Politics Trumps Economics

❝ With each passing day, it becomes increasingly evident that US President Donald Trump’s administration cares less about economics and more about the aggressive exercise of political power. This is obviously a source of enormous frustration for those of us who practice the art and science of economics. But by now, the verdict is self-evident: Trump and his team continue to flaunt virtually every principle of conventional economics.

❝ Trade policy is an obvious and essential case in point. Showing no appreciation of the time-honored linkage between trade deficits and macroeconomic saving-investment imbalances, the president continues to fixate on bilateral solutions to a multilateral problem – in effect, blaming China for America’s merchandise trade deficits with 102 countries. Similarly, his refusal to sign the recent G7 communiqué was couched in the claim that the US is like a “piggy bank that everybody is robbing” through unfair trading practices. But piggy banks are for saving, and in the first quarter of this year, America’s net domestic saving rate was just 1.5% of national income. Not much to rob there!

❝…What Trump is doing is not about economics – or at least not about economics as most academics, political leaders, and citizens know it…But why single out economics? The same complaint could be made about Trump’s views on climate change, immigration, foreign policy, or even gun control. It’s power politics over fact-based policymaking.

RTFA. Please. You don’t have to agree with Stephen Roach 100% of the time. His experience and knowledge-based analysis is a helluva place to start, though!

Will Complacency Be Tested in 2018?

❝ After years of post-crisis despair, the broad consensus of forecasters is now quite upbeat about prospects for the global economy in 2018. World GDP growth is viewed as increasingly strong, synchronous, and inflation-free. Exuberant financial markets could hardly ask for more…

❝ As was evident in both 2000 and 2008, it doesn’t take much for overvalued asset markets to fall sharply. That’s where [a] third mega-trend could come into play – a wrenching adjustment in the global saving mix. In this case, it’s all about China and the US – the polar extremes of the world’s saving distribution.

China is now in a mode of saving absorption; its domestic saving rate has declined from a peak of 52% in 2010 to 46% in 2016, and appears headed to 42%, or lower, over the next five years. Chinese surplus saving is increasingly being directed inward to support emerging middle-class consumers – making less available to fund needy deficit savers elsewhere in the world.

❝ By contrast, the US, the world’s neediest deficit country, with a domestic saving rate of just 17%, is opting for a fiscal stimulus. That will push total national saving even lower – notwithstanding the vacuous self-funding assurances of supply-siders. As shock absorbers, overvalued financial markets are likely to be squeezed by the arbitrage between the world’s largest surplus and deficit savers. And asset-dependent real economies won’t be too far behind.

I agree with Stephen Roach’s analyses of global economics, macro or otherwise, much of the time. He’s done the research and pursued an active living from managing his understanding of economic trends. Especially in Asia. Now, he’s back in the US – back in the US – back in the USA – trying to broaden the understanding of global economics inside a nation where a larger percentage of the population prefer to pray for guidance than to investigate, analyze and learn.

Our Fake President and China’s Codependency Trap

❝ Seemingly at odds with the world, US President Donald Trump has once again raised the possibility of a trade conflict with China. On August 14, he instructed the US Trade Representative to commence investigating Chinese infringement of intellectual property rights. By framing this effort under Section 301 of the US Trade Act of 1974, the Trump administration could impose high and widespread tariffs on Chinese imports.

This is hardly an inconsequential development. While there may well be merit to the allegations…punitive action would have serious consequences for US businesses and consumers. Like it or not, that is an inevitable result of the deeply entrenched codependent relationship between the world’s two largest economies.

❝ In a codependent human relationship, when one party alters the terms of engagement, the other feels scorned and invariably responds in kind. The same can be expected of economies and their leaders. That means in a trade conflict, it is important to think about reciprocity – specifically, China’s response to an American action. In fact, that was precisely the point made by China’s Ministry of Commerce in its official response to Trump’s gambit. China, the ministry vowed, would “take all appropriate measures to resolutely safeguard its legitimate rights.”

❝ …Three economic consequences stand out.

