The Firebug

448276456_82de10ff01_z

As the NY Times reported, Jimmy Kimmel had a concise summary of Trump’s treatment of immigrant children: “Thank you, Mr. President, for lighting the house on fire and now taking credit for putting the fire out.”

It’s good that someone noticed, but this case is far from unique.  Trump’s firebug behavior happens all the time, and he almost always gets away with it.  As with a real firebug, you can see the permanent damage once the false heroics are over.

Example number 1 is North Korea.  Trump started the fire with his visions of an imminent attack and then whipped it up as he played the out-of-control lunatic preparing a preemptive strike.  There never was any scenario where it made sense for Kim to attack the US, so Trump was in complete control of the perceived nuclear threat.  In a truly virtuoso performance he kept the fire going for many months of ups and downs (no surprise that the meeting was “almost cancelled”).  And the final act did no more than put out his own fire.

The nuclear security of the US is no better or worse than it was at the beginning.   There was no disarmament or even a concrete plan.  All the concessions were on the US side—approval of the regime and the cancelled military maneuvers (a signal of intended withdrawal).  All we’ve got is Trump telling us that Kim is now a buddy—which recalls George W. Bush’s famous comment on Putin: “I looked the man in the eye. I found him very straightforward and trustworthy—I was able to get a sense of his soul.”

The damage is on two fronts.  The first is the ringing endorsement of nuclear proliferation.   The best quote is from Beatrice Fihn, the executive director of the International Campaign to Abolish Nuclear Weapons (Ican) “We support diplomacy and peaceful solutions. But there is no agreement on nuclear disarmament and this all looked more like a big welcome party to the nuclear-armed club.”  The second problem is the signal of intended withdrawal.  China was undoubtedly happy to hear it.

However, firebug behavior is even worse when it substitutes for addressing a real problem.  That’s what seems to be happening with the Chinese trade war.  It looks like North Korea all over again.

We started the trade wars, and they’re in the news every day.  As with the Korean affair, we get a steady diet of Trump’s tough-talking belligerence together with analyst worries about the consequences.  That’s all self-created fire.  Despite the fuss, the real worry is that we’ve been set up for the deal to dowse it. Since the Chinese have already announced willingness to do something, and since Trump needs very little to cry success, there should be no problem getting the kind of PR-oriented agreement we got from Kim.  Market access can be as murky as denuclearization.

There’s another factor too.  China matters to Trump in a way no one should ever forget.  The development of China is the biggest single opportunity for the future of Trump’s businesses.   The $500 M already reported is the tiniest bit of it.  That’s another reason this great deal is going to happen.

And the damage will be monumental.

For starters, the Chinese are not amused and have cut back Chinese investment in the US to almost nothing.  Deal or no deal, there’s no reason to believe they’ll turn that around.  It also says a lot about the level of true cooperation we’re going to get on any deal.

The main point, though, is that we will miss a historic opportunity to get real trade concessions from the Chinese.  By antagonizing our European allies as well as the Chinese, we’re losing half our leverage, and Trump’s need for a deal undercuts negotiations even more.  Following the North Korean model, we’ll take what we’re given.  As the Business Roundtable of CEO’s pointed out from the beginning, there’s a real danger of missing the boat entirely.

Arson is not a victimless crime.

 

Instead of Trade Wars

3067527866_b13ca1137a_b

It tells a lot about our current economic policy to compare it with China’s own plan for their economy.  They want to move up the value chain—to be Apple with the big profits instead of a hardware supplier in a highly-competitive business.  They want to do that across the board in all technologies.  They aren’t afraid of automation’s impacts; they want to push it as hard as they can.  Having transitioned their economy to free market concepts, they are ready to transition their workforce to what it takes to win.  They want to be us!

Except that we don’t want to be us anymore.  We don’t like Apple, Google, Facebook, etc. because those companies don’t hire very many people without technical skills.  We need to set tariffs to bring back the 1950’s, so that those people can have jobs.  And our country is a disaster area until we do that.  So we need trade wars to be great again.

