Rethinking Labor Mobility

Harold James
. Colorado farmer

PRINCETON – The past year will be remembered as a period of revolt against what US President-elect Donald Trump likes to call “globalism.” Populist movements have targeted “experts” and “elites,” who are now asking themselves what they could have done differently to manage the forces of globalization and technological innovation.
 
The emerging consensus is that people and communities displaced by these forces should be compensated, perhaps even with an unconditional basic income. But that strategy has many hazards.
 
People who are paid to do meaningless activities, or nothing at all, will likely become even more disengaged and alienated. Regions that are subsidized simply because they are losing out may demand more autonomy, and then grow resentful when conditions do not improve.
 
Thus, simple transfers are not enough. Humans are ingenious and adaptable, but only in some circumstances; so we must continue to search for viable opportunities that allow people to participate creatively and meaningfully in the economy. To that end, we should look to history, and study what happened to the “losers” during previous periods of rapid techno-globalization.
 
In the Industrial Revolution of the late eighteenth and early nineteenth centuries, technological innovation, especially in textile machinery, displaced skilled artisans and craft workers en masse, and left them deprived of any real safety net to cushion the blow. But, in retrospect, it is not obvious that governments could have done anything to compensate Silesian handloom weavers or rural Irish artisans. Although they were hard workers, their products were both inferior in quality and more expensive than what was being manufactured in the new factories.
 
Instead, many displaced workers emigrated – often long distances across oceans – to places where they could take on new forms of work, and even prosper. As the late Thomas K. McCraw’s brilliant book The Founders and Finance shows, America’s tradition of entrepreneurship is a testament to inventive migrants.
 
To see the benefits of migration, we need look no further than Kallstadt, a town of small-scale farmers in southwest Germany where Friederich (Fred) Trump – Donald Trump’s grandfather – was born on March 14, 1869. He moved to the US in 1885 (his wife was also born in Kallstadt, and he married her there on a return visit in 1902). The father of the founder of the food giant Heinz (now the Kraft Heinz Company), Henry John Heinz, was born in Kallstadt as well, in 1811, and emigrated to Pennsylvania in the 1840s, to escape an agricultural crisis.
 
But just one century later, emigration was no longer an option for people whose economic activity had suddenly become obsolete, not least because most countries had imposed tougher barriers against migration. In the first half of the twentieth century, the most vulnerable producers were rural, small-scale farmers who could not compete with expanding food production elsewhere in the world.
 
This was especially true for European farmers, who responded to their sudden impoverishment and bankruptcy with the same sort of populist politics that featured so prominently in 2016. They formed and voted for radical political movements that blended economic and social utopianism with increasingly militant nationalism. These movements against globalization, which culminated in World War II, helped to destroy the contemporary international order.
 
In the aftermath of World War II, politicians in industrial countries found a different solution to the problem of displaced farmers: they subsidized agriculture, supported prices, and sheltered the sector from international trade.
 
In the US – which, tellingly, avoided the nationalist surge – this effort had already been embodied in the 1933 Agricultural Adjustment Act. In Europe, price maintenance and supranational protectionism formed the political basis for European integration in the European Economic Community, which would become the foundation for the European Union.

To this day, the EU budget is overwhelmingly devoted to the Common Agricultural Policy, the system of subsidies and other measures to support the sector.
 
Agricultural protectionism worked well for two reasons. First, US and European agricultural products in this new regime were not fundamentally worthless, as handmade, technically inferior cloth was during the Industrial Revolution. American and European producers still fed the populations of rich countries, even if they did so at a higher cost than was economically necessary. Second, and more important, workers were able to change occupations, and many moved from the countryside to fill attractive, high-paying jobs in urban manufacturing and services.
 
Of course, today the threat posed by globalization extends precisely to these “new” jobs. Europe and the US have long attempted to support “losers” in manufacturing and services through various small-scale programs that do not, in fact, benefit many workers. For example, the US Trade Adjustment Assistance program, which was augmented under the 2009 Trade and Globalization Adjustment Assistance Act, and the EU’s Globalization Adjustment Fund are small, complex, and expensive measures to compensate displaced workers.
 
As a result, many of the dilemmas that confronted nineteenth-century policymakers are confronting their counterparts today. No one can deny that it is a waste of human and natural resources to prop up occupations that create unwanted or obsolete goods. Earlier generations had emigration as a release valve, and many people today, especially in Eastern and Southern Europe, are responding to poor local economic conditions in a similar fashion.
 
Internal migration into dynamic metropolitan hubs is still a possibility, especially for young people. But this kind of mobility – which is increasing in modern Europe, but not in the US – requires skills and initiative. In today’s world, workers must learn to embrace adaptability and flexibility, rather than succumb to resentment and misery.
 
The most important form of mobility is not physical; it is social or psychological.

Unfortunately, the US and most other industrialized countries, with their stultifying and rigid education systems, have failed to prepare people for this reality.
 
 


A Biased 2017 Forecast: Part II

By: The Burning Platform


In Part One of this article I discussed the failure of our brains to think rationally due to our biases and the relentless propaganda flogged by our Deep State ruling class. Viewing the future through the looking glass of the Fourth Turning keeps you focused on the three catalysts which will drive all events in 2017 and beyond. I've addressed my 2017 Debt forecast in Part One.

Now I will make some guesses about what might happen in 2017 related to Civic Decay and Global Disorder.

  Civic Decay Forecast
"Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance." - Daniel Kahneman, Thinking, Fast and Slow
Black Lives Matter and Vandals/Looting in Baltimore


The presidential election and its aftermath tell you everything you need to know about the level of civic decay overtaking this country. The country is as divided as it was after the election of Abraham Lincoln in 1860. There is virtually no common ground between liberals and conservatives. The pure hatred and contempt between the winners and losers in the recent election does not bode well for the country over the next four to eight years.
 
