Tag Archives: Economics

More Drivel: Trump, Trade, and Unicorns

For those who haven’t had enough of the Trumpian penchant for stringing together cliches, generalizations, buzz words, dog whistles, and nonsense, there’s a heavy dose of all the above in the Pensacola Speech…including “America First” isolationism.  Evidently, the United States of America will be “great again” when we posture, pose, and pound our way to the elimination of international trade agreements.  Gone the Trans Pacific Partnership.

Lovely.  The TPP was a flawed proposal, but it was a close version of what the Chinese thought it was — a way to contain Chinese influence in the region.  So, instead of ongoing negotiations we have the increasing importance of the Regional Comprehensive Economic Partnership spearheaded by (Guess Who?) China. [CNBC]

“The mainland is already the biggest trading partner for the bulk of Asian countries, but it’s gradually increasing its political and economic sway by leading projects that impact the region. Those included the Asian Infrastructure Investment Bank and the “One Belt, One Road” infrastructure program.”  [CNBC]

The Australians have figured this out, with one analysis observing the TPP model was better fitted to large developed economies (read: US, Australia, Japan) but without US participation and leadership, the Chinese version RCEP is currently the only game in town.

“We will hopefully keep NAFTA…” he said in Pensacola, but the talks are stalled.  As of November 22, 2017 the outlook wasn’t all that optimistic healthy:

“The United States, Mexico and Canada failed to resolve any major differences in a fifth round of talks to rework the NAFTA trade deal, drawing a swift complaint from the Trump administration on Tuesday that the lack of progress could doom the process.” [Fortune]

And more:

U.S. President Donald Trump has threatened to withdraw from NAFTA unless he can rework it in favor of the United States, arguing that the pact has hollowed out U.S. manufacturing and caused a trade deficit of over $60 billion with Mexico.  The U.S. official expressed frustration that Mexico and Canada were not engaging in talks on the auto content proposal and others aimed at “rebalancing” trade in the region. [Fortune]

Here’s a Pro Tip:  In order to negotiate you have to have a partner.  In this case, partners. If the partners are not at the table then instead of a “reworked” agreement in favor of the US we have nothing.   Trump is also wrong to assume that NAFTA is the only game in town:

“This year, for the first time, 94% of goods moved tax-free across borders in the Pacific Alliance, a trading bloc that includes Mexico, Colombia, Chile and Peru. Formed in 2011, it accounts for half of all trade in the region and covers about 200 million people.

“We are trading as a group of countries in agreement on free trade,” Mexico’s foreign minister, Luis Videgaray,said Wednesday evening in New York. Videgaray spoke alongside the presidents of Colombia and Chile, as well as a Peru’s trade minister.” [CNNMoney]

In other words, watch what happens in the Pacific Alliance, and the South American trade bloc Mercosur.   And, the current  trade negotiations between Mexico and Argentina likely aren’t founded on Mexican reaction to Trump’s continual references to His Wall, but are more likely the result of comments like the ones he made in Pensacola — that NAFTA should benefit the US, and everyone else gets the hind quarters.  Moving from the general to the specific issues with agricultural trade between Mexico and South American nations:

“Mexico bought 100,800 tonnes of yellow corn from Brazil in September and 41,000 from Argentina — a drop in the ocean compared with the 10.5m tonnes bought from the US. But so far this year, it has bought 11 per cent more of the commodity from the two South American countries than in all of 2016, according to government data.” [FinancialTimes]

Pro Tip Number Two: Always assume a negotiator has a back up plan, and it probably won’t be the one you want.  Are we Great yet?  Have we rounded up all those Unicorns Trump said we were going to get?

Unicorn driven negotiations aren’t successful.  The Trump administration appears to believe a tenuous notion: if you start with a Unicorn then you can negotiate your way into getting the Unicorn.  Unicorn 1: The US gets 80+% content on cars in NAFTA (even though auto manufacturers say this will make their autos noncompetitive in the marketplace.}  Saying, “I want my Unicorn, and I’m walking away if I don’t get it,” assumes there’s a Unicorn in the first place, and you can get the thing in the second.