There are a number of problems with that logic.

1.You can’t support our standard of living on non-competitive businesses. To be rich you need to be on top of the value chain.  That involves a number of factors, such as

–  A skilled workforce.  Implies support for education.

–  Equality of opportunity, so that we can use all talents and ideas.  Education is a big part of it, but healthcare and other contributors to family stability are important too.

– To be the place where people with entrepreneurial ideas will want to come realize them.  Google (with an immigrant founder) and Apple (Steve Jobs’ father was a Syrian immigrant) are convenient examples.

– Creating a global environment for trade and cooperation where we can be successful.  That means international engagement.

If we want to maintain our standard of living, these items are primary and we should be doing everything necessary (as China understands) to be successful.  There is not necessarily just one winner, but you have to be playing the right game.

2.The well-being of the population requires separate attention. The problems today are not because business is hurting.   It isn’t.  The population is not prospering as it should from our financial success, because we (through our government) have chosen NOT to make it happen. We have blocked investment in the population and the public good, and just given more and more of the created wealth to the wealthy.  That’s why we can’t fund education or infrastructure.  The new tax plan is a recent and extreme example.

It says a lot about the political climate that Trump can make a statement like “cash-strapped cities cannot hire enough police officers or fix vile infrastructure” (in rejecting the Paris Climate agreement) and get away with it.  The statement is true, because he and others like him have made it that way.

3.Tariffs are not a miracle solution; they are a tax. Tariffs are designed to raise the price of the products sold internally, so as to protect domestic businesses. That means that non-competitive businesses are supported at the expense of others (businesses or individuals) that use those products (e.g. steel).  The markup is effectively a tax.   You can do some of that, but just as with any other tax you have to look at who gets hurt (e.g. anyone who builds with steel).   The effect is not all that different from using taxes to support public works (and public works directly pay people not companies).  You just have to decide what, as a nation, you want to get done.

It should be noted that protected companies have little incentive to make themselves more competitive on an international scale, so the tax is usually forever.  Also companies that need tariffs to compete are by definition highly cost-sensitive, so wages need to be tightly controlled.  Tariffs—like other presents to businesses—are a way of dealing with exceptional or temporary issues (e.g. real national security or bankruptcy), and they certainly don’t help with automation.  They are not a miracle tool for recreating the 1950’s.

4.Isolating ourselves behind trade barriers is conceding the game to China. Compared to Europe, the US had a much bigger domestic market than any other player, and that helped the US to evolve for financial success.  China already has a bigger domestic economy than we do, and they’ve just gotten started.  They’re putting money into infrastructure and education.  Their AI systems have bigger databases to learn from.  They’ve taken over our leading role for technologies of climate change.

With trade barriers, and xenophobia, and intellectual property paranoia we risk losing our edge.  China’s industrial espionage is a problem that requires continuing attention, but the effects of our new isolation policies may make matters worse.

 

That’s where we’re going.   What’s especially bad about it is that we’re making a mess of what is actually a promising situation.  The rise of China is at this point an opportunity, and we’re missing the boat out of sheer greed and ego.  What has to happen is

1. We need to open the Chinese market. China is now rich enough to be significant as a market.  One way to think of the opportunity is the enormous recent increase in the number of Chinese now traveling abroad.  Those people are our potential market and even the Chinese government has to listen to them.  Further, the US plus Europe represents 36% (18 + 18) of the Chinese output.  With that kind of leverage we don’t need a trade war (as emphasized by the Business Roundtable of corporate CEO’s), we just need to use it for the situation we’re in.  Instead we are stuck with two trade wars, because in Trump’s world we’re fixated on being the only winner—a good way to make sure that everyone loses.

2. We need to do everything possible (including all points noted earlier) to support the economic strength of the country in the current technological world—as opposed to the world of the 1950’s.

