Trump's Great Betrayal, Simon Rosenberg, NDN.org, 3/23/17. President Trump is pursuing policies deeply at odds w/his pledge to help every day Americans. It should become known as "The Great Betrayal."
Column: 5 Ways Trump Could Stop Obama's Expansion, Simon Rosenberg, US News & World Report, 3/23/17. There just isn't a lot of justification for the market's optimism that Trump's economic policies - Maralagonomics - will keep the Obama expansion going.
Steve Bannon, Meet Russell Pearce, Simon Rosenberg, US News & World Report, 2/21/17. If history is a guide, Trump's efforts to institutionalize xenophobia and ramp up immigration enforcement could disrupt businesses, hurt the US economy and tear apart families. The blowback could be significant and cause lasting damage to his Presidency.
If you would like to read more of Rob's other recent work, be sure to review our backgrounder "Rob Shapiro on the Economy."
President Trump wants to cut the tax rate for all American businesses to 15 percent, and damn the deficit. If you believe him, any damage from higher deficits will be minor compared to the benefits for US competitiveness, economic efficiency, and tax fairness. The truth is, those claims are nonsense; and the real agenda here is the 2018 and 2020 elections. Without substantial new stimulus, the GOP will likely face voters in 2018 with a very weak economy – and tax cuts, especially for business, are the only form of stimulus most Republicans will tolerate. Moreover, if everything falls into place, just right, deep tax cuts for businesses could spur enough additional capital spending to help Trump survive the 2020 election.
Let’s review the economic case for major tax relief for American companies. It’s undeniable that the current corporate tax is inefficient – but does it actually make U.S. businesses less competitive? The truth is, there’s no evidence of any such effects. In fact, the post-tax returns on business investments are higher in the United States than in any advanced country except Australia, and the productivity of businesses is also higher here than in any advanced country except Norway and Luxembourg.
The critics are right that the 35 percent marginal tax rate on corporate profits is higher than in most countries. But as the data on comparative post-tax returns suggest, that marginal tax rate has less impact on investment and jobs than the “effective tax rate,” which is the actual percentage of net profits that businesses pay. On that score, the GAO reports that U.S. businesses pay an average effective tax rate of just 14 percent, which tells us that U.S. businesses get to use special provisions that protect 60 percent of their profits from tax (14 percent = 40 percent of 35 percent).
Tax experts are certainly correct that a corporate tax plan that closed special provisions and used the additional revenues to lower the 35 percent tax rate would make the overall economy a little more efficient. But lowering the rate alone while leaving most of those provisions in place would have almost no impact on the economy’s efficiency – and the political point of Trump’s plan depends on not paying to lower the tax rate.
Finally, would a 15 percent tax rate on hundreds of billions of dollars in business profits help most Americans, as the White House insists, since 52 percent of us own stock in U.S. corporations directly or through mutual funds? The data show that most shareholders would gain very little, because with 91 percent of all U.S. stock held by the top 10 percent, most shareholders own very little stock.
Moreover, the proposed 15 percent tax rate would cover not only public corporations but also all privately-held businesses whose profits are currently taxed at the personal tax rate of their owners. So, Trump’s plan would slash taxes not only for public corporations from Goldman Sachs to McDonald’s, but also for every partnership of doctors or lawyers, every hedge fund and private equity fund, and every huge family business from Koch Industries and Bechtel, to the Trump Organization.
There is no doubt that the President’s tax plan would provide enormous windfalls for the richest people in the country. Beyond that, it may or may not sustain growth through the next two elections, since even the best conservative economists commonly overstate the benefits of cutting tax rates. But the truth is, there aren’t many other options that a Republican Congress would accept.
This post was originally published on Dr. Shapiro's blog.
Overview – With the debate in Washington soon to turn to budget and economic matters, we have updated and are releasing a memo we first produced in 2016. This short memo looks at the economic performance of the two American political parties when in the White House since the end of the Cold War.
