More To Say About China

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This piece is a little broader in scope that our past posts about China.  That seems useful, since war-mongering in press coverage of China has put us all in blinders.  We’re not claiming here that the Chinese are angels, but there is a lot more to the story that needs to be discussed.

We start with a couple of basic points, of interest regardless of whether we consider China friend or foe:

  1. China is now the world’s biggest economy and is continuing to grow rapidly. Further its population is more than four times the US.  That has many consequences worth thinking about.
  2. China has built itself up from nothing to a world class challenger in many areas. This is not just—or even primarily—a case of “stealing from us”. It is imperative that we understand their example and what we can learn from it.

On the first point, it should be noted to begin with that while the Chinese economy is the biggest in the world, the country is so big that its per capita income is well-below Mexico.  A rising standard of living in China could drive growth in the rest of the world for quite some time.

That is a dramatic turnaround in what China means to the rest of the world.  It is also the reason why virtually everyone expects China’s trade relations to be renegotiated.  Opening China has moved from a largely theoretical matter (because there just wasn’t that much to be sold) to become the primary issue.

This is the time for negotiation, but it’s also a window of opportunity we can easily miss.  In this, as we’ve noted before, a unilateral trade war is actually counter-productive. We’re defending protectionism, when the primary issue is open access to the Chinese market!  Further by insisting on a bilateral deal, we’re substantially reducing the leverage needed to make the deal a success.  The Business Roundtable of corporate CEO’s said as much prior to the start of current negotiations.  This isn’t about trade deficits; it’s about worldwide rules of fair trade going forward.

Trade negotiation, however, is not the only issue here.  US businesses have long had the luxury of focusing on the domestic market.   Economies of scale will now demand a less parochial view.  An obvious example is loosening of fuel economy standards.  That’s a concession to our automobile industry for the domestic market that will hurt international competitiveness.  Another example is 5G mobile equipment.  US vendors are behind the curve, because the domestic market has been fractured and slow-moving.

We are not doing our economy a favor by granting special favors (including tariffs) to domestic businesses.  That’s just perpetuating the idea that winning here is all it takes.  (Tariffs are also an unreliable and inefficient way of producing jobs.)

As for what we can learn from China, we give a few examples

– Government-sponsored R&D pays big benefits.  That is the single biggest contributor to the Chinese success.   They have created a world-class technological empire out of almost nothing.  Even the much-lamented Chinese technology theft is a non-trivial (if nefarious) accomplishment.  How many companies do a good job managing transitions of responsibility even for their own software?

We used to care about the government role in research too.  It was assumed in the good old days of the 50’s and 60’s. Now we have not only cut back on government R&D (Trump’s latest budget is a recent example), but with the current anti-science nostalgia we’re not even sure we want much to do with scientific progress.

– Education is an imperative.  It’s people who make for national success and we need them to be prepared for the jobs that will defend our national standard of living.  China has been ready to spend the money to make it happen.

– We should want to drive up the value chain.  Despite past history, the Chinese understand perfectly that price-competitive businesses are not the way to go.   Real wealth comes from dominant industries with the power to sell on content instead of price.  That’s what technology can deliver.  It’s simply not in the cards to believe past successes will just revive.

– All businesses need to embrace technology for success.  Even in the cost-sensitive outsourcing business, ease of interworking was an important factor in Chinese success.

– Finally (and paradoxically) a dynamic, decentralized economy is a real plus.  This may seem surprising in a list of lessons from China, but it’s strangely true.  The major impetus that kicked off the Chinese economic miracle was an accidental liberalization.  As a small opening, Chinese municipalities were allowed to run independent businesses once they reached their nationally-set production goals.  As it happened, these independent businesses took off and eventually marginalized the state-run enterprises.  Many morphed into successful private companies.  (Xi is now attempting to put that genie back in the bottle, with reemphasized state enterprises.)

We should never underestimate the value of the dynamism of the US economy.  But we had better be careful to understand what has really worked for us.  There has always been an important government role, and diversity mattered too.  In the Chinese example, success was only possible because government provided the environment, particularly education and infrastructure, for the businesses to grow.  In general, prosperity requires both the environment and the opportunity to achieve success.

