Category Archives: Economics

What will drive the Trump agenda?

I think we are actually progressing faster than we ever have to the universal conclusion that a (this) president is a profoundly stupid man. I almost never hear anyone defending his acumen or foresight. No one defends his “policies” because he clearly has none. Every campaign promise has been broken and his opinion on any subject is driven by the last conversation he had or what he saw on Fox News. Republicans of various stripes – libertarians, Christian fundamentalists, big defense interventionists, and fanatical tax cutters are all hoping the Trump wheel stops spinning at their number. None of them can (honestly) say he shares their ideology – they all know he has no ideology other than self-enrichment.
The last place the wheel stopped was on government contract bidding. He proclaimed that contracts should only go to American companies. What could make better sense? I argued that the Obama Stimulus plan of ’09 should have a buy-America requirement built in. Isn’t at least part of the point of government spending to stimulate the US economy.  Trump seems to get this “buy America” thing but when it angers certain interest groups like Ryan’s Border Tax would, then he runs away – just like a man devoid of ideology would do. He wants to do some of those things he promised but only if certain people don’t get mad. Why? He was supposed to be the rich guy who could ignore special interests.

The only logical reason is that it’s bad for business – the Trump Hotel business.

Forcing China or Japan to relent from their mercantalist policies would hurt his chances to open new hotels there. Raising taxes on retailers who source their goods overseas would aggravate many rich hotel patrons and investors. Conversely, policies that only benefit the working poor do the company no good. In fact, association with racist yahoos may hurt the brand.  Such people don’t buy $10mm condo’s in New York. They don’t have low handicaps. If there is no impact on Trump Hotels then his opinion gets blown around by the wind. Let’s filter policies for whether they are OK for his business:

  1. A border wall – poor illegal immigrants don’t stay at the Trump International Hotel. He has no properties in Mexico (he did have a failed one in Baja) or for that matter any part of Central America.
  2. Cancel all health care for the middle class and the very sick. Health care insurance company executives may join Maralago.
  3. Bomb only places where there are no Trump hotels. That takes North Korea off the list since Kim Jong Un would destroy Seoul and Trump has real estate there. Iran is OK.
  4. Tax cuts must only be for the rich – prospective hotel patrons.

In the end the very thing – money, that was supposed to make him able to drain the swamp actually makes him aligned with all the same wealthy vested interests that already control Washington. All of this would have been prevented if he had chosen to completely liquidate his assets before being sworn in. As it is we have just stepped closer to a classic third world construct.

Trump voters have been left hoping that his proven stupidity will shake things up for the better. As long as they are on the side of Trump hotels they won’t be disappointed.

The Populist Scam

We have had populists rise to the top of the American political system in the past. In each case, we saw a relationship between the man and the message. Take a look at the style and wealth of Eugene Debs, William Jennings Bryan, Henry Wallace, and Bernie Sanders. Their message was clear and no one doubted their sincerity.

It became hard to understand the commitment of a real estate millionaire to populist policies such as trade tariffs, more healthcare for the lower and middle classes, lower levels of immigration and less international engagement. Trump’s believers bought into the inconsistency because the man seemed so different from the standard polished lawyers who competed against him. They couldn’t be trusted/believed. Trump spoke his mind and had no history of flip-flopping on policy because he had never been a policy maker.  The fact that his promises were altered to suit his audience never shook their faith.

Trump has abandoned all his populist positions in record time:

  • Repeal and replace became – dump coverage for all those middle-class voters.
  • China (and India and Mexico) were not declared to be currency manipulators as promised, and his talks with the leaders of Japan and China seem to be warm and fuzzy. Wasn’t China our economic archenemy?
  • The tax bill that was to include a Border Tax Adjustment seems to be dying as the retail industry gets its way.
  • No NATO countries are being asked to contribute more or raise their level of defense spending.
  • NAFTA cancellation has become NAFTA renegotiation – light.
  • Where’s the wall?

