My Weekly Reader 23 July 2018.

“Globalization” means the trade in goods and services, the flow of capital, and the movement of workers across national boundaries with little or no national constraints.  This is an old story in human history, but it accelerated dramatically after 1945[1] and it has moved at astonishing speed since 1990.[2]  Globalization has spawned disruptive costs that accompany its immense benefits.  Much attention has focused on some of the costs more than on the benefits.

The political reaction against globalization commands the headlines.[3]  Examples include President Trump’s “America First” policies of tariffs and limits on migration; the British vote to leave the European Union (“Brexit”); and Angela Merkel’s suddenly precarious leadership of Germany.  The most persuasive interpretations see this reaction as rising from two sources.  One is the unequal distribution of both the benefits and costs of globalization.  The other is the resulting discrediting of the elites as leaders in the eyes of everyone else as followers.

One can point to many flaws in democratic governance.  However, part of the current problem is that democracy actually works.  Donald Trump won the 2016 election; a narrow, but real, majority of British voters chose “Brexit”; Italian voters supported the current coalition of anti-immigrant, anti-EU parties that governs the country.  Many of the reforms seem intended to blunt the responsiveness of politicians to the popular will.  These include giving the president of the United States more authority to commit the country to treaties that could not pass the Senate; extending the time between elections to buffer politicians from the public moods; raising the pay of politicians so that a better class of person will go into politics; and instituting civic literacy tests for voters.

Trends that have nothing to do with globalization, but which will rock a globalized world economy get lost in the shuffle.[4]  For example, in Western countries, robots look like a mechanical version of China: low-cost, high-productivity workers.  In developing countries, however, they are just as great a challenge.  Hundreds of millions of people in China, India, and elsewhere have been pulled out of abject poverty by industrialization.  Their jobs, too, are at risk.  Developed countries will have no incentive to off-shore production and developing countries will have to compete with their own robots.

Then soon–but possibly not soon enough–a demographic shift will occur from low birth-low death to low birth-high death.  The United States already depends upon immigration for its population growth (and the financial stability of Social Security).  Japan and many European countries (Germany and Italy for example) are in much worse shape in terms of their young workers-elder retirees ratios.  China will soon enter the ranks of countries this imbalance.  How will different societies pay for their aged, non-working populations?

[1] After the Second World War, the United States led the construction of an open “Free World” economy through institutions like the World Bank (International Bank for Reconstruction and Development), the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT).

[2] The collapse of the Soviet Union discredited centrally-planned, non-market economies in the eyes of previous true believers.  Russia, the former “captive nations” of the Soviet Empire, and the Peoples Republic of China all adopted capitalist market economies.  Many other leftist economies in the developing world (notably India) did the same thing.

[3] Dambisa Moyo, Edge of Chaos (2018).

[4] Ian Bremmer, Us vs. Them: The Failure of Globalism (2018).

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Annals of the Great Recession XVI, Legacies.

In theory, the American economy is doing well.  Unemployment is at the lowest level in this century; corporations are investing, and there are signs of increasing consumer spending.  Fine.  However, there are also reasons to be concerned.  One is the “flattening of the yield curve.”[1]

The United States government borrows money by selling bonds (Treasury notes).  Basically, bonds are IOUs + Interest.  These Treasury notes run for different periods of time and pay different rates of interest.  Long-term bonds run for like 10 years, while short-term bonds run for like 2 years.  The long-term bonds pay higher interest (called “yield”) than do short-term bonds to account for inflation.  When the economy is growing strongly, prices will tend to rise.  The gap between the yield for long-term bonds and the yield for short-term bonds is called the “yield curve.”

If people think the economy will grow, then they will put their money in stocks and the Treasury will have to pay higher interest on its long-term bonds.  If a lot of people want the security of long-term bonds, rather than the risk of stocks and don’t fear inflation, then the Treasury won’t have to pay as much interest.

Then there are the banks.  They borrow money at low short-term rates and lend it at higher long-term rates.  That’s how they make a profit.  If short-term rate approach long-term rates, it pinches their profits.  If short-term rates exceed long-term rates, they actually lose money.  So, they stop borrowing and lending.