Those who persist in believing there are Unicorns may explain their elusiveness by saying they must all be grazing somewhere else.  Fine.  However, the Trump administration chasing its trade Unicorns would be well advised to remember that if they exist but are elusive it’s because they have other pastures in which to play.  The Chinese are more than willing to step in to fill the vacuum created by the loss of American leadership in the TPP, and the Mexicans are perfectly willing to increase their trade with Pacific Alliance and Mercosur partners in South America.  They’ve already done so.

The rhetorical sound track of Trump speeches in which we are promised Unicorns (American Made, America First, American Work) is a thin and tinny cover for inept trade talks during which bluster replaces substance and the Unicorns are no more substantial than the empty promises.

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America Last

The first law of negotiation:  It is impossible to be part of any bi-lateral or collective agreement if an agency is not at the table.

And thus, the Rose Garden Jazz Concert and International Default Announcement last week violated the First Law, by a noted (albeit self-described) deal maker.  Green lit public buildings around the nation and globe notwithstanding, the Grand Announcement was more theater than substance.  There’s a pattern herein.  First, the administration announces its announcements.  “On Wednesday, June ___, at 12:05 pm the White House will ____”  This sets up our cable news “panels” for almost interminable displays of speculation, multiplying the publicity.  Thence comes The Announcement, which may or may not be substantive.  Witness the now infamous Rick-Rolling “announcement” by the administration about President Obama’s birth certificate authenticity.  Notice there was never any apology issued for the Birtherism, and attendant racist cant, just an “announcement” made in conjunction with the opening of a family business hotel.

In reality, the first time the U.S. can withdraw from the Paris Accord comes after the next presidential election.  In reality, the accord is entirely voluntary, and has been noted in several commentaries, can’t be both draconian and voluntary at the same time.  In reality, the rest of the nations aren’t about to allow the US to “renegotiate” the terms, especially since the Paris agreement was framed to answer US objections to the Kyoto version to which the US would not agree.  In reality, the world witnessed a statement expressing the narrow vision of the current administration, violating the First Law of Negotiation.

In short, reality has precious little to do with the Rose Garden Jazz Concert Announcement.  Nor does reality square with the Trumpian bluster that the Deal Maker can get America a better deal in the foreseeable future.  At the risk of redundancy, in order to get a deal an agent must be at the table.  The question then becomes does the administration even want a seat at that table?

One theme among the pundits is that the current administration sees international agreements in zero sum terms, that is, every multi-national treaty or protocol is a link in the shackles restraining American sovereignty.  The problem, of course, is that each American retreat also comes with an obverse side — leadership abhors a vacuum, and others will step in where the US fears to tread.  Isolationism brings with it the specter of Splendid Exile.

A related theme is a theory of executive management in which Dear Leader sits atop the pyramid, in a well appointed corner office, issuing edicts which others are expected to follow without dissent.  This, however, is also a formula for a toxic corporate culture:

“Companies hire people because the managers can’t do everything themselves. It stands to reason that we should trust the people we hire to do their jobs, but some fearful managers can’t give up control.

They have to make all the decisions and call all the shots. A rule-driven, command-and-control culture is a toxic culture that will drive talented people away.”  [Forbes]

It will also drive away those who want to cooperate in major projects and programs — like environmental improvement.  Applying a “toxic” corporate culture model to the management of major governmental projects and processes is counterproductive.

It is equally toxic to consider that an increase in cooperative engagements means that gains by some necessarily means someone must lose.  It’s easy to see the world in terms of Winners and Losers, but this perspective excludes the possibility that if everyone gives a little then the prospects for mutual gains are improved.  This philosophy also denigrates the idea that improvement is always possible, holding instead that destruction is the best option.  One of the first regional trade agreements in the modern era, NAFTA, has problems (which may be feeding discontent with other agreements), however, this doesn’t mean that the benefits of freer movement of goods and capital need to be obliterated in the interests of “removing the shackles.”

