Archive for category: Washington Post

President Donald Trump regularly and proudly takes credit for the US economy’s strong performance.

With rapid growth in the second quarter, the stock market strong, the unemployment rate back below 4 per cent and the midterm elections looming, his rhetoric and that of his supporters will probably escalate in the coming months.

In fact the approval the US president enjoys is boosted more by the strong economy, than the other way around. This conclusion will only be reinforced if Mr Trump’s current steps towards a trade war retard US economic performance, as is increasingly feared. A variety of observations are pertinent.

First, history suggests that presidential popularity rises with declining unemployment. It is reasonable to suppose that, if unemployment were at its long-term level of 5.5 per cent, instead of its current 3.9 per cent, Mr Trump’s approval rate would fall lower than its already anaemic level. As it is, his approval ratings are worse than those of any first-term president with an unemployment rate under 5 per cent.

Second, such acceleration of growth as we have observed is well within the normal range of growth forecast errors. Before the 2016 election, when the Trump presidency was not anticipated, consensus forecasts for the US economy were 2.2 per cent for 2017, and 2.1 per cent for 2018. The actual outcome in 2017 of 2.2 per cent and the consensus forecast of 2.8 per cent for 2018 do not represent a statistically significant fluctuation from the mean.

Third, it appears that growth has accelerated and exceeded expectations more outside the US than within the country, suggesting that whatever is driving America’s growth is a global factor, rather than something for which US policy can take credit. For 2017, the country’s growth exceeded expectations by less than for the world as a whole, or for China, Europe or Japan. For 2017 and 2018 taken together, US growth looks likely to exceed expectations by less than world growth.

Fourth, market evidence calls into question the idea that the US has become a highly attractive place to invest because of Mr Trump’s policies. Net foreign direct investment in the US in the first quarter of 2018 was down nearly two-thirds against the first quarter of 2016. Goldman Sachs analysts have demonstrated that US companies which do more business abroad have outperformed those that are more domestically focused. And there is the basic observation that before trade war fears took hold, the dollar had declined during the Trump presidency.

Fifth, the underlying reason why the US economy is strong right now is that it has been possible to run a very taut economy with unemployment below 4 per cent and not face significant inflationary pressures. No one is quite sure why this should be. It is probable that some combination of globalisation, technology, and the reduction of employee power as unions have weakened have changed the inflation process. It is hard to see why Mr Trump deserves credit for these structural changes, which have been happening for a long time.

Sixth, there is what Ben Bernanke, the former Federal Reserve chairman, has labelled the “Wile E Coyote” issue, after the accident-prone cartoon character. It may well be that an element of current success that can be attributed to Trump administration policy is borrowing prosperity from the future. This is most obvious in the case of the soyabean exports that were accelerated to avoid tariffs, but it is fairly ubiquitous.

Increasing fiscal stimulus is like a drug with tolerance effects — to keep growth constant, deficits have to keep getting larger. Some combination of gathering foreign storm clouds, the end of growing fiscal stimulus and the delayed effect of tightening monetary policies may converge to slow or end the expansion.

The choices this administration are making invite foreign retaliation against US exporters and use up fiscal capacity even as the economy is growing rapidly. Because of this, and because there is limited room for monetary policy, the country will not be in a position to respond strongly if a downturn comes. All the more reason, therefore, why we should avoid pulling demand forward.

This is all quite dangerous. The president has taken credit for far more economic success than he deserves. He will disproportionately be blamed when the downturn comes. What follows will be a test of our democracy.

Donald Trump has put aggressive trade policy at the centre of his approach to the economy. No other economic subject has received such sustained presidential attention or generated so much controversy.

This is problematic as most economists agree that changes in trade policy are unlikely to have a big effect on growth in employment or over gross domestic product and that liberalising trade is likely to do more for US prosperity than managing trade.

But take as a given the US president’s mercantilist premise that the central priority of American economic policy should be achieving more fairness in opening up markets around the world. Even given this dubious judgment about ends, the US is proceeding in a remarkably unstrategic and ineffective way. Indeed it is violating almost every strategic canon.

A first rule of strategy is to have well defined objectives so that success can be judged and your negotiating partners are not confused about what you want. Is the US’s primary objective to reduce its trade deficit overall or just with particular countries? Is it to protect employment in politically sensitive sectors such as steel and automobiles?

Is it to stop commercial practices such as joint venture requirements that unfairly penalise American companies doing business in foreign countries? Is it to gain more market access for US companies regardless of how successful they are likely to be, as in the case of increased access for the US auto industry to the Korean market?