The social fabric of the country has been torn asunder. The Clinton supporters believe anyone not on their side is deplorable, racist, misogynist, and fans of Hitler. Trump supporters believe anyone not on their side is low IQ, Muslim loving, deceitful, math challenged, and fans of a criminal. The gulf between the two sides is unbridgeable.
 
Barack Obama, the well-dressed, polished, articulate, empty suit, who has occupied the White House for the last eight years serving as the front man for the Deep State, has done more to destroy race relations and sense of community than any president in history. His divisive rhetoric and actions over the last eight years created the atmosphere for the acrimonious election and the violent protests that followed.
 
His failure to quell the Soros funded Black Lives Matter terrorist organization has resulted in the slaughter of police across the country. Meanwhile, his hometown of Chicago has seen 800 homicides and over 4,400 shootings in 2016 - with over 90% blacks killing blacks. His legacy is one of complete and utter failure, but his hubris knows no bounds, and he actually believes his eight year reign of error was a resounding success. Facts be damned.

 
Costs and Participation

"A person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise." - Daniel Kahneman, Thinking, Fast and Slow
Obama fears his legacy will go up in flames. When you govern through executive orders, bypassing Congress, and flaunting the Constitution, your actions can be overturned with the stroke of a pen. When your crowning achievement - Obamacare - is derided by virtually everyone in the country as an epic failure and will be repealed and replaced in short order, you realize your entire presidency was a sham and a national disgrace.
 
Obama is flailing about in his final weeks desperately trying to keep the attention focused upon him. He is gambling with the lives of his countrymen by doing everything in his power to provoke World War III with Russia and to inflame the Middle East with his UN engineered snub of Israel. Obama doesn't like to lose and he is acting like a churlish spoiled brat as his time runs out. He has become a laughingstock around the world. He will fan the flames of discontent in this country until he is ushered out of the White House.
 
Here are a few suppositions about what will happen next:
  • Obama trying to sow discord between the U.S. and Russia will fail, as Trump and Putin will meet and find common ground in the Middle East, the Ukraine, and Turkey. Republican neo-cons like McCain and Graham will be outraged. Liberal warmongers who once protested Bush's wars will also be outraged. The mainstream media will continue to try and fan the flames of war.
  • Before leaving office Obama will poke a final stick in the eye of Trump and his supporters by pardoning Hillary Clinton for all possible wrongdoing. This will infuriate the right. Trump will do everything in his power to investigate the Clinton foundation and any issues which could incriminate Bill, Holder, Lynch or Obama. The peaceful transition of power has not been observed by the left, so all bets are off once Trump takes office. 
  • Well-funded (by Soros) domestic agitators, including BLM and various femi-nazi groups, will attempt to disrupt the inauguration ceremonies. There will be violence, conflicts with Trump supporters, and police confrontations. This will further widen the divide in this country. The left have proven to be those who promote violence and will continue to do so. If they venture outside of their urban safe zones, they will be met with a white heavily armed populace.
  • The left wing mainstream media will not be deterred in their efforts to bring down the Trump presidency. They will fire away on a daily basis as their ratings drop lower and lower. Their railing against "fake news" has backfired, driving more people to alternative media sites where they will not be inundated with Deep State approved propaganda. The press will do their utmost to agitate the masses, creating and promoting conflict. Trump will continue to bypass and scorn the media outlets by taking his message directly to the people.
  • Building the wall, shutting off the immigration pipeline of Muslim refugees, defunding sanctuary cities, and fully supporting local police across the country will trigger snowflakes, BLM terrorists, illegal immigrants, and various Soros funded radical groups to stage violent protests in the liberal urban enclaves. They are waiting for their next high profile police shooting to pounce. The civil chaos and violent protests will increase as the year progresses.
  • Whoever Trump nominates as his Supreme Court justice will face enormous scrutiny. The left wing media will stop at nothing to destroy the nominee. The hearings in Congress will be nasty, rude, and vitriolic. The animosity between the opposing sides will reach epic proportions. Both sides know the Supreme Court is of vital importance to the future course of the country.
  • With Obama failing to fade into the sunset and his enormous ego and arrogance spurring him to agitate the left wingers, there will be no de-intensifying of the rhetoric between the right and the left. As we've seen, the left are the proponents of violence as their chief weapon. An attempt on the life of Trump is a distinct possibility in his first year in office. A successful or unsuccessful attempt would have far reaching consequences that could lead to civil chaos.


Global Disorder Forecast
"We focus on our goal, anchor on our plan, and neglect relevant base rates, exposing ourselves to the planning fallacy. We focus on what we want to do and can do, neglecting the plans and skills of others. Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck. We are therefore prone to an illusion of control. We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs." - Daniel Kahneman, Thinking, Fast and Slow
World Cracked


The level of global disorder hasn't been this high since the 1930s. There are dozens of potential flash points capable of producing a cascading crisis which could blow up the world. The highly touted establishment mantra of globalization has produced an interconnected web of trillions in global debt, with one quadrillion dollars of indecipherable derivatives layered on top, all dependent upon the sustenance of insolvent mega-banks and bankrupt nation states. The only thing keeping this global Ponzi scheme alive is the unfounded belief in the brilliance of central bankers and corrupt politicians.

The detonator for these interwoven financial weapons of mass destruction is rising global interest rates. The global financial system will be blown sky high by a sustained high volume sovereign bond selloff. The bond market is always the canary in the coal mine. Bonds will sell-off before stocks and real estate. Bond markets have begun to sell-off in a relatively orderly manner over the last three months, with long term Treasuries falling 13%. Bill Gross recently described the growing risk:
"Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day."
Will that day happen in 2017? No one knows for sure, but the probability is much higher than biased "experts" believe. The substantial concentration of cognitive biases clouding the judgement of the supposed wise men ruling the world has blinded them to the tragic consequences of what happens when the mother of all bubbles explodes like a supernova.

