How we lost America to greed and envy

The US president is hostile to the core values the country used to stand for

Martin Wolf



Who lost China? This cry went up in the US after Mao Zedong’s victory in China’s civil war in 1949. It was a strange question. When did the US own China? Strange or not, this cry helped Republicans win power in 1952. It promoted the rise of Joseph McCarthy, whose politics had similarities to those of Donald Trump — above all, in the charge that traitors infest the US government. In the senator’s case, the target was the state department; for Mr Trump, it is the FBI. The question today is: who lost America? And is it lost for good?

Nobody of course owns the US, apart from Americans. Yet, for westerners and many others, the US stood for something so attractive that it seemed to be “ours” — the guarantor not just of its own freedom and prosperity, but that of hundreds of millions of others. My father, a refugee to the UK from pre-second-world-war Austria, had no doubt. The US was the bastion of democracy. It had saved Europe from falling to Nazi or communist dictatorships. As a journalist and documentary film-maker, he knew about its mistakes. But the US was not just any great power. It embodied the causes of democracy, freedom and the rule of law. This made him fiercely pro-American. I inherited this attitude.




In the postwar world, US policy had four attractive features: it had appealing core values; it was loyal to allies who shared those values; it believed in open and competitive markets; and it underpinned those markets with institutionalised rules. This system was always incomplete and imperfect. But it was a highly original and attractive approach to the business of running the world. For those who believe humanity must transcend its petty differences, these principles were a start.

Yet today the US president appears hostile to core American values of democracy, freedom and the rule of law; he feels no loyalty to allies; he rejects open markets; and he despises international institutions. He believes that might makes right. The Chinese president Xi Jinping and Russian president Vladimir Putin have might. He admires them. German chancellor Angela Merkel and UK prime minister Theresa May are decent women trying to lead democracies. He abuses them.



So why is Mr Trump in power? The answer lies with a political failure that the US might be unable to overcome. Mr Trump’s accession to power is partly an accident, but not only an accident.

The rise of China and the unanticipated impact of globalisation have profoundly affected the US view of itself and its global role. An anxiety that spreads from left to right has replaced the hubristic euphoria of the post-cold-war “unipolar moment”. The US no longer sees itself as so dominant and the world as so friendly. Mr Trump may be an outspoken protectionist. But Hillary Clinton was no defender of liberal trade. Mr Trump’s view that the rest of the world has taken the US for a ride is widely shared. In a country that has succumbed to protectionist ideas, it is not so surprising that the protectionist won. Again, once anxiety over China arrived, a nationalist was a natural choice.



Yet something still more important is happening. The striking feature of the US economy is that, despite its unique virtues, it has recently served the majority of its people so ill. The distribution of income is exceptionally unequal. Labour force participation rates of prime-aged adults are exceptionally low. Real median household disposable incomes are the same as they were two decades ago, while mean incomes are much higher. Uniquely, mortality rates of middle-aged white (non-Hispanic) adults have risen since 2000 in the US.

Mr Trump loves to tweet his shock over every high-profile terrorist outrage in Europe. But, in 2016, there were just 5,000 murders in the EU, a rate of one per 100,000 people (including terrorist attacks). There were 17,250 murders in the US, a rate five times greater. Mr Trump might start to worry about that.



The poor state of so many Americans is in part the product of plutocratic politics: a relentless and systematic devotion to the interests of the very rich. As I have argued before, a politics of low taxes, low social spending and high inequality is sustainable in a universal suffrage democracy only with a mixture of propaganda in favour of “trickle down” economics, splitting the less well off on cultural and racial lines, ruthless gerrymandering and outright voter suppression. All this has indeed happened.

These are the politics of “pluto-populism” or of “greed and grievance”. They have been stunningly successful in making Republicans attractive to many in the white working class. The structural biases in voting are also remarkable. In the past three elections for the House of Representatives, it took 20 per cent more voters for the Democrats to win a seat than for the Republicans, on average. Republicans have also won the presidency twice in the last two decades despite losing the popular vote.