The idea that the US can effectively lead by abandoning the field (or the bargaining table) is inherently false, as are the promises extrapolated therefrom.

The second law of bargaining says “never negotiate with yourself.”  Pronouncements concerning unilateral actions — as being preferable to mutually agreed upon items of interest — rarely lead to positive outcomes. It’s essentially bargaining with yourself.  For example,  the United States under the current terms of the Paris Accord can set its own carbon emission standards and goals.  Operating in mutual terms, the US could modify its goals and simply inform global partners of the changes and rationale.  The isolationist response assumes that xenophobia is a positive feature of national policy, and no other nation is deserving of notice of our intentions and reasoning.  This is tantamount to that isolated corporate executive in the corner office who sees no benefit in having his or her board actually question directives.

When other voices are ignored those directives and policies coming from the top floor are more likely to be the produce of interior monologues than of well crafted discussion, in other words the CEO/President is negotiating with himself.

Violating the first two essential rules of negotiation aren’t exactly the way to cement one’s reputation as a deal maker.

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Keep It Simple: The National Debt Explained Without Panic

Before anyone starts panicking over The National Debt – Oh My Deity In What Ever Form It Takes – Look At The Big Numbers On The Clock:   Feel free to print off the graphics and stick them to the bathroom mirror:

Debt Asset

Yes, that’s correct, and it has been since some man or woman said, “I don’t have all the rabbit pelts yet to trade for your pot, but can I owe your four rabbit skins?”  If the answer is “yes,” then the “creditor” in this transaction is free to start planning how to use the total 14 rabbit pelts in the original bargain that  he or she will receive when the transaction is completed.  Also, the “creditor” in this example could tell yet another individual, “You’re asking for 14 rabbit pelts for that spear, I have ten now and I’m going to get another four from X, so I’ll give you the ten I have now plus the agreement that I’ll hand over the remaining four when I get them. ”  This is so simple even our Caveman could do it.

In our caveman example, the promise of the four rabbit pelts has the same value as the ten in hand IF the people in the market for pots and spears trust the person to come up with them to complete the original transaction.   This is CREDIT, as in the Latin “credere” (to believe, as in credo, “I believe.”)  As in the French crédit, as in the English CREDIT.   The promise to deliver the four remaining rabbit skins is an ASSET which the creditor/investor may use to conduct other transactions.

Sovereign nation

You and I have creditors — banks, credit unions, and other entities to which we owe money for purchases on credit.  Our corporations may issue bonds, our local, state, and federal governments may issue bonds — but I don’t get to issue my own “bonds” — for that matter,  who would buy them when there are government issued obligations of much greater value at much less risk?  Nations are financed by the selling (or auctions) of notes from their Treasuries.  In other words, except for the accounts payable to firms doing business with our government, the U.S. doesn’t have “creditors” is has INVESTORS.

Who owns our public debt? The GAO provides the following information:

Who Owns US debt 2That’s right — a large chunk of our federal “debt” is money we owe to ourselves — especially by the Social Security and Medicare Trust Funds.    Who owns the rest of it? (The part in the blue shaded area. )

Who owns US debt

If we add the approximately 42.2% of the U.S. debt owned by U.S. individuals and institutions to the 17.9% of the U.S. debt owned by the Social Security Trust Fund it means that about 60.1% of our total national debt is owned by OURSELVES.   If we add in the U.S. debt (Treasuries) owned by the Civil Service Retirement Fund, and the U.S. Military Retirement Fund that’s another 8.1% for a total of 68.2% of our national debt owed to ourselves.

Remember: One man’s debt is another man’s asset?  We own nearly 70% of our own debt, which in other terms means we have assets based on the full faith and credit of the United States in our own portfolios.