3. We need to go back to translating economic success into well-being of the population. It is to our benefit to get everyone on-board with what it takes to be successful.  Furthermore, we need to remember that there is an important place in the economy for public works—and not just roads and bridges.  There’s no shortage of work that needs to be done, and we just gave companies $1.4 T to not do it.  Even Adam Smith knew that not every job that needs doing will spontaneously arise from the private sector.

It’s a simple as that.  Most wars are fought out of stupidity.  Including trade wars.

 

The Trump Economy

te10

The goal for this piece is to be comprehensive about the effects of Trump policies on the economy. That sounds rather ordinary, but in fact most discussions of the Trump economy has been myopic to the point of misrepresentation.  There are several reasons for that:

  1. To understand the effect of Trump’s policies you need to untangle Trump’s results from the inherited economy. People tend to shy away from that, but there is actually no alternative—otherwise there is no way to say where we are going from here.  As we’ve noted before, Trump has pulled a fast one on the American public.  It’s not just a matter of claiming responsibility for successes of an inherited economy.  It’s that he is substituting wildly dangerous policies for the ones that actually got us here.  When we last discussed that subject we could only talk theoretically, but now there is considerably more to say.
  2. The usual statistics (even the unemployment rate) tell you more about the business view of the world than about what it means for people. The difference between the two says a lot about the real significance of Trump policies.
  3. Finally, most discussions of Trump’s policies focus on results from the hugely expensive tax cuts that were done last December. However, it is at least as important to understand what we have NOT DONE because of Trump’s economic priorities.  As we’ll see those sins of omission are a serious part of the picture.

The discussion plays out as a series of charts.

 

  1. Effects of Trump’s policies on the economy

We begin by teasing out the effects of Trump’s own policies from what was inherited.

Our first chart shows the changes in unemployment rate over the past ten years:

te1What is most striking about this picture is the continuity:  the trend line is almost straight extending through the present.  That isn’t surprising.  Changes in employment don’t happen overnight, and after the election there were no substantive changes in economic policy until the new tax plan was passed in December of 2017. (Reduced regulation at the EPA was never a factor, since—despite the propaganda—environment regulation was positive for jobs.)

Another way of looking at the same trend is with job creation, which we see in the second chart:

te2

Again what is striking is continuity with the inherited trends.

For 2018, however, we’re no longer in a world where nothing had changed—Congress has just passed a tax plan with monumental business tax cuts sold to the public for effects on employment and wages.  Mitch McConnell was hardly shy in his comments: “Under the policies of this unified Republican government, American workers, families, and business owners are achieving economic growth that is unmatched in recent memory.”

Polifact, however, examined the detailed jobs data—which looks like this:

te3

Their conclusion was what you can see: “Since 2010 — the year the Great Recession began to wane and the recovery began — every January-to-May period saw an average monthly job gain of between 160,000 and 236,000. The performance for 2018 was slightly higher than the average, but pretty typical.”

For now, we’re not going to pronounce on whether the tax cuts will ultimately prove useful or not.  However what we have seen is that even the monumental tax cuts of December, 2017 were not enough to change the clear, multi-year trend shown by all three figures.  The decline in unemployment is NOT where to look for effects of Trump’s economic policy.

Where should we be looking?

To start with we need to look at indicators that are more immediately sensitive to economic changes than the labor market is.   The obvious one is the stock market.

The following chart shows what has been happening to the Dow.

te4

Starting with Trump’s election the Dow has been rising in anticipation of some form of tax cuts.  Not only were those promised in the campaign, but they were the explicitly-stated objective of the major Republican donors.  Corporate tax cuts, which eventually formed the biggest single part of the story, influence the market directly by going to the corporate bottom lines.  (The markets correctly assumed that any payout to workers would be negligible.)

The markets continued to rise until Trump’s up and down trade wars entered the picture.  Since then neither the market nor anyone else knows exactly where things are going.   There are actually two negatives.   First is the obvious uncertainty.   Second is the fact that Trump’s specific tariffs don’t instill confidence, because they don’t match the business needs or even promote employment.