Mr Trump is the logical outcome of a politics that serves the interests of the plutocracy. He gives the rich what they desire, while offering the nationalism and protectionism wanted by the Republican base. It is a brilliant (albeit unplanned) combination, embodied in a charismatic personality that offers validation to his most passionate supporters. Will Trump’s protectionism do many in his base any good? No. But, in their eyes, he is a real leader, at last.

Who lost “our” America? The American elite, especially the Republican elite. Mr Trump is the price of tax cuts for billionaires. They sowed the wind; the world is reaping the whirlwind.

Should we expect the old America back? Not until someone finds a more politically successful way of meeting the needs and anxieties of ordinary people.


Trump May Kill the Global Recovery

Nouriel Roubini




NEW YORK – How does the current global economic outlook compare to that of a year ago? In 2017, the world economy was undergoing a synchronized expansion, with growth accelerating in both advanced economies and emerging markets. Moreover, despite stronger growth, inflation was tame – if not falling – even in economies like the United States, where goods and labor markets were tightening.

Stronger growth with inflation still below target allowed unconventional monetary policies either to remain in full force, as in the eurozone and Japan, or to be rolled back very gradually, as in the US. The combination of strong growth, low inflation, and easy money implied that market volatility was low. And with the yields on government bonds also very low, investors’ animal spirits were running high, boosting the price of many risky assets.

While US and global equities were delivering high returns, political and geopolitical risks were kept largely under control. Markets gave US President Donald Trump the benefit of the doubt during his first year in office; and investors celebrated his tax cuts and deregulatory policies. Many commentators even argued that the decade of the “new mediocre” and “secular stagnation” was giving way to a new “goldilocks” phase of steady, stronger growth.

Fast-forward to 2018, and the picture looks very different. Though the world economy is still experiencing a lukewarm expansion, growth is no longer synchronized. Economic growth in the eurozone, the United Kingdom, Japan, and a number of fragile emerging markets is slowing. And while the US and Chinese economies are still expanding, the former is being driven by unsustainable fiscal stimulus.

Worse still, the significant share of global growth driven by “Chimerica” (China and America) is now being threatened by an escalating trade war. The Trump administration has imposed import tariffs on steel, aluminum, and a wide range of Chinese goods (with many more to come), and it is considering additional levies on automobiles from Europe and the rest of the world. And currently the renegotiation of NAFTA is stalled. Thus, the risk of a full-scale trade war is rising.

Meanwhile, with the US economy near full employment, fiscal-stimulus policies, together with rising oil and commodity prices, are stoking domestic inflation. As a result, the US Federal Reserve must raise interest rates faster than expected, while also unwinding its balance sheet.

And, unlike in 2017, the US dollar is now strengthening, which will lead to an even larger US trade deficit and more protectionist policies as Trump, assuming he remains true to form, blames other countries.

At the same time, the prospect of higher inflation has led even the European Central Bank to consider gradually ending unconventional monetary policies, implying less monetary accommodation at the global level. The combination of a stronger dollar, higher interest rates, and less liquidity does not bode well for emerging markets.

Likewise, slower growth, higher inflation, and less monetary-policy accommodation will temper investor sentiment as financial conditions tighten and volatility increases. Despite strong corporate earnings – which have been goosed by the US tax cuts – US and global equity markets have drifted sideways in recent months. Since February, equity markets have been buffeted by fears of rising inflation and import tariffs, and by the backlash against big tech.

There are also growing concerns over emerging markets such as Turkey, Argentina, Brazil, and Mexico, and over the threat posed by populist governments in Italy and other European countries.

The danger now is that a negative feedback loop between economies and markets will take hold. The slowdown in some economies could lead to even tighter financial conditions in equity, bond, and credit markets, which could further limit growth.

