust enforcement that increases domestic competition, as I’ve argued here.)      

Tai advertised her and the broader Biden trade policy points as part of the former Vice President’s promise to “Build Back Better.” So far, though, the most charitable description of these is actually more like “Pretend More Assertively.”

Im-Politic: More Evidence That Trump Should Really be Trump

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2018 elections, African Americans, Democrats, election 2020, establishment Republicans, Im-Politic, Immigration, impeachment, Jacob Blake, Joe Biden, Joseph Simonson, Kamala Harris, Kenosha, law enforcement, Mickey Kaus, Obamacare, Open Borders, police shooting, race relations, regulations, Republican National Committee, Republicans, riots, RNC, Rust Belt, tax cuts, trade policy, Trump, Washington Examiner, white working class

Since the early months of Donald Trump’s presidency, I and many of those who backed his election have been frustrated by his frequent support for and even prioritizing of issues and positions championed by orthodox Republicans and conseratives. After all, there was little reason to believe that he won the Republican nomination, much less the White House, because he was focused laser-like on cutting taxes and regulations or eliminating Obamacare. If that’s what either Republican or overall voters wanted, then you’d think that an orthodox Republican would have wound up running against Democratic nominee Hillary Clinton – and triumphing.

One reason I came up with to explain the early burst of conservative traditionalism from Mr Trump (highlighted by a failed effort at healthcare reform and a successful full court press waged to pass the Tax Cuts and Jobs Act of 2017) was his need to make sure that the establishment wing of his party stayed with him if he faced an impeachment.

His gambit worked, but even though the impeachment threat is gone, I still hear the President talking up the tax cuts and regulation thing way too much for my tastes. So it’s more than a little interesting to have just learned that, at least according to a report last week in the Washington [D.C.] Examiner, I haven’t been alone. (Or, more accurately, I and a handful of nationalist-populist analysts like Mickey Kaus haven’t been alone.) In this article, Examiner correspondent Joseph Simonson contends that some folks connected with the Republican National Committee (RNC) came to the same conclusion in the late summer and early fall of 2018. And just as important – their analysis came just before the GOP suffered major setbacks in that year’s Congressional elections after doubling down on conventional Republicanism.

Among the highlights of the report (whose existence the RNC denies):

>”Voter data from areas such as Kenosha County, Wisconsin, [we’ll return to this astonishing coincidence below] and other exurban communities, the individual said, showed a troubling trend. Although voters there very narrowly backed Trump in 2016, President Barack Obama’s margins were in the double digits in 2008 and 2012.”

>”Unlike members of Trump’s base, who can be trusted to vote for just about any Republican candidate, these voters feel no strong affinity toward the GOP. Moreover, the interests of those who live in communities such as Kenosha differ greatly from those who live in the Philadelphia suburbs in Pennsylvania.

“These Rust Belt voters favor stronger social safety nets and hawkishness on trade, rather than typical GOP orthodoxies such as lower tax rates and an easier regulatory environment for businesses. That is not to say these voters oppose those things, but the rhetorical obsession from GOP donors and members of the party do little to excite one-time Trump voters.”

>“Back in 2018 the general response to the report from others who worked at the RNC, said one individual, was, ‘well, we have socialism’ as an attack against Democrats and boasts about their new digital voter turnout apparatus.’”

>”Steve Bannon, the former aide to the president who was indicted last week on fraud charges, had viewed the same report a year ago and concluded that the upcoming election against Biden looked like a “blow out” in the former vice president’s favor.”

But let’s get back to the Kenosha point – which of course is unusually interesting and important given the race- and police-shooting-related violence that just convulsed the small city recently. It’s also interesting and important because the alleged report’s treatment of racial issues indicates that the authors weren’t completely prescient.

Specifically, they faulted the RNC for wasting time and resources on a  “coalition building” effort aimed at “enlisting the support from black, Hispanic, and Asian voters who make only a marginal difference in the Midwest and [that] can prove potentially damaging if more likely Republicans are neglected.”

Explained one person quoted by Simonson (and possibly one of the authors): “Lots of these people at the RNC are in a state of denial. The base of the GOP are white people, and that gives the party an advantage in national elections. You could not have a voter operation in California whatsoever, and it wouldn’t make any difference, but the RNC does because they don’t want to admit those states are lost forever.” .