We use 1989 as a starting point for comparison because when it comes to the American and global economies, the collapse of Communism and the non-aligned movement ushered in a new, truly global economic era, one very different from the one that came before. It is thus fair to see how the two parties have adapted to the enormous changes this new era has offered, and whether their policies have helped America prosper or struggle as we and the world changed.
As you will see from the following analysis, the contrast between the performance of the Democrats and Republicans in this new economic era is stark: 2 GOP Presidencies brought recessions, job loss, higher annual deficits, and struggle for workers; the 2 Democratic Presidencies brought recovery and growth, job and income gains, and lower annual deficits.
Based on these findings it is fair to assert that over the past generation the Democratic Party has been far more effective at crafting effective responses to a new economic era than the Republican Party. This case is bolstered, of course, when recalling the GOP’s spirited predictions of economic calamity when opposing both the 1993 Clinton economic plan and budget and the 2009/2010 Obama stimulus and “job-killing” Affordable Care Act. The Republicans have gotten it wrong now in four consecutive Presidencies.
While it will not be the subject of this short memo, our findings raise questions about whether the characterizations of the US economy as one not producing income and wage gains either over 40 years or over the past 15 years are accurate. It would appear that a more accurate description of the US economy in recent years is that with smart policies, Americans can prosper even in a more challenging and competitive global age.
We hope that commentators and policy makers keep the findings of this memo in mind as the Republicans roll out their budget and economic plans in the coming weeks. The Party’s track record on economic matters in this new age of globalization is not something that should inspire confidence in voters looking for plans that create jobs, raise wages and lower the annual deficit. It has been the other Party that has done that.
“Monday Musings” is a new column looking at the 2016 elections published most Mondays. You can find previous editions here.
2016 Overview – Yesterday, we saw several different countervailing dynamics at work which will do much to shape the Presidential race in the coming weeks. First, the very rough Comey press conference. While it appears now that no legal action will be taken against Secretary Clinton, the findings of the FBI investigation have created new and significant challenges for her campaign. You can find good summaries of these new challenges here and here. Second, we saw President Obama on the stump for the first time, marking another step forward in the Democratic Party’s coming together around their new nominee after a contentious primary process. Third, Donald Trump continues to say and do outrageous and truly crazy things (more praise for murderous dictators!) that will make it very hard for the American people (and it appears many Republicans) to ever vote for him.
The FBI’s report on Clinton’s emails has injected a new dynamic into the race at a consequential time. Over the next three weeks the two candidates will pick their Vice Presidential candidate and hold their conventions. As we enter into this intense period of politics in the US, let’s look at where things stand. Clinton has lost a little ground in our favored polling aggregate, dropping from a 6.8 to 5 point lead. Most of the polls taken in the past week have the race at 4-6 points, with a few showing much wider leads. Possible her post-nomination bump has begun to dissipate, as Trump’s did. To me this is still more noise than signal, and she and the Democrats enter this new period in far better shape than Trump and the Rs in overall image, head to head polling, party unity, fundraising and organization. In my mind it remains a year of opportunity for Democrats.
It is significant that the Clinton campaign choose North Carolina as the first state for a joint event with President Obama. Obama didn’t win North Carolina in 2012, and it isn’t necessary for Clinton in 2016. But it is a sign that Democrats view this year as one where they can expand the map, and not just win the Presidency but make significant gains in Congress to help Sec. Clinton govern next year.
Importantly, for discussions of our politics post-Brexit, there just isn’t a lot of evidence that the American electorate is as rebellious, or as angry at globalization or at Democrats/Obama as some say. We went in depth on some of this data last week, finding broad satisfaction with Obama, Democrats and current economic policies that have brought lower deficits while offering many Americans new jobs, better health insurance and rising incomes. This week we add to that data Pew’s recent look at American attitudes toward trade. Asking simply if trade is a good or bad thing, Americans choose “good” by 51% to 39%. Democrats choose “good” by 60% to 30%, while Rs choose “bad” 52% to 40%. 18-29 year olds were the most pro trade age cohort, choosing “good” 67% to 25%. Hispanics were the most pro trade demographic, with 72% saying trade was “good.” Importantly for the coming debate inside the Democratic Party, Bernie Sanders supporters said trade was good by 55% to 38%. This stat, coupled with young people’s significant support of trade, suggest there are limits to the power of Sanders’s anti-globalization/trade argument even among his own supporters; and that it was other issues other than this one that drove people to him in the primaries.