Since 2010, economic slowdowns, risk-off episodes, and market corrections have heightened the risks of stag-deflation (slow growth and low inflation); but major central banks came to the rescue with unconventional monetary policies as both growth and inflation were falling. Yet for the first time in a decade, the biggest risks are now stagflationary (slower growth and higher inflation). These risks include the negative supply shock that could come from a trade war; higher oil prices, owing to politically motivated supply constraints; and inflationary domestic policies in the US.

Thus, unlike the short risk-off periods in 2015 and 2016, which lasted just two months, investors have now been in risk-off mode since February, and markets are still moving sideways or downward. But this time the Fed and other central banks are starting or continuing to tighten monetary policies, and, with inflation rising, cannot come to the markets’ rescue this time.

Another big difference in 2018 is that Trump’s policies are creating further uncertainty. In addition to launching a trade war, Trump is also actively undermining the global economic and geostrategic order that the US created after World War II.

Moreover, while the Trump administration’s modest growth-boosting policies are already behind us, the effects of policies that could hamper growth have yet to be fully felt. Trump’s favored fiscal and trade policies will crowd out private investment, reduce foreign direct investment in the US, and produce larger external deficits. His draconian approach to immigration will diminish the supply of labor needed to support an aging society. His environmental policies will make it harder for the US to compete in the green economy of the future. And his bullying of the private sector will make firms hesitant to hire or invest in the US.

Over time, growth-enhancing US policies will be swamped by growth-reducing measures. Even if the US economy exceeds potential growth over the next year, the effects of fiscal stimulus will fade by the second half of 2019, and the Fed will overshoot its long-term equilibrium policy rate as it tries to control inflation; thus, achieving a soft landing will become harder. By then, and with protectionism rising, frothy global markets will probably have become even bumpier, owing to the serious risk of a growth stall – or even a downturn – in 2020. With the era of low volatility now behind us, it would seem that the current risk-off era is here to stay.


Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.


Global Shipping Is Collateral Damage in the Coming Trade Wars

Yet the industry has proved highly adaptable in past crises.

By Allison Fedirka


With all the attention paid to the goods and services targeted in the trade war between the United States and China, it’s easy to overlook the damage the conflict will inflict on the transportation industries that facilitate trade – namely, global shipping. Maritime shipping is especially vulnerable, considering some 80 percent of all world trade is transacted by sea, so it is little wonder that companies have already begun to prepare. And the ways they do so will tell us a lot about how the trade wars are changing global trade patterns.

The shipping industry is, notably, already accustomed to change. Volatility is practically baked into its business model. The price of fuel – which currently accounts for roughly 15 percent of operating costs – is constantly in flux, formed by dozens of factors beyond shippers’ control. Wars and blockades can impede access of cargo ships. Overcapacity is an endemic (albeit cyclical) problem, to say nothing of the normal ups and downs of any business environment. In other words, the only constant is unpredictability, and the industry has always had to reinvent itself accordingly.

Well, “always.” Seaborne trade is nearly as old as trade itself, of course, but global shipping as we know it today didn’t really take off until the 1960s, when companies around the world standardized the industry. Once shipping containers and equipment were uniform, shipping boomed. But as is so often the case, the boom created a bubble, and the bubble burst. Companies responded by creating large conglomerates, but while the physical infrastructure of the industry had been standardized, rates had not, and each tried to exploit discrepancies to their advantage. Surveying the damage done, shippers finally harmonized container rates.

More booms and busts would follow, the most notable of which came in 1973, just a few years after the debacle of the 1960s. That year, Arab oil exporters famously enacted their embargo, driving the price of oil skyward. High oil prices dramatically raised the cost of fueling cargo ships, and by 1975 maritime trade had dropped by 6 percent, the first decline the world has seen since World War II.

The industry adapted to less dramatic shocks to the system too. In the 1980s, it adopted the “just in time” method of production, which prioritized efficiency and timing in production systems. More recently, around 2008, the industry responded to slowed growth by deploying larger ships and by restructuring its very constitution through mergers and acquisitions. Currently there are three main shipping alliances that control just over 90 percent of the global shipping market. (In the past two months, each of these alliances has cut the number of service lines between the U.S. and China.)