Yet even before the eruption of violence in Kenosha (and too many other communities), this analysis overlooked a crucial reality: There was never any reason to assume that, in the Midwest Rust Belt states so crucial to the President’s 2016 victory and yet won so narrowly, that significant portions of the African American vote couldn’t be attracted without alienating the white working class. For both blacks and whites alike in industrial communities have been harmed by the same pre-Trump trade policies strongly supported by his chief November rival Joe Biden and many other Democrats. (For one example of the impact on African Americans, see this post.) Moreover, among the biggest losers from the Open Borders-friendly immigration policies now openly championed, instead of stealthily fostered, by the Democratic Party mainstream, have been African Americans.

It’s not that the President and Republicans had to convince massive numbers of African Americans with these arguments. A few dozen thousand could be more than enough to make a big difference this fall. And there’s some polling data indicating that the strategy was working even before the opening of a Republican convention that featured numerous African American speakers.

Now of course we’re post-the Jacob Blake shooting by Kenosha police and the subsequent rioting and vigilantism. We’re also post-the Biden choice of woman-of-color Kamala Harris as his running mate. Will those developments sink the Trump outreach effort to African Americans and validate the 2018 memo’s arguments?

Certainly the Harris choice doesn’t look like a game-changer. The California Senator, you’ll remember, was decisively rejected by African American voters during the Democratic primaries. I’m less certain about the Kenosha Effect. On the one hand, Mr. Trump has expressed precious little empathy for black victims of police shootings. On the other hand, he has villified the rioting and looting that are destroying the businesses – including African-American-owned – relied on by many urban black neighborhoods in cities that have long stagnated, at best, under Democratic Mayors. And this poll I highlighted a few weeks ago presents significant evidence that most African Americans have no interest in fewer police on the streets where they live.

It’s not hard to imagine a Trump campaign message developing over the next two months that strikes a much better balance. And an early test case looks set for tomorrow with the President’s planned visit to Kenosha. Somewhat harder to imagine is Mr. Trump significantly downplaying issues like tax and regulatory cuts, and ending Obamacare. As for his priorities if he wins reelection? At this point, the evidence is so mixed that I feel clueless. So stay tuned!

(What’s Left of) Our Economy: The Real Promise – & Pitfalls – of Foxconn’s New US Manufacturing Plan

Tags

assembly, Carrier, components, flat panel displays, Foxconn, incentives, innovation, Jobs, manufacturing, Paul Ryan, productivity, regulatory reform, Scott Walker, subsidies, tariffs, tax breaks, tax reform, Terry Gou, Trade, trade policy, Trump, Wisconsin, {What's Left of) Our Economy

Sorry for the recent absence – and during an incredibly newsworthy period!  There’s been lots of important economic data released recently, which I’ll be reporting on in upcoming days.  So what to focus on in this return offering?  One recent story that seems to reflect many of the biggest developments and trends of the Trump administration’s first six months is the announcement this past week that the Taiwanese electronics giant Foxconn will be spending $10 billion to build a new factory for flat panel displays in southeastern Wisconsin. 

Think this is a stretch?  Then consider this:

The announcement, which could become a big win for the American economy – and a big feather in the president’s cap –was completely upstaged by a series of White House personnel shakeups orchestrated by Mr. Trump himself.

Moreover, the Mainstream Media accounts invariably combined their longstanding hostility to the president with their instinctive rejection of the possibility that unconventional economic ideas and policies can have any merit. 

For instance, they uniformly focused on the job-creation effects of the new factory – which, as typical for capital-intensive products and industries, will be relatively modest – to portray the news as ruse by the president to convince voters that he was keeping his campaign promise to revive manufacturing employment.  Their main evidence?  The tax breaks and other subsidies the project would receive, which came to many thousands of dollars per position, which were easy to depict as a first class boondoggle.

Further, the media uniformly depicted employment as the only possible upside to strengthening the nation’s high value manufacturing.  Its major contributions to the economy’s productivity growth – which could use a major helping hand – and to its innovative capacities, were completely ignored. 

At the same time, the reporting overlooked crucial questions that need to be answered to assess whether the new Foxconn factory will live up to its promise.  Principally, will it be engaged in components production – where so much of manufacturing’s value-added comes from?  Or will it simply be assembling final products from imported components, as has been the case with other recent foreign electronics investments?  If the latter, the subsidies it’s garnered will be much more difficult to justify.  And in this vein, have either federal or Wisconsin authorities imposed any conditions that would encourage genuine manufacturing?   

