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Trade and the Great Recession

The Trade Deficit is among the rarely discussed causes of the Great Recession; yet, to this observer, it is the primary cause.  The Deficit plummeted further as deregulated banks peddled bad debt and allowed homeowners to use homes as ATM machines.  Everything was done to keep the consumer on a buying spree, buying more and more imports, while manufacturing shrank and exports dwindled. These imports, ironically enough, were products of American and Western multinationals now exporting goods from third world countries.

No wonder income inequality soared; the real winners of trade policy and the subsequent buying spree were the top echelons of the multinationals.  Those who insist that CEO billionaires share the wealth with American workers should understand that American workers often had little to do with making the products the multinationals were peddling.

A plummeting trade deficit revealed the profound flaws in a poorly conceived and foolishly implemented plan to globalize the world economy.  Globalization failed.   The proponents of globalization are now strangely silent, preferring to discuss other topics.

The question is: What went wrong with American Trade Policy?

Trade Data 1960-2012X

 

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US Trade Deficits and Blue Collar Jobs

I looks as if I might disagree with Paul Krugman for barely more than once. I admit I am following Brad DeLong (and also that I surfed there from Kevin Drum).

The discussion is over what hurt blue collar US workers, automation, China or two recessions.

Yang says it is automation. Krugman disagrees in a tweet thread noting that productivity growth has been slow (I do absolutely agree with Krugman that Twitter is horrible and that blogs are better).

I will fair use with abandon

OK, it seems mean to pick on Andrew Yang, who won’t even be a factor in the nomination. But he positions himself as the tech guy who knows how the world really works, and there are others like him. So maybe worth pointing out that they’re all wrong 1/

Yang’s thing is that automation is destroying all the jobs, so we need universal basic income. There is a case for UBI (and a case against, in favor of more targeted aid), but either way the premise is wrong. Productivity has been slowing down, not speeding up 2/

Here we have Yang focused on manufacturing and Krugman on the whole economy. Total labor productivity has a lot to do with where people are working and poorly measured production of health care (and education) matters a lot. However, the post great recession slowdowns are similar

The troubles of the very troubling past decade are not due to rampant revolutionary robots.

Krugman argues against Yang (and 1990s Krugman) that trade was very important. But there is an odd shift in time frames. The productivity slowdown noted in tweet 2 is post 2008, the next tweet discusses 2000-2005

And while Yang asserts that automation destroyed lots of manufacturing in the midwest, you don’t have to be a protectionist to realize that the acceleration of job loss after 2000 was mainly about the surging trade deficit 3/

“after 2000” is doing a lot of work here. First the figure shows a non agricultural non oil goods trade deficit surging from 1991 through 2005. In contrast the declines in manufacturing employment are 2000-2003 then 2008q1-2010q2. The raw correlation looks low.

By the way, Brad also has the very smart (as usual) point that blue collar jobs include transportation, construction, and mining (and really wholesale trade) and import competition specifically affects manufacturing (just click the link).

Largely Krugman is assuming his twitter followers understand the effects of the business cycle with high demand causing high employment and large trade deficits and recessions causing reduced employment and trade deficits. He looks at the graph and takes out the dot.com boom, the mini recession, the housing boom and the great recession. Brad and Drum take him to task for this, saying the main problem is aggregate demand. I don’t think Krugman really disagrees with that at all. He just assumes that anyone who looks at his second figure sees dramatic decline in manufacturing employment and increasing trade deficits 2000-2018 somewhat obscured by the business cycle.

But Krugman does have trouble with his little graph. First, since 2007, the non oil non agricultural merchandise trade deficit hasn’t surged. It went from 4% if GDP to 4% of GDP. “after 2000” must mean “fairly soon after 2000 but, by now, a long time ago”. Second, the productivity slowdown (noted in tweet 2) is totally after the deficit surge ended — from 2007 to now. In the years soon after 2000, there were two anomalies (much discussed by one Paul Krugman) a recovery with actually declining employment (job loss recovery after the jobless recovery and before the job lust recovery and I fear to think of the alphabetically following Job Lys tears recovery). The second was the extremely high growth of productivity in a fairly slack economy. Those years fit Yang’s story, about automation.

