Never-Never Land

You can’t turn around today without someone talking about how great the economy is.  Low unemployment and low inflation.  What could be better?

In fact you don’t have to look far to know something’s wrong.  For once this is less a matter of lies than of myopia.   We’re living in an artificially-created bubble, and while we don’t know exactly when it will end, this is never-never land.   We’ll go through it step-by-step:

– The bubble

We incurred $985 B of deficit this fiscal year as short-term stimulus to an economy already at full employment.  That’s a monumental $300 B over last year—in good times. As in every other such case, the tax cuts are NOT paying for themselves.  During the year we had a small reduction in unemployment from 4. 1% to 3.7%, but at no faster rate than last year and with no increase in inflation-adjusted wages (one-time bonuses from the tax cuts were negligible in the statistics).  You might ask why we would do such a thing—$1 T is a lot of money—but one thing the deficit certainly delivers is that much more economic activity in an election year.  The same people who starved recovery from the 2008 crisis to help with the 2016 election gave themselves a big boost for this one.

You might also ask how long we can continue doing it, and the following budget chart makes that unmistakably clear:

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We’re running up unimaginable deficits in good times, with consequences we’ll talk about in a minute.  And the chart actually understates the situation.  The underlying figures come from a CBO report written in April, when their estimate of the 2018 deficit was $805 B. With a final 2018 deficit of $985 B, the situation now looks considerably worse. The CBO report said that we would reach deficit = $1T by 2020 and then reach the sinister milestone of debt = total GDP by 2028.  With the current deficit, we have reached the $1 T value in 1/3 the time, so that second milestone looms sooner now too.

The stock market is a similar case. The corporate tax cuts went directly to company bottom lines, raising price/earning ratios and stock values. What’s more corporations turned around and used all that money for stock buybacks, increasing demand for stocks and further enhancing stock prices.

None of this is sustainable.

– The deficit

Much discussion of deficits seems theoretical, but the consequences of our current deficits are real.  Republicans are already talking about cuts to Medicare and Social Security as counterpart to last year’s tax cuts.  Just imagine now we’ve reached a downturn in the economy—not even necessarily as bad as 2008.  We’ll have the massive deficit-induced debts shown in the prior chart, and now—on top of that—tax receipts that have just collapsed with the economy.  In that case we’re not talking about changes around the edges of Medicare and Social Security, we’re talking about no money for it and “taking the hard choices we just have to do.”   That means dramatic change in what it means to be living in this country.

Further (as noted in the CBO report) the deficit is a time bomb.  As interest rates rise in good times, the yearly cost of financing the deficit rises accordingly.  We’re already talking about deficit finance costs higher than the defense budget.  And it will just continue up, eating into available money for healthcare, education, opioid crisis even before a downturn.  There are good reasons not to incur deficits in good times!

– Our economy

With all Trump’s talk about the private sector and relief from regulation you might think that the country has been liberated from misguided government meddling with private enterprise.  But you’d be wrong.  The current executive-imposed tariffs and trade wars constitute the most extreme government intervention in the economy within memory.

The steel tariffs hit anyone building anything out of steel—basically forcing export-directed activities off shore.   The new USMCA regulations have already caused layoffs at Ford (and the touted benefits to labor are so far from clear that the unions can only wait and see).  The trade war with China disrupts values chains of any corporations not sufficiently well-connected to get exemptions.  The government is choosing winners and losers in the economy based on impulse (coal and steel sound good) or lobbying (the Apple watch).  And established companies have been winning out over newer, innovative ones (net neutrality) any time the issue comes up.

All of that, together with xenophobia and lack of support for education, augurs poorly for the state of our economy going forward.  And we’re even waging economic war with the largest, most rapidly growing economy in the world—in the name of protectionism!

– Our population

Since the subject is the economy, we’re talking here about the related topics of personal and national economic success.  It is of course a truism that the world economy is changing.  Good jobs, and the jobs that maintain our national standard of living, are changing.  Very many of them require more and different training.  (One list of the top ten growing job categories is given here.)  Economists going back to Adam Smith have recognized the responsibility of government to educate the population.

