Economics professors have always agreed about what comes after an industrial economy: a knowledge-based economy. Service industries would rise up to push around the money we made, inventing and utilizing new technologies. Workers would be data crunchers. They would be accountants, economists, health care workers and computer scientists. Great – no problem we all said. Just stay ahead of the (education) curve and don’t expect to get rich as a steel or car plant worker.
There is, however, another path. What if our remaining industrial base becomes so denuded that it (virtually) no longer produces goods. We won’t need as many engineers to improve productivity or to build robots to replace workers. We won’t need accountants or investment professionals to manage the wealth created by these industries. We won’t need scientists to do R&D since that always takes place near the production facility. (Why do R&D anyway in a world of rampant global IP theft?)
China has replaced us as the new industrial behemoth. They need raw materials for their factories and food for their army of peasant labor. Yes, they need services too but those markets are completely closed to foreign providers. (Just ask Google and Microsoft). Who shall feed the beast?
The Future: Our industrial capacity is shrinking towards irrelevance and our service sector is stalled out. We are the global consumer and without any trade barriers, everyone is just chewing on our flesh. We can still buy their goods but it’s all paid for with borrowed money. So now we are to go back to what we used to do – before the 2nd industrial revolution. We will produce food, minerals, and fuel and sell them to China and Japan just like Africa, Australia, and the Middle East. There are no import barriers on oil or wheat. This is economic development in reverse. It is, of course, a path to poverty and massive income inequality. The whole idea behind trade barriers was to protect young industries (and countries) until they have improved efficiency and become innovative. We have been doing the opposite for 20 years and it’s killing us.
Am I being too cynical? Let’s look at the data. In 2017 6/10 of the top exports (by category) to China were commodity goods. Only three of the top ten were commodity sectors in 2007. ” In 2007, the U.S. manufacturing trade deficit … accounted for 76.99 percent of the overall merchandise deficit on a Census basis. The 2017 figure? 116.50 percent.”
The race to the bottom that began when China got MFN status is in its final stages. To sustain 2.5% growth we are bankrupting the state. We have manufactured the illusion of increased wealth by virtue of massive debt increases. The robotics wave will have a greater effect on Chinese and German productivity since that is where global manufacturing now resides. We must get it back. Mercantilism can save us just like it made us in the 19th century but we’ll need a new mindset and new leadership.
Let’s dig up Alexander Hamilton.
That’s how it feels. It’s not just Trump who is after me, it’s the entire Republican party. I have a few basic issues that excite me and it seems that someone in Congress is singularly devoted to doing the exact opposite of what I believe in:
- All steps closer to universal coverage and subsidies for the poor are being undone – as though Republicans want the working poor and the nearly old – to die, literally.
- Net Neutrality is being revoked. I have (like most people) no choice regarding my internet provider. Now, if they want to jack up my rates because I use Netflix then they can and will.
- At every turn, the government seems devoted to anti-science. I seem to waste my time learning about such things as climate change as though my advocacy for clean energy production matters.
- Corporate taxation ranks right at the bottom of my priorities. Why? .. because profits as a share of GDP have never been higher! How does anyone defend lower corporate taxes in this context? Are many head offices moving to Switzerland? Have all those profits produced fabulous wage increases for workers?
- I seem to be the only person left in this country who cares about the US budget deficit. Why? I have to accept that neither party cares and the the Republicans are unfazed about jacking the deficit to $1 trillion/year. If there’s a new recession then maybe we’ll see $1.5 trn!
- Eliminating the estate tax moves us precisely to where the founding fathers said they didn’t want us to be. An up and coming business will be moat construction.
- The elimination of state and local tax deductiblity, is a perfect way for the Republican Party to hurt Democrats including yours truly. Let’s say it together -Double Taxation for all!
We have finally arrived at irrefutable proof that this is not a democracy. Gerrymandering had already pretty much accomplished this. A new tax bill that raises personal taxes on non-millionaires in order to pay for a reduction of corporate taxes tells us that voters are irrelevant. This is precisely the kind of policy you would expect to see in a corrupt third world autocracy.
What surprises me is how this all contrasts wits other western democracies. They’re not taking the same anti-science anti-democratic bus to insolvency town. They all have universal heath care – our House speaker wants to cancel Medicare!
I emigrated to the USA 31 years ago – I never felt as foreign as I do today.