The graph above shows the uncertainty, but it should be pointed out that the performance is actually worse than it appears.  The fact is that the single biggest use for the corporate tax cuts of 2017 was stock buybacks, nominally to raise share value for investors.  Despite all that extra money, there is no current evidence of a solid increasing market trend.  Business confidence has been replaced by nervousness.  Even the Koch brothers and the conservatives in Congress are worried about the consequences of the threatened trade wars.

Then there is the matter of the deficit.  With the Trump tax cuts we have undertaken massive deficit-funded stimulation of an economy at essentially full employment.  Many economists at the time noted the risk of a speculative crash with nothing left to fund recovery.  Recent data has underlined that risk.

In April the IMF issued a warning.  They see a buildup of worldwide debt to record levels with the Chinese and the US as primary actors.  This first chart shows the overall numbers; the “emerging economy” portion represents largely Chinese debt.

te5

The next two charts show the US contribution.  The first shows that the US is an anomaly among developing nations in deciding to run the risk of large deficits in good times.

te6

The next slide adjusts the width of the vertical bar by the size of the national economy, which makes the impact of the US behavior very clear.

te7

The overall message here is that the amount of debt makes the world’s economic system increasingly fragile.  Further it should be remembered that in the 2008 crash the US and China were the major players who prevented a depression by stimulus spending.  They will be hard-pressed to do it again.  Just to be clear, this is not an argument about international responsibilities.  It is an argument about the risk to us.

As to what would provoke such a crash, we have an obvious candidate in Trump’s trade wars.  However the risks are not necessarily so exotic.  Business cycles end (ten years is a long time for one), and they end just when things seem to be going so swimmingly that people get giddy—like Mitch McConnell in the quote given earlier or the many critics of Dodd-Frank.  The following chart (which we’ll revisit in a minute for other reasons) shows when the past few recessions occurred.

te8

On that basis you have to say that 4% unemployment can be dangerous territory (particularly after a multi-year stock market boom).  We are quite literally going in blind with no backup.  And you can be sure that if we have a problem there will be scant sympathy from an administration that hates “losers”.

  1. Trump’s policies and the workforce

The cheers for the Trump economy have been based mostly on the unemployment numbers.  However, the chart just presented shows that is only part of the story.  As is evident from the chart, each of the previous business cycles was accompanied by wage growth in recovery.  But you can see that for the current cycle that wage growth hasn’t occurred.  (From this morning’s NY Times: “The rise in consumer prices over the last year has effectively wiped out any wage increases for nonsupervisory workers.”)

Otherwise stated, the benefits of the recovery have most emphatically NOT trickled down to existing workers.  Even in “Trump country” most people were not unemployed—the problem was replacing good union jobs with Walmart.  That hasn’t gotten better.

The reasons for lack of wage growth have been much studied.  The primary factors are

  • Globalization
  • Rise of Non-Standard Employment
  • Rise of Non-Compete Agreements
  • Automation
  • De-unionization

All of these items reduce the power of workers in dealing with management.  We won’t go through the items in detail (the referenced article does an excellent job), but the bottom line is that the Trump administration is actively engaged in making this problem worse.  The anti-globalization trade wars have been of little value for workers, and on non-compete agreements and de-unionization the administration has aggressively taken the side of management against workers.

Overall the current state of the Trump economy is NOT good for workers.  (It’s worth citing some additional recent data here.)

  1. Lost opportunities

The final topic is what has not been done because of the priorities established by Trump’s economic policies.  The point of departure is the following figure showing a breakdown of the financial impact of the business tax plan.

te9

The most obvious element on the chart is the loss of income due to the corporate tax cut, alone estimated to cost $1,349 B over ten years.  Since the decrease is from 35% to 21%, we get a nice round number for the effect—$100 B for each percentage point.  Note that this occurred as business was doing well, the economy was close to full employment, and the actual corporate tax rate (all benefits included) was a competitive 24%, (and real tax reform could have been close to revenue neutral).  Further we now know that the main beneficiaries thus far have been investors seeing results of corporate stock buybacks.

What could that money have bought?