First, imposing tariffs on imports of Chinese goods and services would be the functional equivalent of a tax hike on American consumers…

Second, trade actions against China could lead to higher US interest rates…

Third, with growth in US domestic demand still depressed, American companies need to rely more on external demand. Yet the Trump administration seems all but oblivious to this component of the growth calculus…

Stephen Roach is the United States’ leading economic expert on China Trade – IMHO. His decades of experience in place on behalf of Morgan Stanley, his research and analysis over time are with few peers. His knowledge of the topic towers over the twerp who is our fake president and most of his second or third tier pimps-as-advisors.

RTFA for the details of this outline.

Moving from Globalization 2.0 to 3.0

While seemingly elegant in theory, globalization suffers in practice. That is the lesson of Brexit and of the rise of Donald Trump in the United States. And it also underpins the increasingly virulent anti-China backlash now sweeping the world. Those who worship at the altar of free trade – including me – must come to grips with this glaring disconnect.

Truth be known, there is no rigorous theory of globalization. The best that economists can offer is David Ricardo’s early nineteenth-century framework: if a country simply produces in accordance with its comparative advantage (in terms of resource endowments and workers’ skills), presto, it will gain through increased cross-border trade. Trade liberalization – the elixir of globalization – promises benefits for all…

In the US, Trump’s ascendancy and the political traction gained by Senator Bernie Sanders’s primary campaign reflect many of the same sentiments that led to Brexit. From immigration to trade liberalization, economic pressures on a beleaguered middle class contradict the core promises of globalization…

In short, globalization has lost its political support – unsurprising in a world that bears little resemblance to the one inhabited by Ricardo two centuries ago. Ricardo’s arguments, couched in terms of England’s and Portugal’s comparative advantages in cloth and wine, respectively, hardly seem relevant for today’s hyper-connected, knowledge-based world. The Nobel laureate Paul Samuelson, who led the way in translating Ricardian foundations into modern economics, reached a similar conclusion late in his life, when he pointed out how a disruptive low-wage technology imitator like China could turn the theory of comparative advantage inside out…

Of course, this isn’t the first time that globalization has run into trouble. Globalization 1.0 – the surge in global trade and international capital flows that occurred in the late nineteenth and early twentieth centuries – met its demise between World War I and the Great Depression. Global trade fell by some 60% from 1929 to 1932, as major economies turned inward and embraced protectionist trade policies…

Similarly, the means of Globalization 2.0 are far more sophisticated than those of its antecedent. The connectivity of Globalization 1.0 occurred via ships and eventually railroads and motor vehicles. Today, these transportation systems are far more advanced – augmented by the Internet and its enhancement of global supply chains. The Internet has also enabled instantaneous cross-border dissemination of knowledge-based services such as software programming, engineering and design, medical screening, and accounting, legal, and consulting work.

The sharpest contrast between the two waves of globalization is in the speed of technology absorption and disruption. New information technologies have been adopted at an unusually rapid rate. It took only five years for 50 million US households to begin surfing the Internet, whereas it took 38 years for a similar number to gain access to radios…

Unfortunately, safety-net programs to help trade-displaced or trade-pressured workers are just as obsolete as theories of comparative advantage…

The design of more enlightened policies must account for the powerful pressures now bearing down on a much broader array of workers. The hyper-speed of Globalization 2.0 suggests the need for quicker triggers and wider coverage for worker retraining, relocation allowances, job-search assistance, wage insurance for older workers, and longer-duration unemployment benefits.

Stephen Roach cautions, “the alternative – whether it is Brexit or America’s new isolationism – is an accident waiting to happen.” Globalization is not only inevitable, the most recent wave is complete. The backwash is populated with opportunist capitalists jumping ship this time for a 10% wage advantage instead of greater – some fleeing China to Mexico for the second time. Replicating the short lurch that followed the passage of NAFTA in the Clinton years.

What comes next in emerging markets, newly-developed and developing economies will be friendly competition and cooperation. That already is a central point of advocacy in China and ASEAN nations. Obama and President Hillary [probably] are stuck with the stereotypical American political solution of playing the blame game to unemployed and underemployed constituents – while Congressional know-nothings continue their death spiral-dance with religious conservatives hoping to retain their seat-of-the-pants veto of any legislation that might aid American workers. We’re faced with the potential of nothing changing in Washington until the elections of 2022 and 2024.