Maybe it’s both so let’s look at five (Republican) axioms for their veracity:
- Flattening, simplifying and reducing the corporate tax rate will help business which will stimulate the economy. Why? Corporate taxes are too high so corporations are not locating here anymore. Really, name some. Last I checked Silicon Valley wasn’t having a problem with new business formation (and they’re in a high tax state too). So how much higher are our rates?The countries with meaningful lower rates are ones where infrastructure and talent are severely lacking. They have lower rates to make up for these (and other geographical) shortcomings. Please note – the effective rate is nowhere near the “statutory” rate.
- Corporations have a ton of money locked up offshore. Give them a tax holiday and it will come home and be spent on new plant and equipment -jobs!! (Yes I have already written about this.) US corporations are awash with cash and rather than spend it on new capacity (or higher wages) they are buying back stock with it. Is this just a plan to increase stock buybacks?
- We are in year 8 of an economic expansion – that’s when we should be raising taxes to balance the budget, not cutting them. Has no one read Keynes?
- If I pay taxes to the state and town, is that money still taxable by the Feds? Let’s say I earn $100,000 and pay $80,000 (total) to the state and my municipality (easy for someone with a big house in Westchester NY). Can the Federal government still come along and ask me for $30,000 more? They have been prevented from doing this ever since the inception of income tax in 1918 so as to protect state revenue from the evil Feds and to prevent income tax rates from exceeding 100%. I feel a supreme court challenge coming.
- Can we please stop saying that tax cuts pay for themselves. Until they come up with one perfectly clean example of this, it must stop. In fact, they don’t really have the right to say that tax cuts are good at all unless they find a case where interest rates rose, taxes were cut, and GDP rose without some corresponding budget deficit nightmare. That leaves the 80’s out. How about the EGTRRA of 2001? Yes – the one that took the budget from a surplus of $600bn/yr to a $200bn/yr deficit. Does anyone want to talk about the Kansas tax cutting disaster? Does anyone remember that Clinton raised rates (in 1993) and economic growth accelerated? In economics, like all social sciences, nothing is cut and dried.
- All LLC’s must have low tax rates to compete with corporations or else they’ll all just incorporate. If the LLC rate falls way below the maximum tax rate then everyone will quit working for wages and become an LLC. Wait, have I seen this ridiculous idea before – Yes, Kansas did it!
If you hear an expert espouse the magic of tax cutting like a religious zealot – change the station.
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:
- 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).
- People started to desperately seek any savings they could get so they abandoned their preference for local products.
- 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:
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.
Both the Brexit vote and the Trump related polls show a consistent pattern. Young people are OK with globalization, immigration, economic integration. Older(er) people are not. The presumption or implied conclusion is that old people can’t adjust to the new world. Perhaps thy are racists or just nostalgic for a time that never existed. They need to get with the program and accept the free flow of ideas and people.
What if those old people know something the younger ones don’t. Perhaps their recollection of a better economic time is not just nostalgia. Thirty years ago an unskilled laborer made $9/hour vs $20/hr today but houses cost seven times more (now). Fifty percent of the workers in America earn less that $12/hr. today. Thirty-two percent of millennials live in the basement of the house of the parent who used to make those high(er) wages. For the first time ever, more millennials live at home than live on their own! They are economic failures, by any measure. I don’t mean to blame them. It’s just that such failure has produced quiescence rather than fury. They have accepted their fate like a prisoner on death row condemned unfairly yet condoning the system nonetheless. Is their opinion on trade and immigration superior to that of the older people who know that there was a better time, when there was a growing and large middle class.
In the UK the unemployment rate is 5.4% but the youth rate is 16%! Shouldn’t they be protesting against unlimited labor immigration rather than voting to stay in Europe. Ah but perhaps the EU isn’t the problem and they get this, just like bad trade deals have nothing to do with abysmal wage growth in the US. Unfortunately this equation is too simple and powerful to overcome: An excess of global labor in low income countries will destroy local wages unless you protect against its inflow (either from immigration or outsourcing). Half of all the new jobs created in the EU over the last seven years have been in the UK and yet wages have been stagnant. The countries of the EU that have not produced new jobs, have youth unemployment at 25-40%. How did the intellectuals of England fail to see the scale of the problem?
The question has to be changed to: What matters more – labor substitution through migration that destroys wages or a possible reduction in exports to the EU by virtue of elevated post Brexit tariffs? The answer is simple – stop the migration and work relentlessly to get good trade deals with rich countries and no deals with poor ones. England should become the low regulation, low tax haven in Europe – like Ireland, and Switzerland combined but with better labor, food, and (more) housing. It’s time for UK trade representatives to earn their keep.