From tweet to tweet, and senior official to senior official, it is impossible for anyone to know what this administration’s priorities are. When everything is presented as a top priority, as often seems to be the case, nothing can really be a top priority. No one can be confident that making concessions will resolve disputes. After all, when China’s current account balance was approaching 10 per cent of GDP, it was a priority for the US to bring it down sharply. Today it is running below 1.5 per cent of GDP and America is more truculent than ever towards China on trade.

A second rule of strategy is to unite your friends and divide your potential adversaries. The US seems to be doing the opposite. Surely, China stands out as a competitor in terms of economic scale, growth, extent of government economic intervention and in areas such as artificial intelligence.

Yet, after alienating its Asian allies by pulling the plug on the Trans-Pacific Partnership, the US enraged all of its G7 allies with the imposition of tariffs on steel and aluminium as well as making further threats that have caused them to doubt the US commitment to the rule of law in global trade.

As with the Obama administration’s disastrous initial shunning of the China-led Asian Infrastructure Investment Bank, the result has been to cause most of the rest of the world to take China’s side against the US.

Decades of sustained efforts to foster a benign relationship with Mexico are also being squandered. The current US approach to Mexico could hardly be better designed for the objective of electing a leftist radical as president.

A third rule of strategy is to use as leverage threats that are credible in the sense that they do more damage to those you are negotiating with than they do to you. “Stop or I will shoot myself in the foot” is a singularly ineffective threat.

The recently imposed tariffs on steel fall into this category. The US has fewer steelworkers than it has manicurists. The market value of the US steel industry is about 0.1 per cent of the stock market. Yet steel is a key input into industries throughout the economy that employ about 50 times as many people as the steel industry does and compete internationally.

By raising the price of steel the US hurts much more of its economy than it helps. Why does the White House think this counts as leverage against the nations it competes with? Especially when in all likelihood they will retaliate in highly strategic ways, with international legal support, by limiting imports from key US industries.

President Trump’s trade policies will raise the prices Americans pay for what they buy. They will reduce the competitiveness of the US economy. They will succeed where our traditional adversaries have failed in uniting much of the rest of the world in opposition to us. They will reduce our legitimacy and power by demonstrating our lack of competence. The sooner they are radically revised the better off the US and the rest of the world will be.

June 5, 2018

April 8, 2018

US bluster has caused most of the world to rally to China’s side

As the possibility of a trade war between the US and China looms, threats and counter-threats are hurled back and forth and markets gyrate, economic logic and truth appear to be an early casualty. There are certain points of fact on which there should be no disagreement.

First, globalization and trade have caused significant disruption to the US economy but this has had little to do with trade agreements of the last generation. It is now clear that increased imports especially from China have inflicted substantial burdens on manufacturing workers, particularly in the the north central part of the country. Where too much conventional analysis goes wrong is in attributing this to trade agreements and in failing to recognize offsetting job gains from exports.

The reality is that the US economy was largely open by the 1980s and that every major trade agreement has reduced other nations’ trade barriers by far more than it altered any American trade barriers. This is most true of China’s 2001 accession to the WTO, in which the US only committed to continuing to keep its markets open on the most favorable nation terms that had already been ratified each year for more than a decade but won major changes in Chinese economic policy.

The real reason for economic disruption was not trade agreements but the emergence of emerging markets as major participants in the global economy. This is not something the US could stop or, given its export interests and broader interests in global co-operation, could plausibly aspire to contain.

Second, much of President Trump’s rhetoric notwithstanding, it is wrong to say nothing has been achieved through negotiation with China. Only a few years ago, China’s current account surplus was the largest relative to GDP among significant countries, it was holding its currency down to maintain demand for its exports, and most software used on its personal computers and videos on sale in its major cities were pirated.

Today China’s global surpluses are far below past US negotiating targets of a few years ago, China has spent about $1tn propping up its currency, and IP protections are far better enforced than a few years ago for major US software and video producers. Of course major issues remain but the view that multilateral pressure without bluster is ineffective is belied by experience.

Third, extraction of IP through joint venture requirements is largely a problem for companies outsourcing production from the US and not for American workers. Corporations headquartered in the US often complain bitterly that if they wish to enter the Chinese market they must enter into joint ventures with Chinese counterparts who demand transfer of intellectual property and then operate on their own.