The coming trade wars, then, were always going to be difficult for shipping companies to navigate, but the situation is compounded by poor timing. The 2008 global financial crisis gave way to an industry crisis from which shippers are only starting recover. In the mid-2000s, maritime transport companies began to prioritize capacity per vessel. The planned expansion of the Panama Canal and rising oil prices compelled companies to build larger-capacity ships that could more efficiently move cargo. From 2005 to 2015, the total capacity of containerships increased from 8,000 twenty-foot equivalent units – the overwrought measurement of cargo capacity, mercifully abbreviated as TEUs – to 20,000 TEUs. Companies started construction early, knowing that it would take some time to build bigger ships. Capacity increased, but global demand for goods, which had slowed in 2008, couldn’t keep up.
     


 
Overcapacity depressed freight rates. Historically, the annual growth rate for shipping by volume is about 3 percent. Since 2015, that figure has been just 1.8 percent. It’s little wonder that, on the whole, the revenue of the world’s major shipping companies either stagnated or declined from 2010 to 2016. They recovered somewhat in 2017, netting roughly the same as they did before the crisis, roughly $210 billion. But in the first quarter of 2018, only three of the top 15 shipping companies posted profits. (Even then, their margins were only about 1 or 2 percent.)

Yet industry experts are relatively optimistic about the future. Drewry, a leading maritime research consultancy based in the United Kingdom, created a (highly unlikely) scenario in which the U.S. placed tariffs on $450 billion worth of Chinese goods. The study concluded that, assuming China reciprocates, the trade war would affect only 1 percent of total global shipping and imperil 7 percent of U.S.-bound cargo from Asia. In terms of tonnage, the U.S. tariffs on China would affect 200,000 TEUs but could climb to 1.8 million TEUs in due time.

Any industry that turns a profit from moving goods from one place to another will balk at the prospect of protectionism. Global shipping is no different. But it’s not as if the trade war will destroy the industry. It’ll just adapt to its environment, much like it always has, traversing new routes to and from new countries that some government is buying from now that markets elsewhere have been cut off. In that sense, it’s a useful tool for analysts looking for the trend that has not yet emerged from the trade wars.


The President Turns the Tables on China

He imitates Beijing’s mercurial approach to negotiation.

By Jeff Moon

Commerce Secretary Wilbur Ross chats with Chinese Vice Premier Liu He in Beijing, June 3
Commerce Secretary Wilbur Ross chats with Chinese Vice Premier Liu He in Beijing, June 3 Photo: Andy Wong/Associated Press 


An overlooked irony of the American trade dispute with China is that Donald Trump is the first U.S. president to fight back using Chinese tactics. This time, it’s the Chinese officials who are frustrated over the lack of clarity in demands, the sudden changes in negotiating positions, and the unpredictable escalation of tensions.

Usually it’s the other way around, as U.S. negotiators in government and business can attest. Chinese officials often blame the foreign counterpart for any number of problems. The foreigners then have a duty, according to the Chinese, to make things right. An old proverb often cited is that a man who drops a stone on his own foot must take responsibility for picking it up. 
But instead of specifying the terms for a resolution, the Chinese officials wait for foreign concessions. When the proposal arrives, the Chinese reject it as inadequate, forcing the foreigners to negotiate against themselves, offering more in each successive round. In the end, the foreigners are relieved when the struggle concludes, but they regret settling on terms much less favorable than they had planned. A 1995 Rand Corp. study traced these techniques to 1971, when Premier Zhou Enlai reportedly blamed tensions over Taiwan on the U.S. as he pressed Henry Kissinger for favorable terms normalizing U.S.-China relations.

This Chinese approach is maddening enough for governments. Foreign businessmen are more vulnerable yet, because Beijing has total leverage over the future of their Chinese enterprises. Businessmen have no choice but to play China’s game, which commonly begins with investigations into misdeeds. Otherwise, their companies may fail regulatory reviews or lose their approval to operate. There are different versions of the game, but aggressive pressure for concessions—sometimes including the transfer of foreign technology—is a constant.