He seems to need love from whoever is in the room more than the satisfaction of actually doing anything he promised. There are always far more people in the room who favor corporate interests over those of the people. That was supposed to be the problem he was going to change. As we watch the demise of Steve Bannon and the rise of Xi Jinping and Jared Kushner we are watching the logical failure of a millionaire who never believed in the cause.

You can tell by how Bernie Sanders combs his hair, that he is a true believer. No one can doubt that when confronted by Wall Street lobbyists he would be deaf to their remonstrations. Trump says he wants to make deals. Did it occur to anyone that blowing up a trading relationship is the opposite of a deal? China will always offer us a “good” deal. After all, they just want to sell us cheap stuff. It will be far easier for Trump to take the easy path.

Inertia is powerful.

The question then becomes – when do his supporters realize they have been had? Do they maintain hope because of his unconventional (moronic) approach/appearance? How will he defend his failure to deliver on anything other than a bombing raid in Syria which is exactly the sort of thing his voters really don’t care about?

The conventional forces of the Washington political quagmire are taking hold – they have sucked this neophyte into their black hole of dysfunction and failure.

Does immigration produce economic prosperity?

There seems to be a popular narrative that says that immigration acts as a sort of economic engine. People arrive, many without skills, and get trained. They work their way up feverishly. They use their new money to educate their children. The next generation is entirely American. They know little of their parents’ homeland and have no desire to move there. They see that they would have never have been so well off if their parents had not emigrated.

The twentieth century provides a sort of glorious history with regard to labor empowerment and enrichment as long as you can live it in fast forward by reading a textbook and avoid one critical fact.

Hordes of people arrive in the 19th century and live horrible lives in poverty and misery while robber barons become rich on the back of labor’s woes. By 1910 everyone understands that the labor glut is killing any chances for labor advancement. Teddy sets up an arbitrator to rule on the coal strike of 1910. The union/labor movement is born. 

Before we continue, allow me to inject an irritating fact:

immigration

As you can see the percent of foreign born people peaked in 1910 – at the exact same time as the labor movement was born. What allowed it to succeed was the steady decline in new cheap foreign labor – until 1970. I’d like to continue my history of economic success and upward mobility by virtue of innovation, foreign wars, government stimulus and the accumulation of skills and education by the great American workforce but, unfortunately, this chart has ruined the narrative.

All those factors put the wind at the backs of labor. When we virtually stopped immigration we saw wages grow with GDP and productivity. An economist must make a hard argument to claim that everything will be fine this time just like it eventually was for our great grandparents in 1910. They have to argue for foreign wars that kill lots of people in countries we trade with and we need a sort of reverse industrialization where labor is needed to boost production rather than machines. If you can’t see either of those two things happening then there is only one way labor recovers from the hole it’s in – we must stop immigration or at least slow it to a trickle. (Need I point out that median wages peaked in 1974?)

Immigration by Another Name

But what about all those poor desperate people who just want a shot at the American dream? (You cry.) I see examples of them every night on the news. Well, there is another answer. Foreign immigrants come into the country in another way: They trade their way in. If we have no tariffs with China then we essentially allow every Chinese peasant to work here. There are hundreds of millions of them. If you want to help a poor Guatemalan immigrant you have to stop buying goods made by that Chinese peasant. Think what the chart would look like if I added in all those Chinese peasants.

This is, of course, nothing more than an argument based on supply and demand. If you expect to have a system that will benefit US labor then you have to have less labor. If you are an open border person (such as Mayor de Blasio) then you have to live with this:

Corporate-Profit-Margins

Once again, I must point out that labor’s share peaked in the 1970’s. Maybe it was too high? It couldn’t last and it wasn’t fair that an hourly worker at Ford without any education at all could make more than a college professor. True. Foreign competition and corporate outrage broke up union power but did we want it all to be completely destroyed so we could go back to the gilded age?

When I hear Silicon Valley whining about immigration bans I have no sympathy. Let the price rise and a labor shortage ensue. Let them train people and push them up the system. Sorry Mr. Zuckerberg, your costs may rise a little and your next useless feature may get delayed. Is there a foreign competitor you are worried about? I don’t hear China whining about not being able to hire Indian programmers. They buried and replaced Google and their economic growth seems to be unaffected. The arguments that begin by decrying our prospective loss of competitiveness are absurd and self- serving. If you repeat them then you have become a dupe for CEO’s desperate to pad their own pockets.