Then there are the great recession and the sluggish recovery. The US has seen stable non oil non agg. merchandise trade deficits, slow productivity growth (also in manufacturing) and an overall decline of manufacturing employment (of about 12%). That sure looks like a period of slack demand and extraordinarily slow growth for a US decade. Since 2007 US GDP detached from the exponential trend it had followed for a century (actually rather more than the shortfall 1929-1941, but I think even more 2007-2017 than 1929-1939). That is, as Kevin and Brad note (and as Krugman has noted again and again) clearly a matter of horrible macro policy (much less horrible than over here).

I’d say overall, the trade and manufacturing employment evidence is pretty weak. The China shock had dramatic effects on some factory towns, but it doesn’t show up very clearly in national data. Something very strange was happening 2000-2005. I didn’t understand it then and I don’t understand it now. Then from 2007 through 2016 (maybe) there was very slack demand largely due to low housing investment and low government investment. It doesn’t seem to have had all that much to do with robots, Chinese people, or even Chinese robots.

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A comment about the economy and the 2020 election

A comment about the economy and the 2020 election

Recently I’ve seen a bunch of takes to the effect that “the economy is doing great, and therefore it is likely that Donald Trump will be re-elected.” In my opinion that fear is overblown for three important reasons.

The first, least noteworthy reason, is that there is still a lot of time between now and the election. As I noted Monday, many – but not all – models of the economy indicate that a recession is likely between now and then, for reasons having nothing to do with the age of the expansion. Needless to say, a recession in 2020 would not bode well for either Trump or the GOP.

Secondly, consider what economic interventions Trump and the GOP have made since they inherited the economy from Obama. There have been three:

1. They passed a tax cut that lopsidedly favored the wealthy and corporations, that has generated zero acclaim from the middle and working classes – and with the decrease in tax refunds, may have generated net negative feelings.

2. Trump has started several trade wars that are proving unpopular, partly because they mainly have hurt portions of his own base, partly because they are  resulting in net higher prices to consumers that may be getting noticed, and partly because negatively affected businesses may start laying off workers.

3. Trump is held responsible for the government shutdown that resulted in a mini-recession.

In short, it’s not clear to say the least that the public at large would give Trump credit for an economy that he mainly inherited from Obama and as to which his known interventions have been received negatively.

Finally, and most notably, the example of the Bush vs. Gore 2000 election strongly cuts against Trump. As I wrote in 2016, all of the fundamentals-based election models, such as the “bread and peace” model, or models based on the unemployment rate or on consumer income and spending, indicated that Gore should have won by nearly a landslide, on the order of 55%-45%, as shown in the graph below:

Instead, Gore won the popular vote by only 0.5%, despite being able to run on both peace and prosperity – the biggest outlier of the entire series going back to 1952.

Two big factors held Gore back: first, the economic expansion had gone on for nearly 10 years, and at some point the public takes it for granted, or in other words, “so what have you done for me lately?” Second, as his Vice President, Gore was stained by Bill Clinton’s slimy personal life.

Both of the factors that worked against Gore in 2000 are likely to work against Trump in 2020: if the economy remains in expansion, the public will probably take it for granted; and Trump’s pervasive sliminess, both public and private, will work against him. In short, Trump is likely to underperform compared with the fundamentals even more than did Gore.

While the example of 2016 certainly means that the 2020 election is another “all hands on deck” moment for Democrats, and nothing should be taken for granted, even if the economy remains in expansion as it is now I do not think that means Trump wins the election.

