Economics Without The B.S.**:
[** Double entendre intended.]
This is a post from the government's trade rep, as it appeared as an op ed in the NY Times.
U.S. Trade Ambassador Jamieson Greer: Why We Remade the Global Order
I agree with the criticism of how the "Old Order" trade system worked against the U.S., but I disagree with using tariffs to re-align the broken system. The Trump Administration agrument is always about what foreingers -- our allies -- have done to us. My argument would be what we did to ourselves, by not fighting back and using fiscal measures of stimulus/incentives to protect specific industries affected by the unfair trade practices we faced or by using specific disincentives against the specific industries of specific countries.
With respect to the argument that our trading partners and adversaries took advantage of us, which is the argument that you most often hear from Trump and his officials, I would offer this; just because a nation, and take China as an example, builds and subsidizes factories for exporting, and especially for the U.S. market, doesn’t mean the U.S. is forced to then make itself the importer of such goods. We made a decision ourselves to be the importer of these so-called cheap goods. All you have to do is go back and listen to economists like Milton Friedman make this argument. It was criticized then, just like today; and that opinion was ignored. We could have enacted specific policies to punish specific nations who engaged in this type of trade practice, but chose not to.
The problem with Trump's tariffs is that they are going to affect a broad base of Americans as consumers, and that should be inflationary in nature. That inflationary pressure can be offset if we raised our productivity (output per hour; not just GDP) substantially; but I don't see this administration inacting enough broadbased incentives to do that. That effort is being left up to our private sector to shift for themselves; so maybe it will work, maybe it won't. In time we will see, you cannot hide the affect of tariffs.
And just to note: When I say (in the first paragraph) that we did it to ourselves I am saying this is a result of economic policies we put into effect which worked against our industrial base. This started under President Reagan and continued under President Clinton during the implementation of globalization policies. [You can look below for the graph of the change in our Balance of Trade.]
I think the Black Friday stock market crash in 1987 – the worst percentage drop in the market in our history – resulted from some of these policy changes. Changes that affected our currency value and the U.S. position as the dominant currency internationally.
These policy changes, in my view, reflected the battle between the economic forces in our society. And especially during the Clinton Administration, reflected what is called the financialization of our economy – where our financial sector will have a more prominent influence in the political power struggle between different sectors of our economy. And I think the Financial Crisis of 2008 really highlighted just how influential the financial sector was in the manner they were bailed out – because that sector, so we have been told repeatedly, represented a systemic risk to the whole economy/society – while the rest of our society had to shift for themselves.
This battle of economic forces is reflected in the growing inequality in our society that manifests itself in how wealth is generated. In the 1960s, when we had the best peacetime performing economy in our history, with a shrinking gap for income and wealth inequality, basically an industrial economy where the different sectors benefited from each other’s improvements, not without issues that resulted in social conflicts, wealth – the value of your assets – and income – derived from the performance of the economy – were closely linked. But by the 1980s, and especially by the 1990s, that linkage was showing signs of deterioration, and the gap in both wealth and income inequality were also spreading apart.
With globalization, the wealthy elite had sources of wealth and income increasingly tied to financial transactions that did not always have a benefit to the broader good of the society. And that was what was revealed during the Financial Crisis of 2008, when a $600 trillion derivatives market (by notional value of the underlying assets) with maybe $60 trillion of that in play and directly related to the mortgage housing market in the United States – and really just a few states, like California, Arizona, Florida, Nevada, and Georgia where the mortgage underwriting was speculative – where the total mortgages outstanding were no more than $10 trillion, so that a slight movement in price on the derivative contract could result in wild swings of profit, or in the case of 2008, great losses. The Crisis showed you did not need a derivative market that large to support the funding of mortgages, and thus a “casino analogy” was applied to this type of economic activity that only the wealthy could play; and had to be bailed out to prevent the whole international financial system from collapsing when the casino crashed and the financial liquidity needed for all financial transactions to flourish was internationally frozen.
So it depends on if you see a problem with the way wealth – the value of assets – is generated in relation to income; with wealth increasing at a greater rate than the economic growth rate which reflects people’s income and not their asset holdings. And as I have said in previous posts, our annual economic growth rates for the past twenty-five years – since 2001 – have been well under 30% of our historic average. And that has a cumulative effect because the growth rates are compounded growth rates, each succeeding year builds on the previous year. Where our present GDP is around $30 trillion, it could have been between $40 trillion and $50 trillion if we had just average growth rates, they wouldn’t have even had to be better than average.
The globalization policies implemented in the 1990s opened up the international economies to the free flow of capital; and at that time the United States was experienceing an international wealthy elite who could take advantage of these new circumstances. And our Wall Street firms were consolidating, and as financial intermediaries they have no real counterparties, so they were in a unique and competitive position to take advantage of the "New Order" shaping the international community. And they have been exerting their political influence to push their economic and business agenda.
And the Trump Administration -- their policies -- are not fixing any of this. Ambassador Jamieson Greer mentions the agreements they have already worked out to the tune of hundreds of billions of dollars in foreign investments coming into the United States; but the total foreign investment in the United States is over $60 trillion. We have never had a problem in attracting foreign investors. And you don’t know if this figure he is floating around is new investments that never would have been made otherwise, or if the foreign countries are just outwitting the administration with investments they intended to make anyway.
And President Trump, who rode into the White House on a populist backlash, is oblivious to this. None of this – the use of tariffs to bring manufacturing back to the U.S.; the use of tariffs to increase revenues and reduce the national debt burden; the use of tariffs as a bargaining weapon to bludgeon your opposition – is reflected in the remaking of the “Global Order”.
This is the Net International Position: Total U.S. Assets ($269 trillion) minus Total Liabilities equal a Net Position of almost -$124 trillion. The graph is the quarterly results.