Here’s the thing.  The gap between long-term and short-term bonds has been closing.  This is called “the yield curve flattening.”  A year ago the gap was 1 percent; three months ago it was 0.5 percent; in early July it fell below 0.3 percent.  Interest rates for long-term bonds has not been rising much, while the rates for short-term bonds has continued to rise.  This suggests that bond-traders do not expect a lot of inflation, which suggests that they have doubts about future economic growth.  At some point, the yield for short-term bonds could rise above the yield for long-term bonds.  When this happens, the yield curve is said to be “inverted.”  Economists interpret an inverted yield curve as “a powerful signal of recession.”  Inversions have come before every recession and one near-recession since 1955.  However, the time lag between an inversion and a recession can stretch from six months to two years.  So, we aren’t there yet.

The huge number of bonds that central banks acquired to push down long-term rates during the period of “quantitative easing” are continuing to weigh on the long-term rates.  Now the Federal Reserve Bank is raising short-term rates to prevent excessive price rises in a strong economy.  There is mounting concern that policies being pursued by the Federal Reserve Bank could harm the economy by pinching off lending or by pushing banks to pursue riskier strategies.[2]    On the other hand, there is evidence that, in the wake of the “Great Recession,” the yield curve has lost some of its predictive power.  Moreover, a strong American economy coupled with a slowing world economy could push foreigners to buy long-term bonds.  The issue at hand is whether the Fed should continue to raise short-term interest rates as planned.  The stakes are high.

[1] Matt Philips, “A Recession Signal Is Flashing Yellow,” NYT, 27 June 2018.

[2] Nick Timiraos, “Fed Debates Signal From Yield Curve,” WSJ, 9 July 2018.

The Economy Stupid.

Since the 1970s, the fates of working Americans have become uncoupled.[1]  Those with a college education have prospered, while those without a college education have seen their incomes stagnate.  Then, the “Obama recovery” since the financial crisis has not been a very satisfactory recovery by historical standards.  The rate of growth has been slow.

First, it is worth asking why the recovery was so unimpressive   On the one hand, demography exerted a choke-hold.  Baby Boomers have begun to retire, while the share of women in the paid labor force seems to have plateaued.   This could be off-set by rising productivity of the labor we do have.  On the other hand, however, a long-running decline in productivity growth has continued to drag on the recovery.  There are various theories about why this has happened, but no consensus, let alone a solution.  On yet another hand, economists point to “skill-biased technological change.”  That is, employers constantly introduce new technology that replaces many low-skill employees while creating a demand for a smaller number of higher-skilled workers.   Those higher skills are acquired through some form of education (although it doesn’t have to be college).

Second, the economic problems have had social effects, and those social effects now have had political consequences.  Donald Trump won the votes of those without a college education by an eight percent margin; Hillary Clinton won the votes of those with a college degree by a nine percent margin.  Even this disguises the reality of President Trump’s electoral base.  The core of voters who actually propelled Trump to the Republican nomination was much more distinctly those without a college education.  Most Republicans—many of them with college degrees—merely voted for Trump because they were supporting the Republican candidate.

What kind of shape is the economy in as Donald Trump takes the helm?  Unemployment is down to 5 percent, what economists regard as “full-employment” given the constant churning in the economy.  Inflation is finally up around 2 percent, the target long-pursued by the Federal Reserve Bank.  The Fed appears poised to raise interest rates this month to keep inflation from accelerating beyond this target point.

To what extent can President Trump deliver on his commitments to the voters who gave him the nomination?  The same forces that have dragged on the economy for a while now are likely to hamper some of his plans, while some of his plans will likely further drag on the economy.

For one thing, tax cuts combined with a big infrastructure plan will expand the deficit and increase inflationary pressures.  The Fed will raise interest rates in response, dragging back on the economic growth that the president wants to encourage.   The anti-immigrant stance will only worsen the labor supply bottleneck is in the years ahead.  Thus, there is some reason to expect that the Trump administration will disappoint its core constituency.

Democrats might want to hesitate before shifting from protesting in the streets to dancing in the streets.  First, no one doubts that America needs a massive overhaul of its infrastructure.  How to pay for it and how to burst through the resistance of opponents[2] are problems for any successor to the Trump administration.  Second, in a labor-short economy, a big chunk of workers (those without college degrees) are being left behind.  Somebody needs to think of a constructive solution, rather than just viewing them with contempt.

[1] Gregory Mankiw, “Advice for Trump: Ask an Economist,” NYT, 12 March 2017.