Brexit Raises the Stakes In The US Election – Last week Donald Trump gave an extraordinary speech, one which has no real analog in recent American political history. In his speech Trump essentially called for the break-up of the West as a political idea, suggesting, rather remarkably, that US policies over the past several generations had made America weaker and poorer. During his campaign, Trump has now gone on the record for ripping up the global trade system, praising Brexit, ending the North American project, pulling out of the Paris climate accords, questioning the propriety of NATO, abandoning America’s historic commitment to religious liberty, forcibly removing 11m people from the US and aggressive global censorship of the Internet. Given current trends in Europe, Trump’s election here in the US could signal a radical break from a body of thought that has animated the US and Europe since the end of World War II.
It is important to note that leaders like Trump and the UK’s Nigel Farage are not offering a corrective to the modern West, they are only offering its dissolution with no imagined alternative to replace it. The Isolationist/Nationalist vision advanced by Trump last week had remarkable echoes of language from the 1930s, an era where rising tariffs and reactionary politics brought us a global depression and history’s most horrible war. The current global system criticized by Trump (and far too often by Bernie Sanders) was designed in response to the economic and human wreckage in a time when Trumpian style policies prevailed.
And while not perfect, the Four Freedoms-inspired Post WW II era has brought about perhaps the greatest period of productivity and innovation in all of human history, with rising standards of living across the world; dramatic advancements in life expectancy, literacy, and overall health; far less grievous conflict and far more living under democracies; and of course historic technological advances that altered and improved the human condition in ways unimaginable in the mid 20th century.
Whatever issues Hillary Clinton thought she would debating this fall, it is now clear that the entire Western post WW II project is on the ballot here in the US this year. A win for Trump could deal this project a potentially lethal blow. A win for Clinton will do much to slow nationalism’s progress in the West, and help preserve the global system we have today. History is calling Hillary Clinton now, and has given her a truly vital mission – the preservation of a global system, while not perfect, that has done so much for so many while advancing American interests along the way.
In this campaign, Democrats, as current stewards of the American political party who imagined and built this global system, have to raise their sights a bit higher than they have them today. We need to far more purposefully take on the responsibility of preserving the post WW II project for future generations. The construction of this global system over the past 70 years has arguably been the Democratic Party’s greatest achievement in its proud history. But history is calling us too, and we need to take the steps here at home and abroad that prevents the extraordinary work of previous generations to crumble on our watch.
I will talk a bit more about what Democrats should be doing to modernize and reform our global system, and companion steps we should be taking at home to bring the American people along in coming columns. But I end with a link to the very first paper this organization published back in the spring of 2005, “Meeting the Challenges of the 21st Century: Crafting A Better CAFTA,” which argued then that after years of no wage and income growth in the US policy makers should only expect continued support for globalization among the American people if their own personal economic conditions improved. The core of our work over these past 11 years has been an extended effort to both preserve the openness characteristic of the West today, while advancing policies that would make sure more Americans prospered in a new and different economic age. While things are undeniable better for the American people than they were eight years ago, we still have a lot of work to do.
Update: In a new, very strong piece, Frank Foer offers his take Putin and Trump and the end of the West.
The condition of most American households, and of the country as a whole, is set largely by people’s income – both the levels, and the income progress that people make as they age from their 20’s to their 30’s, 40’s and 50’s. For generations, most Americans have believed that if they work hard, they’ll have real opportunities to earn steadily rising incomes. Such broad based upward mobility is one of the reasons that Americans have been generally optimistic and willing to extend opportunity to successive minority groups. But is that the way America really works? One common view argues that wages have stagnated and most Americans have made, at best, modest income progress since the 1970s. This view is based on a time series of a single statistic, “aggregate median household income.” In fact, the true picture is more complex.