The younger generation has given up on prosperity – why should we listen to them?
A key principal behind the European Union is the idea that all citizens of member states are free to relocate to other countries inside the union just like in the United States. That sounds great for economic efficiency right? It did when the union consisted of a set of countries with similar labor market conditions, i.e. wages. You have to pay a Frenchman a lot of money to move from his beloved Paris to evil rainy London so not many were expected. Along came the internet which boosted the value of English so many more people learned it. Suddenly a lot more workers became qualified to work in the UK (and the US for that matter). How many Middle Eastern refugees speak Dutch or German?
Then the union expanded to include such places as Latvia and Poland – countries whose GDP/capita is a fraction of the core countries’ of Europe. Poland’s average is less than 1/3rd of Britain’s. This expansion set it up for disaster. If you work in the UK and you’re not a rocket scientist, a Pole can replace you because he will work for half what you were paid. The Economist’s answer: Get more education! It’s like a new mantra for theoretical economists everywhere. If you’re a house painter or a car repairman you are supposed to go back to college and study big data analysis using Python.
So what’s the policy supposed to be when these conditions guarantee the destruction of your middle class? Aside from blocking labor migration, all you can do is send these poor people a check taken from the wages of a banker or technology worker, every month until they die. If you have other suggestions I’d love to hear them. Then you must stop the poor from having children.
The US case is no different. Our immigrants have a slightly darker skin tone but the effect is identical. When the Democratic party speaks up for illegal aliens, it is supporting the same destructive force that tore up the UK. Does Hillary have a plan to save our middle class? Trump may be a racist but his policy may be the only rational one unless you’re OK with huge tax transfers.
The UK abhorred and mocked the EU for a set of very good reasons but it needed to figure out a way to gently breakup. It’s not you, it’s me … I still want to be friends and visit your children to sell them banking services. England wants low tariffs and they must protect their labor force. They can just ask (beg) politely for the same status as Norway or Switzerland.
UK diplomats will finally get a chance to earn their pay.
We all know the saying: “If you’re young and conservative you have no heart; If you’re old and liberal you have no money.” Millennials are not doing some of the things that previous generations of young people used to do – they (virtually) don’t get married, they don’t buy houses, apartments, or cars and they don’t save any money. We can reasonably blame all this on their paltry incomes.
If I were 25, single, and had few prospects with respect to marriage or significant income then I too would be in favor of high marginal tax rates, free education and free health care. It’s all free to me because I don’t pay taxes. If house prices fall – great, maybe then I could buy one. If the stock market falls -whatever.
The young me would hate big corporations because they are devoted to finding the cheapest workers in the world, not providing me with training or a career path. That’s why I only stay at a job for 2 years max. Loyalty is so last-century. This economic system doesn’t invest in me so I don’t feel invested in it. What’s wrong with socialism anyway? Isn’t that what they have in those nordic utopias?
Bernie may have virtually no foreign policy ideas but my millennial self doesn’t read newspapers online or off. I know nothing of international affairs. I read Twitter and follow celebrities through social media. I sometimes read news headlines but never an actual article. I don’t read books, I play computer games.
It makes sense that when you destroy the feedback loop between unemployment and wage growth, you also destroy the workers engagement with the old system that put workers in the middle class – fifty years ago.
The Repubs have a similar problem but their answer is to double down on the same system. Like a religious fundamentalist they assert that the problem with capitalism is that we haven’t been devout enough. We have drifted toward socialism and lost our way. If we just close our eyes and pretend it’s 1960 then everything will be fine. This argument will never succeed with Millennials who relate to 1960 as much as they do to 1860, (apparently) social media doesn’t include much history. I’ m happy to see economic fundamentalism fail on both sides but both sides need to see that unfree trade has rotted the ship for young workers/voters. It has exploded income inequality so it’s easy to find wealthy political patrons but very hard to appeal and relate to voters unless you go outside normal boundaries.
This is an old story with a new extreme twist. It’s actually very European. What made us different was our ever growing middle class It made political extremism inappropriate. When you get radical extremes in income you should expect to see extremes in political choices.
I’ve described the Apple Computer method of generating extraordinary profits:
- Make everything in the third world.
- Sell everything you can in the first world.
- Depend on other entities to pay those buyers first world wages.