Alas, Trump the idiot has stumbled upon the correct policy of America First = less immigration and a tax system that favors “insourcing”. Beware of malevolent morons executing good policies. The policy may end up being desecrated.

Can you please stop saying this?

Sometimes if you repeat something enough, everyone accepts it as the truth. “Obamacare is a disaster” for example. Really? How does insuring 30 million new people represent failure? If rates have gone up elsewhere because Congress failed to fund the program then that’s not the fault of the program. Here are a few more of my favorites:

Illegal Immigration is no longer an issue – after all, border crossings from Mexico have dropped to zero.

Yes, border crossing are down but does that mean that illegal immigration has declined? What if people are simply flying in as tourists and never leaving? Here’s some data from the Migration Policy Institute:

immigrants-to-us

The sum of all F1, H1B, and E8 visas granted has grown from 250,000 to 700,000 since 1992. The average is about 400,000 compared to total immigration of approximately 1 million/year. The popular revolt against massive immigration is not based on mythology. The data supports the populist argument that at the low end of the pay scale job competition is growing enormously by virtue of illegal immigration. Building a wall will not fix the problem.

Manufacturing plants will never be built in, or return to, the United States.

The New York Times did an excellent feature on the huge list of subsidies China offers to Foxconn so it can make and export iPhones. Is it unreasonable to believe that we can compete on an even playing field? US workers rank third in global productivity behind Luxembourg and Norway which are not exactly normal cases. We are three times more productive that Mexican workers for example. Comparisons to Chinese workers is hard because the data includes parts that are outsourced and local subsidies such as the ones mentioned by the NY Times. The reality is that manufacturing plants are being opened (and closed) all the time in the United States. I don’t expect a new iPhone plant in the US to look anything like its Chinese counterpart. Automation would be a much bigger component but higher wage jobs would be created as would jobs for security guards, sanitation workers, and hair cutters. Did I mention that R&D follows plant location?

The question we must ask is what would an iPhone cost without all those subsidies? We must have an industrial strategy to beat those foreign mercantilists who are already doing everything they can to destroy our industrial base. Then we can compare costs.

Israel is one of our closest allies.

What does it mean to be a close ally exactly? Israel advocated for our invasion of Iran. It chose to talk to the political opposition rather than President Obama. Does it support our diplomatic efforts in the Middle East?  Israel says that simply being a democracy is enough to earn love and everlasting aid. Is it? Being a close ally means doing something for us that does not help them or may be contrary to their interests. I seem to have missed those actions. Maybe they just have a terrible (American)  public relations department. Maybe there’s no such thing as close allies in such a Realpolitik world.

Germany needs Muslim immigrants since they have no population growth.

This is repeated right after it is mentioned that allowing in oceans of people from Syria and Eritrea was an act of mercy. Yes Germany has a very old population but are there no unemployed people in the Balkans or Spain? Wouldn’t it be easier to provide German lessons to Italians than to illiterate Syrians? What would it cost Germany to go on a worker hunt among the PIIGS where they offered transportation, subsidized housing, worker training and language courses? I’m sure it would be less than what they will pay to inhale a vast collection of Eritreans and Afghani’s. Did I mention that the unemployment rate in the PIIGS for 20-30 year-olds is above 25%? Bringing in culturally insoluble people to lower your average age is a multi-generational error.

 

 

 

The Death of Capitalism

The last time capitalism was under attack was during the Great Depression. Without proper bank regulation and government stabilizers like unemployment insurance, people began to question its efficacy. Postwar growth ended the conversation. The failure of the Soviet Union discredited Marxism. It is hard to see central planning as a viable alternative to free markets. It’s not so hard to see an economy with more government involvement. The major death blow to capitalism is globalism. We were told that it would deliver four things

  1. Additional foreign capital for investment
  2. Additional technology and innovation
  3. Additional consumers to buy (our) goods
  4. Additional workers to produce all these new things.