These complaints are often accurate. Notice, however, that they typically involve cases where the company in question produces for China in China and so have little impact on US employment. In many cases a substantial number of the company’s shareholders are foreign and it pays taxes to many governments. It is more than a little ironic that an administration that condemns outsourcing should make standing up for those who move production to China so central a priority.

Fourth, bilateral trade bluster is not an effective strategy for the US. While most countries feel somewhat threatened by Chinese trade and business practices, it has been the unfortunate accomplishment of US trade policy in recent months to cause most of the world to rally to China’s side because of our disregard for the WTO and the global system.

Not only does having many others on its side make it easier for China to resist the US, it also undercuts the effectiveness of our sanctions. China can still export to other markets and US producers who use Chinese inputs lose competitiveness when only they are forced to pay tariffs. History is clear that moments of high trade truculence like that pursued against Japan in the early 1990s accomplished very little while imposing substantial costs.

Fifth, threats have to be credible to be effective. In recent weeks, every time the US has pushed its strategy markets have had mini-collapses, and every time it has appeared to pull back markets have rallied. How in such a world can it seem credible that the US will actually carry through on its threats? And without credibility why should one expect strong responses from China? I return from a recent meeting with senior Chinese officials with the clear sense that they are more bemused than alarmed by what they see as a boomeranging US approach.

The US can do much better for itself and for the global economy but this is the subject for a subsequent column.

The international community should give officials a very uncomfortable week

October 8, 2018

The US administration’s tax plan is not a plan. It is a mélange of ideas put forth without precision or arithmetic. It is not clear enough to permit the kind of careful quantitative analysis of budget costs, economic impacts and distributional implications that precedes legislation in a serious country. It is clear enough to demonstrate that the claims of Steven Mnuchin, Treasury secretary, Gary Cohn, director of the National Economic Council, and Kevin Hassett, chair of the Council of Economic Advisers, are some combination of ignorant, disingenuous and dishonest.

I have strong disagreements on tax policy with Republican economists like Greg Mankiw, Glenn Hubbard and Martin Feldstein and with Treasury alumni like Nick Brady, John Snow and Hank Paulson. Nothing I have ever heard or read from them seems absurd or dishonest in the way that almost everything coming out of this administration has that character.

We know enough to know that a tax reform plan along the lines of the administration’s sketch will not substantially increase growth, will blow out the budget deficit and will make America an even more unequal place.

The administration pushes the idea that cutting the corporate tax rate will spur investment. It is certainly possible that with a lower rate, accountants will locate more corporate income in the US but a big spur to investment seems very unlikely. With long-term interest rates well below 2 per cent, the stock market sky high and business able to write off investments immediately, capital costs have never been lower.

True, there is much cash parked outside the US. But almost all the companies with large cash holdings outside the US also have cash hoards in the US that they choose not to invest. The first order impact of a “territorial system” that renounces a US tax claim to corporations’ overseas income will be to encourage the relocation of productive activity from America to tax-haven jurisdictions, and so to slow US growth.

It should not be forgotten that the most rapid growth in gross domestic product that the US has seen took place in the 1950s, 1960s and 1970s when top tax rates were nearly twice as high as now. Those rates were surely too high and punitive rates would be a huge mistake in the current context. Yet it is absurd to suggest that reductions from current levels will call forth some renaissance of hard work.

What about the budget deficit? In order for tax cuts to pay for themselves, as Mr Mnuchin sometimes asserts, they would have to massively spur growth. Since it is unlikely they will have any important effect on growth, they will bloat the budget deficit at a time when we should be preparing for the next downturn, for rising entitlement costs, and potentially for the need for increased national security spending.

It is worse than this. Many in the administration’s orbit have expressed the belief that the Federal Reserve’s quantitative easing programme has inflated asset prices. If so, increasing the supply of bonds should have a significant depressing impact on asset prices and the economy. Any possible supply-side benefits of the tax programme have to be weighed against the damping impact of future deficits on economic growth.

Finally, there is the question of fairness. Those secure in their beliefs do not, as Mr Mnuchin did, seek to de-publish studies by apolitical civil servants. There is very little doubt among serious economists that the immediate impact of corporate tax cuts would be to help corporations and that the vast majority of corporate shareholding is concentrated among those at the top of the income and wealth distribution.

Anyone in doubt about fairness should note that the administration chooses to exclude the estate tax from discussion when it considers fairness and is unwilling, as all previous Treasuries have been, to present a revenue and distributional analysis of its plan.