 

All that being said, what can we say about dealing with China?  A few guidelines:

We are misled if we think “enemy” is all we need to know.  China is an important factor for both good and bad in the world economy.  They were an important help in the efforts that prevented a depression in 2008.  They can be a major locomotive in the world economy going forward.  They contribute to the worldwide development of science and technology—which makes us all richer.  They recognize the importance of climate change.  It is our task to make that all work for us.

To get there we need to treat the Chinese like any other adversary—we should deal with them from strength and look for mutual advantages.

It is not productive simply to dictate, with the idea that we can shut them down by denying them access to our market.  We represent 18% of their export market and much less of their total economy.  That’s plenty to cause trouble, but not enough to dictate, and in any case real pain would hurt us as well.  Further, if we want success in their market, there has to be ongoing mutual self-interest—no signed document will do it.   And there’s a historical side of this as well:  China endured some of the worst of western imperialism in the nineteenth and early twentieth centuries.  That memory lingers, and we are not served by recalling it with our behavior.  Mutual advantage is much better than antagonistic isolation.

We need to extend the rules for fairness in international commerce through the WTO.  As noted earlier all parties recognize this has to happen, and we have historically led such initiatives.  We have twice the leverage in cooperating with the EU (also 18% of Chinese exports), and we avoid the hypocrisy of endorsing protectionism in the argument for opening of their markets.

Matters such as intellectual property protection and theft should be solvable problems, in part because the Chinese now have much to defend as well.  It’s not for nothing that Huawei is well ahead of the curve in 5G development.   Chinese universities are now high on the list of international institutions (even though Western ones still have cachet in China!), and the Chinese are acquiring patents like everyone else.  It’s also true, if seldom noted, that Chinese computer hacking decreased significantly by the end of the Obama years and went way up when Trump declared economic war.

The military installations in the South China Sea are a serious problem, but the fact is that the great majority of Chinese imports and exports pass that way—so it’s not surprising they’re worried about it.  We make that worry all the greater by declaring that it is legitimate to use all resources at our disposal to get the Chinese to do what we want.  The only real solution is some kind of freedom of the seas regional agreement that all parties can have confidence in.

Human rights violations are also important, and we have to keep those issues alive.  It’s hard to know how far we’ll be able to get.  The one thing you can say is that we shouldn’t be too quick to use Xi a stand-in for China as a whole.  We’ve already noted Xi is a throw-back (a “princeling” heir to the Maoist past), so perhaps there is hope for better later.  There are many conclusions to be drawn about us if you take Trump as a stand-in for everything American.

In the end the point is to treat China like any other independent nation.  China as “enemy” has real roots, but also large doses of domestic politics (China has been a convenient excuse for our own misdeeds) and “yellow peril” racism.  China needs to work properly in the international system of trade and ideally also in international security agreements.  Any efforts to avoid a new set of arms races will have to involve them.

Vigilance is fine, but there is at least the potential of much to build on.

Prosperity in Today’s Economy

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The title of this article sounds rather ordinary, but in fact there’s more to say than you might expect.   There aren’t a lot of new facts here, but we bring together several strands of argument that don’t tend to be followed to conclusion.  It’s useful to think step-by-step about prosperity today and going forward.

  1. Our national standing today is largely determined by technology.

There are many aspects to this.  The most obvious one is the role of high-tech companies in the economy.  The NYTimes had an article a few months ago (on the occasion of Apple’s becoming the first $1 T company) with graphic displays showing the size of Apple (as well as Google, Microsoft, Amazon, and many others) in the US economy.  The dominance of high-tech is unmistakable. That’s what supports our standard of living and always has. Railroads, steel, automobiles were all high-tech in their day.  (Note this is not saying that Google or Facebook are angels, it’s our national strength in technology that matters.)

It is only because we are on top of that heap that we have the money that supports the rest of the economy.  That includes much of small business and service industries.  It is from the strength of our competitive economic position that we can pay for the non-competitive industries we choose to support.  The aluminum and steel tariffs are being paid by us from the industries that don’t need them.  To state this somewhat differently—we are not going to build a dominant economy by selling each other stuff anyone can make at artificially high prices.

It’s also worth pointing out, given all the discussions of the military budget, that the technology argument applies in spades for the military.  Building new aircraft carriers is not going to make us safe.  One only has to think, theoretically of course, about the effect of a North Korean virus disabling the military’s command and control.  From the chart below, it is obvious that our level of military spending ought to quash everyone else hands down if money were the only object.  But it’s not doing the job, because that’s not the game anymore.  And it’s not just AI, it’s across the board.