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The Grand Illusion 2.0

The Grand Illusion 2.0

Introductory note: this is a very long epistle. But I think my point needs to be made fully and at length. Before you go further, in fairness here is the TL:DR version:

  • Advocates of free trade and globalization were taken aback a week ago by the assumption by China’s President Xi Jinping of rule for life.
  • This was because it runs completely contrary to their theory that free trade leads to economic liberalization, which in turn leads to political liberalization.
  • This theory has been repeatedly and thoroughly repudiated throughout history, most catastrophically be World War I.
  • That’s because autocrats will use the gains of economic trade for their own ends, typically the pursuit of further political and military power.
  • Historically middle classes do not revolt against autocracy when they are prospering, but rather only after a period of rising expectations has been dashed by an economic downturn in which the autocratic elite unfairly forces all of the burden onto them.
  • But since these historical facts are nowhere to be found in the economic models, they are ignored as if they do not exist. We can only hope they do not once again lead to catastrophe.

First, let me pose a thought experiment.  Country A and Country B propose to enter into Agreement X. We have no idea at all what Agreement X is, but we know that the result will be that both Country A and Country B will each be richer by $1 Trillion each and every year thereafter.
Country A, being an egalitarian paradise, is going to share out the proceeds equally among its population of 250 million, with each person getting $4,000 per year.
The dictator of Country B is going to do the same with 1/2 of its $1 Trillion gain, making his population very happy, but — because this is his personal aim — he is going to spend the other $500 Billion each and every year in building up its military so that it can challenge and eventually vanquish Country A, and then keep all of the gains of Agreement X to itself.
Should Country A enter into Agreement X?
——————
A week ago The Economist opined that “The West’s Bet on China has Failed,” stating that:

Last week China stepped from autonomy into dictatorship. That was when Xi Jinping … let it be known that he will change China’s constitution so that he can rule as president for as long as he chooses …. This is not just a big change for China but also strong evidence that the West’s 25 year long bet on China has failed.

After the collapse of the Soviet Union, the West welcomed [China] into the global economic order. Western leaders believed that by giving China a stake in institutions such as the World Trade Organization would bind it into the rules based system … They hoped that economic integration would encourage China to evolve into a market economy and that, as its people grew wealthier, its people would come to yearn for democratic reforms ….

CNN’s Fareed Zakaria recoiled in horror, writing in the Washington Post that

[W]hat’s happening in China … is huge and consequential. China is making the most significant change to its political system in 35 years.

For decades, China seemed to be getting more institutionalized…. But that trend has now been turned on its head. If term limits are abolished, which is now almost certain, Xi Jinping could stay China’s president, general secretary of the Communist Party and chairman of the Central Military Commission for the rest of his life. And he is just 64.

…. The real danger is that China is eliminating perhaps the central restraint in a system that provides staggering amounts of power to the country’s leaders. What will that do, over time, to the ambitions and appetites of leaders? “Power tends to corrupt,” Lord Acton famously wrote in 1887, “and absolute power corrupts absolutely.” Perhaps China will avoid this tendency, but it has been widespread throughout history.

If Zakaria felt blindsided, he should not have been. Because ten years ago, after he published “The Post-American World,” arguing that because the US had successfully spread the ideals of liberal democracy across the world, other countries were competing for economic, industrial, and  cultural — but not military — power, I confronted him at the former TPM Cafe.
For the truth is, the West’s bet on China, so ruefully mourned by The Economist and Zakaria, was always likely to fail. That free trade leads to economic and political liberalism and to peace —- championed by neoliberal economists and their political retinue — has been a fantasy for over 100 years, and for 100 years it has been a lie. They would have known if their theories and equations could account for the likes of Kaiser Wilhelm II. But since their equations and theories are blind to the pursuit of power, they dismiss it — at horrible cost to the world.

