(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

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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

Tags

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.

Making News: Podcast of My Recent Appearance on Red State Talk Radio

Tags

2016 election, Donald Trump, Leonora Cravotta, Making News, recovery, Red State Talk Radio, The Scott Adams Show, Trade, trade policy

I’m pleased to announce that the podcast of my appearance last week on “The Scott Adams Show” on Red State Talk Radio is on-line.  Click onto this link for a great discussion between Scott, co-host Leonora Cravotta about how growing U.S. trade deficits and the trade policy failures behind them have slowed the American economy – and energized the 2016 presidential election. The segment begins at about the 12-minute mark.

And keep checking in with RealityChek for news of upcoming media appearances and other events!

 

Making News: Correction to This AM’s Red State Talk Radio Info

Tags

2016 election, Donald Trump, economy, Making New, recovery, Red State Talk Radio, Trade, trade policy

My apologies, folks.  I was under the impression that the Red State Talk Radio interview I just finished would be broadcast live.  In fact, it was taped and will be aired later today.  More details on listening live as soon as I get them.  Sorry again for any confusion or inconvenience, and I  hope you’ll all want to tune in later today.  It was an unusually interesting and timely discussion of the economic forces affecting this presidential election, and how Republican nominee Donald Trump plans to use trade policy overhaul to speed up this feeble recovery!

(What’s Left of) Our Economy: So You Think You Know Manufacturing’s Productivity Leaders?

Tags

labor productivity, manufacturing, multi-factor productivity, offshoring, productivity, Silicon Valley, technology, trade policy, {What's Left of) Our Economy

Washington has just released detailed new manufacturing labor productivity data, and as with the 2014 numbers (which have been revised), these new 2015 figures show a head-scratching list of out-performers, mediocrities, and laggards. Specifically, the champs include lots of sectors that few would consider “high tech” or “industries of the future” or “knowledge-intensive,” and the mediocrities include many that would be lumped into those glitzy categories.

A reminder – the labor productivity performance measured here is the narrower of the two efficiency gauges tracked by the U.S. Labor Department. It shows the amount of goods and services produced for each hour on the jobs by an American workers. The other measure – multi-factor productivity – as the name implies, measures how much output is created by a group of inputs taken together. The inputs include not only labor but capital, energy, materials, and others.

Earlier this year, Labor reported that labor productivity for the entire manufacturing sector increased by 1.39 percent in 2015. That’s OK by recent standards, but recent standards as poor by historical standards. Here’s a list of the ten sectors that beat this average by the greatest margin:

agricultural chemicals: +11.6 percent

tobacco products: +11.3 percent

industrial machinery: +8.0 percent

miscellaneous furniture-related products: +7.6 percent

paints, coatings, and adhesives: +7.6 percent

miscellaneous non-metallic mineral products: +7.6 percent

sawmill and preserved wood products: +7.4 percent

coating, engraving, and heat-treating materials: +7.4 percent

petroleum and coal products: +7.0 percent

lime and gypsum products: +6.0 percent

I don’t see anything screaming “Silicon Valley” here, do you?

Here’s a list of the ten sectors with the worst productivity growth last year:

household appliances: -10.9 percent

medical equipment and supplies: -6.9 percent

leather and allied products: -8.9 percent

bakeries and tortilla products: -7.3 percent

electrical equipment: -5.9 percent

fabric mill products: -4.6 percent

miscellaneous textile mill products: -4.4 percent

beverages: -4.2 percent

ships and boat-building: -4.1 percent

alumina and aluminum: -3.8 percent

architectural and structural metals: -3.8 percent

Nothing real high tech here, either. But most of the real surprises come from industries practically synonymous with innovation. Many experienced 2015s that were ho hum at best. In particular:

pharmaceuticals and medicines: +3.9 percent

semiconductors and electronic components: +3.4 percent

aerospace products and parts: +1.0 percent

Moreover, their 2015 numbers were worse than their (revised) 2014 performance. Which were as follows:

pharmaceuticals and medicines: +5.7 percent

semiconductors and electronic components: +3.5 percent

aerospace products and parts: +6.6 percent

Lastly, what about that torrid American automotive sector? It hasn’t been remotely torrid in terms of labor productivity growth. In 2014, labor productivity actually sank by 2.2 percent for vehicles but rose by 3.8 percent for parts. The 2015 numbers: a 0.5 percent decrease for vehicles, and a 1.7 percent gain for parts.

As I’ve often reminded, great uncertainty still surrounds the concept of productivity (either version). Here’s what seems a lot more certain. If America’s leaders were the slightest bit familiar with these detailed manufacturing productivity figures, and if they valued the sectors that really generate the greatest productivity growth and all of its unquestioned benefits (like sustainably rising living standards), the nation’s offshoring-happy trade policies of recent decades would look a lot different.

(What’s Left of) Our Economy: Free Trade Claims that Deserve Some Lumps

Tags

lump of labor fallacy, Paul Krugman, protectionism, The New York Times, Trade, trade policy, {What's Left of) Our Economy

All knowledgeable students of economics know that a big reason for rejecting most critiques of U.S. trade policy is their allegedly heavy reliance (explicitly or not) on the “lump of labor fallacy.”

As explained by economics Nobel-ist and New York Times columnist Paul Krugman, the fallacy holds that “there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs.” And it’s especially pernicious, Krugman explained, because it “feeds protectionism. If the public no longer believes that the economy can create new jobs, it will demand that we protect old jobs from new competitors in China and elsewhere.”

So it was interesting, to say the least, to see a leading economist this week make clear that this fallacy isn’t so fallacious, and that its existence strengthens the case for U.S. policies that depart from the free trade norm. Even more interesting: His name is Paul Krugman.

As explained by Krugman, Americans are living in a barely growing world that’s “awash with excess savings and inadequate demand, where interest rates can’t fall (or at any rate not much) because they’re already near zero. That is, we’re in a liquidity trap.”

In that world, Krugman continues, “it’s true both that trade deficits do indeed cost jobs and that there are basically no benefits to capital inflows — we already have more desired savings than we are managing to invest. “

And the clincher: In such a currently stagnant world, “and maybe for a long time to come, if secular stagnation theorists are right — mercantilism makes a fair bit of sense.”

To be sure, current U.S. trade policies have created major problems even when the world was less “lump-ish.” As I’ve pointed out, the rebound in the portion of the American trade deficit most strongly affected by trade deals and similar decisions has greatly slowed growth in this already weak recovery. Moreover, evidence is abundant that the immense global imbalances fueled by decades of poorly negotiated trade agreements helped set the stage for the last financial crisis.

And even when global and/or U.S. growth is adequate, ill-considered trade liberalization can still create win-lose results for American workers by eliminating more growth (and therefore employment) opportunities than they create.

But none of this reduces the importance of Krugman’s post. As a result, unless trade enthusiasts can credibly explain why American or global growth is going to pick up significantly any time soon, they’ll deserve to take major lumps whenever they belittle lump-of-labor-related trade policy critiques.

Making News: New Marketwatch Op-Ed on Trade Overhaul as Good Economics as Well as Politics

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2016 elections, Bernie Sanders, Donald Trump, gross domestic product, inflation-adjusted growth, Making News, Marketwatch.com, recovery, Trade, trade deficit, trade policy

I’m pleased to report that Marketwatch.com has just published my latest op-ed article – a piece showing why the kinds of U.S. trade policy course changes favored by so many voters this election year would also give the sluggish American recovery a major growth boost.  Click on this link to read it.