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What all this means is that the people who support our technology position are critical resources who matter to all of us.

This is a lot less elitist than it sounds, because it’s not saying we shouldn’t care about or value everyone else (more on that later).   The point is that we shouldn’t be spending our time worrying about who is or isn’t supplanting whom.  Our success depends on nurturing and exploiting the best and the brightest—at least for these skills—and we had better spend our time trying to find them and encourage them, regardless of race, gender, or sexual orientation.  And if foreigners choose to come here and establish successful startup companies—mostly in high tech—we should be happy they do.  It is a major strength of the US economy that people find the US to be the best place to realize their ambitions.  We erode that strength at our peril.

Anger at elite technologists may be natural, but they are the wrong targets.  Their effect on the rest of us is positive.  What we need to avoid is a two-tiered society of haves and have-nots.

  1. Businesses today are different from the past in important ways.

Since we’ve identified the key role played by the tech sector, it’s worth thinking about what kind of businesses those are.  So let’s take a quick look at Google, Apple, Amazon, Microsoft, and Facebook.

– A first point to notice is that they are all some form of monopoly.  This is not surprising as they are all (even Amazon and Apple) essentially software companies.  Software businesses invite monopoly, because costs of production are minimal. In such cases, research and development costs become primary, and the company with largest market share can afford to offer products with more features than a smaller competitor can.  As automation continues, particularly with AI, similar arguments will apply to much of the rest of the economy.

Managing monopolies is a serious issue:

Monopolies squelch competition.   It is imperative for our success that established companies can’t limit the innovative power of new entrants.  That has been our historical advantage over foreign competitors and is a major factor in any discussion of how we deal with the rise of China.  This is not just a problem with Google, etc.  The demise of Net Neutrality is a classic case of giving in to established players, in this case the major telecom carriers.

Monopolies take more than their share of our money.  Monopoly power limits price sensitivity. Since the determining feature of competition is more often uniqueness more than price point, products are priced at what the market will bear—as with the iPhone or patented drugs.   Furthermore, through manipulation of assets including intellectual property, hi-tech monopolies have been tough to tax.   Apple’s success in this is legendary.   Their windfall from the recent corporate tax cuts is something to behold (and unnecessary as a spur to investment).  It is imperative we learn how to tax monopoly-level profits.

– Next, personal success in these companies requires a high-level of technical competence.   Amazon is obviously a case in point, with two completely different populations:  the mass of box fillers versus the corporate staff.  Note that technical competence is not just a matter for developers, but is also required for the many people in management, support, administration, and even sales.  As just noted, as automation proceeds, this trend will extend well outside of high-tech.

This represents the threat of a two-tiered society, as discussed earlier.  As a country this implies at the very least a basic responsibility for broad-based solid education and a livable minimum wage.

It should be emphasized that strengthening of education is required for both national success and personal prosperity.   Regardless of what advantages we have for staying on top of the heap, we cannot succeed if we don’t have the people to do it.

– Third, all of these business are intrinsically international.  With the growth of the world economy (and China in particular) economies of scale are such that we have to think in global terms.

– Finally our fourth and last comment for this section is about a different trend not limited to high-tech—the institutionalized irresponsibility of business.  It has become gospel that businesses have responsibility only to their investors, and all other considerations are more or less theft.  Businesses used to care about retirement, healthcare, training, even local charity.  But current reality is that if someone is going to care about those things, it’s out of the question for it to be them.

In addition, because of the sheer size of the country, the US more than anywhere else has to deal with the phenomenon of towns or regions where the economic base can just disappear. Company town are the obvious example. In an age of accelerating technology change, we can’t stop such things from happening.   And we can’t expect rescue to happen by all by itself.

However we emphasize this isn’t just about charity.  In the current state of affairs, the private sector is not be doing what’s necessary even to provide the environment for its own success.

That leads to the next topic—what do we need for national success?

  1. Our infrastructure problems mean more than we thought.

Infrastructure has to be thought of as whatever is necessary for national success and personal welfare.  I.e. much more than roads and bridges.  The educational system fits in this category as it is required for both personal and national success.  Declining upward mobility and the student loan crisis are two indications that there is unquestionably a lot that needs to be done.

