Op-Ed Analysis


The Dollar Could Be a Curse for America

Dollar’s Reserve Currency Status Will Allow U.S. to Spend, Spend, Spend

 

By Peter Morici, Ph.D.

April 15, 2019 (First Published in MarketWatch)

Oil has proven a curse for many developing countries and now, troubles abroad and growing reliance on the dollar could prove the same for America.

Petroleum permits national leaders to engage in socialist giveaways, placate elites by padding their bank accounts and consolidate dictatorial power without making the kinds of broad investments in industries and human resources that ensure lasting prosperity. Venezuela is collapsing as the money runs out and Saudi Arabia will do the same.

Decadent politics and economic policies in Europe and Asia are making the euro, yen and yuan unattractive as long-term investments. Money managers and pensioners are smart to hedge their portfolio with dollar-denominated securities and if they can, American real estate.

Theresa May – who did not support leaving during the Brexit campaign – has carefully maneuvered Britons into a Sophie’s choice. Accept colonial status inside the European Union – remain in the customs union with no say about the rules – or a hard break with no plan to manage it.

Ultimate EU victory

The ultimate EU victory over Brexit will intimidate Italy and other victims of its maddening macroeconomic, currency and immigration policies from demanding systemic change or eventually bolting. Germany, which ultimately dictates the rules, will continue to arrogantly profit while Europe’s southern underbelly remains permanently near or in recession and growth overall remains anemic.

Japan’s population and labor force are aging and shrinking. Labor force and robust economic growth cannot be sustained unless women accomplish a minimum fertility rate of 2.1 or populations are backfilled by immigration, which the Japanese culturally resist.

Prime Minister Shinzo Abe can strengthen banks, break up industrial cartels and reform labor markets but unless his efforts to boost immigration shift into high gear, Japan collapses. The yen one day becomes worthless and investors are smart to buy U.S. Treasuries TMUBMUSD10Y, -0.41%  and Hawaiian real estate-not California property, because most Golden State residents want out.

Chinese President Xi Jinping has fashioned himself president for life and imposed tougher state orchestration of private firms, central planning and electronic monitoring and ideological conformity on ordinary citizens. Investing in the yuan would be akin to buying Mussolini war bonds in 1939.

Cross-border debt financing

Businesses follow suit. The dollar’s share of cross-border debt financing has jumped to 62% even though the U.S. is one-fifth of the global economy. Forty percent of all cross-border trade is denominated in dollars – 23% of German exports even though only 6% are headed for America.

All this permits Americans to borrow increasing sums from foreigners and sell U.S. real estate and other assets at handsome prices. The federal deficit has more than doubled since 2015 without long-term U.S. interest rates rising very much by historical standards. The 30-year Freddie Mac mortgage rate is 4.3% whereas it peaked at 6.8% before the financial crisis and above 9% in the mid-1990s.

Slow growth abroad has inspired other large economies to turn to protectionism and imposed a $620 billion trade deficit on the United States, devastated interior American communities once reliant on manufacturing, and put Donald Trump and America First in the White House.

The ultimate bottom line is that Modern Monetary Theory is partially right-the U.S. can pay for significantly more public spending.

Printing presses

Not on the merits of growth and a tax dividend but on the good luck of green gold. The global appetite for dollars permits Uncle Sam to run the printing presses but that is not an unlimited warrant. And like black gold, green gold can be misused.

Mayor Bill de Blasio and Gov. Andrew Cuomo subject New Yorkers to a third-world subway system. Eight hundred million dollars is being spent on modernization but $40 billion is needed to bring the system up to par with Paris or London. Yet those politicians recently found the money for free pre-school child care and paid family leave.

Nationally, artificial intelligence is driving innovation and growth. China has a well-financed program but the U.S. budget does not finance the same. Instead more Americans are on the dole than before the financial crisis, and that’s Rep. Alexandria Ocasio-Cortez’s recipe for turning America into a socialist paradise like Venezuela.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Western Democracy May Be a Fading Star

 

By Peter Morici, Ph.D.

April 12, 2019 (First Published in Washington Times)

President Xi Jinping believes China’s ascent to global dominance is inevitable, because its authoritarian government and socialist-market economy can better deliver technological progress and prosperity than decadent Western democracies. Established elites in the West may be proving him correct.

The euro is overvalued for the Mediterranean region and undervalued for Germany and other northern states. Consequently, Italy and others must run large trade deficits with Germany and pile up foreign debt or accept perpetual austerity and high unemployment.

Eurozone rules strictly limit national deficits. When the League and Five Star Movement won enough seats to form a coalition government that would break Italy loose from those rules, Sergio Mattarella – president and de facto protector of the establishment – refused permission to form a government unless the coalition effectively pledged not to implement policies that could eventually exit the country from the euro and EU.

That effectively canceled the mandate of a democratically elected government. When the coalition proposed a budget deficit outside EU guidelines, Brussels struck it down and Italy was thrust into recession.

Emmanuel Macron

In France, Emmanuel Macron won office on a fraud. His program of hope and change is little different than center-left Socialists and center-right Republicans that governed in recent decades – incremental labor market reforms, high taxes on the working and middle classes to finance costly social programs in the face of flagging growth and allegiance to the EU’s strict rules on for economic, environmental and immigration policy.

A graduate of ENA – an aristocratic institution that takes very few students from the middle and working classes and produces France’s top civil servants and many business leaders – he is the very epitome of France’s metro elites. Like America’s Wall Street bankers, they grow richer by enabling the globalization that impoverishes France’s working and middle class as represented by the Yellow Vests.

By proposing another fuel tax to combat global warming, which would do diddle if China and other developing nations continue to increase emissions, President Macron unleashed more than a revolt against the high cost of driving. Yellow Vests are violently protesting the deaf greed and statist superstitions of France’s aristocrats.