So WHY did Senator Tom Coburn (R-OK) stand on the Senate floor and chop up a poster of a “U.S. Credit Card?”  He says:

“I think it’s time we quit borrowing money against the future of our kids,” Coburn said. “It’s time we quit mortgaging their future. It’s time we started taking responsibility for the actions of the federal government rather than giving excuses for why we can’t get together and address the real problems of this country.”

I just love it when politicians play the “Think of the Children” card.  What Senator Coburn is saying, in essence, is “Let’s stop issuing Treasury notes to the Social Security and Medicare Trust funds, and the Civil Service Retirement Fund, and the U.S. Military Retirement Fund?” … and to the Federal Reserve…and to the major banking institutions…and to the general public in the form of Savings Bonds?

When the kiddies “hit the future” those bonds will have been repaid or will be earning interest for their retirement or for their medical needs when they are over 65 — or for other purposes if they’ve been collecting savings bonds. By all means “let’s think of the children” — and allow those funds to invest in the safest securities available in the world, U.S. Treasuries.

A debt level problem

Recall our caveman.  The very local economic wealth was increased by the value of four rabbit pelts when one person decided to take the promise of the other person on faith.  In a more modern setting if a person has a credit score from a rating agency that’s closer to 850 than it is to 300, then that individual can take on more indebtedness because lenders perceive the person to have “good credit.”  The loan created may be used to generate more wealth, as when it’s sold to into the secondary market, a common transaction with credit card accounts, student loans, automobile loans, and home mortgages.

The danger for the United States with a House of Representatives some members of which don’t think “default” is a dirty word, and are ready to dive over the fiscal cliff,  is that if we default — our “credit rating” drops.  If our credit rating drops then it will cost us more to borrow in the future — and there’s the point at which someone could rationally say: “Think Of The Children!” —  Children who will have to pay taxes to support  increased debt service because Pop and Grandpa decided it wasn’t a big deal to put the “full faith and credit of the United States” at risk.

On August 6, 2011, amid the last great fiscal cliff histrionics, the United States of America lost its AAA rating from Standard and Poor’s because the rating agency (which helped give us the Housing Bubble debacle) wasn’t convinced the U.S. had done enough to “stabilize the nation’s medium term debt dynamics.” [Reuters] The outcome was the highly unpleasant and economically unproductive Sequester Deal.   The CBO weighed in with its comments on the impact of the Sequester spending levels:

“Although output would be greater and employment higher in the next few years if the spending reductions under current law were reversed, that policy would lead to greater federal debt, which would eventually reduce the nation’s output and income below what would occur under current law. Moreover, boosting debt above the amounts projected under current law would diminish policymakers’ ability to use tax and spending policies to respond to unexpected future challenges and would increase the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates).”

This recommends a balancing act.

Balance Fulcrum formula

In economic terms, we need to balance our level of indebtedness with our need for economic growth.   If we keep in mind that economic policy should be a balancing act rather than adding too much weight on one end of the bar or the other we should end up in better shape.  Too much spending without raising revenues tips the balance, as does slashing spending without concern for the consequences on economic growth.   The balance is a political act, setting economic policies with an eye toward keeping things level.  So, how are we doing?

National Debt PresidenciesAnd what are we trying to pay off?

Source of National Debt

In other words, we’re out of balance primarily because we cut revenues (Bush II tax cuts) and lost revenues from the Housing Bubble Crash and Mortgage Meltdown while adding expenses associated with military operations in Iraq and Afghanistan.  As the graph indicates, if we’d not tried to cut taxes in wartime, and hadn’t had to incur expenses associated with preventing the next Great Depression — the level of indebtedness would have continued its downward trend.   In short, there’s no such thing as a free war.