This week the world’s finance ministers and central bank governors will gather in Washington for the annual International Monetary Fund-World Bank meetings. These meetings used to be a time when the US urged other countries to respect the laws of economics and arithmetic in formulating economic policies. This time the lecturing should go in the opposite direction. The international community should make sure that US officials have a very uncomfortable week. Just possibly, that will be enough to get the administration economic team to consult their consciences as well as their Twitter accounts.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

June 4, 2017

In economics as in life things often take longer to happen than you think they will and then happen faster than you thought they could. So it may turn out with the catastrophic international economic policies of President Donald Trump. It is possible that the past week will be remembered as a hinge in history – a moment when the US and world started moving on a path away from the peace, prosperity and stability that have defined the past 75 years.

For all that has gone wrong in the past 75 years, they have witnessed more human betterment than at any time in human history. The rate of fatalities in war has steadily declined even as growing integration has driven global growth and improvement in life expectancy and living standards. Progress is too slow and not well enough shared but Americans have never lived so well. This has been driven by remarkable developments in human thought especially in science and technology and a relatively stable global order that has been underwritten by the US.

Will these trends continue? Optimists have suggested that despite the revanchist and often anti-rationalist rhetoric of his campaign, Mr Trump has in the international sphere surrounded himself with rational establishment advisers and has either retreated or been stymied by Congress on proposals like launching trade wars or building walls.

Until last week, they had a reasonable argument. No longer. We may have our first post-rational president. Mr Trump has rejected the view of modern science on global climate change, has embraced economic forecasts and trade theories outside the range of reputable opinion, and relied on the idea of alternative facts rather than evidence-based truth.

Even for Conservative statesmen like Ronald Reagan, George W Bush and Henry Kissinger the idea of a community of nations has been a commonplace. Now HR McMaster, national security adviser, and Gary Cohn, director of the national economic council, who have been held out as the president’s most rational globally minded advisers have now taken to the Wall Street Journal to proclaim that “the world is not a global community.”

They advance a theory of international relations not unlike the one that animated the British and French at Versailles. On this view, the objective of international negotiation is not to establish a stable peaceful system or to seek co-operation or to advance universal values through compromise but to strike better deals in “an arena where nations, non-governmental organisations, and businesses compete for advantage.”

In service of this theory, the president last week renounced any claim to American moral leadership by failing to convincingly reaffirm traditional US security commitments to NATO and abandoning participation in the Paris global climate agreement. The latter is probably our most consequential error since the Iraq War and may well be felt over an even longer term.

There will be consequences to all of this as there were to the pursuit of short term advantage rather than systemic stability at Versailles. One does not need to subscribe to pessimistic versions of Graham Allison’s Thucydides Trap about the perils associated with a rising power to worry about Chinese efforts to fill the vacuum left by the US.

How, after the events of the last week, can America’s adversaries and allies alike not follow Angela Merkel, German chancellor, in concluding that the US is now far less predictable and reliable? How can the responses be other than destabilising?

It is essential that leaders in American society signal clearly their disapproval of the course the administration is taking. History will judge poorly business leaders who retain their positions on Trump administration advisory boards in the hope of being in a position to cut favourable deals. Elon Musk of Tesla and Robert Iger of Disney have taken the right and principled stand by resigning their presidential appointments. More should follow.

What is to be done? The US president is not America. The world will be watching to see whether President Trump’s words and deeds represent an irrevocable turn in America’s approach to the world or whether they represent a temporary aberration.

April 9, 2017

Donald Trump and Chinese President Xi Jinping have now completed their first summit. Observers on both sides seem to be relieved. If no diplomatic breakthroughs on major issues were achieved, it is also the case that there were no outward displays of truculence from either side. Neither high hopes nor great fears have been realised.

This leaves the question of where economic relations between the United States and China are going and where the US should want to take them. As important as the resolution of any specific issue is the definition of the challenges, which will be the focus of economic diplomacy henceforth. Having recently returned from China, where I had a chance to participate in a major economic forum and meet a number of senior officials, I have become convinced that the issues that preoccupy many Americans are either invalid or of secondary importance and the most important economic challenge posed by China is receiving far less attention than it deserves.

Discussions by the US of alleged currency manipulation by China are in the economic realm what discussions of changing the “One China” policy are in the geopolitical realm – unconstructive at best and possibly dangerous. While there is a case for the proposition that China manipulated its currency in an unreasonable way during the decade after 2005, by no stretch of any imagination is China today manipulating the renminbi downward for competitive advantage. In terms of the volumes of reserves expended and the extent of capital controls imposed, few countries in recent years have done as much to try to prop up their currency as has China.