Coyly obstructed

In the U.K., Theresa May, who opposed Brexit during the referendum, has coyly obstructed the outcome by acceding to all of the EU demands. Instead of forcing the negotiation of a free trade agreement that would give Britons the same continental market access as Canada, she brought back a deal for a customs union that would require the U.K. to follow Brussels rules without a say in writing those.

Then Mrs. May confronted Parliament with a choice of either accepting those terms or the chaos of hard break.

In America, Donald Trump legitimately won the presidency by defeating the Bush and Clinton dynasties. He offered hope and change to America’s Yellow Vests – those away from the large coastal cities who have long suffered from jobs-destroying free trade and immigration.

Stalling appointments

The residual establishment among Democrats and center-right Republicans in Congress have obstructed President Trump’s legitimate mandate by stalling appointments. Democrats have abandoned support for Obama-era policies where those coincide with his agenda.

They forget President Obama ratchetted up border enforcement and deportations. In his 2006 “The Audacity of Hope” book, he wrote “When I see Mexican flags waved at pro-immigration demonstrations, I sometimes feel a flush of patriotic resentment. When I’m forced to use a translator to communicate with the guy fixing my car, I feel a certain frustration.”

The West faces a mass migration from collapsing regimes in the South. It threatens the cultural cohesiveness and values that made possible liberal democracy and two centuries of progress from the Age of Invention to the post-World War II middle class prosperity.

Warned Mr. Macron

Gerard Collomb, a respectable center-left politician and Interior minister until last October, warned Mr. Macron that France risks civil war if legal and illegal immigration are not sharply curtailed.

Democratic leaders Chuck Schumer and Nancy Pelosi, and federal judges who do their bidding, might heed those words too instead of enabling the champions of open borders, de facto naturalization and voting rights for those who enter America illegally.

The efforts of Sen. Schumer and Mrs. Pelosi, House Committee chairmen and young mischief makers among the “Ladies in White” to discredit and perhaps remove a legitimately elected president are not the work of a loyal opposition but rather a terrible sin against democracy.

President Xi must be so pleased.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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How Better Planning Can Mitigate Climate Disasters

Building Taller Cities to Cope with Climate Change Is Less Costly than the Green New Deal

 

By Peter Morici, Ph.D.

April 3, 2019 (First Published in WashingtonTimes)

Humans are unique in our ability to change the environment and unlock the secrets of nature.

Erecting shelters, building aqueducts and mining the Earth, we moved from the temperate plains of Africa and caves of Chauvet-Pont d’Arc to harness agriculture, establish great cities and create technological wonders. Fossil fuels accelerated the ascent of man but according to the architects of the 2016 Paris Agreement, we must curb our appetite or global warming will make uninhabitable vast settlements.

Diplomats, scientists and the merchants of socialism preach draconian steps to limit the increases in global temperatures to 3.6 degrees Fahrenheit.

Too much debate focuses on the validity of doomsday scenarios and impractical solutions like the Green New Deal. The inadequacy of wind and solar would require handing control of nuclear reactors to dictators in places like Venezuela or Syria – hardly a recipe for human survival.

Mitigation may prove much less costly, because even under harsh climate change scenarios, cities can be protected with seawalls and homes and commercial structures raised to withstand flooding.

Pushing back

Rich countries are pushing back – not just the Trump administration. China, the largest source of greenhouse-gas emissions, is building vast new coal-fired facilities and provincial governments in Canada and the Yellow Jackets in France are opposing various kinds of carbon taxes. After falling for three years, U.S. carbon emissions are rising again thanks to inexpensive gas and more SUVs.

Even if we could freeze carbon emissions levels now, significant threats to the American financial system and living arrangements already bedevil us. Witness the increased frequency of terribly destructive hurricanes pounding the Gulf and Atlantic Coasts, polar vortexes and deep freezes that shut down the Middle West, tornados that rip the plains and Southeast, and California wildfires.

Casualty companies are rapidly figuring that much of the country – not just the coasts – have homes and public buildings, bridges and tunnels, drainage and sewage systems, emergency services, and gas lines and power grids prone to risks that are simply not insurable at reasonable costs.

Somewhere between 50 percent and 80 percent of the country is likely underinsured, and the deep well of financial vulnerability is likely beyond the fiscal capacity of federal, state and city governments to ameliorate. Look at the financial heaving caused by Hurricane Sandy to New York’s subway system and tunnels under the Hudson that bring Amtrak trains into Manhattan.

Climate change bankruptcy

In January California’s PG&E became the first major climate change bankruptcy – thanks to its culpability in the 2018 Camp Fire and other recent wildfire disasters. It is easy to point to poor risk management and the failure to adequately insulate powerlines and build systems to shut those down and rely more on distributed generation during dry spells, but those deny the dysfunctions in public policy that placed substantial human settlements and high tension lines in the path of intolerable risk. Large cities and close-in suburbs in California as elsewhere increasingly impose zoning requirements to maintain neighborhood ambience that make building attractive, denser residential structures close to commercial centers too expensive for what working and middle class jobs pay.

Along with the potential to distribute work patterns and the natural attraction of its woodlands, California has enabled the gentrification of cities by encouraging home construction deeper into the wilderness just as risks imposed by wildfires are rising – thanks to rising temperatures and endemic human error.

Like everywhere else, California’s public utility regulators must balance delivering electricity to these communities at reasonable prices against offering investors a decent rate of return – the geography and penchant for me-too environmentalism in the Golden State make that no mean task. In some measure, PG&E risk management challenges in the woodlands got shortchanged as it built the grid to those communities.

California simply duped investors into believing they were putting their hard-earned savings into a company that guaranteed a decent rate of return, when in fact the state was gambling its money at a casino where no one could win. And homeowners live in places where sooner, rather than later, they may lose their investment, as well as the banks that hold their mortgages.