The complacency of those in charge and the trusting masses will eventually be dealt a death blow when the high frequency trading computers run amuck and wipe out trillions of faux paper wealth in a matter of minutes. The powers that be will declare no one could have seen it coming, when in actuality anyone with a basic understanding of math could have seen it coming from a mile away. Most have chosen to remain blind to reality, because dealing with it is too painful to consider.
"We can be blind to the obvious, and we are also blind to our blindness." - Daniel Kahneman, Thinking, Fast and Slow
Let's get to a few prognostications regarding global events in 2017:
  • Obama, in a despicable act of trying to fence Trump in, has introduced further sanctions against Russia and Putin based upon no solid evidence other than the opinions of the same people who were sure there were WMD in Iraq. The MSM and the neo-con faction of his party are all on Obama's side. I expect Trump to override Obama's childish display of antagonism, while showing the neo-cons there is a new sheriff in town, by developing a working relationship with Putin and lowering the tensions between the two countries.
  • Trump and Putin will come to an agreement regarding keeping Assad in power in Syria while turning both nations' attention to obliterating ISIS and the so called "moderate" Al Qaeda terrorists in the Middle East. General Mattis and Trump's team of rational thinkers will develop a feasible plan to destroy ISIS once and for all. Safe zones will jointly be created in Syria and Iraq by the U.S. and Russia to stem the tide of refugees pouring into the EU and U.S.
  • The U.S. dependency on Saudi oil will continue to decrease, further reducing their influence on U.S. policy in the Middle East. Saudi failure in Syria, Yemen and keeping Iran contained will lead to further discontent in the kingdom. Financial woes, declining oil output and religious tensions will fray the fabric of their insular society and lead to a religious uprising and civil war.
  • Turkey has been pushed into the Russian sphere of influence by U.S. meddling. The country is falling apart. A civil war on par with the Syrian conflict is likely to breakout. Russia would likely support the dictator Erdogan against rebel forces supported by NATO. Religious and sectarian violence will tear the country apart and create further tensions between Russia and the U.S.
  • Israel will pre-emptively take action either covertly or overtly to damage the Iranian nuclear program without informing the U.S. of its actions in advance. This will be supported by the neo-con factions in the U.S. government, but will strain relations between Netanyahu and Trump.
  • The crackpot efforts at demonetization by Modi in India will destroy the Indian economy and cause societal upheaval among his 1.25 billion mostly poor citizens. With the eighth largest economy on the planet imploding, the economic reverberations across Southeast Asia will be enormous, possibly being the trigger for the next step down in this ongoing global recession. India's weakness could spur their enemy Pakistan to take aggressive border actions which could lead to military conflicto.
  • With the fourth largest economy in the world in near permanent recession for the last twenty years, Japan's debt to GDP ratio of 230% portends financial collapse. In the midst of a demographic implosion, with negative interest rates, and a central bank buying all the newly issued debt and billions in stocks, Japan is a bug seeking a windshield. When this Ponzi economy crashes, the worldwide impact will be significant. If Japan doesn't trigger the global eruption, it will be a major contributor as the detonation spreads around the world.
  • China continues to steadily devalue the yuan against the USD and has eliminated all the gains since 2010. At the same time they have reduced their foreign reserves by over 20% since mid-2014. China's third largest economy in the world is slowing rapidly as more bad debt builds up in their system. They have a real estate bubble that makes the U.S. bubble seem like a pimple on the ass of a fly. A trade war initiated by Donald Trump would be the pin bursting the Chinese debt bubble. The situation could intensify into a bond selloff and panic. If derivative positions of over-leveraged or poorly-hedged globally systemic banks begin to unravel, cascading losses could lead to a vicious cycle and a tragic outcome.
  • Potential military conflict between China and Japan/U.S. over the islands in the South China Sea ramps up by the day. No one wants a war, but all it would take is a careless stupid act by a low level military officer to create a crisis. China is already bent out of shape by Trump acknowledging the existence of Taiwan. China is still essentially a dictatorship. The country is racked by corruption. An economic collapse could be met with distracting the public through a military adventure against Taiwan. These scenarios are unlikely in 2017, but not out of the question.
  • The most likely and potentially most dire event which could affect the world in 2017 is the disintegration of the EU. Greece is still a basket case. Italy is on the brink. The EU area economy barely registers positive after years of negative interest rates and debt issuance. Unemployment rates, excluding Germany, range between 10% and 25%. Brexit and Trump's victory portend a further shift to the right in the EU. The right wing party will win the French presidency. Merkel will be defeated in the upcoming elections. France and Italy are likely to have a referendum on leaving the EU. The departure of either will end the failed experiment. The insolvent Italian, French and German banks, specifically Deutsche Bank, will collapse in an EU disintegration scenario.
  • The influx of Muslims into Europe is destroying their culture and leading to violence, terrorism, bloodshed, and now retribution. The left wingers have made a dreadful mistake in allowing hordes of Muslims to invade their countries. Their already fraying social welfare states are now completely bankrupt and citizens are afraid to go into the streets for fear of being attacked by members of the religion of peace. With the right gaining power in France, Germany and Italy, the blowback against Muslims will be violent and bloody. European cities will be rocked with violence throughout 2017.
"Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it. It is wise to take admissions of uncertainty seriously, but declarations of high confidence mainly tell you that an individual has constructed a coherent story in his mind, not necessarily that the story is true."  - Daniel Kahneman, Thinking, Fast and Slow
Overconfidence


I think it is pretty obvious my pessimism bias may have skewed my predictions for 2017. I've been pessimistic for the last eight years and the stock market is up 200%. I try to assess the world from a logical fact based frame of mind, but for the last eight years the world has been kept afloat by a combination of debt, delusions and denial.

The Deep State propaganda machine has convinced the masses we are living in normal times, despite the fact the Fed printed $3.5 trillion out of thin air and handed it to the criminal Wall Street banks, interest rates have been kept at or near zero for eight years, revelations from Snowden that we truly live in a surveillance state far exceeding Orwell's dystopian vision, the national debt doubling to $20 trillion, proof that all financial markets are rigged, undeclared wars being waged across the globe, and a reality TV star defeating a criminal to be president of the United States. Sounds pretty normal to me.