All we got was #4.  It turns out we didn’t really need more capital. We have more than enough available to us through our own capital markets. New technology and innovation seem to largely come from Silicon Valley rather than from Shanghai Or Mumbai.  All the new consumers turned out to have virtually no money [relatively speaking] so they couldn’t afford to buy anything that was made in America. That left us with all those additional workers who were eager to make goods for us –  at a much lower wage.

If you add new capacity with new workers but no new demand then there is no reason to invest in new plant and equipment, especially in the United States [or any other developed  country] . Excess corporate cash is used instead to either buy out competitors or to buy back stock.  The result is an ever greater amount of concentration in virtually every industry in the United States from energy to finance.

Every economics textbook has been rendered quaint. How do professors discuss “perfect competition” when there is none. How do they discuss free trade when none of it is free? The rise of populism and the growing absurdity of policies born from theoretical economics is not just a coincidence.

If Thomas Friedman is right and there is no going back then we shall descend into one common global living standard. There will be no difference between a laborer’s standard of living in Delhi and that of a worker in London or Cincinnati. Education will add less value over time as robotics renders it pointless. Owners of capital will roam the earth avoiding taxes like golden Gods. All the luxury condos in Dubai will sell out.

It turns out that globalism ate away at the ability of a state to control the  excesses of capitalism. Worker protections, pollution limits, and minimum wages are only possible if we reconstruct state sovereignty. That’s possible with protectionism and isolationism. Western populist movements seem to have stumbled on these policies without seeing the wicked invisible pile of unwritten import restrictions on Chinese imports, and the absurdity of the Ricardian trade model. They are lashing out and liberals feel their pain but defend their targets. Every tortured liberal economist who celebrates the rise of China also  laments the horrible job prospects of his children. They must pick a side.

Adam Smith knew all about the flaws of capitalism. The current crop of defenders sound more like plutocrat sycophants. Everyone knows it has major problems but few seem willing to accept the obvious cures. Must the populist revolts from below become violent before our policy makers accept that changes need to be made? The people of Europe seem to understand that the Euro is a failure better than their governments. Rural Tennessee voters understand that trade with China is deleterious while the entire Democratic party has its head in the sand. We have allowed the idea that “capitalism is a perfect model”  to spread because we love the theoretical model.

Unfortunately the model and our reality are completely unrelated.

Citizens of the world – Burn shoes!

Does it make you happy to know that a foreigner living in a third world country has been brought out of poverty by virtue of a trade deal with the US? Does it matter to you that they did so by firing US workers? If you don’t care about your neighbor (he can find another job or go back to school) then you have passed the first Clinton test of political tone deafness. You will never win back the middle class nor do you deserve to.

Does it warm your heart to know that allowing in an illegal immigrant has provided a job and a better life to an impoverished foreigner regardless of whether it is at the expense of a domestic worker? If your answer is yes then you have passed the second Clinton test of political tone deafness.

Do you believe that Islam is a religion of peace and that it is utterly disconnected from global terrorism? Are you happy with its tenets regarding women, apostates, and homosexuals, so much so that you are completely indifferent to whether new immigrants are Muslim or atheists? If you answered Yes then you have passed the third Clinton test for (stupidity) and political tone deafness.

If you answered yes to all three questions then – congratulations, you are a citizen of the world, not a citizen of the US. You take pride in all the new skyscrapers in Beijing and look upon your neighbor with complete indifference. You love new trade deals and trust every Muslim immigrant – how dare they do onerous background checks on these poor people? Your mentality prevents you from seeing that a company that employs only Americans is evil (New Balance) . One that outsources to 3rd world countries – hiring children and paying slave wages is your champion (Nike).  I hope you are happy living in the political wilderness.

 

http://www.wsj.com/video/new-balance-sparks-social-media-backlash/09AB650C-6891-4A05-A7E9-FE11FFB1CBF3.html

Brexit – A Return to Normalcy

In ancient Rome they called it Portorium. As goods poured in and out of Rome a tax was put on the importation of foreign products. Around the time of the American Revolution there were only two sources of government revenue:

  • Taxes on booze
  • Import duties (tariffs).