[2] For example, both the Keystone XL and Dakota Access pipelines are infrastructure projects.

My Weekly Reader 1 March 2017.

In recent years, I have noticed–and lost track of–how many times a head-line in the New York Times describes something as “risky.”[1]  The word is meant to deprecate, rather than to laud the thing being described.  Clearly, both the editors and the typical Times reader are risk averse.  OK, so what?  So this.

Tyler Cowen, The Complacent Class: The Self-Defeating Quest for the American Dream (2017), argues that risk-taking and an openness to change “made America the world’s most productive an innovative economy.”  Now, however, the American economy appears much less innovative and aspirational.[2]  Start-ups as a share of American companies have fallen from 12-13 percent in the 1980s to 7-8 percent today; over the last eight years productivity growth has increased at about half the average rate for the period since 1945.  The former may be taken as a rough measure of entrepreneurialism; the latter may be taken as a rough measure of technological innovation.  Then there is the widespread prescription of mood-leveling anti-depressants.  Perhaps these blunt enthusiasm and engagement (as well as the impulse to drive your car into a telephone pole)?  Even Americans’ recreational drugs-of-choice disappoint.  We’ve gone from dropping acid and snorting coke to drifting away on an opioid cloud.

Cowen believes that Americans have shifted from “building a new and freer world” to “rearranging the pieces in the world we already have.”  To steal a metaphor from demography, Americans are becoming increasingly “endogamous” (marrying people inside the familiar social group) and decreasingly “exogamous” (marrying people outside the familiar social group).  That is, people are increasingly “matching” with others who share their own identity, whether it is politics, or residential location, or interior design.[3]  One way or another, risk-aversion and a fear of change have seized hold of the hearts of a broad swathe of Americans.

While Cowen offers some cautious suggestions about the future, the book may incite a closer examination of the past.  If Cowen is correct, then how did this risk-aversion come about?  In a sense, “morning in America” or no, the last forty years have been trying times.[4]  The oil shocks of the Seventies announced a long era of the disruption of the settled economy of the post-war period.  A whole set of important social relationships and institutional arrangements rested upon the prosperity yielded by that settled economy.

A whole string of unforeseen disasters revealed errors in human judgement.  Take a few recent examples.  The invasion of Iraq in 2003 seemed like a good idea to some people and a bad idea to other people, but no one anticipated that the Pentagon would mess-up the subsequent occupation.  In the first decade of the 21st Century, a housing bubble existed and banks were badly compromised, but only a few people perceived the danger and government regulators were not among them.  The “Deepwater Horizon” blow-out left some people agape at the realization that no one in the oil industry had ever asked what would happen if the blow-out preventer failed, as technology does with surprising frequency.[5]

Seen in this light, it is possible to understand why many people have come to adopt a stance of “first do no harm.”  However, it may be that such a stance does a different kind of harm.

[1] For a sampling, see: https://www.google.com/search?q=New+York+times+%22risky%22&ie=utf-8&oe=utf-8

[2] Matthew Rees, “Lazy Does It,” WSJ, 1 March 2017, p. A15.

[3] For another take on this issue, see: https://waroftheworldblog.com/2017/02/08/pret-a-penser/

[4] “Make America Great Again” is a frank acknowledgement of a feeling shared by many Americans.

[5] For example, Samsung phones catching fire or Takata air-bags deploying when there weren’t supposed to.

Good news and bad news on the economy.

The American economy is huge (producing $18 trillion worth of goods and services every year) and growing (GDP is projected to double over the next fifteen years).[1]  Business analysts had projected that the American economy would grow at a rate of 2.5 percent in the second quarter of 2016.[2]

What’s the good news?  If you leave out business inventories, then in the second quarter of 2016, the rest of the economy grew at 2.4 percent.  Also, consumer spending (which makes up roughly two-thirds of the economy) grew at a rate of 4.2 percent.  This reflects the belated rise in wages (by 2.5 percent over last year) and the fall in gasoline prices.  The United States International Trade Commission projects that the Trans-Pacific Partnership (TPP) trade deal could add 128,000 full-time jobs and $42.7 billion to the GDP by its fifteenth year.

What’s the bad news?  First, companies have been meeting the rising demand in part by drawing down their inventories, rather than by making new stuff to keep their inventories stocked.  If you include inventories, then the economy grew at a rate of only 1.2 percent.  This is half the rate calculated if inventories are excluded.