However with the tax cuts we took a very different tack, essentially trusting private sector prosperity to raise all boats.  There is no evidence that works.  The tax cuts went primarily to stock buybacks (see the mind-boggling level of buybacks below), leaving issues such as education (including the student loans crisis), infrastructure, and healthcare up for grabs.

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For now, protectionism is the solution to job retraining, consequences of automation are unaddressed, and instead of preparing people for good jobs we’re busy fantasizing about the past.

– Climate Change

Climate change belongs on this list, because inaction will just make the economic effects worse.  Climate change may have morphed into a partisan issue, but nature isn’t fooled.

Consequences will be in many forms—severe weather, changes of temperature and rainfall, sea-level rise.   Turning around today’s carbon-based economies takes time, so if we don’t start acting now, we’re talking many trillions of dollars of expenses for repair and to forestall truly disastrous consequences.  The recent IPCC report found more serious effects than previously recognized by 2040.   As the following chart shows, the US currently generates twice the per-capita CO2 of any other major player, so we have a long way to go.

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For now we are doing worse than nothing.  Climate change is an issue where international unity of purpose is extremely important, because cheaters—with cheap coal—can prosper.   We have not only endorsed coal for ourselves but actively encouraged cheating.  Further our departure from the Paris Agreement process—and in particular our disavowal of the whole idea of rich countries helping poorer ones act in our common interest—leads directly to dangers such as Brazil abandoning protection for the Amazon.

Ignoring climate change means more damaging effects of warming, and more drastic (and expensive) action in the end.   Furthermore, as a purely economic issue, by denying the issue we are sidelining our own companies’ participation in this necessary multi-trillion-dollar enterprise.  The day will soon come (we’re now talking just 20 years to get off coal, oil, and gas) when this moves to page 1 of the news, and stays there.

 

Our never-never land economy is good only so long as we keep our eyes closed.  But if we don’t open them soon, we won’t recognize what we’ll find later.

Losses of War

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The current trade war with China is so ill-conceived and damaging to the US that one hardly knows where to start.

As one point of departure, it’s worth pointing out that the rhetoric around the trade war sounds like the kind of propaganda campaign used to pump up public support for a real war.  It’s all about “winning” and vilification of the Chinese, as if we’re going to knock them down, so that they’ll never threaten our dominance again.

Given that rhetoric it’s worth pointing out a few basic facts:

– China has been overall good for the American economy.   Much of Chinese manufacture is done for American supply chains.  Low prices and high quality of Chinese exports have helped American companies to sell value-add products worldwide, and has also benefited American consumers.  American businesses, with few exceptions, are not pushing for the tariffs.

– There is of course no question about the decline in good, well-paying jobs for people without specific skills.  The Chinese have contributed to that by making good, cheap stuff, in part through undervaluing their currency.   They perfected outsourcing from spec to such a degree that they have made themselves suppliers of choice, leading to declines in manufacturing jobs in the US. While all of that is true, it is also true that they are scapegoats as much as perpetrators for the consequences.   The Chinese are not the source of growing inequality in the US—we did it to ourselves.  And that, as much as the Chinese, caused the pain frequently blamed on globalization.

– The rhetoric around the trade war is remarkably vague over exactly who or what is being defended.  When the subject is the deficit, that makes it sound like the Chinese are stealing from our economy.  But businesses are not tariff supporters, and the deficit is just plain not measuring the right things.  The iPhone is a good example.  It is a fantastically profitable product for Apple—sold at 300% markup over the imported hardware–but it counts as a big loss for the deficit, because the profits are declared in Ireland and Luxemburg for tax purposes.

So maybe we’re doing it for employment.  But the same people who are pushing this are fighting unions, so it pays to look closer.  There’s no guarantee that the tariff-protection will be positive for jobs, particularly good jobs.  Tariffs are a tax, and a very expensive and unsure way to protect a few jobs while putting many more at risk.  To emphasize this point, it should be noted that the new tariffs on China are much like the previous steel tariffs in that they are assessed on basic commodities rather than finished goods—which means that they put all businesses that make the finished goods at risk.   This is obvious in the case of steel, but many of the new tariffs affect hardware which American companies use as platforms for their software—as in the iPhone example.  So the result is much the same as for steel.