Not that the Foxconn announcement completely vindicates globalization policy critics, either – or at least not those who, like me, have insisted that manufacturing revival that matters will require a thorough recasting of American trade policy.  I’ve been especially skeptical of the idea that jaw-boning a la Trump plus some subsidies could make a real difference – though I’ve insisted since Mr. Trump as president-elect intervened in the Carrier company’s decision to offshore Indiana manufacturing jobs that his use of the bully pulpit could greatly aid the welcome transformation of America’s approach to manufacturing that he seemed to have in mind.  And for the record, I’ve been skeptical that subsidies can be decisive, either – because America’s financial support for manufacturing was so unlikely even to approach the scale of, say, China’s. Finally, I’ve never thought that the kinds of regulatory reform efforts Mr. Trump has launched would matter much, either, given that so many potent American trade rivals are practically regulation-free.  

At this early stage, the jury is still out.  But since the Foxconn announcement has hardly been unique, and no significant changes have taken place in U.S. trade policy other than a withdrawal from the Trans-Pacific Partnership trade agreement, the president so far is doing a pretty good job of proving me wrong.

Nonetheless, I’m still confident that, sooner rather than later, the manufacturing needle won’t be moved without imposing trade curbs of some kind.  Although avowed fiscal conservatives like House Speaker Paul Ryan (of Wisconsin) and his state’s governor, Scott Walker, enthusiastically supported the Foxconn incentives package, their appetite for such measures – even when reduced taxes are involved — is likely to be limited for other parts of the country because of their budget-busting effects.  Indeed, it looks like Ryan may wind up accepting a smaller corporate tax cut in Congress’ tax reform package for precisely this reason.  Moreover, these breaks could easily be offset by similar moves by foreign governments – and added to existing predatory practices like currency manipulation and tariffs of their own.  And I remain convinced that a high-income country, first world country like the United States can never rely heavily on deregulation to compete better against very low-income, largely regulation-free third world countries like China or Mexico. Nor should it want to. But no initiatives could match the power of policies that would limit or close off access to the world’s greatest economic and commercial prize by far, the American market.

In fact, as Foxconn’s CEO has strongly suggested, the threat of U.S. tariffs helped persuade him to promise to manufacture much more in America.  And he’s hardly alone in the corporate world, as I’ve reported.  That’s why I’m somewhat worried about the administration’s reluctance actually to impose tariffs, as opposed to threatening them.  If Mr. Trump keeps hemming and hawing about steel tariffs, and if he keeps opposing ideas like the border adjustment tax, which has just been stripped from Congress’ tax reform package, America’s competitors could easily conclude that his trade policy is largely bluff, and that they can keep using Americans as customers and not workers after all.

(What’s Left of) Our Economy: New Peterson Pro-Globalization Study Only Deserves a “Nice Try”

Tags

China, Financial Crisis, Gary C. Hufbauer, Global Imbalances, globalization, Great Recession, Larry Summers, manufacturing, Peterson Institute for International Economics, productivity, secular stagnation, technology, Trade, trade agreements, trade liberalization, trade policy, World Trade Organization, {What's Left of) Our Economy

The Peterson Institute’s new study of the benefits to Americans of globalization apparently leaves no doubt that the nation should promptly forget about any retreat from conventional trade liberalization policies and resume its aggressive pursuit of new trade agreements like the Trans-Pacific Partnership (TPP). Or does it? A close reading of the report reveals gaping holes in these claims.

According to authors Gary C. Hufbauer and Zhiyao Lu, between 1950 and 2016, “trade expansion” has enriched the overall U.S. economy by $2.1 trillion, and boosted America’s output per head and per household by just over $7,000 and $18,000, respectively. Even better, lower-income households probably gained the most (since the greatest trade liberalization progress has been made in the goods that comprise so much of their consumption).

Yet the phrase quoted in that previous paragraph points to the first big hole in the Peterson findings. “Trade expansion’s” benefits, the authors specify, entails much more than either signing new trade deals or otherwise reducing trade barriers. It also includes “technological advances in transportation and communications [that] have drastically slashed the economic distance between countries.”

Of course, there’s been a lot of the latter over the last 66 years. What share of expanded trade’s benefits has come from trade liberalization policy decisions and what share from that technological progress? Darned if the authors know.

The long time frame, in turn, reveals a second major problem with the central argument. Obviously over that last two-thirds of a century, the world economy, and America’s position in it, have changed in numerous and fundamental ways. One prominent example: For the first roughly three post-World War II decades, the United States was the only fully intact developed country. How could trade liberalization not have been a major net benefit? America produced countless products that the rest of the world desperately needed. And none of its important industries faced significant import competition until the 1970s. That doesn’t sound much like current circumstances.