Today, the Brookings Institution issues a new report which I worked on for the past year. Using new Census Bureau data, I analyze household incomes by age cohort – say, people age 25 in 1980 or in 1990 –and then follow those age cohorts as they age. The results revise what we thought we knew about incomes. The data show that broad, strong income gains were hallmarks of the 1980s and 1990s. Moreover, the steady progress of the Reagan and Clinton years covered just about everybody -- households headed by men and by women; by whites, blacks and Hispanics; and by those with college degrees, high school diplomas, and no degrees at all. This broad upward mobility, however, simply stopped under Bush and has not recovered under Obama. Moreover, this dramatic turnaround, including declining incomes from 2002 to 2013 for a majority of American households, affects every demographic group.
I’ll be writing more about what’s really happened to income, why, and what we can do about in coming weeks and months. If you want to read the report for yourself, click here.
This post was originally published on Dr. Shapiro's blog.
The sharp fall in worldwide oil prices is a silver lining with a silver lining, even if the linings are a bit tarnished. The price of the world’s most widely-used commodity has fallen sharply over the last five months, from a spot market price of $115 per-barrel in late June to $77 last week. For consumers everywhere, that means major savings that will mainly go to purchase other goods and services; and those boosts in demand should spur more business investment. So, if low prices hold for another six months, analysts figure that growth in most oil-consuming and oil-importing countries could be one-half to a full percentage-point higher than forecast, including here in the U.S. and in the EU, China and Japan. It’s a blow to the big oil-producing and oil-exporting nations; but the global economy will come out ahead. After all, the U.S., EU, China and Japan account for more than 65 percent of worldwide GDP, while the top ten oil exporting countries, led by Saudi Arabia and Russia, make up just over 6 percent.
The hitch for this rosy scenario is that much of the revenues that OPEC countries now won’t see would have gone into financial and direct investments in the U.S. and EU. That means that new investments in American and European stocks and bonds could be reduced by some $300 billion per-year. The upshot may be slightly higher interest rates and slightly lower equity prices, which would dampen the growth benefits of lower oil prices.
The lower prices are driven mainly by supply and demand, but market expectations and some strategic maneuvering by Saudi Arabia play a role, too. Yes, worldwide oil supplies are up with rising production from U.S. and Canadian tar sands and shale deposits, and Libya’s fields are fully back online. Moreover, these supply effects are amplified by softness in demand for oil, coming from economic stagnation in much of Europe and Japan, China’s slower growth, and our own increasing use of natural gas. Oil prices also are influenced, however, by the prices that buyers and sellers expect to prevail months or years from now. Last week, when the “spot price” of crude oil was about $77 per-barrel, the price for oil to be delivered next month was almost $10 lower. In fact, the world’s big oil traders see crude prices continuing to decline not simply into 2015, but for a long time: The price for oil to be delivered in mid-2016 is less than $72 per-barrel and, according to these futures prices, not expected to reach even $80 per-barrel until 2023.
Don’t count on a decade of cheap oil. Yes, technological advances have brought down the cost of extracting oil from tar sands, shale and deep water deposits, as well as the cost of producing and transporting natural gas. But the economics of these new energy sources work best at prices higher than those prevailing today. A long period of low oil prices would slow the growth of supply from those sources -- and so drive oil prices back up. The Saudis are counting on it. They’ve refrained from cutting their own production, which could restore higher prices, in hopes that another year of low prices will slow down investments in all of those alternatives sources.
The truth is, oil prices will rise again whether the Saudis’ tactic works or not. While the outlook for much stronger growth remains slim for Japan and much of Europe, an extended spell of lower energy prices will support higher growth here, in China, and across many of the non-oil producing countries in Asia, Latin America and Africa. Stronger growth and energy demand will bring on line more alternative sources of energy -- so long as oil prices are high enough for the alternatives to be competitive.