OTOH — If Americans are bright enough to remove bigots-pretending-to-be-conservatives from Congressional power in the November election, there may be an opportunity to implement the sort of safety net Dr. Roach suggests. We’ll see. Part of being both an optimist and cynic is my confidence in science and knowledge aiding our species in solving the problems we create. Just not in my lifetime.

Has China left behind traditional fixed growth targets?

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Lou Jiwei, Xi Jinping and Zhou Xiaochuan

“Isn’t it now time for China to abandon the concept of a growth target?”

That was the question I asked Chinese Finance Minister Lou Jiwei this week at the 15th annual China Development Forum, which brings together top Chinese officials and an international delegation of academics, leaders of multilateral organizations, and business executives. Having attended the CDF since former Premier Zhu Rongji initiated it in 2000, I can attest to its role as one of China’s most important platforms for debate. Zhu welcomed the exchange of views at the Forum as a true intellectual test for China’s reformers.

It was in that spirit that I posed my question to Lou, whom I have known since the late 1990’s…I have always found him to be direct, intellectually curious, a first-rate analytical thinker, and a forward-looking advocate of market-based reforms. He is cut from the same cloth as his mentor, Zhu…

While it may seem like splitting hairs, continuing to frame the economic goal as a target sends a message of determined and explicit guidance that now seems at odds with the government’s market-oriented intentions. Wouldn’t dropping the concept send a far more powerful message? Isn’t it time for China to let go of the last vestiges of its centrally planned past?

Lou’s response: “Good question.”

China, he went on, is in fact moving away from its once single-minded emphasis on growth targeting. The government now stresses three macroeconomic goals – job creation, price stability, and GDP growth. And, as evidenced by the annual “work report” that the premier recently submitted to China’s National People’s Congress, the current emphasis is in that order, with GDP growth at the bottom of the list…

This is particularly relevant in light of the important threshold that has now been reached by the structural transformation of the Chinese economy – the long-awaited shift to a services-led growth dynamic. Services, which now account for the largest share of the economy, require close to 30% more jobs per unit of output than the manufacturing and construction sectors combined. In an increasingly services-led, labor-intensive economy, China’s economic managers can afford to be more relaxed about a GDP slowdown…

RTFA. Few economists have the experience, personal knowledge of Stephen Roach on China. I mentioned in a recent post about the fight against corruption that economics and commerce fit more into my personal interests. You may find the topics dull as a hoe handle; but, if you haven’t curiosity about what’s going on in the whole world and how events will affect your own life – you may as well settle back and let some priest or pundit run your life.

Here’s where Doctor Roach ends up on this particular occasion. For more, read his latest book, Unbalanced: The Codependency of America and China.

Since Deng Xiaoping’s reforms of the early 1980’s, less and less attention has been paid to the numerical targets of central planning…China’s most senior fiscal and monetary policymakers – Lou Jiwei and Zhou Xiaochuan – are close to taking the final step in the long journey to a market-based economy. Their shared interpretation of flexible growth targeting puts them basically in the same camp as policymakers in most of the developed world. The plan is now a goal-setting exercise. From now on, fluctuations in the Chinese economy, and the policy responses that those fluctuations imply, need to be considered in that vein.

China’s economic slowdown, unlike that in other emerging countries, should be welcomed

Once again, all eyes are on emerging markets. Long the darlings of the global growth sweepstakes, they are being battered in early 2014. Perceptions of resilience have given way to fears of vulnerability.

The US Federal Reserve’s tapering of its unprecedented liquidity injections has been an obvious and important trigger. Emerging economies that are overly dependent on global capital flows – particularly India, Indonesia, Brazil, South Africa, and Turkey – are finding it tougher to finance economic growth. But handwringing over China looms equally large. Long-standing concerns about the Chinese economy’s dreaded “hard landing” have intensified.