My confidence level in my predictions is quite low. But, if one or two of the low probability events comes to fruition, the financial and/or human devastation will make 2008 look like a walk in the park. I don't have an agenda in putting forth these predictions. I'm not selling anything or hawking stocks, bonds, or gold. I don't tout myself as an expert like the over-confident, arrogant pricks on CNBC, CNN, MSNBC, or FOX. I'm just trying to understand what is happening in this crazy universe. We live in an uncertain world. I believe an unbiased appreciation of uncertainty is the cornerstone of rationality and reason. Not acknowledging the role of luck or chance in the course of human events is setting you up for a fall.

Our countries, central banks, financial complex, military industrial complex, sick care complex, global mega-corporations, and government bureaucracies are ruled by men whose hubris, arrogance, greed and hunger for power has warped our world, producing unfathomable ill-gotten profits for the financial class who can abuse justice with impunity while the average man is bullied, pillaged and abused with disregard.

These well dressed, highly educated, sophisticated, soulless barbarians hide their evil deeds behind the trappings of culture, but they are revealed by their grotesque schemes, murderous policies, and war profits soaked in blood. When they lose control of this global Ponzi scheme, I hope they pay the ultimate price for their traitorous deeds. Will it happen in 2017? I don't know. But it will happen before this Fourth Turning climaxes.
"The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort - in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind's willingness to use it." - Strauss & Howe - The Fourth Turning


What Will the Next Four Years Bring?
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podium    

When Donald Trump settles into the Oval Office in mid-January, his administration is expected to roll out policy changes on several fronts: taxes, health care, engaging with Asia, environmental regulation and so forth. While some actions will follow predictable paths, such as the attempt to recast health insurance policy, others will meet obstacles from either market realities or rule-making processes, or bring surprises, such as a new Asia pivot, according to the deans of Wharton, Penn Engineering and Penn Law.

According to Wharton dean Geoffrey Garrett, future U.S. leaders including Trump face two big challenges. One is to “increase growth rate from 2% to north of 3%, back to where it has been historically has been since World War II,” and the other is to ensure that “the benefits of that growth are more widespread.”

Trump’s policies would bring short-run economic gains that could last as much as a decade but end up saddling the government with far too much debt, said Garrett. He noted that stagnant incomes for many Americans over the past 15 years played a big role in Trump’s win. The takeaway from that for the future is to ensure equitable sharing of the gains from economic growth, he added.  

Trump will back a conservative jurist to fill the Supreme Court vacancy created by the death last year of Justice Antonin Scalia, predicted Theodore Ruger, dean of the University of Pennsylvania Law School. He noted that Trump had said that he would make his pick from a shortlist of candidates he released last May. That list includes individuals who were selected by former president George W. Bush and who were confirmed but are currently sitting on the lower federal bench or state Supreme Courts.

“We have a fair degree of certainty that we will have a mainstream – in terms of high pedigree – but very conservative jurist,” said Ruger. “If that’s the only appointment that will be made in the next several years, the key doctrine will not change all that much, because Justice Scalia was already voting in that direction.” But if Trump were to be reelected for a second term, “we might see some real doctrinal shift,” he added, referring to the possibility of three more vacancies that could arise over the next eight years.

According to Penn Engineering dean Vijay Kumar, one area that could see unkind cuts is federal funding for R&D in science and technology. He noted that such funding has been falling steadily even with the 2008 stimulus by President Obama. Further, he pointed out that federal funding for R&D is currently only 0.6% of GDP, a far cry from the 2% during the “Sputnik Era” of the 1950s through the 1970s (so called for the frenetic space research activity triggered by the Soviet Union’s launch of the Sputnik satellite in 1957). Private companies have stepped in to pick up the slack in federal R&D funding to some extent, he added. “[But] I worry about the [funding] for the long moonshot projects that were funded by federal R&D.”

Garrett, Ruger and Kumar shared their perspectives in a panel discussion titled “Predicting the Future: What Will the Next Four Years Bring?” at Penn Engineering on November 30, 2016.

Infrastructure Investments

Trump’s infrastructure investment plans have every chance of becoming reality because “a big infrastructure spend” has bipartisan support, said Garrett. However, he called for careful consideration on three aspects. First, he suggested there should be a balance between public and private sector investments.

Second, Garrett emphasized the need to focus on longer-term productivity gains and not just on job creation in the short-run. While typical infrastructure projects would include roads, bridges, dams and the like, he proposed ventures such as 5G telecom networks or fiber-to-the-home projects that would boost productivity in the long run. Third, he had concerns about how the Trump infrastructure plan would be funded. “The Republicans would like to fund it through tax breaks, but that could become political football,” he said.

Health Care, Immigration Reforms

Trump also will carry out his plan to phase out the 2010 Affordable Care Act (ACA), otherwise known as Obamacare, predicted Ruger, who also teaches health law and pharmaceutical regulation. “If we were to catalog predicted policy changes after mid-January, I expect substantial repeal, reduction and defunding of important parts of the ACA,” he said. He noted that Trump’s pick of Tom Price as the next secretary of the department of health and human services “solidifies” that expectation. A physician and a Congressman from Georgia, Price has been a staunch opponent of the ACA. After a statute is passed to change the ACA, the government might allow a two-year period for people to continue to get health insurance from state exchanges before an alternative system is put in place, predicted Ruger.

According to Ruger, a repeal of the ACA would affect between 10 million and 15 million Americans. Most American workers get their insurance through their employers; an ACA repeal will mostly affect those who are self-employed or work for small firms, others who have preexisting medical conditions or those who earn just enough to not qualify for Medicaid, he explained.

“The rest of the system will keep going, and we will still be dealing with some of the cost control problems that we dealt with before the ACA that the ACA didn’t solve,” said Ruger. As for anticipated changes to the Medicaid program, he expected the Trump Administration to cut back spending, but convert some of that into federal block grants to states, where the latter have discretionary power on where to spend those monies.