This was essentially true right up to the 20th century when we made income taxes permanent. Everyone for millennia have plainly understood a simple truth:  One should favor the products made by your neighbor over those produced by someone outside your community or country. I need my neighbor to prosper so he can buy my stuff and I want him to pay taxes towards the school that our children attend and the roads we both use. If he’s gainfully employed, then I don’t need to worry about him having to borrow from me or rob me at the local Seven Eleven.

It’s true – that makes me a bad citizen of the world but I assume that they’ll all act the same way. Take a look at local Mexican or Chinese policies and you’ll see a huge structural preference for locally made goods,  There have been quid pro quo tariffs on all goods traded throughout the world forever until two things changed:

  1. Economists started to argue that we would be richer if we screwed our neighbors and bought stuff from people on the other side of the world (even if they never buy anything we produce).
  2. People started to desperately seek any savings they could get so they abandoned their preference for local products.
  3. Companies stopped worrying about how their ex-employees would be able to buy anything after they fired them en masse. They became the government’s problem. A short term earnings gain matters far more than weak sales far into the future.

Brexit is about to put England back into a position that previous generations would recognize well. Mercedes cars will cost more and domestically made textiles and food will become more competitive. France thinks this is hilarious – Mon Dieu! How backward! France has bought into the idea that massive German and Chinese imports are marvelous and perpetual economic stagnation – no problem. France had a trade balance in 2001 – now it has an 85bn Euro deficit.

Yes I know all those theoretical economists will say there will be huge costs to not getting oceans of cheap junk from China but apparently they haven’t been following the British current account:

united-kingdom-current-account

Mon Dieu!  One could argue that a drastic measure like Brexit was necessary to save Englishman from their import crazed insanity. All those well to do bankers who must now decamp seemed to be good at only buying foreign goods and going on holiday anywhere but in the UK.

“Free” trade is so profoundly un-free that the USA, like the UK , has become a dumping ground for luxurious Audi’s and tons and tons of Chinese steel. Sadly it’s the biggest economic issue of our day and the message deliverer is a moronic narcissist. The first half of the debate was won by Trump because every sane person sees the logic in his argument. Hillary is and should be embarrassed by the position of her party on this issue. That’s how she acted on stage. It wasn’t until we got into Donald’s crazy tax plan and his record of hypocrisy and racism that Hillary took over.

I can only hope that the sting she felt at the beginning made enough of an impact that it affects her policies when she becomes President.

How to Fix Economic Stagnation -Right Now

The economic data are becoming clearer:

  • Productivity growth has completely stalled (much of it was based on fictional benefits from import substitution).
  • Population growth is diminimus.
  • Government stimulus is static. The budget deficit is sitting at $600bn – is that OK?
  • Private and public sector investments are dead. Corporations are just buying back stock and governments are scared to raise taxes to pay for bridge and road repair.

We can now ask – Are we happy with the status quo? There shall be no raises for Millennials, no new jobs for aging baby boomers. We can’t afford Medicare or Social Security.

In Europe the central bank is buying every bond in sight so all yields are at zero. They have produced a lost generation by virtue of the absurd levels of youth unemployment. Outside of Germany everyone has deficits in excess of EU limits. Do we want to talk about income distribution and the coming demographic nightmare?

So what are policy makers and politicians on both sides of the Atlantic offering as solutions? The Repubs typically suggest a reduction in the corporate tax rate as though new repatriated $ would be used to increase production facilities in the US. They have all the capacity they need offshore. Please find me one company that says it is dying to build a plant if only they had some repatriated profits. Just one? The Dems have absolutely no ideas at all beyond raising the maximum tax rate by some tiny amount. The Federal Reserve board seems to be most agitated by this stagnation but it’s clear to everyone that monetary policy is making no difference.