These problems replicate throughout the country and will erode the solvency of our financial system until we build much denser, more hospitable, weather resistant and taller cities and abandon our obsession with four bedrooms on a quarter acre.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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A Market-Based Solution to Fixing College Admissions and Student Debt

Make Colleges Liable if Their Students Can’t Get Jobs or Repay Loans

 

By Peter Morici, Ph.D.

April 1, 2019 (First Published in MarketWatch)

The college admissions scandal lays bare the corrupting consequences of American higher education’s most tragic failings – its obsessions with athletics and liberal prejudices that subvert academic standards – and the misplaced value parents often place on prestige schools.

Universities lower admission requirements and set aside slots for athletes, minorities other than Asians, applicants demonstrating commitment to liberal causes, and children of alumni and big donors. At more selective institutions, those practices limit opportunities for qualified hard-working middle-class children, and moderate or conservative political views.

Graduates in STEM disciplines from elite universities don’t earn more than those from middling schools. A liberal arts diploma from a prestige institution is worth more but that seems more related to the quality of incoming students, and middling schools often dobetter at lifting skills over four years.

Nevertheless affluent families will spend upwards of $200,000 burnishing their children’s resumes with private-school tuition, trips to Peruvian orphanages and the like to upgrade their children’s chances at a top school.

William Singer

The really desperate have turned to crime. William Singer allegedly collected $25 million from wealthy parents to bribe coaches and defraud admissions exams.

The upshot is universities with too many unqualified or poorly motivated students, and faculty who dumb down standards. Those produce lots of dropouts and ill-educated graduates, often with few job skills and burdened by terrible debt.

Much of the student-debt problem is a holdover from the financial crisis. Unable to create enough decent jobs with ultra-low interest rates and $1 trillion dollar stimulus package, President Barack Obama took millions out of the labor force by encouraging heavy borrowing by many unqualified students to attend college.

When something is offered so freely, it gets abused. Since 2009, college tuition is up more than double the pace for health insurance or consumer prices generally, and the average student attends classes and studies less than 30 hours a week.

Universities spend millions

Universities spend millions on movie theaters, bowling alleys and other amenities to make four to six years at Club Med as pleasant as possible.

No surprise, more than 40% of young college graduates are stuck in jobs that don’t require a degree and pay wages too paltry to service hefty student loans.

Most of the debt was foisted on young folks too young to make sound decisions about investing vast sums of money – I’m for returning the age of majority to 21 from 18.

The $1.6 trillion student debt needlessly slows the economy. Young folks are delaying marriage and buying homes, and having fewer children.

Unqualified students

Cynical admissions counselors have duped unqualified students into believing degrees obtained through street demonstrations for social justice, as opposed to classroom studies, would have value in the job market. Consequently, the money to relieve much of this student debt should be raised by suing the universities who defrauded these students.

The universities could cover their losses by borrowing against their buildings – universities own lots of valuable real estate debt free – and service that debt by cutting back on summer camp activities.

Instead, Democrats want to tax the wealthy to relieve debt and make college free. With universities already admitting too many unqualified students and under pressure to boost minority graduation rates, free tuition would enable them to abandon all remaining semblance of academic standards and responsibility for students’ post-graduate success.

According to a recent Pew Research study, Americans believe high school grades and standardized tests should determine who gets into college and less than one in 10 supports considering athletic ability, race or whether parents attended the same institution.

Going forward, ending all preferences in admissions would be more consistent with our national values than liberal biases, and bringing market forces to bear would better serve students. Universities should be required to mortgage their assets to raise half of the capital needed to finance student loans – if graduates didn’t find decent jobs, they would default and diploma mills would be liquidated.

Self-preservation would compel universities to be careful about whom they admit, uphold academic standards and impart marketable skills, and require faculty to teach and students to show up for class.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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The Fight with China is about National Security not Toasters

A tariff deal would let China dominate Crucial Technologies

 

By Peter Morici

Feb. 19, 2019 (First published at MarketWatch) 

The Trump administration is pursuing a trade deal with China that will not resolve bilateral commercial tensions and could risk national security.

China’s culture in public service and private business holds in contempt the rules for competition generally adhered by among advanced Western nations. It more severely limits imports of products it can make domestically, refuses to honor intellectual property rights, and promotes exports through a wide range of aggressive subsidies.

Beijing surreptitiously orchestrates consumer boycotts against foreign companies – like Samsung- to gain advantages in foreign policy. And it insidiously organizes private espionage – for example, Lenovo imbedding spying software on computers shipped to foreign markets – to win commercial and military advantages.

China’s word

China’s 2001 accession agreement to the World Trade Organization was supposed to deal with many of those practices but President Xi Jinping and his predecessor have repeatedly demonstrated China’s word is as worthless as those of fascist leaders during the 1930s.

Moreover, compliance would have required Communist Party leaders to cultivate among young party leaders and business professionals respect for Western norms of honesty and decency in dealing with foreigners.

Instead, its markets are now more closed and exports more subsidized. Thanks to the internet and the increasing importance of artificial intelligence in the design, production and delivery of modern goods and services, the Chinese kleptocracy poses an existential threat to Western capitalism and democracy.

Owing to their size, China, the United States and a few other Western nations create most of the world’s cutting-edge technology. If everything China invents is respected by Western law and business norms but what the West invents can be stolen by Chinese enterprises and military with impunity, the West will fall under Beijing’s yoke much as did the ancient world to Rome.

U.S. strategy

The U.S. strategy of imposing rather weak tariffs – most of the retaliatory tariffs are 10% and have been neutralized by yuan depreciation- to essentially compel China to honor its 2001commitments won’t work.

Contempt for foreign property rights is religion in China and the real negotiating partners – China’s deep-state bureaucracy and state-owned enterprises, military and private-business chieftains-are not at the table and Xi can’t deliver them.

In 2015, China signed an agreement to end state-sponsored industrial espionage that it has simply failed to honor.