On immigration reforms, both Republicans and Democrats agree that the existing H-1B visa program for U.S. companies to hire temporary foreign workers suffers from inequities, said Kumar. Many companies try to game the system and corner as many as possible of the 65,000 H-1B visas the U.S. issues annually to foreign workers, he explained. Trump will take steps to try and level the playing field and prevent manipulation of the visa program, he predicted.

Climate Change and Reality

Trump’s belief that climate change is a hoax will likely run aground when it meets the realities of economics, said Kumar. He offered several data points to make his case: “Electric cars are becoming viable. The cost of batteries is declining by about 12% a year. The cost of solar energy has declined by about 75% in the last five years. The cost of offshore energy has halved over the last three years. The cost of energy generation will be less than the cost of energy distribution, which means we will all produce our own energy.”

The Trump team will face obstacles as it attempts to convert into policy its attacks on the Environmental Protection Agency (EPA) and its regulations. For example, regulations on carbon emissions may change, “but they won’t change quickly,” said Ruger. EPA regulations have been codified and have gone through formal rule-making processes, and they can be undone only with another round of formal rule-making — a process that takes years and one which entails input from the scientific and environmental community, he explained.

Engaging with Asia

Trump has blamed international trade agreements for U.S job losses, but the role of technology is three times as important as globalization in its impact on lower skilled jobs, said Garrett. However, perception scores over reality here, he noted. “You can’t see technology the way you can see a factory in China or an immigrant in a job,” he said. “So it’s harder to rally against technology politically.”

Specifically, Trump has argued that China has taken away U.S. manufacturing jobs, and that the Trans-Pacific Partnership (TPP) that Barack Obama championed would leave the U.S. at a disadvantage. Garrett said he was indeed “very concerned” about how Trump would engage with Asia. “But there is a chance that a Trump presidency would do better things for the U.S. in Asia than would have been possible under Hillary Clinton,” he noted. While the TPP excludes China, “Trump is in a positon now to say that he could do a deal with China that would be good for them and for the U.S.,” he said. He clarified that while he wouldn’t bet on that deal materializing, “there is a greater chance it will happen under Trump than would have been true under Hillary Clinton.”

Understanding Job Losses

The loss of U.S. manufacturing jobs that Trump has vowed to reverse is an inescapable outcome of technology enabling increased productivity, said Kumar. “Manufacturing productivity over the last 30 years has gone up by a factor of two, both as a fraction of the GDP and in terms of the overall value created in society.” However, the number of jobs declined by 33% in those 30 years, he added.

“That means that as technologists we’ve become a lot more efficient. We’ve become ruthlessly efficient in any kind of a production system, whether it is agriculture or manufacturing.”

Agricultural productivity has gone up, too, over the past century, Kumar said. “At the beginning of the last century, every farmer fed three other mouths. At the end of the century, every farmer was feeding 200 other mouths.”

Kumar noted that other jobs, too, are at risk, such as those of paralegals or secretaries, just like those of weavers at the beginning of the industrial revolution. “What is different now, particularly with the advent of data science, network science and artificial intelligence, is that the timescale of these changes is getting smaller and smaller.”

Learning from the Election

Understanding the factors that drove Trump’s victory in the election will inform future policy-making, according to Garrett. Trump won because of a combination of three factors, he said. They include anguish over stagnant incomes; sharper divisions between urban and rural voters and along gender lines; and a stronger showing by voters loyal to Trump while many of those loyal to Clinton stayed away from the polls.

Voters who were expected to vote for Hillary Clinton but who didn’t go to the polls were mostly African Americans in urban areas, said Garrett. It helped Trump that others who were expected to stay away actually went to the polls and voted for him. “These were white Americans living in rural areas, and who happened to live in states that mattered, like Pennsylvania, Wisconsin and Michigan.”

“The cleavages in this election may have been starker than they have been before, but their structural roots have been there for a long time,” Garrett noted. For example, the Democrats haven’t won the white male vote since 1968, and the Republicans haven’t won the female vote since 1988. “That gender divide has been around for a long time,” he said.

In addition, pollsters didn’t factor in sufficiently that many Americans have had stagnant incomes for three decades, said Garrett. Here, he referred to supporting data that Wharton management professor Mauro Guillen had shared with him. It revealed that while real wages for Americans across all segments of the income distribution rose steadily in the 30 years between 1970 and 2000, they had flattened between 2000 and now.

“If you are living in a country in which 80% or 90% of the people have been experiencing flat incomes over a 15-year period, with the post-2008 downturn having an impact there, it’s no surprise that people are frustrated with the status quo,” he said. In fact, that phenomenon of stagnant incomes is true of 80% of the people in the entire western world, he added, citing a McKinsey study.

The takeaway from that last point for future leaders is that “economic growth is unbelievably important, and more inclusive economic growth is at least as important,” he noted.

Tempering Action

Although Trump courts controversy with his utterances, his actions will be tempered by the shared balance of power between the executive branch, Congress and the judiciary, said Ruger.

The framers of the Constitution had put in place a system that keeps presidents in check.

“President-elect Trump comes in to a system that was designed with fears in mind about a single person taking too much power,” he said. He recalled that the framers of the U.S. Constitution such as James Madison and Alexander Hamilton infused a healthy dose of “cynicism and distrust” that helped avoid a concentration of power with the President and shared powers between the executive branch, Congress and the Supreme Court. He also recalled Madison’s famous utterance that “ambition must be made to counteract ambition,” referring to a war of wits between Congress and the executive branch that helps protect the judicial system.

The “blocking effect” the framers of the Constitution wanted will be limited to an extent in a Trump regime where Congress is controlled by the Republicans, said Ruger. But when it comes down to law-making, he pointed out that “there are strong egos in Paul Ryan and Mitch McConnell, who won’t always get along with the Trump White House.” Ryan is currently speaker of the House of Representatives and Mitchell is the Senate majority leader.

Ruger also expected states like California and New York, and cities like Philadelphia, New York City, San Francisco and Los Angeles to use their powers to push for “progressive policy initiatives” in areas including environmental protection, education, technology and health care.