And in fact, Hufbauer and Lu acknowledge this problem, noting, for example, that “compared to previous decades, increased trade since 2003 has not delivered substantial gains.” At this point, however, their analysis gets dicey. For example, they speculate that that low recent payoff resulted partly from “the lack of fresh policy liberalization on a large scale (the failure of the Doha Round)….” But that period actually saw a hugely important liberalization initiative completed – China’s accession to the World Trade Organization. And don’t forget the numerous free trade deals signed by the George W. Bush and Obama administrations, including with South Korea’s very large economy.

Moreover, although Hufbauer and Lu rightly note that the financial crisis and Great Recession also have marked the post-2003 period, they claim that “The decade that experienced the greatest gains from increased trade was 1970 to 1980.” That decade witnessed no less than two recessions (three if you count the 1980 downturn).

Undaunted, the authors contend that returning to the trade liberalization policy course will result in even more American wealth creation. But here’s where their discussion of the post-2003 period fails badly – and unmistakably. They never mention that, thanks largely to that aforementioned boost to incredibly lopsided U.S.-China the first decade of this century produced the greatest U.S. trade deficits and associated global economic imbalances in world history. They ended in the financial crisis and the nation’s worst economic downturn since the Great Recession.

Since America’s main trade partners – including China – seem either just as export-dependent, and/or just as import-and consumption-phobic as ever, it’s difficult to understand why a return to conventional trade diplomacy, combined with the cumulative and often lagged impact of past deals (as noted by Hufbauer and Zu) wouldn’t end in near-catastrophe again.

Another big problem: Former Treasury Secretary and chief Obama economic adviser Larry Summers, along with many others, worry that the United States has fallen into an economic trap they call “secular stagnation.” They speculate that the nation has become so incapable of generating healthy growth that it’s grown dependent on blowing up credit and consumption bubbles to at least produce (misleading) signs of economic life – and that these bubble’s inevitable bursting keeps creating financial crises and serious slumps. Do Hufbauer and Zu believe that the sandbagging of domestic manufacturing (which hasn’t grown in real terms since 2006) due to import competition and offshoring isn’t partly to blame? 

Finally, and similarly, American leaders have finally recognized that the economy is experiencing a major productivity growth slowdown. Can trade liberalization’s real economic impact be measured without considering the effect on productivity of allowing all that trade damage to manufacturing, which historically has led the nation in productivity growth?  

It’s definitely encouraging that a major think tank like the Peterson Institute is looking in detail at globalization’s impact on America’s economy.  Let’s hope that its next effort reflects some actual thinking.  

(What’s Left of) Our Economy: Latest Trade Deficit Scuffles Still Missing Lessons of 2008

Tags

bubbles, finance, Financial Crisis, free trade agreements, G20, Germany, Global Imbalances, investment, Japan, manufacturing, offshoring, tax reform, Trade, Trade Deficits, trade policy, trade surpluses, Trump, Wall Street, {What's Left of) Our Economy

Roughly ten years after it broke out, it’s still incredibly rare to see economists or pundits link U.S. and resulting global trade imbalances with the financial crisis. So I’m always thrilled – as I tweeted this past week – to see it ever happen. All the same, even this insightful column by Reuters’ Edward Hadas simply dances around the crucial link between these imbalances and American trade policies, and in particular, their offshoring-friendly nature.

In a March 15 essay, Hadas commented on the German (and other countries’) trade surpluses that have attracted such attention this past week for two main reasons: German Chancellor Angela Merkel’s first-ever meeting with President Trump, and a conclave taking place at the same time of the finance chiefs of the world’s 20 leading economies (the so-called G20). The author’s main contention is indisputable as far as it goes. According to Hadas, the real problem with these imbalances is financial:

“The euros, pounds and dollars which Germany, Korea et al accumulate inevitably land in the global financial system. There would be no problem – only gains all round – if these monies funded valuable infrastructure, productive factories and other assets which can generate a reasonable economic return.

“Too often, though, though, the extra currency winds up supporting counterproductive finance. It backs ultimately ruinous property speculation, lends support to chronically weak governments, encourages unsustainable consumer spending and destabilises developing economies, not to mention enriching banks and bankers and stimulating corruption. A typical example: the recycled dollars from the U.S. trade deficit helped fund the American housing bubble whose pop created the 2008 crisis.”

But what Hadas – and so many others – fail to do is explain adequately why deficit countries (like the United States) make such dangerously shortsighted choices with their windfalls. Three main (and not mutually exclusive) reasons have been served up. First, financial systems in the deficit countries (especially the United States, which runs the biggest deficits) have over-rewarded uses of capital that produce the fastest possible payoffs, and under-reward longer-term projects. The result is too much investment that encourages speculation, financial monkey business, and simple consumption, and too little investment that builds factories and laboratories and funds other activities that create wealth more slowly, but on a more sustainable basis.