Second, the fall in energy prices has caused energy companies to shut down a lot of production rather than investing; in other sectors, the strong dollar is choking off a lot of sales, so companies aren’t investing as much.

Third, the TPP’s projected job creation and GDP growth projections are pretty small compared to the over-all economy.  In addition, it is projected to increase wages by only 0.19 percent over where they will be otherwise.

Fourth, the growth of labor productivity holds the key to economic progress.  Labor productivity is the amount of output (stuff) per hour of work.  If labor productivity increases, the employers get more stuff to sell at the same labor cost as before.  That allows for higher profits, or lower prices to buyers, or higher wages to workers, or—the trifecta—all three.[3]  Between 1870 and 2013, the American economy averaged 2.3 percent growth in productivity each year.   This made for a gigantic rise in living standards.[4]  However, that average disguises differences in productivity growth during the sub-periods.  From 1948 to 1973, the annual growth in productivity averaged 2.8 percent.  From 1973 to 1995, it averaged 1.4 percent.  From 1995 to 2010, it averaged 2.6 percent.  From 2010 to 2013, it averaged 0.7 percent.[5]

Apparently no one knows what caused the shifts.  No one knows why it suddenly dropped in 1973 or why it dragged along at a low level for two decades; no one knows why it shot up in 1995 and stayed at a high level for fifteen years; no one knows why it fell again in 2010 (after the end of the financial crisis); and no one knows what the poor performance of the last few years portends or when it will end.  However, in the first quarter of 2016, it fell by 0.6 percent.

The future is uncertain.  Over the short-run, will companies begin investing to meet rising consumer demand or will the investment decline undermine the growth of consumer spending?  Over the longer-run, will productivity growth begin rising or will it continue to limp?  Will rejection of the TPP leave world trade as it is or will it begin a downward spiral in trade?

[1] Eduardo Porter, “Uneasy Alternative to an Imperfect Trade Deal,” NYT, 27 July 2016.

[2] Neil Irwin, “What’s Right and Wrong With the Economy,” NYT, 2 August 2016.

[3] See: Henry Ford.

[4] Alan Blinder calculates this as a 25-fold increase.

[5] Alan S. Blinder, “The Unsettling Mystery of Productivity,” WSJ, 25 November 2014.

The Crisis of 2008 and the Return of New Deal Economics.

The “Great Recession” of the 2000s and since has inspired a certain interest in the “Great Depression” of the 1930s.[1]

The New Deal’s economic policies were grounded in historical precedents.  On the one hand, various forms of relief and public works projects put people to work, while the Agricultural Adjustment Act shored up the situation of farm-owners—at the expense of tenant farmers and share-croppers.  Like the Medieval three-field system, these policies put a floor under the economic collapse.  Thank God for that.

On the other hand, the New Deal tried to come to terms with the modern industrial corporation.[2]  This would be one engine of real recovery.  The Democrats along with some Republicans were divided on this subject.  For some, big business was inherently bad.  Businesses grew by swallowing up smaller firms; then they produced monopoly effects—higher prices, lower quality, a slowing of innovation.  This analysis was rooted in the “Populist” attack on railroads and other big corporations in the “Gilded Age.”  Subsequently, Democratic “Progressives” led by Woodrow Wilson had embraced a version of this policy.  They rejected big interest groups and wanted a strong national government to break-up or prevent their formation.  This strand of the New Deal pursued various anti-monopoly initiatives.

Others, however, accepted big interest groups (Big Labor as well as Big Business) and wanted a strong national government to hold the ring between them in the national interest.  This strand of thought pushed European-style “cartelization” to prevent the competitive price cutting that led to mass business failures, and downward pressure on both wages and demand; and promote efficiency through cooperation between big corporations and the government.  This strand sprang from the government directed economies of the First World War.  Allied with this strand of thought were intellectuals who had been deeply impressed by the Soviet “achievement” (although they sometimes shuddered at the human cost) and who favored “planning.”

The two strands struggled all through the New Deal.  Most often, anti-monopoly policy lost out because the efficiency and production advantages of big corporations far outweighed the gains from limiting the logical effects of competition.