What we don’t need at the moment are politicians dramatizing the horrible terrible no good debt — especially on behalf of the children — or demanding we put all of our emphasis on economic growth.  The Austerians have held sway thus far, and we have the sluggish economic growth rates to prove it.  However, we do need to be aware that as we experience economic growth, this in turn fuels higher revenues leading to lower indebtedness.

What we don’t need is Panic —

Panic Quote

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Heller’s Platitudes on a Platter: With Charts and Pictures

Heller 2Quick! Someone get some valid economic information to Senator Dean Heller (R-NV) before he embarrasses himself again.

“The nomination of Jack Lew to be Secretary of the Treasury suggests that this Administration has learned nothing from the debt-driven economic policies of the past four years, and intends to move forward with more of its signature tax and spend policies.

“As the architect and defender of the President’s irresponsible budgets amid grave economic circumstances, Mr. Lew has failed to demonstrate the leadership and commitment to responsibility that this country needs in its chief economic advisers.

“While I respect the fact that Mr. Lew has remained a public servant for many years, I cannot support the nomination of an individual who does not share my commitment to treating taxpayers’ dollars responsibly,” Heller said. [RGJ]

Let Us Parse:

“….debt-driven economic policies of the past four years…”  OK, Senator Heller isn’t expected to be reading all the articles in every economic and business magazine and journal, BUT he could at least look at the pictures in Forbes.  We Repeat:

Obama spending forbes chart

Now what does the headline, “Slowest spending in decades,” tell us?

…signature tax and spend policies…   Here’s a heads-up for everyone. There are basically two things to do with tax revenues: (1) spend the money for government services, or (2) utilize the funds to reduce the federal debt.  However, if you’ve been reading this blog even for a short while, you know that already.

Of all the GOP talking points, the elderly “tax and spend” bumper sticker shorthand is the most hoary, and least accurate.  For example, the last time we had a budget surplus it was during a Democratic Administration.   Notice that the annualized growth in federal spending stood at 3.2 and 3.8 during the Clinton years.  Notice what it did during the two Administrations of George W. Bush, during the “Credit Card Conservative” years?  Those numbers are 7.3 and 8.1, even if the 2009 stimulus is assigned to the Democratic Obama Administration.

Secondly, during any recession, and we had a whopper when the Housing Bubble exploded all over the economy in 2008, government spending increases when AUTOMATIC STABILIZATION programs kick in to soften the damage to our economy.  Unemployment insurance benefits, food stamps (SNAP), and similar stabilization programs prevent recessions from becoming depressions.   The Tax Policy Center explains:

“Automatic stabilizers are features of the tax and transfer systems that tend by their design to offset fluctuations in economic activity without direct intervention by policymakers. When incomes are high, tax liabilities rise and eligibility for government benefits falls, without any change in the tax code or other legislation. Conversely, when incomes slip, tax liabilities drop and more families become eligible for government transfer programs, such as food stamps and unemployment insurance, that help buttress their income.”

Why keep repeating this basic bit of modern economics? Because it seems to have escaped Senator Heller and other radical conservatives, who believe that if we simply reduce taxation on the wealthiest Americans investment in domestic business enterprises will magically increase even if consumers don’t have the financial wherewithal to increase the demand for goods and services.

“…As the architect and defender of the President’s irresponsible budgets amid grave economic circumstances…”  There are several problems with this analysis, aside from the fact that it is vacuous and vague.  First, I thought one of Senator Heller’s complaints was that we don’t have a budget…that we haven’t passed a budget…that we are operating without a budget? [NPR]

Heller No Budget

All right, the President is functioning with numbers from the 2011 Budget Control Act, the response to the GOP threat to shut down the federal government in the debt ceiling fight of 2011, and the source of the Silli-quester we’re now engaged in.   So, is the “out of control” spending a function of the Congressional act of passing the Budget Control Act?

Frankly and bluntly, the phrasing adopted by Senator Heller is nothing more than a repetition of the Tax and Spend mythology from the first paragraph of his statement.   And, now to the second point.