Second, such irresponsible uses of capital have become practically inevitable if only because the deficits have been so enormous, and so much money has become available. When anything is in such abundance, and therefore costs so little, most economists would agree that there’s little reason to use it carefully. After all, it looks like a sure bet that more of that thing at very attractive prices will be readily available.

A somewhat different version of this argument has to do with what economists call “moral hazard.” It argues that the American financial system used over-abundant money so recklessly at least partly because investors felt certain that they’d get bailed out of most or all of their mistakes by government. So why not take maximum advantage of what seems to be a “heads, we win; tails, we lose” proposition?

The third explanation for the irresponsible use of resources focuses on the consumption-heavy nature of the economies of the deficit countries. (This argument also tends to note that the surplus countries frequently try to limit and even depress consumption.) The more capital they take in, in other words, the more such spending (as opposed to productive investment) is likeliest to result either because such behavior is encouraged by government, because a “live for today” has been produced by that country’s culture, or because of some combination of the two.

Whenever something as a big as a global financial crisis strikes, many culprits are responsible. And all of the above explanations should be taken very seriously (along with others, like lax financial regulation). But what Hadas and all the rest continue to miss is how the world trade system, national trade policies, and the trade flows they have fostered have actively fostered in deficit countries like the United States a neglect of productive activities like manufacturing (which is so heavily traded).

Specifically, as Washington in the 1990s and 2000s signed more and more trade agreements structured to encourage multinational companies from all over the world to supply U.S. consumers from locations in super low-cost and virtually unregulated developing countries like China and Mexico, American leaders and other elites (e.g., in the media) naturally sought to rationalize their decisions by spreading the message that sectors of the economy like manufacturing (and the income loss produced by the accelerated offshoring that rippled throughout so much of the Main Street economy) could be neglected with impunity. And the administration of George W. Bush (along with Congress of course) and the Federal Reserve chaired by Alan Greenspan underwrote America’s spendthrift ways with big budget deficits and ultra-low interest rates, respectively.

Even worse, these destructive trends fed on themselves. The more offshoring seemed to pay off, and the more domestic manufacturing operations looked like losing — or at least anachronistic — propositions, the less interested financiers became in investing in them. So the amount of productive activity on which to use incoming capital to start with began shriveling. And the less productive activity available to sustain Main Street living standards responsibly (i.e., mainly through earnings), the greater the political establishment needed to prop up those living standards by providing more easy money — at least if it wanted to stay in power while maintaining the offshoring status quo.

Ironically, even though Hadas emphasizes regulation as the answer to global imbalances, his particular focus has big trade implications:

“Regulation can do more than strengthen bank capital ratios. It can reform the system, so trade surplus funds are not directed to economically counterproductive uses. That will be tough, both politically and practically. But it should be easier – and will be far more helpful – to solidify finance than to try to change the national characters of Germany or Korea.”

I’m all in favor of channeling the use of trade surplus funds by deficit countries into productive activity. In fact, I strongly support requiring such uses by U.S. multinational companies if much-discussed tax reform finally succeeds in persuading them to bring home the vast amounts of earnings they’re currently stashing abroad to avoid paying higher U.S. corporate rates. 

But this requirement needs to be accompanied by (at the very least) strong measures to keep out foreign-made goods that benefit from predatory trade practices like dumping, subsidization, and intellectual property theft. Otherwise, foreign competitors will be able to keep undercutting their domestic American competition in the U.S. market, and these new productive investments will fail. It’s also entirely likely, however, that more sweeping trade curbs will be needed – to offset the scale economy disadvantages created by U.S.-based firms’ inability to sell into so many important markets and their rivals’ ability to sell freely in their home countries and the United States.

And this is in fact where recognition is needed that the trade problem created by American policy concerns not simply inducements to offshore, but the coddling of protectionism in high income countries like Japan and Germany.

The bottom line: As indicated in a post last week, the United States may have to accept that even reasonably balanced foreign trade is not achievable with competitors holding radically different economic priorities (as I argued last week was precisely the case with Germany), and that reducing trade flows is a more than acceptable price to pay for preventing financial crises caused by imbalanced trade. When you add in America’s great capacity for much more self-sufficiency in a wide range of manufactured good, that seems like a more than acceptable trade-off to me. More important, it’s where the Trump administration, admittedly in fits and starts, could be leading us.