This is an old story. Oil prices fell, and as sharply as they did this year, in 1985 and 1986, in 1997 and 1998, and in the aftermath of the 2008-2009 financial upheavals. Each time, oil prices marched up again after one, two, or at most three-to-four years. Of course, that volatility also makes some people billionaires. To join them, what you’ll need is patience and a hedge fund’s access to credit. With that, all you do is go out and purchase a few billion dollars in contracts to take delivery of crude in 2018 or 2020 at today’s futures prices, and then dump the contracts when oil prices once again head north of $100 per-barrel.
This post was originally published on Dr. Shapiro's blog.
President Obama deserves at least two cheers for his recent economic address. In an unusually clear-eyed assessment of how the economy has shaped our current politics and national mood, he traced most people’s disillusion with government to their “daily battles to make ends meet.” The “defining challenge of our time,” he declared, is to make “sure our economy works for every working American.” For his part, the President pledged to devote his second term to restoring upward mobility and reducing inequality.
To make progress on these fronts, the President and many progressives should first step back from some common populist myths. In his address, for example, the President stressed the populist trope that the median income today is only 8 percent higher than it was in 1979. The clear implication is that middle-class Americans have been caught in an economic squeeze for nearly 35 years, and Washington should turn away from the policies of the 1980s and 1990s.
This view, at best, is only partly right. It is the case that today’s extraordinary inequality began in the latter-1970s. In 1976, the share of national income claimed by the top 1 percent of Americans fell to less than 9 percent, its lowest point in the 20th century. Since 1977, however, their share of the economy’s rewards has grown steadily and sharply, reaching more than 23 percent in 2008, its highest level since 1928. Nevertheless, most people’s incomes continued to grow at reasonable rates through the 1980s and 1990s. If that strikes many Americans as implausible from today’s vantage, it’s only because much of those income gains were swept away over the last decade. The challenge of restoring upward mobility comes mainly from what has happened economically since 2002.
Here is what has really happened to incomes, based on data released recently by the Census Bureau. Across all households – all ages, races, and both genders -- the inflation-adjusted median income increased by an average of 1.7 percent per-year from 1983 to 1989, or by nearly 12 percent over the course of the Reagan expansion. The recession of 1990-1991 took back about one-third of that progress, leaving a typical middle-class household with net income gains of just under 8 percent from 1983 to 1991. Those gains were followed by more income growth through the Clinton expansion, averaging another 1.4 percent per-year after inflation. The recession of 2001 took back one-fifth of those gains, leaving a typical middle-class household with net income growth of more than 10 percent from the 1990s and 18 percent from 1982 to 2002. Nor did upward mobility stall out in this period: Throughout the 1980s and 1990s, those who had long lagged behind achieved the greatest gains, namely, households headed by African Americans and by women.
The income squeeze most Americans feel today owes its bite almost entirely to the developments of the last decade. Through the Bush expansion of 2002 to 2007, household income growth plummeted to just 0.2 percent per-year. Moreover, those meager gains were followed by the Great Recession, which cost the average household an unprecedented 5 percent of their incomes. Those losses wiped out not only all of the income growth from 2002 to 2007, but also 40 percent of the net gains of the 1990s. Even worse, the economic damage from the 2008-2009 crisis, on top of some new problems, continued to eat away at incomes. In 2010-2011, American households gave back, on average, another 4 percent of their incomes. Those losses finally stabilized in 2012, when household incomes were virtually unchanged. All told, the median income of American households declined nearly 10 percent from 2002 to 2012.
To get out of this hole, policymakers have to confront the two new dynamics which largely define the last decade economically, globalization and technological change. There is no possible retreat from globalization, a historic advance that has drastically reduced poverty across much of the world and driven innovation and cost savings here at home. But the intense competition generated by globalization also produces unprecedented pressures on businesses to cut their costs, and then directs those pressures to jobs and wages. Policymakers can help relieve some of those cost pressures, starting with a stronger commitment to contain the health care costs for both employers and workers. They also could help jumpstart stronger job creation with financial reforms that link a bank’s access to the Fed’s virtually-free funds to its willingness to provide capital for young businesses.