Support for theoretical research is in the same category.  It is precursor work for new technologies before they are ready for business. A point worth stressing it that it is not only the research itself that is important—research work assures that there will be a population ready to exploit new opportunities as they arise.

Continuing on, we list a few more significant infrastructure projects needing immediate attention.

– The American Society of Civil Engineers keeps a web site with a break down of national infrastructure requirements.  We currently rate a D+.

– To that we add the urgent needs of combatting climate change, which will be considerable, regardless of how the final plans work out.

– Healthcare is currently in flux with ACA under attack and nothing to replace it.

– Finally we have the general specter of a two-tiered society, with all the misery and threat of conflict that represents.  That too needs to be dealt with as a national problem, and there’s no one in this picture other than government to do it.

From the point of view here our much-discussed infrastructure needs—back to the roads and bridges—have to be viewed as bellwethers.  The fact that we can’t deal even with roads and bridges means that we have a fundamental problem funding the common good, and we have to take that head on.

  1. There is a mismatch between the needs of our country and the forces that currently control it.

The governing ideology of this country is simple to summarize:  let the private sector do it and get out of the way.  All government regulation is bad, and taxes are just a brake on the private sector’s ability to make everything great.

The chief beneficiaries of this policy are the ultra-rich funders of the Republican Party, although the problem of money in politics (especially after Citizens United) transcends parties. In this enterprise Trump is largely a front man for the real forces running things.

For these people, with fortunes going back even into the nineteenth century, it’s natural to regard the country as a money-machine.  Taxes, regulations, and government services—except for the military—are deductions off the bottom line.

The problem with that view, even for them, is that it is the wrong model for the world we just described.  That set of policies would make sense in an extractive economy, where all that is necessary for success is a cadre of imported experts to arrange for pumping oil with purchased technology.  In that case you don’t need much from the national population in order to collect the proceeds.

That’s not our situation.  As described, we live in a technology-dominated world where the population must earn our national success.  For that world we’re currently going in the wrong direction.  Devaluing education, denying climate change, cutting research, encouraging xenophobia will get to us sooner than we’d like to think.  China is a formidable challenger.

However, it not so hard to be optimistic if we can just be serious about what needs to be done.  We have all the tools for success:  the money, the work to be done, even the means to avoid a two-tiered society.

The story is not complicated.  If we can return to exploiting our strengths, then we should be able to remain in the technological forefront for our chosen areas of focus.   If we can control the monopolies, then the associated margins in an expanding world economy should yield money enough (if we can collect it) to produce a workable society for everyone ready to participate.

There is certainly no shortage of work in the infrastructure area, and it needs all kinds of people.  In this respect the Green New Deal may be too glib in pinning everything on climate change, but their basic idea is correct.   If we play our cards right, the high technology future will provide the funds to support the infrastructure for its own success and for the prosperity of the nation.

We should not underestimate the job.  Careful and transparent planning is critical—defining exactly what needs to be done to support both the economy and the population.  And then determining how that work can be best supplied.

It should be emphasized is that we’re NOT talking about socializing away the free market economy.  If there’s one bad misconception that needs to be hammered down everywhere, it’s the idea that the private sector is magic for all problems.  We’ve just gone down a long list of things it’s not going to do.

Even Adam Smith was clear about this from the beginning.  The private sector is a participant in the public economy, but that economy will deliver the benefits of a free market only if #1 government keeps the private sector from corrupting the markets (e.g with monopolies and bribes) and #2 government provides the resources (e.g. education and other infrastructure) necessary for success.  That’s the definition of our job.

This will necessarily require a renewed focus on government and public service.  It’s interesting that a couple of recent mainstream books (Volker, Lewis) have recognized public service as an important issue.  In that respect “Green New Deal” isn’t a bad term:  we need to be as serious as Roosevelt’s brain trust in planning for the next stage for our country’s future.

This is a battle both old and new.   In Smith’s words, “The interest of [businessmen] is always in some respects different from, and even opposite to, that of the public …The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”  Wealth of Nations is only achieved when government does its job.

Getting Productive with China

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This is yet another note about China. It’s hard to stop thinking about it, as our current policies are both dangerously unproductive and difficult to undo.

Let’s start by believing the worst.  Suppose the Chinese really do represent the devil incarnate—the third Reich back again for another racist attempt at world domination.  What should we be doing in that case?