 “Within our pluralistic system with different nodes of governance, opposition and distrust of the central regime can be expressed and indeed is designed to be expressed,” said Ruger.

“Whether you agree with Trump or disagree with him, there will be outlets for all of our voices.”

Ronald Reagan Part II

Garrett dubbed Trump as “Ronald Reagan Part II” for his pledge to cut taxes and increase government spending. He recalled that Reagan in his presidency (1981-1989) kept his campaign promises and cut taxes, increased military spending and scaled back economic regulation. Like Trump, Reagan, too, had said that increased economic growth will take care of the higher federal debt his policies would bring.

“The economy had a smart rebound, and [Reagan] was seen as one of the most successful of U.S. presidents,” Garrett said. “But he left a lot of debt that Bill Clinton had to deal with. He pointed to the Penn Wharton Budget Model, which predicts that Trump’s tax plan will boost the economy in the short run but also increase debt in the long run.

Markets share that short-term optimism, Garrett noted. “That is very positive, but it is not enough, because the two big growth drivers [of the U.S. economy] have been globalization and technology,” he said. “You can’t turn off either of those, and you shouldn’t, but [you can] ensure that more people benefit from these unbelievably powerful forces for change. The challenge is to get more people to benefit from them.”

Education must be a top priority to address those challenges, said Garrett. He pointed to “increasing evidence” that the big challenge in the U.S. today is not the lack of good jobs, but that there are not enough skilled people to take those jobs. For example, an increase in the number of people with coding skills would reduce the supply-demand mismatch for good jobs, he said.

“I would encourage the Trump administration to not only focus on growth, but to focus on growth that will broaden the filter and not narrow the filter of beneficiaries,” said Garrett.

“Think about expanding the pie. Of course, you have to think about how the pie is divided, but everybody is better off [if] the size of the pie [is bigger].”

In order to get there, the emphasis must be on higher education, vocational skills and training, said Garrett. Countries like Sweden, Germany and Norway have adopted that approach to good effect.  “They are small countries and they don’t control markets but react to them by investing in their people  to make them well placed to do well at the leading edge of the economy and not play catch-up,” he said. “Countries like the U.S. have the resources to do that.”


Wall Street's Best Minds

Byron Wien Reveals His ‘10 Surprises of 2017’

Among the strategist’s predictions: Donald Trump will conclude that he’s been wrong about China.

By Byron Wien               
 

Each year I make a practice of reviewing The Ten Surprises of the year that has passed. Last year’s list was on its way to being one of my best and then Donald Trump won the presidential election and everything changed.

Before that, oil was in a downtrend, the Standard & Poor’s 500 was heading toward its January starting point and interest rates were surprisingly low. After the election, investors decided that growth would be boosted by Trump’s plans to lower corporate and individual income taxes; deregulate energy, healthcare and financial services; and offer tax incentives for infrastructure spending. Equities rallied almost every day for two weeks and bond yields moved higher. Even the president-elect could not have expected such a favorable reaction to his victory.

The purpose of The Ten Surprises is to stretch my thinking (and hopefully yours) about what might happen in the coming year. I don’t tamp down the Surprises to get a high hit score.
Every year there are a number of unexpected events that influence the financial markets and 2016 was a good example. Very few expected Trump to be elected. I certainly didn’t. I define a Surprise as an event that the average professional investor would only assign a one in three chance of taking place, but I believe is probable, meaning it has a better than 50% chance of happening during the year. Usually I get five or six of the Surprises more or less right. 

My first 2016 Surprise was that Hillary Clinton would win the presidency against Ted Cruz. I knew the Republicans would pick an outsider, but I thought Donald Trump would prove too extreme and unconventional to be nominated. I underestimated Cruz’s unpopularity with the Republican establishment and Trump’s ability to connect with an electorate yearning for change. He had a clear economic message that resonated with many Americans who felt that Hillary Clinton would not improve the country’s growth.

I also thought the Democrats would take the Senate, but the Republicans retained control. Other than expecting a low voter turnout, there was no part of the First Surprise that I got right.

I did not do any better on the Second Surprise. I thought earnings for U.S. companies would be disappointing because of a profit margin squeeze and the S&P 500 would end the year in negative territory. Moreover, as I expected, worries about global instability did encourage investors to maintain large cash balances and this hurt the performance of many hedge funds.
Profit margins did shrink as a result of a lack of pricing power, modest revenue growth and increased wages. But overall the market shrugged off the bad news and ended the year up by 9.5% on the S&P 500 and 12% with dividends.

Finally, in the Third Surprise, I got one right. I said the Federal Reserve would only raise interest rates once during the year even though they indicated in December 2015 they might raise rates four times. My reasoning was the economy would only be growing at about a 2% pace and be too fragile to endure four rate increases. The Fed’s comments remained cautious all year.

The Fourth Surprise was really hurt by the outcome of the election. I had thought that foreign investors would reduce their holdings of U.S. assets including stocks and the dollar would weaken. While the dollar did show some signs of softness during the year, the Trump victory caused people to believe it would strengthen because of renewed growth in America. So I ended up getting this one wrong also.

At the beginning of 2016 there was considerable concern that China would have a hard landing.
I thought growth might slow in the world’s second largest economy, but overall business activity would still do reasonably well. If the official figures are right, growth was actually stronger than I expected. I also thought the renminbi would decline in value to seven to the dollar and it was approaching that level at year-end. So I got this Surprise essentially right.

I continued to believe that the refugee crisis would destabilize Europe. Certainly concern about immigrants played a major role in the June 23rd referendum in the United Kingdom resulting in Britain’s decision to leave the European Union. Refugee issues also influenced the primaries in France, indicating a shift to the right. The European Union ended the year in a somewhat weakened position, which was the thrust of this Surprise.