More broadly, America’s economic future is shaped much more by policy choices made in Washington than in Beijing. To the extent that China trade has caused disruption in the US, it is the result of China’s remarkable growth and increase in capacity to produce, not unfair trade policies.

So a commercial focus on China’s trade deficit with the US is largely misguided. Yes, China subsidises various exports to the rest of the world in a number of ways. But if the US succeeds in stopping the subsidies or blocking the subsidised products, the results will be to shift production to Vietnam and other low-wage countries rather than to create good jobs in the US. Likewise, a reduction in Chinese trade barriers to products produced by American companies will indeed help these companies, but only a small part of the extra production will take place in the US.

American firms have valid complaints about requirements that they share intellectual property with Chinese partners when they invest in China, but if they were resolved the result would likely be more outsourcing of production to China, not less.

If currency issues are invalid and commercial diplomacy is unlikely to have much positive effect on the US economy, what should be the focus of US economic policy with respect to China?

It is difficult to overestimate the extent to which China is seeking to project soft power around the world by economic means. Mr Xi’s speech in Davos in January quoting Abraham Lincoln and laying out a Chinese vision for the global economic system at a time when the US is turning inward was the rhetorical edge of a concerted strategy.

Of course there is Mr Xi’s “One Belt, One Road” initiative, which envisions infrastructure investment and foreign aid to connect China and Europe. In a little noticed development, the Asian Infrastructure Investment Bank, a Chinese-sponsored competitor to the World Bank, has announced that it will invest all over the world. Already Chinese investment in Latin America and Africa significantly exceeds that by the US, World Bank and the relevant regional development banks. And China will soon be the leading exporter of clean energy technologies.

This investment will over time secure access to raw materials, allow Chinese companies to gain economies of scale, and help China to win friends. The US has chosen not to join the AIIB and to act as the dragging anchor on the financial scale of the Bretton Woods institutions, and to undermine rather than lead global co-operation on climate change and to sharply cut back foreign aid. In doing so, it is accelerating a perhaps invevitable loss of its pre-eminence in the global competition for prestige and influence.

The objectives of global economic co-operation and the respective roles of the US and China would be subject of a truly strategic economic dialogue. It is very important that such a dialogue start soon, but this will require the US to focus less on specific near-term business interests and more on what historians will remember a century from now.

The advent of global supply chains has changed production patterns in the US
 
Trade agreements have been central to American politics for some years. The idea that renegotiating trade agreements will “make America great again” by substantially increasing job creation and economic growth swept Donald Trump into office.

More broadly, the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties.

As Senator Daniel Patrick Moynihan once observed, participants in political debate are entitled to their own opinions but not their own facts. The reality is that the impact of trade and globalisation on wages is debatable and could be substantial. But the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd.

There is a debate to be had about the impact of globalisation on middle class wages and inequality. Increased imports have displaced jobs. Companies have been able to drive harder bargains with workers, particularly in unionised sectors, because of the threat they can outsource. The advent of global supply chains has changed production patterns in the US.

My judgment is that these effects are considerably smaller than the impacts of technological progress. This is based on a variety of economic studies, experience in hypercompetitive Germany and the observation that the proportion of American workers in manufacturing has been steadily declining for 75 years. That said I acknowledge that global trends and new studies show that the impact of trade on wages is much more pronounced than a decade ago.

But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreements.

American tariffs on Mexican goods, for example, averaged about 4 per cent before Nafta came into force. China had what was then called “most favoured nation” trading status with the US before its accession to the World Trade Organization and received the same access as other countries. Before the Korea Free Trade Agreement, US tariffs on Korea averaged a paltry 2.8 per cent.

The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers.

Rather the naysayers argue that different demands should be made on other countries during negotiations – on issues including intellectual property, labour standards, dispute resolution or exchange rate manipulation. I am sympathetic to the criticisms of TPP, but even if they were all correct they do not justify the conclusion that signing the deal would increase the challenges facing the American middle class.

The reason for the rise in US imports is not reduced trade barriers. Rather it is that emerging markets are indeed emerging. They are growing in their economic potential because of successful economic reforms and greater global integration.

These developments would have occurred with or without US trade pacts, though the agreements have usually been an impetus to reform. Indeed, since the US does very little to reduce trade barriers in our agreements, the impetus to reform is most of what foreign policymakers value in them along with political connection to the US.

The truth too often denied by both sides in this debate is that incremental agreements like TPP have been largely irrelevant to the fate of middle class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the US want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?

Framed this way the solution appears obvious. A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.