(What’s Left of) Our Economy: Why Trump Voters Look Smarter on Trade than Big Media Journalists

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2016 election, automotive, Brookings Institution, China, exports, free trade agreements, industrial machinery, Mexico, Ronald Brownstein, Rust Belt, The Atlantic, Trade Deficits, trade policy, Trump, {What's Left of) Our Economy

Boy, those working class Americans who voted for Donald Trump for president. How ignorant! At least that’s the clear message sent by Ronald Brownstein’s recent article for The Atlantic reporting on new findings about the America’s trade performance and prospects and their likely impact on one of Mr. Trump’s main constituencies.

In Brownstein’s words, “If Trump’s moves ultimately reduce trade flows and squeeze exports, the biggest U.S. losers will include not only big metropolitan areas that almost entirely supported Hillary Clinton in November, but also the smaller places that provided the core of Trump’s support.” His evidence? A new Brookings Institution study purporting to show that (Brownstein’s words) “Although the big metropolitan areas generate the most exports, selling to the world is often proportionally more important to smaller places.”

More specifically, writes the author:

“The metropolitan areas where exports account for the largest total share of local economic output are smaller and midsized communities that are almost all hubs for either manufacturing or energy production. These places read like a recap of Trump’s campaign-travel itinerary: Columbus, Elkhart, Kokomo, and Lafayette in Indiana; Racine, Fond du Lac, and Sheboygan in Wisconsin; Lake Charles and Baton Rouge in Louisiana; Waterloo, Iowa; Hickory and Rocky Mount in North Carolina,; and Midland and Battle Creek in Michigan. The list of metropolitan areas where exports provide the greatest share of total gross domestic product doesn’t reach a big city until Seattle—which ranks about 40th.”

So what could be more obvious – and pathetic – than the conclusion that many of Mr. Trump’s supporters essentially opted to shoot themselves in both feet, at best?

Brownstein and the Brookings specialists do offer one explanation – though it plainly reinforces the impression created of Trump voters as know-nothings:

“Many of those smaller places…would initially welcome a more protectionist trade policy, on the belief that it will force manufacturers now relocating or building new facilities abroad to reinvest in the United States. The downside for them is less visible, but potentially more consequential: the cost to their local economies if retaliation from other nations, or simply a diminished effort to open other markets, leads to fewer sales from American firms to the world.”

Distorting these shortsighted Trump supporter views even more? “[I]t’s difficult for local officials to keep that broader perspective in mind when trade’s losers are so much more visible than its beneficiaries.”

Here’s a pretty big rub, though. Although most of the Mainstream Media for decades have swallowed claims from think tanks like Brookings about recent and current trade policies supercharging exports and benefiting the U.S. economy and its workers on net, the data tell the opposite story. Here are two leading (but by no means unusual) examples that have directly and powerfully affected the kinds of Trump strongholds listed in Brownstein’s article.

The first concerns U.S. trade in industrial machinery – a broad category of products that includes machine tools and construction equipment and farm machinery and engines and turbines and industrial heating and cooling equipment (think Carrier). Let’s see what’s happened on the trade front since 1997. That’s when the U.S. government adopted its current predominant system for classifying sectors of the economy, which has therefore generated nearly two decades of apples-to-apple statistics. It’s also when the first big effects began to be felt of major trade liberalization decisions made starting in the early part of the decade with places like Mexico and Canada — which were advertised overwhelmingly as “Big Emerging Markets” for American-made goods and services.

In 1997, this big segment of domestic manufacturing ran a $17.39 billion trade surplus. By 2015, this surplus had become a $14.33 billion deficit. And in the 2016 presidential election year, that shortfall was up nearly 60 percent through November (the latest figures available). Some net export bonanza.

The second example concerns the automotive sector – which has also been kind of important to the Rust Belt economy. In 1997, vehicles and parts combined racked up a trade deficit of $63.07 billion. In 2015, this figure was just under $178 billion – much bigger than the machinery gap. And through November of last year, it too had risen – though by a more modest 2.25 percent. Still, no export bonanza here, either.

And it’s the Trump voters who are ignorant?

(What’s Left of) Our Economy: More Signs that US Trade Policy Needs a Total Rethink

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anti-trust policy, Bloomberg, China, CNBC.com, competition, economic concentration, innovation, monopolies, Noah Smith, oligopolies, Peter Thiel, The Wall Street Journal, Trade, trade policy, Trump, White House Council of Economic Advisers, {What's Left of) Our Economy

It’s obviously just a coincidence, but it was a heartening development anyway. Soon after I made an unconventional (but urgently needed!) observation about the relationship between trade policy and domestic anti-trust policy, two items came out in the news showing that some big shots in the economics and business world – including a key adviser to Donald Trump – have been thinking about the same subjects.