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Puerto Rico, Transfer Pricing, and Kevin Hassett

Puerto Rico, Transfer Pricing, and Kevin Hassett

Scott Greenberg provided a nice summary of what section 936 was and how its expiration had contributed to Puerto Rico’s economic and fiscal difficulties:

beginning in 1976, section 936 of the tax code granted U.S. corporations a tax exemption from income originating from U.S. territories. In addition to section 936, the Puerto Rican corporate tax code gave significant incentives for U.S. corporations to locate subsidiaries on the island. Puerto Rican tax law allowed a subsidiary more the 80% owned by a foreign entity to deduct 100% of the dividends paid to its parent. As such, subsidiaries in Puerto Rico had no corporate income tax liability as long as their profits are distributed as dividends. When section 936 was in effect, U.S. corporations benefited greatly from locating subsidiaries in Puerto Rico. Income generated by these subsidiaries could be paid to U.S. parents as dividends, which were not subject to U.S. corporate income tax under section 936, and were deductible from Puerto Rico’s corporate income tax. Because of these generous tax incentives for business, Puerto Rico grew rapidly throughout the 20th century and developed a substantial manufacturing sector, though it remained relatively poor compared to the U.S. mainland. However, because section 936 made foreign investment in Puerto Rico artificially attractive – creating, in effect, an economic bubble – it left the island vulnerable to a crash if the tax provisions were ever to be repealed.

The story is that starting in 2006, the IRS would treat the Puerto Rican affiliates of life science companies as contract manufacturers which would greatly reduce the transfer pricing manipulation made legal under section 936. Greenberg notes:

2006 also marked the beginning of a deep recession for Puerto Rico, which has lasted until today. Puerto Rico’s high corporate taxes on domestic corporations along with low taxes on U.S. subsidiaries had skewed the Puerto Rican economy toward foreign investment from the U.S. When section 936 was repealed in 2006, foreign investment began to flee. Without a strong domestic corporate presence to fill the void, the economy began to contract, along with tax revenues.

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Trade agreements have harmed manufacturing employment

 by New Deal democrat

Dear Prof. DeLong: wherein I say you are wrong, trade agreements have harmed manufacturing employment. I: Germany actually undercuts your case

Prof. Brad DeLong in an article earlier this week made a bold claim:  that “US trade agreements have not substantially harmed manufacturing employment. Period.”    I am making the equally bold claim that he is wrong.  There are at least two major points in his article that I believe are plainly incorrect.

First, in making his case that US manufacturing jobs have disappeared because of efficiency and the strg dollar, Prof. Brad DeLong invokes comparisons to Germany.  Let me quote him at length:

Germany is widely believed to have a first-rate manufacturing sector, yet it has seen the same pattern as the US

Consider a country that has, everyone agrees, done everything right as far as nurturing its manufacturing sector is concerned: Germany

….  One possible baseline, given how many people hold up Germany as a model for the way it has protected its manufacturing, is to assume that under the best policies, the US would have matched Germany. It would have shed about 50 percent of its manufacturing job share since 1971, rather than the 62 percent that we did shed. That would have given the US today manufacturing employment equal to 12.2 percent rather than 8.6 percent of nonfarm employment. That represents a gap between reality and one theoretical alternative world of 5.4 million manufacturing jobs. Call that the excess shrinkage of US manufacturing.

Respectfully, Professor, your comparison with Germany is a misleading one. Let’s start with a comparison of the number of manufacturing jobs in Germany vs. the United States since 1975:
The only reason that both are conquerable starting in the 1970s is because Germany’s %age collapsed in tne early 1990s, as part of the

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The Bizarre and Manipulative Crusade by Centrist NYT Columnists to Persuade Clinton to Adopt the Republican Fiscal and Regulatory Agenda – [with update]

All the experts tell us not to pay too much attention to polls for another week or two. Still, it does look as if Hillary Clinton got a big bounce from her convention, swamping her opponent’s bounce a week earlier. Better still, from the Democrats’ point of view, the swing in the polls appears to be doing what some of us thought it might: sending Donald Trump into a derp spiral, in which his ugly nonsense gets even uglier and more nonsensical as his electoral prospects sink.