– Finally the specific evils attributed to the Chinese—theft of intellectual property, currency manipulation, unfair competition in China and elsewhere—are resolvable issues, as we will discuss shortly.  The trade wars guarantee that those resolvable issues will now be sacrificed to the raw emotions of war.

 

To understand where we stand with China, it helps to think a little bit about recent history.  Over the past twenty years the Chinese economy has come from nowhere to now surpass the US in total volume.  (However, the Chinese population is so large that per capita income is still well-below Mexico.)

The result is that China has transitioned from a country with no capacity to absorb imports and an economy 100% based on export-driven growth—to a country with a middle-class market comparable to the US.  One indication of the transition is the sudden appearance of Chinese tourists everywhere in the West.

That change has many consequences.  For growth, it means that the Chinese are acutely dependent on prosperity in the West for continuing growth of such a huge economy.  For intellectual property, it means that the Chinese have as much to defend as we do.  For imports, it means that the Chinese middle-class has as much interest in western goods as it does in western travel.  And the Chinese are now supporting their currency rather than undervaluing it.

All of that means that—though negotiation with China will certainly not be easy—there is a common interest recognized by all parties.  This is already happening in particular domains, such as financial services.  The world is ready for a historic step—international trade agreements opening China as a major economy and preparing for an era of worldwide growth to the benefit of all parties.  That’s what we are torpedoing with the trade wars, undermining the necessary trust between participants.

Regardless of what we think we’re negotiating, the trade wars mean we’re giving up on access to the biggest economy in the world, growing at 6%, in favor of protected industries at home.  Trade wars are not like real wars in one important respect—we have limited control of the results from the agreement we reach.  People will still have to buy the stuff, and industries have many ways of avoiding a result that no one wants.   An agreement reached (as the Chinese have said) with a knife at the throat is unlikely to bear fruit.  “Winning” in Trump’s sense has little to do with this situation.  And the “it’s no fun winning unless everyone else loses” attitude is a proven recipe for disaster—for us.

If we look toward the future, we are not going to make China go away as a world power—and it’s not to our advantage to do so.  And it’s certainly delusional to think they are just a bunch of cheats whose only talent is in stealing from us.  If we want to be successful, we need to build upon our strengths.  China is a legitimate challenger technologically, and we will fall behind if we don’t recognize what those strengths actually are.  There was one such list of strengths in the NYTimes today;  here we’ve also given a more technology-oriented list.  Many of those items are at-risk in the current anti-science and xenophobic environment.

We should recognize that if we play our cards right, the value of our openness and democratic structures cannot be overestimated, compared with China’s authoritarian regime.   (One can even argue that China’s enormous growth was largely in spite of, rather than because of, its central authority, and that Xi is tightening the screws.)  I’m old enough to remember when we worried about Japan overtaking us, through their disciplined, top-down economy.  There was even a moment where they too had a central technology plan that was going to leave us far behind.   That never happened, and the dynamism of what we represent continued to reinvent itself in the many decades that followed.

And the whole world got richer.  That should be our future also.

It’s Always the Elites and the Foreigners

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A recent book serves as a reminder of what happened in the economic collapse of 2008.  Lessons from 1929 were learned, and the world pulled itself back a few inches from the brink.  Major economies, principally the US and China, pushed enough money into the world financial system to keep it going.   We didn’t have a depression, and ten years later we’re doing well enough that we seem ready to forget.

Who were our friends in 2008?  The Chinese and the competent people who knew what they were doing.  Who won out?  Opportunists of various stripes who saw the near-depression as an opening.   And their villains were the usual suspects:  elites and foreigners.

Elites and foreigners are always convenient scapegoats, but scapegoating these days seems to dominate all political discourse.  That is a problem for both the left and the right.  Let’s start with “elites”.