Two obvious target areas are

  • Education, where school financing has never recovered from the 2008 crash, state budget cuts have teachers out on strike, and increased public college costs have led to a generation trapped in debt.
  • Infrastructure, a problem area identified by both candidates for President but unaddressed in the budget, because there was just no money left.

Estimates are available online for many projects in both areas, so with a hypothetical set of projects we can make the answer concrete:

  • The estimated backlog for repairs of existing highways is $430 B.
  • The estimated cost of upgrading US airports over ten years is $48 B.
  • Ten years of K-12 school repair to upgrade fair and poor facilities nationwide is $380 B.
  • Ten years’ worth of the estimated cost of a federal program to provide free tuition to all the US public colleges and universities is $470 B.

With $1,349 B we could have done all of that.  (The now-proposed cuts to Social Security and Medicare are another sign of what was lost.)

 

We can now summarize the state of the Trump economy.

  1. The declines in unemployment associated with recovery from the 2008 crash have continued in the same way through the Trump Presidency. No policy act of the Trump administration, including even the 2017 tax cuts, has produced a significant impact on that trend.
  2. Trump’s own policies have been disruptive. His repeated and ever-changing threats of trade wars have unsettled markets and businesses.  Even more importantly he has embarked on massive deficit-based stimulation in good times, contributing to an IMF-identified risk of repeating 2008 or worse.
  3. The decline in unemployment has not produced the usual accompanying increase in wages. Some of the reasons are structural, but the Trump administration has exacerbated this effect by systematically attacking labor’s leverage in dealing with management. Despite the decline in unemployment, the Trump economy has not been good for the existing workforce.
  4. Trump’s tax cuts have essentially stifled any action to address the pressing problems of education and infrastructure in this country. We have become in effect a poorer country.

 

Mid-Term Diplomacy

8139529067_587e649d74_z

Given all the publicity around our trade wars and the North Korean negotiations, it’s worth taking a step back to look at what’s going on.  Let’s check each one.

Why have we started the trade wars?

It’s a good question, since

– The steel and aluminum tariffs have nothing to do with the real issue.

– We gave up half our leverage with China by going it alone, and there have been no significant achievements beyond what China was prepared to do anyway.

Given those facts, there is only one conclusion here—it’s reality TV for the mid-term elections.  “I’ve fought for you like no one else has ever done.”  That way every single news story is a win.  Who cares about the details anyway?

That also fits with Wibur Ross’ explanation to the Europeans of the peculiar idea that the best path to negotiation is to declare war:

“China are paying their tariffs …. China hasn’t used that as an excuse not to negotiate… It’s only the EU that is insisting we can’t negotiate if there are tariffs.”

Otherwise stated:  why can’t you people be like the Chinese?  They let us play boss when we think it looks good.  You people just have to learn.

What’s going on with North Korea?

Trump needs a deal, and he’ll get one on Kim’s terms.   It will be just like all the other agreements with North Korea—phased (and easily reversed) build-down of nuclear weapons in exchange for benefits.  Except this time it will probably include phased withdrawal of US forces from the South—a bigger concession than any other American president has every made.

However, that will be enough for the Trump propaganda machine to get going, and the rest of the press will be so relieved that Trump’s worst impulses were contained that they’ll probably agree.  And so, for public consumption, Trump can be peacemaker for the mid-terms!

 

Back in the real world, though, there are two different questions worth asking:

What do these trade games mean for our future?

If there’s any policy, it’s that we’ve decided it’s no fun winning unless everyone else loses.  So we’re not interested in alliances or trade agreements.  Prosperity is only achieved at others’ expense, so conflict is good—a philosophy that is historically disastrous and particularly inapt today.

Where is the outcry about “national security”?

Our President’s “national security” trade wars are already a constitutional crisis—arbitrary control of trade is NOT an executive power.  And it’s just going to get worse until someone finally does scream.  Trump has been increasingly willing to make up a “national security” excuse for almost anything he wants to do.  Unless the Supreme Court (or public outcry) stops him, there is no limit to where that leads.