The seventh Surprise said that oil would languish in the $30s. Languishing in the $40s would have been a better call. I was worried about additional production from Iran and Iraq as well as the drawdown of the huge inventories in place at the beginning of 2016. I also thought OPEC would find doing a deal to limit production to be hard. While I got several of the concepts influencing the price of oil correct, the actual price was more than $10 higher than my estimate.

I did get the eighth Surprise right. I thought high-end real estate in both New York and London would soften and that did happen. In New York, the major factor was an abundance of supply, while in London the Brexit vote cast doubt about that city’s role as the financial center of Europe. The Trump victory may renew interest in high-end New York real estate, but at this point that isn’t clear.

I was expecting interest rates to stay low in the Ninth Surprise and they did. Even though the yield on the 10-year U.S. Treasury shot up 50 basis points after the election, it still stayed below the 2.5% target in my Surprise. I believe there is a surplus of liquidity throughout the world, keeping interest rates from rising meaningfully above present levels. Investors are willing to endure negative rates in Europe and Japan, and that is restraining the rise in yields in the United States.

Finally, I expected world GDP growth to approximate 2% in 2016. At the beginning of the year, estimates from various institutions monitoring world growth were closer to 3%. With the U.S. growing at 2%, China at 5%–6%, and Japan at 1%, I didn’t believe the emerging markets (showing sluggish economic behavior in many cases) would boost world growth much above 2%. Given that actual GDP growth in 2016 is coming in a little over 2%, I put this one in the “right” column.

A number of people provide ideas for The Ten Surprises. George Soros has shared his insights for more than 30 years. (This is the 32nd edition of the Surprises.) My Third Thursday group of former research directors has also been consistently helpful over that time span. Gideon Rose and Jonathan Tepperman of Foreign Affairs at the Council on Foreign Relations discuss the surprise possibilities with me each year. Countless friends and associates give me their thoughts. In the end the Surprises are my own and I am accountable for them.

My Radical Allocation Portfolio was positioned somewhat defensively, so I thought it was in reasonable shape in case the financial markets reacted badly to a Hillary Clinton victory in the Presidential election. As it turned out, Donald Trump won and equity markets responded favorably. Given that the Radical Asset Allocation was essentially “all equity,” it did well. I believe asset allocations should be shifted gradually. I am reducing Hedge Funds and Fixed Income by 5% each and adding 5% to “Other U.S.” and 5% to Japan to start 2017.

Now here are The Ten Surprises of 2017. I will discuss them in detail in my February essay.

1. Still brooding about his loss of the popular vote, Donald Trump vows to win over those who oppose him by 2020. He moves away from his more extreme positions on virtually all issues to the dismay of some right wing loyalists. He insists, “The voters elected me, not some ideology.”
His unilateral actions throw policy staffers throughout the government into turmoil. Virtually all of the treaties and agreements he vowed to tear up on his first day in office are modified, not trashed. His wastebasket remains empty.

2. The combination of tax cuts on corporations and individuals, more constructive trade agreements, dismantling regulation of financial and energy companies, and infrastructure tax incentives pushes the 2017 real growth rate above 3% for the U.S. economy. Productivity improves for the first time since 2014.

3. The Standard & Poor’s 500 operating earnings are $130 in 2017 and the index rises to 2500 as investors become convinced the U.S. economy is back on a long-term growth path. Fears about a ballooning budget deficit are kept in the background. Will dynamic scoring reducing the budget deficit actually kick in?

4. Macro investors make a killing on currency fluctuations. The Japanese yen goes to 130 against the dollar, stimulating exports there. As Brexit moves closer, the British pound declines to 1.10 against the dollar, causing a surge in tourism and speculation in real estate. The euro drops below par against the dollar.

5. Increased economic growth, inflation moving toward 3%, and renewed demand for capital push interest rates higher across the board. The 10-year U.S. Treasury yield approaches 4%.

6. Populism spreads over Europe affecting the elections in France and Germany. Angela Merkel loses the vote in October. Across Europe the electorate questions the usefulness of the European Union and, by the end of the year, plans are actively discussed to close it down, abandon the euro and return to their national currencies.

7. Reducing regulations in the energy industry leads to a surge in production in the United States. Iran and Iraq also step up their output. The increased supply keeps the price of West Texas Intermediate below $60 for most of the year in spite of increased world demand.

8. Donald Trump realizes he has been all wrong about China. Its currency is overvalued, not undervalued, and depreciates to eight to the dollar. Its economy flourishes on consumer spending on goods produced at home and greater exports. Trump avoids punitive tariffs to prevent a trade war and develops a more cooperative relationship with the world’s second largest economy.

9. Benefiting from stronger growth in China and the United States, real growth in Japan exceeds 2% for the first time in decades and its stock market leads other developed countries in appreciation for the year.

10. The Middle East cools down. Donald Trump and his Secretary of State Rex Tillerson, working with Vladimir Putin, finally negotiate a lasting ceasefire in Syria. ISIS diminishes significantly as a Middle East threat. Bashar al-Assad remains in power.
 
ALSO RANS
 
Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are “probable.”

11. Having grown weary of Washington after a year in the presidency, Donald Trump moves the White House to New York from April to December and to Palm Beach from January to March. He makes day trips to the Capitol on Air Force One for legislative and diplomatic purposes.

12. The Democratic Party is sharply divided on strategy, with Bernie Sanders and Elizabeth Warren arguing for a shift to the left and others wanting to remain in the center. A lack of leadership gives rise to widespread speculation about sharp losses in the 2018 congressional elections.

13. Donald Trump’s intimidation tactics prove effective in discouraging companies from moving some U.S. manufacturing abroad, but he fails to bring jobs back. The wage differential is just too great. This becomes his biggest first-year disappointment.

14. Trump’s first major international confrontation comes, not unexpectedly, from North Korea. Kim Jong-un threatens to set off a nuclear bomb in the mid-Pacific, calling it “a test.” Trump’s advisors try to restrain his desire to punish the country severely.

15. India comes back into the investment limelight. Its economy grows at 7% and corporate profits for established companies are strong. Its stock market leads other large emerging countries, along with China.