The answer is clear.  The Chinese have a huge population, world-class technology, and the industrial might to back it all up.  They are a formidable adversary, and need to be confronted (as in the past) by a world united against them.  What we need are strong alliances, in the Far East and elsewhere, to counteract the threat.  That alliance must be ready to act in everyone’s interest, with partners able to trust each other’s long-term commitments and no one looking to make a few bucks off the others on the sly.

We just failed that one, so let’s back the threat down.  Suppose the Chinese threat of domination is economic, not military and political.  In that case we need to protect world-wide supply chains, so the Chinese can’t just pull the rug out from under the existing order.  And we need clear rules defining fair trade, so that it’s obvious who is a renegade.  That sounds like some version of TPP and the WTO—so the highest priority is getting those right.  (TPP can’t be too bad, since large chunks of it were taken verbatim in the new version of NAFTA.)  What it doesn’t sound like is our modern version of protectionism, where we reserve the right to do anything we like and impose it unilaterally on anyone else.

Now let’s add one more element to the picture—China is the largest most rapidly growing market in the world.  This is an item of some interest, although it doesn’t get the press it deserves.  For one thing China has just added an inconceivable number of people to the world’s middle class.  One of our grievances is that China has not opened its markets as it should.

There are two remarks to be made.   One is that China has only recently developed enough of an upper middle class to be an effective market for us.  This is a matter for emphasis now, and the maximum leverage is when the US and EU work together (each representing 18 percent of Chinese exports).   There are actually multiple reasons to be guardedly optimistic about current prospects for negotiation.

Second, the fact is that as a country we’re actually rather reluctant exporters.  Our domestic market has always been so large as to be primary.  Going forward, this is a matter of some concern.  For example we claim we want to sell cars in China and elsewhere, but we’re relaxing environmental regulations to help our manufacturers—and guarantee that the mainline production won’t be acceptable in most other countries.  Denying climate change has the same kind of effects across the board.  We can’t forget that open markets are only the first step to actually selling the stuff.  Even today the Europeans, with the same level of Chinese imports as us, have a substantially lower trade deficit.

As a next point, in formulating China policy we should at least make an attempt to think about things from their point of view.  That doesn’t justify it, but we have a large blind spot if we don’t try.   It’s a worthwhile exercise independent of whether we like their current leadership or not.

On that subject the primary factor is that China underwent some of the worst effects of western imperialism, lasting well into the twentieth century.  The Opium Wars deserve their name.  The British made fortunes with opium produced in India and sold under military protection in China.  And the rest of the West joined in.  The Chinese had expected some help in the aftermath of World War I, but were denied.

It is not surprising that the Chinese feel both suspicion and hostility toward the West, as well as a need to be fully in control of their own destiny.  In that light it is easy to imagine the attitude of the Chinese toward Trump’s initial set of demands in the trade war, expressed as terms for unconditional surrender.  It probably made Trump feel important and powerful, but it’s hard to imagine anything less likely to produce real cooperation. As for Chinese attitudes toward the South China Sea and intellectual property, we should remember the “Monroe Doctrine” and the heroes who brought British textile technology to the early US.  That’s not to say they’re right; it’s just counterproductive—and frequently delusional—to approach international cooperation as a moral crusade.

The only solid basis for relations with China (or anyone else) is shared interest—again regardless of whether we like their current leadership or not.  We’re not going to defeat them—in either military or economic terms—so it’s crazy to assume that’s the right model for policy.  (You can even go farther and say that’s it’s not even in our interest, but we don’t have to go that far here.)  They’re no more willing to capitulate than we are, so it’s a lot more productive to stay in the real world.  Mutual trust is a requirement for success.

With that we can make some suggestions:

  1. We should be negotiating rules for open markets and intellectual property protection as a matter for the WTO. As noted, there is ample basis for agreement of those subjects going forward, so there is reason for guarded optimism—meaning not just agreement but cooperation.  To be clear, the US has historically won 85% of its cases with the WTO.
  2. Technological competition with China is inevitable. They are already formidable competitors, but our strengths and weaknesses are different, so there is room for both of us in a growing world economy. Above all we should recognize and take care of our own strengths.
  3. We have work to do in preparing our economy for a world where the outside is at least as important as the domestic market. Not being the world’s biggest economy is a big change.
  4. We have even more work to do to make sure that the whole population profits from an ever more highly-integrated and highly-automated world. That’s not only a moral requirement, but the only way to defeat the parasitic demagogues who threaten to take over here and elsewhere.