For example, the Justice Department has recently indicted officials of Chinese cybersecurity firm Boyusec for hacking Moody’s Analytics, Siemens AG and U.S. global positioning system developer Trimble

Inc. Huawei

Inc. Huawei has an organized program that pays bonuses to employees based outside of China to steal technology from foreign rivals.

Too much of what is in WTO rules pertains to what are becoming quickly ancient playing fields of competition – manufacturing major appliances and motor vehicles, merchant banking, and motion pictures. Any government with a checkbook can foster an industry in one of those.

The real competition is in super computing, space exploration and artificial intelligence. Those offer opportunities for commercial dominance and explosive growth akin to the spread of mass production and automation in the 20th century and absolute military superiority.

The same kinds of artificial intelligence that permits smartphones and facial recognition to track web surfing and personal movements to generate targeted advertisements and for police to anticipate criminal acts will enable the Chinese and Russian militaries to anticipate the tactics and neutralize the effectiveness of the U.S. Navy and Air Force and ultimately destroy American civic institutions and markets – if we let either vault into the lead.

Well-financed strategies

China supplements trade policies and commercial espionage with well-financed national strategies to accomplish dominance in super computing, space exploration and artificial intelligence by 2030. It’s ludicrous to believe American negotiators can smother those ambitions with treaties that Beijing will violate at first opportunity.

It’s time to join the commercial war with China-for real. Impose tariffs high enough to compel balanced bilateral trade – allocate import quotas by auction that limit purchases from China to the value of exports into its market. Apply aggressive financial and trade sanctions against Chinese companies that pirate technology and initiate national strategies in advanced computing, space exploration and artificial intelligence that can ensure national survival.

All those require higher prices for toasters and teapots at Target and less entitlement spending and higher taxes, but that’s the price for national survival.

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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When Money Is No Longer Artificially Cheap

 

By Peter Morici

Feb. 13, 2019 (First published at The Washington Times) 

Federal Reserve Chairman Jerome Powell has decided to listen more to markets and embrace a healthy agnosticism about economics.

During his first year, the Fed increased the federal funds rate – the rate banks receive on deposits at the central bank and pay each other on overnight loans – by a full point to about 2.4 percent – and continued to run down holdings of mortgage back securities accumulated during the financial crisis.

The former strongly affects short-term business loans, credit cards and auto rates, while the latter significantly influences the markets for long-term corporate bonds and home mortgages.

Through December, the stock market fell a record seven times in a row following Fed policy committee meetings and in a stunning vote of no confidence, dramatically after the chairman spoke in December.

Mr. Powell has backed off

Mr. Powell has backed off. He won’t be raising the federal funds rates again any time soon and has promised to be more cautious about liquidating the Fed’s holdings of the mortgage-backed securities and Treasuries.

Pundits have concluded that the Fed has gone from trying to wean markets from cheap credit to promiscuity, giving the equity investors exactly what they want.

Nothing could be further from the truth – money isn’t artificially cheap anymore.

Over the last decade, credit markets have changed profoundly. More supply: Sluggish growth and endemic structural woes in Europe, China and Japan have increased the dollar’s role in global commerce. Consequently, foreign investors and central banks are holding more Treasuries and other dollar denominated securities and bank deposits.

Less demand

Less demand: Consumers are more cautious about credit card debt and too many of them are burdened by excessive student loans to consider too much borrowing for homes.

These combine to significantly lower the neutral rate of interest. At 2.4 percent for the federal funds rate and 4.4 percent to 4.7 percent for mortgages, the Fed has found the sweet spot for hitting its 2 percent inflation target and maintaining a solid pace of economic growth. For example, as mortgages inched up to 4.9 percent in November, new home sales tanked but as rates slipped back in December, buyers returned to the market.

All of this flies in the face of what Fed economists crank from their models. At 4 percent unemployment, the recent rapid pace of hiring should be pushing wages off the charts. For the last decade, economists harped productivity growth is dead – all the good stuff has been invented.

In January, the economy created 304,000 jobs and wages were up 3.2 percent from a year ago but inflation remains remarkably subdued. Employers are finding ways to attract folks who quit looking for work during the Obama years back into the labor market and investing heavily in training to assist the handicapped hold satisfying positions and the unskilled find career paths.

Lot of games

Economists must be playing a lot of games and betting on sports with their hand-held devices and laptops while the rest of humanity is using those to harvest benefits from artificial intelligence. The latest data indicates productivity is clipping along well above the 1.2 percent rate necessary to accommodate wage increases of 3.2 percent and inflation at or below 2 percent.

So many things are working to keep prices from flying out of control. For example, the excess profits consumer products companies reap from mixing 25 cents worth of ammonia and lemon scent to sell window cleaner at $3.29 is under assault by Amazon and discount chains offering own-label products at fairer prices.

In China, the Communist Party is panicking to do most anything to keep the factories rolling – including never-repay loans for its increasingly dominant state-owned enterprises. That pushes down prices everywhere. More broadly, excess capacity abounds for manufacturing worldwide.

Shale boom

Oil and gas prices and the cost of just about everything else that uses that stuff have been pushed down by the shale boom in West Texas, where drilling is getting ever more efficient.

Economists’ models forecast the future by churning data – mostly domestic information – from the past several decades, and simply don’t capture those sorts of structural changes.

Mr. Powell can’t very well say economics is bunk – but I can. And though he can’t fire those jug heads, he doesn’t have to listen to them.

Good for him and good riddance to the Dismal Science.

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Europeans must get rid of the failing EU one way or another: The polite Brexit way, or the rowdy yellow-vest way

The tyrants of Brussels are as out of touch as the nobility of Versailles

 

By Peter Morici

Feb. 11, 2019 (First published at MarketWatch) 

Populism is sweeping Europe, because the European Union and its constituent governments have become as unresponsive as the 18th century aristocracies those replaced.