My point, made briefly in my recent op-ed for CNBC.com, noted that backers of current trade policies seemed much more concerned with maximizing economic competition and its benefits by opening the U.S. market to more foreign entrants than by countering the rise of monopolies and oligopolies at home. For centuries, of course, economic thinkers have been telling us that the more producers of goods and services enter a market, the more fiercely they need to vie with each other for sales, and the more pressure they feel to innovate, to raise quality, and to lower prices. Therefore, creating the greatest possible levels of competition has long been a main objective and rationale for seeking the freest possible international trade flows.

But last spring, as I wrote, the White House Council of Economic Advisers came out with a study reporting that American levels of business concentration in many sectors of the economy have become worrisomely high. In other words, too many monopolies and oligopolies have emerged lately, slashing the number of businesses competing for customers and threatening to boost prices and depress quality and innovation more than would otherwise be the case.

The result, I argued, was a downright weird, and logically indefensible situation: Washington has been working overtime, in recent decades in particular, to promote competition by bringing more foreign entrants into the U.S. economy. But it’s also largely turned a blind eye to (and arguably at times encouraged) business deals inside that same U.S. economy that lowered the numbers of domestic participants and therefore weakened competition.

Given all the other problems I’ve linked to current trade policies, I suggested that these priorities have been completely backward. More competition is definitely a benefit. But why such apparent doubt by supporters of these trade policies that the gargantuan American economy can create adequate levels all by itself if government pursues vigorous anti-trust policies? Why such apparent determination to ignore how focusing on maximizing domestic competition ensures that the main corporate benefits – more competitive companies and all the jobs and production they’d be able to generate – remain in the United States? And why the great reluctance to acknowledge that much of the foreign competition admitted into the U.S. economy is either owned, controlled, or heavily subsidized (or some combination of the three) by foreign governments? Their successes clearly distort economic activity in the United States and abroad, and longer term, undermine free markets and the gains they can produce everywhere.

That’s why I was so interested to read this week of new academic findings that American companies that have faced greater Chinese competition lately have cut all kinds of new investment – including on research and development. In other words, they’ve became less innovative. As explained by Bloomberg columnist Noah Smith, economists have never ruled out the chance that greater foreign competition could undermine corporate innovation – e.g., because firms suffering consequently lower profits would have fewer resources available to pay for laboratories and tech workers. But scholars much more often assumed that greater trade competition would produce the opposite results.

Of course, the new research could mean that fostering greater domestic competition could produce the same innovation-curbing results. But perhaps it’s also reasonable to suppose that removing or reducing the foreign competitive pressures and increasing the domestic pressures could strike the best possible combination of benefits. I’ll be watching this front closely for answers to these crucial questions.

Another fascinating take on these issues is coming from Peter Thiel, the noted Silicon Valley magnate and adviser to President-elect Trump. According to a December 13 Wall Street Journal article:

“Mr. Thiel has spoken out against free trade and remains skeptical of globalization—worrisome for a tech industry that gets most of its revenue overseas. He wrote in his 2014 book, ‘Zero to One,’ that globalization enables the developing world to copy existing technologies, which he says is unsustainable and inferior to finding new technology solutions.”

So Thiel, too, seems to be saying that freer trade undermines innovation. But his solution – or rather, the combination of solutions he’s recommended – is novel to say the least:

“Mr. Thiel says government can play a central role supporting big tech projects such as the Apollo space program. He views monopolies as a positive force for the economy, which could portend weaker antitrust enforcement.”

To complicate matters further, Thiel describes himself as a libertarian.

It would be tempting to conclude from these items that no one with any standing in economics and business knows anything definitive or even useful about the relationship between trade and competition anymore. But let’s not forget the potential bright side. For decades, trade theory has been one of the most stagnant, encrusted area of economics (and the punditry and chattering class conventional wisdom it’s spawned). Clashing findings could signal that obsolete sacred cows are finally starting to be challenged. For me, few developments could be more hopeful.

Im-Politic: Why Clinton’s Still Untrustworthy on Trade

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2016 election, Donald Trump, free trade agreements, Hillary Clinton, Im-Politic, TPP, Trade, trade enforcement, trade law, trade policy, Trans-Pacific Partnership, World Trade Organization, WTO

For a politician widely considered such a policy wonk that she’s often stayed in the weeds at the cost of boring voters, Hillary Clinton gave an awfully sketchy picture of her views on trade and globalization in her ballyhooed economics speech in Michigan yesterday. In fact, the Democratic presidential nominee’s views so far contain fewer specifics, and her overall approach for dealing with the trade challenges that have caught fire in this campaign is much less coherent, than those of her Republican rival, Donald Trump (whose own proposals on the subject, I’ve noted, fall short in many analytical and prescriptive respects).