- Pay your own first world workers as little as possible, regardless of profitability.
This has worked like a dream and was adopted by everyone from IBM to Walmart. Eventually though the strategy only works if most firms don’t use it. After all we need somebody to pay the first world consumers well enough so they can afford cars and smartphones. If no one does then we depend on governments to do so but their subsidies (unemployment insurance, food-stamps etc) are too meager to sustain the game.
As they watch it all come to an end they tell shareholders that lost revenue will be made up by sales to Chinese peasants and the third world elite. Economists marvel at the ever increasing skew in income distribution and propose tax changes to fix things. Raising the taxes of Apple computer will not make them change their strategy! Raising any CEO’s taxes won’t make him hire a first world worker. Tax policy treats the symptoms, not the problem. We have a global (peasant) labor glut and Chinese wages are spreading like a plague.
We have a chance to get two ugly outcomes at the same time:
- A profit slump as first world consumers run out of money.
- A permanent decline in wages as they march down toward third world poverty levels – crushing budget deficits and GDP growth along the way.
The Chinese slowdown that comes from all this allows them to devalue their currency locking in a self reinforcing mechanism for the further destruction of wages and (first world) industrial competitiveness. The race to the bottom is accelerating and theFed can’t save us this time because rates are already at zero. The fix is simple. We must cut off the blood sucking parasite attached to our neck.
We have paid for enough skyscrapers in Shanghai.
We saw something this week that we have never seen before: GM announced that it will import the first 100% Chinese made car. It’s the Buick Envision.
GM is, as you might remember, the car company that survived the 2008 economic meltdown only by virtue of government money. Now that money is being used to hire Chinese workers and fire Americans. Is there any point at which the US government feels embarrassed about being taken by US multinationals and … China.
The current tariff rate on cars imported into China = 25%. Our tariff is 2.5%. The big point here is that cars are a huge value added product and almost the only one left that employs a large number of Americans. Car companies are like diamonds that every country desperately seeks because high value added = high wages. Has everyone bought into the idea that since T-shirts and TV’s are all made there, everything might as well be made there? Plenty of SUV’s are made (profitably) in the US. Is the government malevolent or stupid (= my favorite question about George W Bush). How did the citizenry become so quiescent or suicidal that it is willing to actually buy an Envision, knowing where it’s made?
People are willing to boycott goods that are made by rogue states or evil corporations (tobacco, big oil polluters) but seem to have no sensitivity to economic sovereignty and the death of the middle class. The (American) left has decided (apparently) that a job in China is just as good as a job in America and the right is in favor of anything that improves multinational profits. Our dysfunctional government is not sitting on the fence here.
It is financing our economic enemy.
The stock market mess started when China decided to devalue its currency by a paltry 3%. The panic that followed has apparently stopped them from doing more, if they ever had more in mind. Their stock market (if we can call it that) has fallen by 42% after rising spectacularly over the preceding year. That “market” is extremely illiquid and composed of odds and sods that hardly represent their macro-economy.
But even if it were the perfect cap-weighted index with every major company included, why should I care if it fell 42%? Do western banks lend to Chinese companies? No. Do western investors invest in their stocks? No.
If it’s indicative of a Chinese economic collapse, I still don’t care! China buys (virtually) nothing from the west so our companies would lose no orders. Sure Australia would sell them less iron ore but is that what we are so worried about? The question is, how does a decline in an irrelevant economy – spread to the west? What is the transmission mechanism?
Perhaps investors in Japan will get scared by a decline in that market and then we get scared by a decline in the Nikkei -etc etc but that sounds more like a limited decline. Oil prices will fall since China is a huge buyer and anyone with oil stocks or stocks of banks that lend to oil companies will get hurt. There is of course a benefit on the other side- we are all richer since we will save money at the pumps.
There are clear losers: Canada, Russia, Venezuela, Australia, Saudi Arabia etc. but can they cause fear to spread and explode. How much do we care about Toronto real estate or negative Venezuelan GDP? The answer is murky since transmission lines are often opaque so I don’t want to get too cavalier. Perhaps Chinese economic weakness is a symbol of weaker US import demand. China may just be the leech in the coal mine simply telling us that our own growth is flagging.
Wage growth has completely stalled as I predicted it would years ago. No wage growth -> no consumption growth -> no import growth. Competition from Chinese peasant labor has killed the glorious US consumer who they (the Chinese) depend on for work. The cycle is almost complete.
The parasite has sucked too much blood from the host.