The EU antecedent, the European Economic Community (1957) was created to prevent another World War by integrating the continent’s iron and steel industries and then its broader continental markets for goods, services, capital and labor.

The process created a politically unaccountable bureaucracy, whose broad policy directions are set by consensus among the national heads of government and cabinet ministers. However, Brussels enjoys wide administrative discretion in supervising the customs union, agricultural and fisheries management, and national subsidies, anticompetitive practices, and other behavior that could undermine the “single market.”

Through a succession of treaties and agreements, national leaders “pooled sovereignty” to empower the European Commission to issue edicts that member states must directly obey or conform national laws and regulations in areas such as social policy and human rights, consumer protection and product standards, transportation, and immigration.

European Central Bank

European Court rulings have direct application in national courts, and 19 of the 28 states have ceded monetary policy to the European Central Bank by adopting the euro.

To win votes, mainstream national politicians have endemically statist impulses, and hue to globalist views regarding the virtues of freer trade and more open immigration, regulatory responses to environmental challenges like climate change rather than mitigation, and impelling cultural diversity as opposed to preserving local cultures.

In Europe, national leaders have empowered the commission to impose the pain and constraints on private freedoms that such globalist policies require. Then they can point to Brussels to alibi they are just advancing a stronger European Union.

That’s the point. The European Project, as Tony Blair likes to call it, and multilateralism more generally, have become ends in themselves with too little attention to whether free trade within Europe and with other nations, more open immigration, and pan-European regulation in so many areas best serves the well being, security and values of the great mass of native-born Europeans.

Multilateralism

As Federica Mogherini, the EU high representative for foreign and security policy puts it, the “priority of our work will be to strengthen a global network of partnerships for multilateralism.” Not ensuring prosperity, safeguarding freedom or securing borders for polities threatened by Russian aggression and a refugee crisis.

Free trade, immigration, farm subsidies and fishing quotas, antitrust rulings, mandates regarding the rights of women and minorities, and even rules for the marketing of cheese create winners and losers. Generally, professionals in metropolises have prospered, while ordinary working folks in the suburbs and hinterland languish under the yoke of low-paying jobs and unemployment, burdensome taxes, and declining police and public services.

In recent decades, the arrogance of the commission, burdens of regulation and taxation, and mismanagement of the euro have virtually extinguished growth, reduced much of Southern Europe to near poverty, and driven governments in Spain, Ireland, Greece and elsewhere to near bankruptcy.

All that inspired the British working class to unshackle from the albatross by voting for Brexit.

Populists are rising

Across Europe populists are rising up against center-left and center-right parties that have controlled national politics throughout the EU era, but the commission has cracked down on their agendas when they win control of governments in the most biased and cynical manner.

For example, on Italy’s budget for violating EU deficit rules but not on French President Emmanuel Macron’s spending plans, which violate the same strictures, against Hungary for building a fence along its border with Serbia, and against Poland for reforming its judiciary to national values.

Macron tried to defuse the yellow-vest rebellion by backing off his gas tax, raising the minimum wage, advancing other proposals to increase worker and pensioner incomes, and established a network of town meetings, but those are as ineffective as prescribing a cold compress for a burst appendix.

Ordinary Europeans are as helpless to dispose of the EU’s tyranny as were the starving peasants under the reign of Louis XVI and noblemen who their fed dogs better than their workers. Now, the French peasantry are again turning to violence.

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Western Decadence Puts Democracy at Risk

Moscow and Beijing Are Scoring Wins Where It Counts

 

By Peter Morici

Feb. 4, 2019 (First published at MarketWatch) 

With the fall of France in 1940, Britain and America were left to defend democracy and capitalism – systems built on the ideas that ordinary people choosing their leaders and pursuing their own destinies in free markets best serves the progress of civilization.

Once the dust settles from Brexit, the world may not be in much different a place.

Continental Europe is in disarray. Unable to grow, innovate or defend its borders, the yellow jackets paralyzing the Macron government in Paris will likely prove precursors of populist upheavals in places like Italy, Hungary and Poland, gradually pulling the European Union into complete dysfunction.

Britain’s future is brighter than defenders of the status quo realize.

Driving growth

That will not be defined by seamless supply chains in manufacturing across the channel but rather by services – finance, artificial intelligence and the like – which are now driving growth in global trade and where its universities are on a par with the best in America.

China and Russia look a lot like fascist Japan and Germany in the 1930s. Each features disciplined government finance and state-directed businesses. And their advance is assisted by decadence among the most significant actors in Western democracies.

China may have big government and private-sector debt but it sits on huge holdings of U.S. Those substantially limit the possibility of a bubble bursting and enable Beijing to project power.

Putin keeps Russian debt in check while investing its oil wealth in military modernization and disciplined expansion of social programs. Those appeal to Russian nationalism and expectations established during the communist era for guaranteed employment, health care and a steady diet of propaganda.

Centers of  tyranny

Corporate chieftains understand absolute loyalty to Moscow and Beijing is essential to business success and personal survival. And those centers of tyranny have successfully ensnared America’s corporate leaders – consider Ford’s decision to stick with Russia after the annexation of the Crimea and Google’s cooperation with Chinese firms that can ultimately advance Beijing’s population-monitoring and control technologies.

So far, Moscow and Beijing are scoring wins where it counts.

Russia is in the eastern Ukraine and Georgia, undermining public confidence about elections in Europe and the United States (how else could Democratic leaders Nancy Pelosi and Chuck Schumer deny the legitimacy of President Donald Trump), and extending its menacing influence in Syria, Iran and the wider Middle East.

Notwithstanding some pushback to its Belt and Road initiative, Beijing continues to win acolytes among autocrats in Asia, Africa and elsewhere. Even growing more slowly than in the past, it still boasts more progress for workers and a lot less terrorism and crime than Western democracies.