As a result, we’re finally seeing some prominent Republicans not just refusing to endorse Mr. Trump, but actually declaring their support for Mrs. Clinton. So how should she respond?

The obvious answer, you might think, is that she should keep doing what she is doing — emphasizing how unfit her rival is for office, letting her allies point out her own qualifications and continuing to advocate a moderately center-­left policy agenda that is largely a continuation of President Obama’s.

But at least some commentators are calling on her to do something very different — to make a right turn, moving the Democratic agenda toward the preferences of those fleeing the sinking Republican ship. The idea, I guess, is to offer to create an American version of a European-­style grand coalition of the center­-left and the center-­right.

I don’t think there’s much prospect that Mrs. Clinton will actually do that. But if by any chance she and those around her are tempted to take this recommendation seriously: Don’t.

No Right Turn, Paul Krugman, New York Times, Aug. 5*

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Failure of Globlization and the Fourth Estate

“Free Trade,” the banner of Globalization, has not only wrecked the world’s economy, it has left Western Democracy in shambles. Europe edges ever closer to deflation.  The Fed dare not increase interest rates, now poised at barely above zero.  As China’s stock market threatened collapse, China poured billions to prop it up. It’s export machine is collapsing. Not once, but twice, it recently manipulated its currency to makes its goods cheaper on the world market. What is happening? The following two graphs tell most of the story.

First, an overview of Free Trade.
Deficit

 

Capital fled from developed countries to undeveloped countries with slave-cheap labor, countries with no environmental standards, and countries with no support for collective bargaining. Corporations, like Apple, set up shop in China and other undeveloped countries. Some, like China, manipulated its currency to make exported goods to the West even cheaper. Some, like China, gave preferential tax treatment to Western firm over indigenous firms.  Economists cheered as corporate efficiency unsurprisingly rose.  U.S. citizens became mere consumers.

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Tales of Globalization: Russia and China

by Joseph Joyce

Tales of Globalization: Russia and China

The end of 2014 marked the 23rd anniversary of the dissolution of the Soviet Union and the establishment of the Russian Federation. Like Chinese leaders in the previous decade, Russian policymakers faced the challenge of integrating their nation into the global economy. Russia’s trade openness (exports and imports scaled by GDP) grew from 26% in 1991 to 51% in 2013, very similar to the rise in China’s trade openness from 29% to 50% during these years. Russian exports increased from 13% of its GDP at the beginning of this period to 28% in 2013, while the corresponding figures for China are 16% and 26%. Both counties gradually allowed foreign capital inflows. But the similarities end there.

Russia’s exports are primarily commodities, particularly oil and natural gas. Consequently, sales of these resources account for a large part of Russia’s GDP: 16% in 2012. The plunge in world oil prices, combined with the sanctions imposed by U.S. and European Union governments following Russia’s annexation of the Crimea and its threats against the Ukraine, threaten to push the economy into a recession. The deterioration of the economic situation caused the ruble to plunge against the dollar in December, before recouping part of its value after the central bank intervened in the foreign exchange market and raised its policy rate to 17%.

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Public Works, Economic Stabilization and Cost-Benefit Sophistry

by Sandwichman (reposted from Econospeak)

Public Works, Economic Stabilization and Cost-Benefit Sophistry

I. Public Works and Economic Stabilization

This is where it all began. The National Resources Board’s 1934 Report on National Planning and Public Works contained a radically different vision of the methods and purposes of conducting a cost benefit analysis than what has subsequently become the convention. This has profound conceptual (and possibly legal?) consequences for the supposed “economic optimization” of action to limit climate change.
John Maurice Clark was the NRB’s economic consultant on the issue of “the use of public works as an economic stabilizing device.” His findings provided the substantial basis for the report’s Section II, Part 3 “Public Works and ‘Economic Stabilization.'” A comprehensive report by Clark, Economics of Planning Public Works, was published in 1935 by the National Planning Board of the Federal Emergency Administration of Public\Works.

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