Let’s start with the big picture – i.e., the fundamental reasons why American trade policy has gone off the rails according to the candidates. Even if you don’t agree with it, you’ve got to agree that Trump’s critique is coherent. As he’s emphasized time and again, the United States has long run big trade deficits that have killed lots of jobs both because protectionist foreign governments are determined to grow by racking up big surpluses with America, and because multinational corporations and their Wall Street bankers have successfully pushed Washington to sign trade agreements that fuel these deficits by encouraging companies to supply the U.S. market from abroad, not domestically.

Clinton’s speech actually revealed that she agrees on these scores with Trump:

“It’s true that too often, past trade deals have been sold to the American people with rosy scenarios that did not pan out. Those promises now ring hollow in many communities across Michigan and our country that have seen factories close and jobs disappear.

“Too many companies lobbied for trade deals so they could sell products abroad but then they instead moved abroad and sold back into the United States.

“It is also true that China and other countries have gamed the system for too long.”

But (again, whether you agree with it or not) Trump’s promised policy follow-through dovetails with his analysis. He’ll negotiate better deals that prioritize boosting American growth and jobs on net, and enforce them with tariffs. Moreover, he’ll impose stiff duties on the products of those companies that move overseas and “sell back into the United States.”

Clinton’s remedies? She, too, pledges “to finally make trade work for us, not against us.” She will “stop any trade deal that kills jobs or holds down wages – including the Trans-Pacific Partnership [TPP].” But she says nothing about what concrete provisions need to be placed in new trade deals to achieve those goals. And she seems to think that existing deals can be improved sufficiently by ramping up “enforcement by appointing, for the first time, a chief trade prosecutor, I will triple the number of enforcement officers, and when countries break the rules, we won’t hesitate to impose targeted tariffs.”

As I’ve explained before, this approach faces three insurmountable obstacles to success. First, even a much greater government enforcement effort would be pathetically inadequate to monitor the factory complexes of even smallish countries like Vietnam for violations of current protections in trade deals against repressing workers and egregiously polluting the environment. How much more in the way of resources and personnel would be needed to keep track of the gargantuan Chinese manufacturing sector?

Second, she seems satisfied with the current domestic U.S. system for helping individual American companies and industries fight foreign violations of domestic and international trade rules covering practices like illegal subsidies, dumping, and intellectual property theft. Yet even taken on its own terms, the American trade law apparatus is a proven failure for reasons that have been obvious for decades. It’s reactive. It’s piecemeal. And its legalistic procedures are sadly ineffective against foreign governments that don’t share America’s rule of law tradition, and its associated transparency. Therefore, gathering evidence is all but impossible.

Third, as I’ve just written, the dispute-resolution systems created by individual U.S. trade agreements and by the World Trade Organization that was set up in 1995 serve as powerful checks on America’s ability to use its national trade law system unilaterally. The reason? In all these agreements, Washington has agreed to structures that treat it as simply one among equals even though access to its gigantic market is invariably the global economy’s paramount prize. And as a result, America is continually outvoted by export-dependent countries determined to keep its markets much more open to their products than vice versa.

Clinton also appears to labor under major illusions about the global politics of achieving even the limited trade policy tweaking she seems to favor. Like many long-time trade policy critics in the Democratic party and on the political Left, she has taken to lambasting Trump on social media for threatening to “start a trade war with China” – and presumably the other countries she agrees have “gamed the system for too long.”

But how do they think these countries will react to any serious, genuinely promising efforts to eliminate or offset their predatory trade practices? By embracing them with open arms? Does she expect no push-back at all? And when it comes, how will she deal with it?

Moreover, Clinton’s views of America’s leverage are difficult, at best, to understand. On the one hand, she charged that Trump’s trade “approach is based on fear, not strength. Fear that we can’t compete with the rest of the world even when the rules are fair. Fear that our country has no choice but to hide behind walls.” She insists that “America isn’t afraid to compete.” And yet she seems to be the candidate who’s cowed by the prospect of trade wars – which indicates that Clinton believes America lacks the leverage to prevail when push comes to shove. Why, then, does she think that her strategy will succeed? Because of the power of persuasion?

Clinton’s trade policy criticisms this year have been widely seen as campaign-driven – and therefore untrustworthy, especially among supporters of her former Democratic presidential rival Bernie Sanders and others on the Left. If they read this latest economics speech critically, they’ll find little reason to change their views of her trade policy positions as quintessentially political – and therefore all too ephemeral – constructs.