Washington also can help tens of millions of Americans to upgrade their skills for an economy that now provides few rewards for those without the training and skills to operate effectively in workplaces dense with information and internet technologies. For a modest cost, for example, the federal government can provide grants to hundreds of community colleges to keep their computer labs open and staffed on weekends and evenings, so any adult can walk in and receive free training in information and internet technologies.
The economic record also tells us that the government got a number of things right in the 1980s and 1990s. As in the 1950s and 1960s, usually sensible macroeconomic policies tempered the business cycles, especially after dealing with the oil-shock inflations of the 1970s. Successive presidents and congresses also continued to liberalize trade in the 1980s and 1990s, encouraging businesses and workers to shift their resources to areas where they held powerful advantages even as Germany, Japan and other advanced countries began to compete actively again. And from the late 1970s onward, Washington reinforced those advantages by deregulating transportation, telecommunications, and other sectors -- including finance, where policymakers went too far in the late 1990s.
Public investments in infrastructure remained generally robust until the 1990s, and even then, the private sector sunk tens of billions of dollars into new information and telecommunications infrastructure. Higher education programs helped tens of millions of Americans expand their human capital, building on the GI Bill of the 1950s and 1960s with major expansions in student assistance in the 1980s and 1990s. And science and technology policies continued to promote innovation by aggressively funding government research institutes and through technology competitions sponsored by the Pentagon (including the internet).
To restore income gains and upward mobility, Washington also needs to revisit what works. Recommit macroeconomic policy to healthy growth by ending mindless austerity and doubling down on public investments in infrastructure and basic research and development. Further expand the markets for innovative American goods and services by completing the current trade liberalization talks with the European Union and much of Asia. Help millions of young people complete their higher education by reforming student assistance – for example, by replacing most current loan and grant programs with federally-funded free tuition at public institutions that limit their future cost increases to overall inflation.
There is no iron-clad guarantee that these approaches will restore the reasonable income gains of the 1980s and 1990s, much less the stronger progress seen in the 1950s and 1960s. Nevertheless, they provide a credible place to begin, one based on the real economic record and the actual nature of our economic problems.
This post was originally published on Dr. Shapiro's blog
As summer ends, and investors and policymakers look ahead, the American economy faces a range of downside risks. Most of these risks are what economists call “exogenous,” which is a fancy way of saying that they come from sources outside the economy itself. Left to itself, the economy appears set to maintain its current path of moderate growth. GDP grew at a 1.8 percent rate in the first quarter of this year followed by 2. 5 percent growth in the second quarter, with no signs of the bracing job and income gains Americans remember from the 1980s and 1990s. But this may be the best-case scenario, since outside forces from lamebrain moves by Congress to developments in China could knock moderate growth off its perch.
The most clear and present threat to growth lies in the looming fight over the debt ceiling. It has to be said how truly foolish and irrational it is that this matter should pose any risk to our economic security. But the Republican Party is caught in an internal power struggle that could well result in Congress suspending the Treasury’s legal authority to issues bonds to finance debts already accrued by the current and previous congresses. It would constitute a technical default by the United States — and that would trigger an unprecedented slump in the value of all U. S. Treasury securities, until now the world’s most secure and stable financial instrument.
Interest rates on those securities would shoot up, and we would see a chaotic selloff in U.S. and global bond markets followed by a sharp economic slowdown and a precipitous nosedive in stock markets. It would all unfold like a bitter divorce, where one spouse spitefully engineers a collapse of the marital assets heedless of how it will affect their children (that’s the role for rest of us). Of course, it is not inevitable. Once the debt limit debate has produced some fiery political theater, the grownups in the GOP leadership and wealthy donors who underwrite most Republican campaigns may yet bring their party’s radicals to heel.