Cheap Chinese manufactures

Rationalized as engagement to encourage democratic reforms, bankers and multinational CEOs, academics and civil society grow rich and influential by lobbying to keep American markets open to cheap Chinese manufactures.

Ultimately, the U.S. negotiations with China will yield a document reminiscent of the 2001 World Trade Organization accession agreement and the bilateral trade deficits will continue. The resulting U.S. borrowing builds Beijing’s dollar horde, European leaders happily buy Russia’s natural gas, and together those finance China’s and Russia’s soft power and military buildups and adventures.

Now Russia has developed a hypersonic nuclear-weapons delivery system to foil America’s defenses. China has landed a rover on the dark side of the moon and plans a permanent colony to claim its resources before manned American voyages can return to lunar soil.

And it is claiming the lead in quantum computing and important dimensions of artificial intelligence.

Focus resources

All because Moscow and Beijing can focus resources where it counts, while Washington and European capitals remain engulfed in sterile quarrels about the viability of the WTO and sanctity of the EU, homophobia and shaming historical figures, and whether the advent of robots entitle adults to a guaranteed annual income.

Have you ever heard Bernie Sanders or Alexandria Ocasio-Cortez talk about national security or the importance of technology to their socialist utopia?

Meanwhile, Google refuses to cooperate with the Pentagon, and alongside Facebook, and Twitter, Google builds private systems that monitor the behavior and thoughts of every private citizen every bit as threatening as China’s emerging social-credit system.

Ultimately, democracies in the West are at risk, because their leaders too are hostage to the false gods of multilateralism, political correctness, and good old-fashioned greed.

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Carbon Taxes and Other Idols of Economics

 

By Peter Morici

Jan. 31, 2019 (First published at TheWashingtonTimes) 

Few things are more threatening to the progress of our civilization than a group of economists at a blackboard prescribing public policy.

In a Wall Street Journal op-ed, an all-star panel led by former Federal Reserve chairmen, Nobel laureates and presidential advisers from both parties recommended that the United States adopt a $40-per-ton carbon tax and increase that tax annually until the nation reaches its goals for greenhouse gas emissions – presumably those spelled out in the 2016 Paris Agreement.

In the cultural bubble of economics, markets work perfectly, information is good enough to make sensible plans and an omnipotent regulator ensures everyone follows the rules.

Sadly, the real world does not work that way.

Free trade

Consider free trade. According to the theory of comparative advantage all those workers in Middle America displaced by imports from China and other Asian nations should be employed as West Coast software engineers or heading for the new Amazon facilities in Long Island City.

Instead, we have urban decay, prostitution, opioid addiction and endemic poverty throughout much of the Rust Belt. I wonder how many of those economists who signed the recent op-ed ever bothered to drive to places like Wilkes-Barre, Pennsylvania, and stroll down Main Street.

Climate change is real enough – atmospheric temperatures are up by nearly 2 degrees Fahrenheit since latter decades of the 19th century and CO2 and industrial emissions are the primary culprit. How much further those go – with or without a universal carbon tax – is difficult to project. What is clear is that we are not headed for an economic Armageddon.

Assuming a high emissions path – thanks to fairly slow improvements in energy efficiency and other technologies – the U.S. economy in 2090 will be at least three times larger in real terms than it is today. With GDP at $61 trillion, the annual costs imposed by higher atmospheric temperatures would be a manageable $510 billion.

The latter is likely to be less but where the burdens are visited, those will be severe.

Prospective risks

Coastal floods and ferocity of storms along the East and Gulf Coasts and wild fires in the West are already escalating, but insurance companies, with armies of climatologists, are having fits trying to model where and how much further their prospective risks will increase. At the same time, fresh water supplies are becoming more valuable and the target of speculative investors, like the Harvard endowment, and agricultural land in Canada’s Prairie Provinces more productive and valuable.

Still mitigation – such as building sea walls in cities like New York and tougher building codes in Texas – and relocating populations from many high-risk areas will be less expensive than a carbon tax, because the tax would have to escalate to draconian levels and impose unconscionable risks to accomplish the Paris Agreement’s objectives.

To substantially reduce the trajectory of carbon emissions globally, about 100 kilowatt hours of electrical generating capacity – about 3.3 kilowatts per year over 30 years – will be needed. The Merkel government in Germany has pulled out all the stops on renewables and found it can only accomplish about one-fifth its annual share – and it is a highly advanced society with the best engineering expertise.

Universal carbon tax

Consequently, a massive buildout of nuclear power would be required for a universal carbon tax to accomplish a meaningful reduction in the path of projected greenhouse gas – not just in industrialized countries but also in the developing world.

If Japan with its superior organization could not avoid the Fukushima Daiichi nuclear disaster, do we really want to build out a pervasive network of nuclear reactors including places like Venezuela and the Sudan?

China, which is the largest source of greenhouse gas emissions, has reversed course and is building new coal fired facilities that will almost equal total existing U.S. capacity. Provincial governments in Canada and the Yellow Jackets in France are opposing national carbon taxes of one sort or another.

If the United States took the economists’ advice, it would be free trade all over again – America and some European nations would play by the rules while others would not. More jobs would be lost to China and other destinations in Asia. Global emissions would rise not fall as those nations generated the necessary electricity with cheap coal, and the costs to the U.S. economy of a carbon tax would far exceed the benefits.

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Opinion: Why Europe Is Failing

 

By Peter Morici

Jan. 23, 2019 (First published at TheWashingtonTimes) 

Populism and unrest are sweeping the continent, because the European Union and its constituent governments are as undemocratic and unresponsive as the monarchs and aristocrats who lost their power and heads during the succession of uprisings bookended by the American and Russian revolutions.

The goal of the EU’s antecedent, the European Economic Community (1957), was to prevent a third World War by integrating the defense industries and broader national markets for goods, services, capital and labor of historical rivals – Germany and France.