Unity and Divisiveness

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Newspapers are filled with discussions of our political divisions and whether we can ever return to unity and shared national values. Many of those discussions are quite philosophical.  This one is not.

The first thing to note is that divisiveness is hardly surprising when the two strongest political forces in the country are actively inciting it:

– The mainstream Republican Party is at this point inseparably intertwined with the Koch organization for both money and organization.  There is no secret about the Koch organization’s objective.  They want to return to a world where their ultra-rich members run the country, pay minimal taxes, and do anything they want.   Consequently they want minimal government with defense and very little else—no regulation, only basic education, no social services.   Since those are not necessarily popular positions, the Kochs have been systematic about divide and conquer, using the Tea Party and later Trump as front men to stoke culture wars.  Pence, Pompeo, Gorsuch, and Kavanaugh are examples of Koch people.  These are the people behind the scenes in the famous NYTimes op-ed piece.

– Trump is a populist front for the Kochs, but with his own objectives as well.  For Trump divisiveness is the name of the game.   It’s his people against the enemy with a siege mentality to build loyalty among the followers.

 

The conclusion from this is that the polarization of attitudes is not entirely—or even primarily—a matter of differing philosophies.  What you have on one side are the self-serving programs of the Koch organization, together with justifications their think tanks have concocted to sell them.   On the other side is a set of attitudes—starting with democracy and including even an immigration proposal—many of which were shared by both parties until the Koch people bought the Republicans.

As noted, Trump and the Tea Party are populist fronts.   Contrary to what you read every day, the Tea Party was not a spontaneous movement; it was created and funded by the Koch organization.  Its prominence, and the prominence of its message were only possible because of the level of funding.  The Tea Party presaged Trump in the “true-believer” attitudes of the members.  The Kochs had studied techniques of the communist party (of all things) to understand how to sell the message of secular paradise.

Trump is a step beyond.  For one thing he has brought the cult of personality to the cult of secular paradise.  For another he has added his own program to the program of the Kochs.  In so doing, he has become a complete mask for what is going on.  His tariff program—no matter how ill-conceived—really sounds populist, and his culture war persona is impeccable.  He’s always in the news.  The Kochs were undoubtedly delighted to see their tax program go through as his achievement.

If Trump really does make himself a dictator the Kochs may get more than they bargained for (and we get to live with it), but for now—despite tariffs, racism, and scapegoating—he’s their guy.

 

So going back to the question of divisiveness, where exactly do we stand?   Support for the Koch-Trump program is of two sorts:  there are those who really do benefit (some level of rich), and there are Trump’s true believers.  Many articles have remarked on the strength of the reciprocal love that binds the latter group with Trump.   Not an easy thing to address.

Why did these people buy in from the beginning?  Lots of reasons have been presented:  economic factors, racism, cultural conflicts, or simple non-homogeneity of the population.  While there is plenty of evidence for the non-economic reasons, it makes sense to focus on the economic ones to start with, because those create an environment where the other evils can flourish.  People fighting over scraps are unlikely to play nice.  It’s true that polarization is self-sustaining once it starts, but addressing people’s concrete problems always has to be a first step.

One thing going for change is that the ideology of private sector salvation has now had a chance to show its true colors.  The tax cuts did not get turned into bonanzas for employees; instead they got turned into this dramatic and revealing chart:

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Furthermore healthcare was a fiasco, and even climate change is emerging as a threat.  The tariffs only sound good—more people buy and build cars than make steel.

The only way any of that matters is if the Democrats do take the House.  If that happens, the Democrats have a chance to show that they can produce solid programs for real problems.  Healthcare was well-chosen if we can get our act together and really do it.  The opioid crisis is still untouched.   It would be nice to produce a jobs program that can get people out of Walmart.  The Republicans have tried to poison opportunities with the tax cuts, but we’ll have to figure a way out.  The ACA tax might be a model.

So the message is that the way back from divisiveness may be more ordinary than it seems.  Stop calling people names and figure out ways to make visible progress.  That may even lead to forced cooperation between parties.  Even if nothing gets implemented, it will be clear what could be.

And someday there may even be justice for the Republican Party’s prolonging the pain of the 2008 crash, so they could deliver the Koch tax cuts!

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.

 

 

If Not Now When?