On one side there is multi-millionaire Trump, who has never wanted for anything or hidden his blatant self-interest, but who has nonetheless successfully portrayed himself as a warrior against elites!  From his inaugural address: “a small group in our nation’s Capital has reaped the rewards of government while the people have borne the cost.”  On the other side I’ll quote a recent email article from Robert Kuttner admiring Trump’s trade war against China and decrying how “the corruption of ruling U.S. elites created a vacuum that opened the door to Trumpism.”

When you come down to it, in both cases the elites are charged with the crime of turning the US into something that doesn’t look like a rose-colored picture of the 1950’s and 60’s, when America was “great.”  It’s convenient to find someone to blame for those changes, but the world is not the same.

You can argue about trade policy (and why it happened), but you can’t wave away the accelerating effects of technology and globalization (itself fueled by technology) with scapegoating.  No nation today can isolate itself behind tariff walls or anything else and maintain its standard of living.  We’ve done a bad job of solving problems of transition for the current real world, but trivializing those problems doesn’t help.  In Trump’s case we have the craziness of reducing support for education and research while promoting coal mining instead.  His trade wars are more a publicity stunt than a solution to the problems of the working class.

There’s another issue too.  As a nation we are in desperate need of elites:  the people who make our economy go and who understand how things work.  Who kept us out of depression following 2008.  But those aren’t the only elites in the picture.  There’s Trump. There are the ultra-rich behind the Koch organization who want to maximize their profits and bring back the not-so-great gilded age.  There are the politicians and lobbyists in Washington.  There are even the sinister invisible elites we keep hearing about behind the scenes.  Accusing “elites” mixes up the picture.  It creates innocent targets as a mask for not solving real problems such as education, wages, economic dislocation, racism, financial and geographic inequality…

With “foreigners” the problem is if anything worse.  It is worth remembering our common interest with the Chinese in 2008.  Despite the current trade war propaganda, China is neither friend nor enemy.  China is a major partner in worldwide, technology-fueled growth that has made the world and us richer.  They are a major player with a common interest in dealing with climate change.  You can’t deny their effect on the domestic economy, but we also contributed to the pain.

We have specific issues that need to be addressed—e.g. intellectual property, opening of markets in a now richer China—however the main challenge from the Chinese is that they are good at what they do.  American high-tech companies have had trouble making headway in China largely because of real competition.  As China grows, we need to remain at the top of our game and to adapt to a world where we are not the largest and richest market (already true).  That could be quite a good future with new products and new markets, or we could all strangle in trade (and possibly real) wars.

The divisions in this country are deep, but it is perhaps encouraging that it is less about issues than about scapegoats.  If we could just remember that it is NOT all about ill-defined elites and foreigners, we could get quite a lot done.

 

 

Thrashing our Way to the Brink

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Despite Trump’s business credentials, the most immediate dangers of his presidency have always been economic. The promotional hoopla around current unemployment numbers hasn’t changed that risk.  It is worth remembering that no one foresaw the last Republican disaster in 2008, and there are similarities to that situation now.

Our basic problem is that Trump has never stopped thinking of the Presidency as a business, and that is fundamentally at odds with the reality of running a country.

Trump’s approach as a businessman is easy to describe: get all you can get away with and kill the opposition.  It doesn’t matter who gets hurt as long as you don’t get caught and come out a winner.  Even in bankruptcy.

That sounds great (“he may be a crook, but he’s OUR crook”) but as President of the most economically powerful country in the world, you can’t ignore consequences.   That’s obvious in the case of bankruptcies, but it also affects how you deal with the rest of the world.  On the positive side the progress of the world economy since the second world war shows how shared prosperity has raised all boats.  The Marshall Plan was not just benevolence, it was good policy—helping others helped us.  However the reverse is also true—disasters propagate.  Beggar thy neighbor policies have a way of biting back.

The EU, Canada, and Mexico each account for $250B in US exports—downturns in any of them affect us.  Corporate supply chains now link many countries.  China’s cheap hardware has been the basis for Apple’s profits and even for software service companies such as Google and Facebook.  We’ve already seen with the steel and aluminum tariffs that it’s easy to lose more jobs than you save.  The web of relationships can be so complicated that it’s hard even to identify all the consequences of tariffs or other such actions.  Unanticipated consequences are the order of the day.