That outcome must be the expectation of most bond and stock traders, who are less concerned today about the debt limit than about the risks of Federal Reserve policy. The trillion-dollar question for big finance is when and by how much the Fed will step on Wall Street’s near-zero interest rates by “tapering” the Fed’s current quantitative easing program, QE3. The path of QE3 has even become an issue in the contest to succeed Fed Chair Ben Bernanke. While Vice Chair Janet Yellen believes that but for QE3, the economy would be weaker, Larry Summers has said the program doesn’t make much difference anyway. The implication is that Summers sees less risk in rapid tapering. And that may be why, according to a recent survey, most Wall Street traders prefer Yellen, despite Summers’ lucrative stints as a Wall Street adviser. While all of this makes for diverting debates on cable TV, the truth is that QE3 policy probably poses little risk to the U. S. economy. If interest rates jump in response to Fed tapering, whoever chairs the Fed will slow or suspend it.
That leaves risks from abroad to disturb the sleep of the President’s economic advisers. Two regions (the Middle East and Europe) and one country (China) have the economic heft to materially affect the path of American economy. In the Middle East, the immediate economic issue for the President is whether his coming response to Bashar al-Assad’s crimes could trigger some series of events that ultimately affects the flow of oil from the region, driving up energy prices everywhere.
Europe seems even less likely to disturb our recovery, especially as compared to a year ago, when investors’ confidence in the ability of Greece, Italy, Spain and Portugal to finance their sovereign debts nearly collapsed. A European sovereign debt crisis could still bring down the continent’s largest banks and plunge all of us into a deep recession. But for now, Mario Draghi, who heads up the European Central Bank (ECB), has convinced Germany’s Angela Merkel to muzzle her qualms about large-scale ECB interventions to head off a Eurozone meltdown.
The possibility of a different sort of debt crisis also has appeared in China. Since 2008, public and private debt in China has shot up from 130 percent of GDP to 200 percent, even as the country’s GDP has expanded nearly two-thirds. Over this brief period, corporate debt nearly doubled and household debt tripled. Worse still, in the face of these skyrocketing debts, overall growth, the returns that Chinese companies earn on assets they borrowed to finance, and Chinese wages all have slowed sharply. Already, many companies now pay their suppliers with six-month promissory notes, producing cash crunches for their own suppliers and workers. Many large banks are also writing down large numbers of non-performing loans. And as banks pull back, interest rates have risen, increasing the debt loads of firms and households, and forcing thousands of companies to downsize.
The Financial Times observed recently that “such a rapid increase in borrowing has historically led to crises in countries from Argentina to South Korea.” Some experts dismiss this prospect, pointing to China’s stringent capital controls to prevent large-scale capital flight and Beijing’s strict management on the value of the currency. But markets that lose confidence find ways to subvert such controls; for example, through bank runs, accelerating inflation, and sharp drops in foreign investment. So, even if China can sidestep a full blown credit crisis, it cannot escape much slower growth while the government and domestic firms unwind the excess debt. And that will mean slower growth in many countries that depend on rising exports to China—starting with Japan, South Korea, Taiwan, Australia and Chile — as well as here at home, in states such as California, Texas, Washington, Illinois and New York.
This post was originally published in Dr. Shapiro's blog
In the latest in a series of thoughtful FT pieces on what Amerca needs to do get its economy back on track, Jeff Sachs offers up a valuable contribution today, arguing:
A proper US investment recovery plan has five parts. The first is a significant boost in investments in clean energy and an upgraded national power grid. These should be promoted through guaranteed price subsidies to clean energy to be financed by gradually rising carbon taxes, as the clean energy capacity comes on line during the coming decade. The alternative cap and trade system is cumbersome, unnecessary and politically dead.
The second is a decade-long programme of infrastructure renovation, with projects such as high-speed inter-city rail, water and waste treatment facilities and highway upgrading, co-financed by the federal government, local governments and private capital. Such projects are complex, requiring government leadership in land management, project design, public-private co-operation and partial subsidy or credit guarantees. New tools can help, such as a national infrastructure bank – championed last year before plans were strangely downplayed.