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We are ten years into the current business cycle.  We have not repealed the law of gravity.  The cycle will end, and history says sooner than we would like to think.

It’s important to recognize what that means.  Very simply we have to be realistic about what we’ve put off for tomorrow.  If we’re not serious about something today, there is a fair chance that tomorrow isn’t going to come any time soon.

Let’s make a short list of what we’re not serious about:

Education:  Funding for education has never recovered from the 2008 crash.  This affects all aspects (building, salaries, equipment) and all levels.  It directly contributed to the student loan crisis.  It affects the well-being of young people and our competitiveness as a nation.

Infrastructure:  Both candidates raised the issue in the election, but nothing serious has been done.

Opioid crisis:  This is a monumental problem that has thus far received only lip service.

Wages:  Businesses got a huge tax break with the Trump tax plan, but nothing has shown up in wages.  We can’t even talk about raising the minimum wage from its historic (inflation-adjusted) lows.

Medical coverage:  ACA has been deliberately crippled with nothing coherent to replace it.

Climate change:  We can pay now or pay more later, but we won’t be able to run away from it.  Thus far we’ve just closed our eyes, but the changes will be non-trivial.  Carbon capture—the least drastic path in the most optimistic estimates—would be at least 5-10 Trillion dollars a year worldwide.

 

In these good times we’ve chosen not to address any of those issues.   Tax cuts for businesses (now turned into stock buybacks) took precedence.

Unless something changes soon we should recognize that we have chosen to live with all of those problems—for as long as anyone can see.

Learning from Apple

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On the occasion of Apple’s rise to become the first $ 1 T company, the NY Times had a good article with graphic displays showing the size of Apple (as well as Google, Microsoft, Amazon, and many others) in the US economy.  There are a number of lessons to be drawn from this.

1. The surprisingly dominant role of Apple—together with the other three just mentioned—shows the importance to this country of technology leadership. That’s what supports our standard of living and always has. Railroads, steel, automobiles were all high-tech in their day.  We cannot pretend that even behind high tariff walls we can build a successful economy out of staying put.

Our challenge is to seize the opportunities and bring everyone along.  One important positive from this story:  much of what these companies sell didn’t exist twenty years ago, which says a lot about opportunities for the future.

2. It’s worth recognizing that (despite all the fuss) China’s rise has been a good thing for Apple and for the US economy generally. The iPhone is a prime example of why trade deficit arguments are wrong.  One of the most profitable American products ever is a loser in the trade deficit, because profits are declared in Ireland for tax purposes!  Are we really going to tell China: “Don’t send us any more of those cheap iPhones that we sell everywhere at 300% markup until you can buy more yourselves”?

For the future, now that China is richer, East and West are actually joined at the hip.  Continued growth has to be collective, so the last thing anyone needs is a trade war.   Sure they tried to copy us—we should do something about that, but the bigger challenge is that they’re good at it.  To be successful we need to play to our strengths:

–  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 and far from exceptional cases.

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

3. Apple is also emblematic of the high-ticket corporate welfare we are now practicing. It’s hard to argue that Apple, of all companies, needed a huge tax break on $252 B of repatriated profits plus a current-income tax break, all yielding $100 B of stock buybacks. US companies were doing fine before the new tax plan, and stock buybacks have been the primary result of their tax savings.  In other words, companies have decided the best thing to do with their tax cut money was just to give it back—for the benefit of the rich people who own them.

The other side of that policy is our current inequality of wealth and opportunity.   We have refused to help our population move to the increasingly high-tech future—and created a cast of bogey men to blame for it. We won’t spend money on education, infrastructure, or people—despite the difficulties of transition.  We’ve fought unions and anything that gives workers clout. But it’s the Chinese, or the Europeans, or the liberals, or the immigrants who are to blame.

 

We’re moving toward a worst of possible worlds: a capitalist mal-distribution of wealth combined with socialist top-down economic policy.  We’re fighting tariff wars so senseless that even the Kochs are complaining, because Trump feels empowered to decide which sectors of the economy ought to be winners.

Apple’s success shows what happens when we build to our strengths.  We know how to do that.  We did it for a long while.   But for now we’d rather shut our eyes to the opportunities, and pretend we can bring back the good old 1950’s.

 

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 Round table of CEO’s pointed out from the beginning, there’s a real danger of missing the boat entirely.

We’ll just have to see what we get!  (Recent update here.)