That doesn’t mean we’re powerless to deal with problems, but “trade wars are easy” is a good way to lose big.

And there’s one more factor to keep in mind. As the IMF has warned, the world has become increasingly awash in debt, a concern for global stability.  It’s easy to be playing with fire.

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To understand the risks, it’s worth looking back at the George W. Bush administration.  There were a number of unanticipated consequences.

– Deregulation of the economy worked great for a while until it undermined the banking system and produced the worst recession since 1929.   No one saw it coming, as they didn’t know where to look.

– The collapse of the Russian economy produced abject misery.   The Bush administration refused to offer assistance (Dick Cheney’s position was “they’re the enemy, let them starve.”) The unexpected consequence was the return to authoritarianism under Putin and the rise of Russian nationalism.

– The attacks of 9/11 led to the invasions of Afghanistan and Iraq.  No one foresaw the consequences for political instability in both countries.  That in turn led to $3T wars with at most very limited benefits.  The financial consequences are still felt here today in the lack of money for education and infrastructure.

 

The risks of today’s policies are at least as bad.  We’re thrashing around inconsistently and in all directions.  We’re obsessed with trade imbalances, incorrectly treating them as a kind of scorecard with our competitors. (China sure doesn’t think they’re winners for giving us cheap iPhones that we sell worldwide at huge markup.)   We institute tariffs supposedly to protect workers but lose more jobs overall and fight unions to depress wages.  We have no plans for dealing with consequences of automation.  We’re unaccountably cutting spending on both education and basic research.

The current strong US economic position is based on technology, innovation, and the associated value chains.  We’ve now decided the current order is stupid and we’re going to fix it—without restraint.  We don’t even bother to see if we’re doing what the protected industries want.

There are explicit parallels with the Bush issues:

– We’ve gone even more gung-ho for the private sector.   They’re going to fix everything, and it’s perfectly fine to overstimulate the economy at full employment.  And run a deficit to do it.  And we just don’t have to care.

The charts below show where we are in the business cycle (one could also add the yield curve), so chances are we’ll care sooner rather than later.  Maybe we’ll undermine the EU (Trump offered France a special deal to leave the EU), maybe we’ll cripple our own supply chains in China, or maybe we can’t just keep prolonging our 10-year-old business cycle with deficit-funded tax cuts.  With all the thrashing around there are just too many chances.  Giddiness about economic success didn’t work for 2008.

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– China not Russia is the issue this time around.  They’re a tough customer, but they’ve gotten to the stage where their continued prosperity depends on ours.  We need a working relationship with them in order to develop a system of shared prosperity.   Throwing our weight around with tariffs before negotiation and insisting on our inherent right to supremacy will only make the real issues tougher.

Further we need to work through the WTO for maximum leverage.  Insisting on unilateral deals just hurts us.

– With all the generalized belligerence it’s hard not to worry about war now too.   Perhaps with Iran, perhaps not.  Perhaps Bolton is only in the administration to shut him up.  But perhaps not… With history as evidence, war is the ultimate for unpleasant unanticipated consequences.

 

The world is more leveraged and more interconnected than in 2008.  We’re going off the rails in the same ways as before.  Time to stop this train.

The Firebug in Korea and China

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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.

We’ll just have to see in October!

 

Instead of Trade Wars

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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 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 or buys steel products).   The effect is not all that different from using taxes to support public works.  And with public works projects you at least know what you get.   Rather than subsidizing companies and hoping for the best, they pay people for necessary work that the private sector won’t do.  Education and infrastructure are only under-funded because we choose it that way.

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 be magically performed by the private sector.

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

 

Trump’s Fabulous Foreign Policy Triumphs

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Trump’s foreign policy has been a media success. David Brooks has decreed that Trump’s “Lizard Wisdom” is far superior to liberal elitism.  Others have called attention to Trump’s fiendishly-clever strategy of brutal attack followed by pull-back to less crazy positions.  That approach hasn’t done much for the real world, but it sure has worked with the press.