I can fix it all – today, with just one new policy:

In China, if you want to set up a company you have to have a domestic partner and most if not all the stuff you make must be targeted for export. All we have to do is copy their rules:

All Chinese/Asian/Multinational companies importing anything must have domestic partners and at least 40% of the content of these imports must be produced locally by those partners. If China wants to send TV’s to Greece, 40% of the TV must be made in Greece. If Apple wants to sell iPads in Texas, 40% of the product must be made in the USA. Otherwise there will be a 40% duty charged on these imports.

If Greece can’t figure out how to make enough of the product then they’ll have to do without new flat screen TV’s. The simple truth is that they can’t afford to buy these imports anyway so the sudden austerity hit would be good policy.

The US would have to figure how to make at least a portion of a lot of of stuff. Let Foxconn show us how, just like IBM showed Lenovo. Am I destroying “free trade”? Absolutely not, because it was never free unless you consider all these same rules in China to be within the boundaries of free. Everyone can still import and export as much as they like, but if they refuse to meet my 40% requirement then all those goods must be sold outside the US.

I guarantee that there would be a burst of growth in the west like we haven’t seen since the Marshall Plan. SEO experts making $22k/yr would be offered huge raises to do something of value. They might actually make enough to get married and buy a house, something Millennials have virtually never done. Export trolls like China, Singapore, and Korea would have to generate growth by new domestic stimulation policies, Yes, we would be wrecking a chunk of the Chinese exporting economy … but then, I was never a fan.

(For a short explanation of how to properly use NAFTA to achieve this go HERE)

Political Contradictions That Must Be Exposed

There are a few major policy issues that get me worked up and when I see a new set of cases that should test my opponents then I want to hear what they have to say. Media interviewers never seem to ask the right questions so I’ll ask them here and maybe they’ll hear me.

  1. NPR and other liberal outlets like to produce American women who volubly proclaim their desire to wear a veil of their own free will. They want us to know that there is no oppressive Imam or husband telling them it is mandatory. We are then supposed to believe that all Muslim women are not chattel, oppressed by their masters. We must not judge them.

I shall withhold my judgement of them provided they give me a quid pro quo. I need to see that everywhere where Islam is practiced women are allowed to cast off their Chadors into a dumpster. In fact I want to see many examples of this before I buy the idea that Islam is not oppressive and that this woman is indicative of many or any other women.

  1. All free market fanatics who like to wax on about the miracles of supply and demand – even with regard to allocating medical services, must defend the maker of Epipens and the potential death of people priced out by recent mark-ups. They must also defend this jackass –Martin Shkreli. These are perfect examples of why health care cannot be run by free market pricing unless you want only rich people to live. As drug companies search for ways to raise their ROE we will probably see more of it. Free marketeers and libertarians should be forced to explain how this is good for society and how higher profits on old drugs help sick people on the verge of death or anaphylactic shock.
  2. All open border liberals (Bill DeBlasio et al) who find it so easy to attack the stupidity of Donald Trump seem to go way too far. They wax on about immigrants (always dropping the term illegal), claiming they are good for economic growth and cause no trouble in terms of crime. This heated defense of all foreign people leads one to presume that they must be in favor of completely open borders. Clinton and DeBlasio should be forced to explain the terms under which they would restrict immigration and how they would enforce it. Either you let everyone in or you enforce the law – time to choose, Hillary. By keeping people out you may look heartless and the indigenous Hispanic voters may not like you. Liberal politicians should not be allowed to get away with voter pandering just because the competition has gone mad.
  3. Every politician who waxes on about the nobility of military service must explain why they and their children did not volunteer. They must also explain how the military excursions into Iraq or Vietnam were valuable. How can a soldier be honored for doing great work defending our country if his tour of duty included violent acts that were without merit. You must defend both the people and their missions or neither. If you can only do the former then you should be characterizing conscripts as victims. Then I will give you and your family a pass for never serving.

I’d also like to jump on the hypocrisy of:

  • State governors who allow their states to sink into financial oblivion while proclaiming their record of balanced budgets.
  • Economists who refuse to see a link between the global labor glut (through trade) and the decline of middle class wages.
  • Comedians who mock politicians but refuse to be truly polemic since that may hurt ratings.
  • Social media advocates who fail to explain why widespread narcissism is good for society.

Where have all the good interviewers gone?