In the throes of crisis, generalization is the norm; in the end, however, it pays to differentiate. Unlike the deficit-prone emerging economies that are now in trouble – whose imbalances are strikingly reminiscent of those in the Asian economies that were hit by the late-1990’s financial crisis – China runs a current-account surplus. As a result, there is no risk of portfolio outflows resulting from the Fed’s tapering of its monthly asset purchases. And, of course, China’s outsize backstop of $3.8 trillion in foreign-exchange reserves provides ample insurance in the event of intensified financial contagion.

Yes, China’s economy is now slowing; but the significance of this is not well understood. The downturn has nothing to do with problems in other emerging economies; in fact, it is a welcome development…Yet a superficial fixation on China’s headline GDP growth persists, so that a 25% deceleration, to a 7-8% annual rate, is perceived as somehow heralding the end of the modern world’s greatest development story…

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Misreading Chinese rebalancing, of course

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Used Car Lot – Shenyang

The punditocracy has once again succumbed to the “China Crash” syndrome – a malady that seems to afflict economic and political commentators every few years. Never mind the recurring false alarms over the past couple of decades. This time is different, argues the chorus of China skeptics.

Yes, China’s economy has slowed. While the crisis-battered West could only dream of matching the 7.5% annual GDP growth rate that China’s National Bureau of Statistics reported for the second quarter of 2013, it certainly does represent an appreciable slowdown from the 10% growth trend recorded from 1980 to 2010.

But it is not just the slowdown that has the skeptics worked up. There are also concerns over excessive debt and related fears of a fragile banking system; worries about the ever-present property bubble collapsing; and, most important, the presumed lack of meaningful progress on economic rebalancing – the long-awaited shift from a lopsided export-and-investment-led growth model to one driven by internal private consumption…

For an unbalanced economy that has under-consumed and over-invested for the better part of three decades, this is unnerving. After all, China’s leadership has been talking about rebalancing for years – especially since the enactment of the pro-consumption 12th Five-Year Plan in March 2011. It was one thing when rebalancing failed to occur as the economy was growing rapidly; for the skeptics, it is another matter altogether when rebalancing is stymied in a “slow-growth” climate.

This is superficial thinking, at best. The rebalancing of any economy – a major structural transformation in the sources of output growth – can hardly be expected to occur overnight. It takes strategy, time, and determination to pull it off. China has an ample supply of all three…

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China in transition – 5 Easy Pieces from Project Syndicate

There are dozens of pieces in this collection linking the latest with the recent, butting the detailed up against broad data sources, contrasting old hands with new analysis from within and outside China. Some of my favorite writers from Project Syndicate. Some I haven’t read before. I’ve picked out five – to start.


Xi Jinping talks with local people in the home of Roger and Sarah Lande in Muscatine, Iowa

President Xi’s Singapore Lessons

China is at a crucial point today, as it was in 1978, when the market reforms launched by Deng Xiaoping opened its economy to the world – and as it was again in the early 1990’s, when Deng’s famous “southern tour” reaffirmed the country’s development path.

Throughout this time, examples and lessons from other countries have been important. Deng was reportedly substantially influenced by an early visit to Singapore, where accelerated growth and prosperity had come decades earlier. Understanding other developing countries’ successes and shortcomings has been – and remains – an important part of China’s approach to formulating its growth strategy…

China’s House Divided

There has been much talk about America’s decline in recent years, with the corollary that China will take its place. But, while the United States does indeed face problems that urgently need to be addressed, if China is to rise further, to say nothing of supplanting the US internationally, it must first put its own house in order.

Those who argue that America is in decline have a difficult case to make in economic terms. For all its recent woes (which many countries would gladly exchange for their own), the US remains a dynamo of industry and innovation, and may be emerging as an energy powerhouse as well.

What threatens America’s global leadership is, rather, some of the most divided and disruptive domestic politics in its history. A country whose people have traditionally prided themselves on practicality is experiencing a debilitating bout of excessive theorizing, ideology, and so-called “new ideas,” thereby forestalling the practical ideas that come from constructive interaction with one’s political opponents…

A New Agenda for China’s New Leaders?

Political leadership transitions typically signal either a change in direction or continuity. But the mere prospect of such a transition usually postpones some important political decisions and freezes some economic activity, pending the resolution of the accompanying uncertainty.