With North Korea the press turned from hysteria at the “rocket man” rhetoric to admiration when Trump decided to cool it by accepting Kim’s meeting proposal.  All that  happened, though, is that Kim received a gift that North Korean leaders have wanted for years—certified international status—with no preconditions, which is to say with no commitment to do anything at all.

Kim is running this show for his own benefit.  Whether there will be advantages or disadvantages to the US remains to be seen, but Chinese president Xi sure doesn’t look unhappy.  And the presumption of success adds pressure on Trump to get an agreement under whatever assurances Kim will accept.  The only success in this picture is Trump’s convincing the press of an accomplishment.

Next about China.  David Brooks was crowing about a new opening for American cars—ignoring that Xi had already announced an opening for American cars before the trade war.  Trump’s trade war with China seems to be following the pattern of North Korea:  bluster followed by an agreement that can be trumpeted as “great”.  And the press is likely to fall for it again, overjoyed that the trade war has been replaced by “reason”.

In fact the dual trade wars (China and the EU) have greatly weakened the negotiations with China, and Xi can be quite happy with the cards Trump has dealt.  The U.S. represents 18% of China’s exports; the EU is almost the same.  Trump took half his leverage off the table with the attack on the EU.  As far as Xi is concerned—only in his dreams!

The third issue is the cancelling of the Iran nuclear deal.  This isn’t a case of bluster and retreat, but it’s another pretty story for public consumption.  Trump, Brooks and others talk about the moral imperative (ignoring the nuclear weapons consequences) of imposing sanctions for Iran’s other transgressions.  However, not only is it clear that the sanctions strengthen the hand of the fanatical clerics, but also by turning on the sanctions we have just played our last card.  We’re simply out of the game in Iran, waiting for rescue by regime change.   It’s interesting that we expect ordinary Iranians to love us and hate the Mullahs, because we choose to starve the poor and bankrupt the middle class.

Iran now has no reason (short of war) to care about US policy,  a position they succinctly expressed with the immediate rocket attack on Israel.  We have taken one more step to complete irrelevancy in the Middle East, this time leading to a possible war and a nuclear Iran.

As Trump has said over and over again:  he can’t lose because he owns the press—he’s just too good as copy.  On foreign policy you can push that one step farther: the copy is all you get.

Tesla and Ice

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This is a short note on a couple of issues related only in that they say something relevant about the future we should be planning for.

The first relates to Tesla and its production difficulties with the new, lower-priced model 3.  The highly-automated production of the model 3 is well-behind schedule, to the point where it is a big hit to the cash flow of the company.  We mention it here, though, because the delay is an indication that mass production of electric cars is something fundamentally new.

An electric car is a much simpler machine than an ordinary, gas-powered vehicle.  In principle the construction should be both cheaper and easier to automate.  Current production of Teslas is intrinsically a low-volume operation.  The model 3 will be the first indication of what newly-imagined electric car production is like.

I don’t know if we’re in for a shock or not (this is after all a first go at it), but this could be another big change to conventional middle-class employment.  And there will be follow-on effects for gas stations, and especially maintenance and repair.  This is another of many indications that broad, technology-based disruption of jobs is going to happen.

 

The other story is about the commissioning of a new class of Russian icebreaker—targeted at clearing northern ship lanes freed up by the retreat of polar ice with global warming.  The phenomenon is already clear, although the amount of traffic is still small.  The Russians are preparing for the opportunity with multiple classes of new machines planned for release up to 2025.  The Chinese have announced cooperation with the objective of reducing shipping times to Europe by a third.

The US is of course uninterested in consequences of climate change.  The only Coast Guard ice breaker is 40 years old, and they have a hard time getting authorization to get a new one.  The Bering strait, however, could be a shipping lane.

This is a very small example, but climate change affects many things, and as a country we’re trying to avoid finding out about them.

 

The current federal budget is put together for a world where the private sector will take care of everything.  That has always been a fantasy—the efficiency of the private sector comes in large part from its ability to ignore everything not relevant to immediate financial success.  It is particularly false for a world undergoing fundamental change.  We either recognize it and help people through it, or we fall behind and revert to the nightmares of the nineteenth century.