What grave economic circumstances? For Whom?

Is he talking about economic activity in terms of the U.S. financial markets?  If he is then someone needs to get him a newspaper.  Here’s the graph of financial markets as measured by the S&P 500 for the past five years:

SP 500 march 2013

For reference, the index was at 683.38 as of March 2, 2009.  An 831.03 increase (or 121.606 % increase) in the S&P doesn’t signal anything “grave” to me about the health of our financial markets.  So, if a family’s income depends on investments then the past five years have been anything but “grave.”

If, however, ones personal wealth doesn’t come from investments, then indeed, the picture isn’t quite so pleasant. Consider the following information from The State of Working America (pdf).

Change in Wealth

Those reports about most of the increase in the nation’s wealth going to the upper echelons of American economic elites are accurate, and not only are they accurate they follow a pattern beginning in the 1980s in which the rich start becoming yet richer while the percentage going to the bottom 80% of the U.S. population begins to trend downward.

And, it’s not only wealth distribution which is increasingly headed toward the top, it’s income as well.  During the recovery we’ve seen most of the income going to about 15 counties in the United States.  [Forbes] Forbes has more:

“Galbraith’s not the only one who feels that way. Here’s the free market apostle Alan Greenspan in 2007 admitting that “you cannot have a market capitalist system if there is a significant mood in the population that its rewards are unjustly distributed.” Notice please the notion “unjustly distributed” from one of the policymakers who made it so.”

So, at this point it might be wise to ask if Senator Heller and his Republican colleagues in the U.S. Senate might be amenable to suggestions regarding how to devise a more just distribution, one in which more American consumers could be encouraged to support our manufacturers and retailers by spending more money?

The Real Questions

Does Senator Heller understand that, as discussed previously, aggregate demand and Gross Domestic Product are essentially the same thing?  And, that a reduction in government spending means the reduction in spending for everything from personnel costs to paper clips? From aircraft carriers and armaments to thermometers for food safety testing?  Some companies are manufacturing and selling these products — thus if orders decline so does our GDP.  [See more here]

Would Senator Heller and his associates agree with legislation to increase the minimum wage?  If you really want to put more money into more people’s pockets this is the easiest way to do it.  We can assume he would not be in favor of this remedy because he voted against raising the minimum wage in January 2007.  [H.R. 2 Fair Minimum Wage Act 2007, vote 18]

Since most of the wealth for those not earning most of the family income in the financial markets is tied up in the family home, would Senator Heller support measures to bolster the value of family residences and to help families facing foreclosure?  Judging from his voting record, it doesn’t seem so.  Senator Heller’s on record opposing the Home Affordable Mortgage Program (2011), and opposing modification to bankruptcy laws to help homeowners avoid foreclosures (2009). [OnTheIssues] Nor could he even find it in his conscience to support funding affordable housing renovation in “severely distressed public housing.” [OnTheIssues]

The Real Answers

Contrary to popular thinking among Republicans it really is possible to be Pro-Business and to also consider the needs of shareholders and consumers.  Being Pro-Banking doesn’t necessarily mean a person is Pro-Growth.   Growth, as former Federal Reserve Chairman Greenspan came to understand by 2007, requires a vigorous consumer base, which in turn requires protection for those who work in our factories and provide our services.  Consumers and shareholders do not benefit from policies which further exacerbate wealth and income inequities, nor do they benefit from policies and legislation which undermine the faith in our free market system.

Protecting the incomes of the economic elite does precious  little to prevent economic instability for the majority of American wage and salary earners.  Protecting the economic elite can never add to the total wealth of a nation as much as adding more willing participants in our markets…our housing market, our retail markets, our automotive markets, or in any other market.

In short, Senator Heller’s platitudinous palaver and vague rhetoric is bumper sticker speak obscuring the very real economic issues and the very real economic answers we should be discussing.

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