Unwittingly, Mr. Trump is turning China’s tried-and-true approach against it. He accuses Beijing of “ripping off” the U.S. and says longstanding Chinese policies are to blame for today’s trade tensions. His rhetoric addresses three U.S. interests: cutting the U.S. trade deficit with China, opening China’s market further to foreign businesses, and easing industrial policies such as the China 2025 plan, the stated goal of which is to exclude foreign technology vendors and then dominate global markets.

But Mr. Trump has never specified exactly what he wants or whom he has granted the authority to make a deal. He has shifted to China the responsibility to make things right. In response, Beijing has indicated flexibility regarding opening new sectors to foreign companies and importing more U.S. goods to reduce the trade deficit. To date, President Trump seems to have rejected these proposals as insufficient.

The Chinese clearly want to reach an agreement, but they remain confused about how to proceed. They may have to sweeten their offers and have even consulted Mr. Kissinger and other luminaries for negotiating advice. In the meantime, the Chinese have responded defensively to Mr. Trump’s tariffs with their own tariffs of equal amounts.

Mr. Trump’s negotiating style is bombastic, volatile and reckless. Its success remains very much in doubt, since the situation is difficult to read. But at least the Chinese government is learning an old American saying: What goes around comes around. 
 
Mr. Moon is a former assistant U.S. trade representative for China.




New Age Fiscal Stimulus Is Unprecedented — And Ominous

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In a normal business cycle, the economy expands for a while and businesses hire lots of new people at somewhat higher wages, generating enough tax revenue to shrink the government’s budget deficit – and in rare cases produce a surplus. So, for a while, the government borrows less money.

Not this time. The current recovery is nearly ten years old and the labor market is so tight that desperate companies are trying all kinds of new tricks to attract workers – including higher wages.

Yet the US just announced its intention to borrow $1.3 trillion in this fiscal year, the most since the depths of the Great Recession.

And this isn’t a one-shot deal. Trillion-dollar deficits are now projected for as far as the eye can see:

US projected budget deficts new age fiscal


What does this mean? The US has decided that since we’ve borrowed a lot of money in the past and are still here, debt must not matter. Voters don’t care, the markets don’t care, so why not spend money we don’t have on cool stuff in the here-and-now. A new generation of super-weapons? Sure.

A wall across 3,000 miles of southern border, check. Tax cuts for people who already more than they’re able to spend? Why not?

But here’s the problem – or the short-term one, anyhow: Using debt to push an expansion beyond its natural lifetime (this one is approaching the longest ever) makes the imbalances that normally end expansions much, much worse. The aforementioned labor shortage, for instance, will only become more extreme if the economy keeps growing. Interest rates, already rising, will keep going up.

10-year Treasury note yield new age fiscal

So think of the current bout of late-cycle New Age fiscal stimulus as an experiment in the style of QE and ZIRP. That is, something that hasn’t been done in the past but – given the alternatives – seems like the least risky option.
 
And as with QE, the US isn’t alone. Japan has given up trying to balance its budget and is now looking for new things to buy with fresh-off-the-press yen. China, faced with a manufacturing slowdown and incipient trade war, is “going for growth” via a domestic infrastructure program – after a decade of the biggest infrastructure build-out in world history.

It’s useful to note that even Keynesianism, generally the most debt-friendly (or debt-oblivious) school of economic thought, views deficit spending as a cyclical stabilizer. That is, in bad times governments should borrow and spend to keep the economy growing while in good times governments should scale back borrowing – and ideally run surpluses – to keep things from overheating.

But now we seem to have turned that logic on its head, with fiscal stimulus ramping up in the best of times, when unemployment is low, stock prices high and inflation stirring. New Age fiscal policy seems to call for continuous and growing deficits pretty much forever.

New Age vs Keynesian fiscal policy  new age fiscal

As I said, unprecedented and definitely ominous.