Now the anti-trust arguments have reared their head again.[3]  Business concentration seems to be increasing.  Democrats focus on the real or imagined malign effects.  Bernie Sanders has called for the big banks to be broken up; Elizabeth Warren has called for an anti-trust assault on the big companies of Silicon Valley; and Hillary Clinton argues that big business uses its power “to raise prices, limit choices for consumers, lower wages for workers and hold-back competition from start-ups and small business.”

The New Deal analogy suggests that there is something to be said on the other side.  The New Deal’s first effort at “cartelization,” the National Recovery Administration (NRA) ended because the Supreme Court ruled against it in 1935, not because it had (yet) failed.  Later, with American entry into the Second World War, the New Deal abandoned its anti-business stance to get the massive increase in production needed for victory.  Both production and working-class incomes rose sharply.  That settled that question.  From then on, American liberalism rejected both government planning and attacks on monopoly.  Until now.

[1] See Amity Schlaes, The Forgotten Man, and Paul Krugman, The Return of Depression Economics and the Crisis of 2008, as examples.

[2] Ellis Hawley, The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence (1966).

[3] Eduardo Porter, “With Competition in Tatters, The Rip of Inequality Widens,” NYT, 13 July 2016.

The Rise and Decline of Nations.

Back in the day–as young people used to say before they moved on to some other expression up with which I have not caught—I was going to be an economic historian. I came across a book by Mancur (Man-Kur or Man-Sur, depending on who your listening to) Olson.[1]  It’s a remarkable book, although—like many another remarkable book—long forgotten.

At the core of the book is a puzzle.  Germany and Japan lost the Second World War big time, while the United States won big time.  So how come the post-war German and Japanese economies were so dynamic, while the American economy slowed down?

Olson’s answer is one that will be obvious to sailors.[2]  You leave the boat in salt-water and it will pick up barnacles.  It also will be obvious to heart surgeons.  You have too many double bacon cheeseburgers with the twisty fries covered in BBQ sauce and your arteries will get clogged with sludge.  In either metaphor, the system gets loaded with stuff that slows down its operation.

What, in economic terms, are these barnacles/sludge?  They are the various interest groups that grow up around an established way of doing things: unions, government regulators, tax collectors, and business monopolies and cartels.  They grow up with—well, slightly behind– any new industry.  They figure out how the system works.  They figure out how to work the system.  They’re opposed to change because they know how to work the existing system.[3]  They fight over shares of the existing pie, rather than over how to expand the pie.  Eventually, the contending groups reach agreement on how to divvy-up the pie.  These agreements Olson labels “distributional coalitions.”  They are the “masters of the crossroads.”[4]

The thing is that the Second World War destroyed all these “distributional coalitions”—the barnacles, the sludge, the interest groups, the barriers to new technology and new relationships–in Germany and Japan.  War “emergencies” caused the German and Japanese governments to break down established relationships from the pre-war era.  Then the American and British occupations banned many regime-associated groups.  In contrast, the victor nations institutionalized their own “distributional coalitions.”  American and British unions foreswore strikes, while lots of leading businessmen took “dollar-a-year” jobs with the government.[5]  Subsequently, many interest groups dug-in to established positions.  So, Germany and Japan were able to achieve rapid economic growth, while the United States merely chugged along and Britain soon fell behind the countries against which it had fought from the first day of the Second World War to the last.

In a sense, then, catastrophic defeat in war serves as a kind of social and economic angioplasty.[6]  Obviously, Olson was talking only about already advanced industrial economies.  I doubt that anyone expects Iraq to be the next “economic miracle.”

Trite observation though it is, the same analysis might be applied to any organization.  For example, colleges facing severe competition either ruthlessly adapt or wither.

[1] Mancur Olson, The Rise and Fall of Nations: Economic Growth, Stagflation, and Social Rigidities (Yale UP, 1984).

[2] Nevertheless, will all the non-sailors please spare me the abusive remarks about me wearing pink—“salmon” in the imagination of my brother-in-law—pants, blue Polo shirts, and Topsiders?  Please?

[3] Big Carbon—coal and oil—has a lot more drag with the gummint than does Not-So-Big Renewables.

[4] See: https://en.wikipedia.org/wiki/Papa_Legba  See also: Madison Smartt Bell, All Souls’ Rising (1995); Master of the Crossroads (2000); and The Stone That the Builder Refused (2004).

[5] See, for example, Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War  (1995). 

[6] Curiously, this is how mainstream economists saw a business-cycle recession before the Great Depression.