The process created a politically unaccountable bureaucracy that supervises internal free trade and a common external tariff, joint systems of agricultural and fisheries management, subsidies to industry and an antitrust regime to crack down on the cartelization of national commerce that could block the benefits of a single market.

Over time, Brussels has been hijacked by left-leaning national politicians and civil society activists bent on imposing a United States of Europe and their socialist agenda.

Pooled sovereignty

Through a succession of treaties and agreements, national leaders “pooled sovereignty” to empower the European Commission to issue edicts that member states must directly obey or implement by conforming national laws and regulations in areas such as social policy and human rights, consumer protection and product standards, transportation and immigration. The EU has courts to enforce these mandates, and 19 of the 28 states have ceded monetary policy to the European Central Bank by adopting the single currency.

Endemically, national politicians have statist impulses – consider that George W. Bush pushed out the frontiers of the welfare state with Medicare prescription drug coverage and the recent Republican-controlled Congress refused to roll back entitlements or repeal Obamacare.

In Europe, national leaders have empowered the commission to impose the pain from globalization, the climate change conspiracy and widening state constraints on private freedoms. Then they can point to Brussels and alibi they are just advancing national commitments to a stronger European Union.

And that’s the point. Pan European government and regulation, free trade within Europe and with other nations, and open immigration have become ends in themselves. Not whether they best serve the wellbeing, security and values of the great mass of native-born Europeans.

Partnerships for multilateralism

As Federica Mogherini, the EU High Representative for Foreign and Security Policy puts it, the “priority of our work will be to strengthen a global network of partnerships for multilateralism.” Not ensuring prosperity, safeguarding freedom or securing borders for polities besieged by Russian aggression and a refugee crisis.

Free trade always creates winners and losers as do mandates regarding the status of women and minorities, farm subsidies, fishing quotas and immigration. While professionals in big cities prosper, ordinary folks in the suburbs, smaller cities and rural communities languish under the yoke of low-paying jobs and unemployment, high taxes and inadequate transportation, police and other public services.

In recent decades, the arrogance of the commission, burdens of regulation and taxation and mismanagement of the euro have virtually extinguished growth, pulverized much of southern Europe into poverty, driven governments in Spain, Ireland, Greece and elsewhere into near or complete bankruptcy, and inspired the British working class to vote for Brexit.

Brussels’ decrees

The EU Commission has acquired the sovereign powers of a federal government without politicians who must seek re-election and hence broker tradeoffs among conflicting constituent interests. In particular, among those who benefit and those who bear the costs imposed by Brussels’ decrees.

President Emmanuel Macron tried to defuse the yellow vest rebellion by backing off his gas tax, raising the minimum wage and advancing other proposals to increase worker and pensioner incomes but those are as effective as prescribing Tylenol for a serious systemic infection.

Across Europe, populists are rising up against center-left parties that have controlled national politics throughout the EU era, but the commission has cracked down on their agendas when they win control of governments in the most biased and cynical manner. For example, on Italy’s budget for violating EU deficit rules but not on Mr. Macron’s spending plans which violate the same strictures, against Hungary for building a border fence and Poland for reforming its judiciary to national values.

Ordinary Europeans are as helpless to dispose of the EU’s tyranny as were the starving peasants under the reign of Louis XVI and noblemen who their fed dogs better than their workers – until the peasants rolled out the guillotine.

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Engineering a Soft Landing

Fed Faces Challenge of Navigating Growth, Inflation and Interest rates

 

By Peter Morici

Jan. 17, 2019 (First published at TheWashingtonTimes) 

Federal Reserve Chairman Powell faces the tough challenge of engineering a soft landing for the economy. The task is made terribly more complicated by economic conditions abroad and new technologies that have broken traditional relationships among growth, employment, inflation and interest rates.

The nearly three percent growth accomplished in 2018 – despite chronic skilled labor shortages – was no accident of nature. Trump tax cuts and a February 2018 budget deal that lifted federal appropriations caps boosted consumer and government spending.

Lower corporate taxes permitted businesses to invest in labor saving robots, artificial intelligence and workforce training. Trump Administration deregulation slashed private sector compliance costs, and together those boosted labor productivity.

More demand, more supply and the economy zoomed ahead at a pace defying naysayers in the left-leaning media.

Conditions in Europe and China

In 2019, consumers are getting an additional lift from falling gas prices but the benefits from more government spending and personal tax cuts have largely run their course. Businesses should continue to invest but conditions in Europe and China are troubling.

Brexit, the yellow vest riots in France and the emergence of a populist government in Italy were nominally caused by unchecked immigration, higher taxes on gasoline and reforms that tighten belts for workers and pensioners and a left-right coalition agreement to spend more than EU national debt limits permit. In reality, the onerous regulations imposed by the EU bureaucracy and mercantilist policies in Germany and a few other northern European economies that impose perennial trade deficits and austerity elsewhere are pulling the EU apart.

The rump of it is Europe can’t grow-and it’s America’s most important export market.

China has run the string on credit driven growth, and Republicans and Democrats alike are tired of Beijing’s protectionism imposing a whopping $365 billion trade imbalance and exporting unemployment and social problems here.

Trade war

Donald Trump’s trade war is criticized only because Hillary Clinton, who campaigned on a similar policy, did not win the election. The Fed would have to deal with the uncertainty created by a trade war no matter who occupied the Oval Office.

A decade of low interest rates boosted real estate and stock values in the United States and permitted struggling corporations and foreign governments to avoid reforms that would make them competitive and less corrupt. Now just about anything the Fed does has feedback effects on asset prices, corporate and foreign government finances and ultimately U.S. exports and growth.

Finally, tools the Fed uses to navigate are broken. The Philips Curve, which charts the tradeoff between inflation and unemployment, is flashing red but the hard economic data say otherwise. Even with unemployment at 3.9 percent, wage increases of 3.2 pose few inflationary pressures with stronger productivity growth to pay for those.

