It’s Always the Elites and the Foreigners

6778135275_62a99f3616_z Surian Soosay

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.

 

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.

 

The Trump Economy

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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:

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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:

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.