The third component is more education spending at secondary, vocation and bachelor-degree levels, to recognise the reality that tens of millions of American workers lack the advanced skills needed to achieve full employment at the salaries that the workers expect. The unemployment crisis is largely a structural crisis of job skills. It is hitting young workers – many of whom should still be learning – and older workers who lack a degree.
The penultimate part of the plan is boosting infrastructure exports to Africa and other low-income countries. China is running circles around the US and Europe in promoting such exports of infrastructure. The costs are modest – essentially just credit guarantees – but the benefits are huge, in increased exports, support for African development and a boost in geopolitical goodwill and stability.
The fifth and final element should be a medium-term fiscal framework that will credibly reduce the federal budget deficit to sustainable levels within five years. This can be achieved partly by cutting defence spending by two percentage points of gross domestic product, meaning ending the Iraq and Afghanistan occupations and cutting wasteful weapons systems. Other measures should include gradually phasing out the tax subsidy on high-end health insurance, taxing Wall Street bank profits and bonuses, raising high-end marginal tax rates and, if necessary, introducing a small value added tax. Public investment costs could be financed mainly by public tolls, gradually rising carbon taxes and by repayments of international loans to finance the export of infrastructure.
The Obama administration and Republican opposition are both guilty of irresponsible short-termism and lack of forward-thinking. Both would dangerously prolong the budget deficit, the first through a combination of increased fiscal transfers and tax cuts, and the latter through even larger and more unsustainable tax cuts. Neither would do what America needs and China is doing better: investing for the future through serious attention to sustainable energy, cutting-edge infrastructure, enhanced labour-force skills and the promotion of international development through the export of infrastructure.
Yesterday I offered some thoughts on the volatility we are seeing in American politics today. The New York Times's Matt Bai, writing from his new perch in the main paper, offers this take:
But to suggest that this week’s primaries are just part of the latest revolt against incumbency, brought on by pervasive economic angst, is to miss some deeper trends in the electorate that are more consequential — trends that have brought us to an unprecedented disconnect between, on one side, the traditional shapers of our politics in Washington and, on the other, the voters who actually make the choices.
The old laws of politics have been losing their relevance as attitudes and technology evolve, creating a kind of endemic instability that probably is not going away just because housing prices rebound. Nor is that instability any longer driven only by ideological mini-movements like MoveOn.org or the tea parties, as some commentators suggest. Voter insurrection has gone as mainstream as Miley Cyrus, and to the extent that the parties in Washington take comfort in the false notion that all this chaos is fleeting, they will fail to internalize the more enduring lessons of Tuesday’s elections.
As someone who has been making the case that a "new politics" is emerging in America, driven by vast changes in demography, media/technology and the global economic and geopolitical landscape, I have great sympathy with Matt's thoughtful take. But at the same time, those who discount the large structural economic changes at work now (driven to some degree by these same changes in media and technology Bai describes), and how they are leaving way too many Americans behind, miss what may be indeed the most consequential set of societal changes underway in America today.
We are in no ordinary economic times. We are leaving one economy, a 20th century economy, with a certain set of rules, global players, skills and knowledge required for success, and entering a new and very different 21st century economy. This new economy is more globally competitive, technology-dense, universally-wired together and in need of transition to a low-carbon foundation. So far America has not done a particularly good job in transitioning to this new economy of the 21st century, as we are both leaving too many in our current workforce behind, and critically, not making the needed investments in our infrastructure and the knowledge and skills of our future workforce to ensure our future success.
I agree with much of Matt writes this morning, but challenge him to look a little deeper at what may be the most consequential societal changes afoot today - the birth of a new and much more challenging 21st century economy. This economy is one which America still has not come to adequately come to understand, and is certainly far away from having a compelling national strategy to transition our 20th century economy and strategies into the 21st.