16. Trump’s efforts to get out of the Iran deal fail. The other countries signing the agreement believe Iran’s weapons-grade nuclear production has been restrained and force the U.S. to remain a participant.


Wien is vice chairman of Blackstone Advisory Partners, a subsidiary of the Blackstone Group.


Thinking About a US-China War, Part 2

Sanctions and blockades as an alternative to armed conflict would lead to armed conflicto.

By George Friedman


Read part 1 here.


China has a key geopolitical imperative. It depends on exports to sustain its economy. Most of those exports are shipped by sea, and therefore access to the world market begins at its eastern coastal ports. Geography poses a problem for the Chinese. Shipments from the country’s east coast ports, both south and north of the Taiwan Straits, must transit through a string of islands. Some are large islands, while others are extremely small. But they form a string of choke points through which Chinese maritime trade must pass.

Choke points are normally geographic realities important to navigators but no one else. But they also create a potential vulnerability for China. The existence of choke points, however many, makes the movement of Chinese vessels predictable. More importantly, given a sufficient air-sea force, blocking those points can block Chinese exports and cripple the Chinese economy.
 
China navy
A Jan. 2, 2017 photo shows a Chinese navy formation, including the aircraft carrier Liaoning, center, during military drills in the South China Sea. STR/AFP/Getty Images
 


The Chinese see the United States in three ways. First, the U.S. has an extremely powerful Navy. Second, the U.S. is highly unpredictable in how it responds to challenges. The Chinese saw this unpredictability in Korea, Vietnam, Kosovo, Operation Desert Storm, Iraq and so on. At times, the U.S. does not respond. Other times it over-reacts, from the Chinese point of view. Third, the U.S. prefers economic sanctions that at times include physically blocking the trade of a given country.

Given these three facts about China’s potential adversary, China finds itself in an extremely difficult position. It cannot match American naval power. It cannot predict what the U.S. will do. To the extent that the U.S. might choose, sanctions that include interference with Chinese trade are the most likely opening move. Therefore, the geography of the Western Pacific archipelago poses a potential threat to core Chinese national interests.

There are many passages from China’s east coast into the Pacific. The American task would be to create sustained interdiction of all passages without exposing U.S. vessels to excessive risk. The likely strategy would be to place about five carrier battle groups east and south of the archipelago. The vessels would be located as far east as possible to assure interception before the maritime vessels reach high seas. They would be close enough to be within reach of air and sea anti-ship missiles, and close enough that carrier-based aircraft could have overlapping patrol zones without having to refuel. Submarines would also be used.

The Chinese counter to this deployment would be primarily land-based anti-ship missiles. With so much American sea power backed by land-based strategic aircraft from Guam, Chinese ships would find it dangerous to sortie. Having anticipated this, the Chinese would try to strike at the blockade with anti-ship missiles. The problem with using anti-ship missiles is that while they have terminal guidance systems, they require some general targeting information. That would come from signal intelligence, satellites or longer-range drones. Chinese aircraft patrolling east of the archipelago would face both fighters and American missiles. The U.S. likely has anti-satellite capability. But I would assume that both American and Chinese satellites have defensive systems, from the ability to maneuver to deploying ball bearings in an attacker’s path. While it would be useful for the Chinese to blind American satellites, it would be essential for the Americans to do so. That would be difficult, but the real threat would be Chinese high-altitude drones locating American carrier battle groups. The Chinese would then deliver saturation attacks to overwhelm U.S. fleet anti-missile defenses. The U.S. would try to shoot down the drones or render them mute through electronic warfare.

 
 
The Chinese have been pushing toward this point. They cannot tolerate a blockade and cannot engage in full-fleet action against the Americans. The construction of extensive anti-ship systems coupled with multiple types of sensors is the key. Therefore, if the U.S. wants to carry out a blockade, it would need an extensive air operation to destroy Chinese anti-missile capabilities. And that must be preceded by massive suppression of air defense.

Note that as with the Chinese invasion of Taiwan, what appears to be a simple problem spins out of control. The U.S. can’t be certain it would not be detected and would have to attack the Chinese mainland. Even then it would be unlikely to destroy all Chinese missiles, and Chinese command and control is undoubtedly redundant. The possibility of significant U.S. losses can’t be discounted. That would mean that the use of sanctions and blockades as an alternative to armed conflict would lead to armed conflict.

The Chinese have not, however, fully solved their problem. Even if they drive everyone out of the East and South China seas, which isn’t likely, they are still enclosed by the archipelago. They know the U.S. is unpredictable and therefore can’t assume that the U.S. is reading the battle problem as they are. The Chinese are not facing imminent crisis, but they must have a long-term goal of taking control of the choke points and basing in such a way as to push the U.S. Navy back into the central Pacific.

Attack by main force is not an option. There are too many choke points, and the American response is too unpredictable. The ideal solution is political. This works one of two ways. The first is to reach an agreement with a major country that controls key choke points to allow passage and a Chinese naval presence. Aside from Taiwan, the country that would be valuable in this regard is the Philippines. As long as the Taiwan Straits are open, the Philippines could serve as an exit point. You might note the behavior of the Filipino president of late.

The second option would be to create insurgencies to destabilize one or more countries. This is far less efficient than a political shift, but the Chinese have been quite good in the past with supporting insurgencies, while the U.S. is not at all good at counterinsurgency. It would not provide a satisfactory solution to the Chinese in any reasonable time frame.

The point I am making here and in yesterday’s analysis is that any discussion of war between the U.S. and China overestimates either the Chinese capability or the American capability. The Chinese would not be able to take Taiwan. There are too many failure points. The U.S. could blockade China if it was prepared to accept losses. The U.S. is risk averse, and minimizing threats would mean a far larger war than merely a naval picket line.

Each action by either side faces a counter that opens the door not only to failure but also to losing forces neither side can afford to lose. The only practical way to force a change in the balance of power in the region is a shift in alliances by one of the countries, and the Philippines is the one to watch.