China’s decennial leadership transition, culminating at the Chinese Communist Party’s 18th Congress, is a case in point. And, while many will remember when a Chinese leadership transition was a political and cultural curiosity that had few direct economic implications for the world’s major powers, those days are long gone.

The Renminbi Challenge

Last month, China unveiled its first aircraft carrier, and is gearing up to challenge the United States in the South China Sea. By initiating a plan to internationalize its currency, China is similarly seeking to challenge the dollar on the international stage.

In carving out a global role for the renminbi, Chinese policymakers are proceeding deliberately. In the words of the venerable Chinese proverb, they are “feeling for the stones while crossing the river…”

China is Okay

Concern is growing that China’s economy could be headed for a hard landing. The Chinese stock market has fallen 20% over the past year, to levels last seen in 2009. Continued softness in recent data – from purchasing managers’ sentiment and industrial output to retail sales and exports – has heightened the anxiety. Long the global economy’s most powerful engine, China, many now fear, is running out of fuel.

These worries are overblown. Yes, China’s economy has slowed. But the slowdown has been contained, and will likely remain so for the foreseeable future. The case for a soft landing remains solid…

The voices in our press that speak for official wings of American politics are still locked into Cold War ideology. I doubt the difference is more than one of degree between the NY TIMES and FOX NEWS. Without this commitment, the single largest wasteheap of taxpayer dollars – the Pentagon Budget, public and hidden – cannot be justified. The built-in subsidy to America’s war machine is impossible to pass in a nation at peace, working for peace, a nation that considers peace a critical goal.

A sound deficit-free economy is still held hostage to the military-industrial complex Eisenhower feared – and every president since has worked to increase, fatten and fawn over.

Presidential election sets a new low for China bashing

As America’s election season nears its finish, the debate seems to have come unhinged. Nowhere is that more evident than in the fixation on China – singled out by both President Barack Obama and his Republican challenger, Mitt Romney, as a major source of pressure bearing down on American workers and their families. Get tough with China, both stressed in the presidential debates, and the pain will ease.

Nothing could be further from the truth. Consider the following charges:

Currency manipulation. Since China reformed its exchange-rate regime in July 2005, the renminbi has risen 32% relative to the dollar and about 30% in inflation-adjusted terms against a broad basket of currencies. These are hardly trivial amounts, and more renminbi appreciation can be expected in the years to come.

Unlike Japan, which was pressured by the West into a large yen revaluation in 1985 (the “Plaza Accord”), the Chinese have opted to move gradually and deliberately. American officials call this “manipulation,” arguing that market forces would have resulted in a sharper renminbi appreciation than has occurred. Fixated on stability – a concept alien to US politicians and policymakers – the Chinese prefer, instead, to play a more active role in managing the adjustment of their currency. I call that prudence – perhaps even wisdom. Two lost decades later, the guinea pig, Japan, might have a view on which approach works best.

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America’s Renminbi Fixation

For seven years, the United States has allowed its fixation on the renminbi’s exchange rate to deflect attention from far more important issues in its economic relationship with China. The upcoming Strategic and Economic Dialogue between the US and China is an excellent opportunity to examine – and rethink – America’s priorities.

Since 2005, the US Congress has repeatedly flirted with legislation aimed at defending hard-pressed American workers from the presumed threat of a cheap Chinese currency. Bipartisan support for such a measure surfaced when Senators Charles Schumer (a liberal Democrat from New York) and Lindsey Graham (a conservative Republican from South Carolina) introduced the first Chinese currency bill.

The argument for legislative action is tantalizingly simple: the US merchandise trade deficit has averaged a record 4.4% of GDP since 2005, with China accounting for fully 35% of the shortfall, supposedly owing to its currency manipulation. The Chinese, insists a broad coalition of politicians, business leaders, and academic economists, must revalue or face sanctions.

This reasoning resonates with the US public…

“Enough is enough,” President Barack Obama replied, when queried on the renminbi in the aftermath of his last meeting with Chinese President Hu Jintao. Obama’s presumptive Republican challenger, Mitt Romney, has promised to declare China guilty of currency manipulation the day he takes office.

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