The Yield Curve – the difference between the short and long-term interest rates on Treasuries – has been flattening. Historically, that has proven a pretty good indicator of a recession in the next year or so. Theoretically, it is supposed to indicate businesses that buy equipment and hire don’t believe that prospective sales growth justifies borrowing long-term to finance expansion.

Foreign investors

The problem is that since the 2000s U.S. long rates have been suppressed by foreign investors. Europeans stuck in a lethargic economy, and Latin Americans and Asians fearful that their corrupt governments will ignite inflation to solve their debt problems, have been buying up U.S. real estate and long bonds.

Similarly, the dollar has increasingly become the preferred currency for all global trade further increasing the demand for U.S. bonds.

Those unhinge the relationships between business expectations and interest rates. For example, the yield curve has been sending warning signals since late 2017 but the economy sped up instead of slowing.

Lacking the Philips Curve and Yield Curve as tools, Mr. Powell is flying without an altimeter and air speed indicator. Not being an economist he hasn’t been to pilot school either.

With all this, turbulence in stock prices is understandable and can’t be ignored. Along with the hostile press coverage President Trump gets no matter his spending or trade policy proposals, falling stock prices could pull the economy into, rather than follow, a recession.

The best thing Mr. Powell can do for now is pull back on the stick and announce he is not planning any more interest rate increases until at least this summer.

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Putting Democracy at Risk

How China and Russia behave like Japan and Germany in the 1930s

 

By Peter Morici

Jan. 9, 2019 (First published at TheWashingtonTimes) 

With the fall of France in 1940, precious few democracies remained to defend liberalism – the idea that free men seeking their fortunes in private markets and governing themselves could best advance civilization, a just prosperity and the security of nations and individuals.

Today’s threats to freedom – an ascendant and autocratic China, and a resurgent and ruthless Russia – look a lot like fascist Japan and Germany in the 1930s. Each features disciplined government finance and state directed businesses. And their advance is assisted by dysfunction and decadence among Western democracies, summoned up by greed and political correctness.

China may have big government and private sector debt but it sits on huge holdings of U.S. dollars. Those substantially limit the possibility of a bubble bursting and enable Beijing to project power.

Vladimir Putin keeps Russian debt in check while investing its oil wealth in military modernization and disciplined expansion of social programs. Those appeal to Russian nationalism and expectations established during the communist era for guaranteed employment, health care and a steady diet of propaganda, bologna and vodka.

Centers of tyranny

Corporate chieftains understand absolute loyalty to Moscow and Beijing is essential to business success and personal survival. And those centers of tyranny have successfully ensnared America’s corporate leaders – consider Ford’s decision to stick with Russia after the annexation of the Crimea and Google’s cooperation with Chinese firms that can ultimately advance Beijing’s population monitoring and control technologies.

These adversaries are winning where it counts. Russia is in eastern Ukraine and Georgia, discrediting elections in Europe and the United States (how else could Democratic leaders Nancy Pelosi and Chuck Schumer deny the legitimacy of Donald Trump), and extending its menacing influence in Syria, Iran and the wider Middle East.

Notwithstanding some push-back to its Belt and Road initiative, Beijing continues to win acolytes among aspiring autocrats in Asia, Africa and elsewhere. It boasts more robust growth and social progress for workers and a lot less terrorism and crime than western democracies.

Rationalized as engagement to encourage democratic reforms, bankers and multinational CEOs, academics and civil society grow rich and influential by lobbying to keep American markets open to cheap Chinese manufactures.

U.S. borrowing

The U.S. borrowing that necessitates builds Beijing’s dollar horde. European leaders happily buy Russia’s natural gas, and together those finance China’s and Russia’s military and international adventures.

All that is appeasement of the most amoral variety.

Today’s threats to freedom – an ascendant and autocratic China, and a resurgent and ruthless Russia – look a lot like fascist Japan and Germany in the 1930s.

When these policies devastate the working classes in the West and limit opportunities for quality employment for all but the elites, civil society blames the Euro-American white male culture that created modern democracy in the 18th century, ended slavery and the grip of monarchies in the 19th century and defeated fascism in the 20th century.

The Obama administration Education Department imposing kangaroo courts at universities, the #MeToo movement extorting huge payouts from CBS and other companies, and Maxine Waters’ plans for House Financial Services Committee diversity witch hunts are tragically remindful of Third Reich brown shirts, forced labor and ethnic scapegoating.

Foil America’s defenses

Now Russia has developed a hypersonic nuclear weapons delivery system to foil America’s defenses. China has landed a rover on the dark side of the moon and plans a permanent colony to claim its resources before manned American voyages can return to lunar soil. And it is claiming the lead in quantum computing and important dimensions of artificial intelligence.

All because Moscow and Beijing can better focus resources where it counts, while Washington and European politicians remain engulfed in sterile quarrels about international governance, homophobia and whether adults should be required to work with the advent of robots. Have you ever heard Bernie Sanders or Alexandria Ocasio-Cortez talk about national security or the importance of technology to their socialist utopia?

Meanwhile, activists and civil society label Donald Trump a demagogue for criticizing Europe’s neglect of national defense, purchases of Russian natural gas and complicity with China. And for seeking to stem the flow of Chinese imports and U.S. dollars into Beijing’s coffers.

Google refuses to cooperate with the Pentagon as it does with Chinese firms and fires forced-diversity critic James Damore for embracing politically incorrect values. Alongside Facebook and Twitter, Google builds private systems that monitor the behavior and thoughts of every private citizen.

Ultimately, democracies in the West cannot respond effectively, because they too are hostage to profiteering and self-righteous prejudices of these multinational elites, self-aggrandizing activists and democratically unaccountable civil society.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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The Making of a Recession

How the Federal Reserve Chairman Mishandles Monetary Policy

 

By Peter Morici

Jan. 7, 2019 (First published at TheWashingtonTimes) 

Nowadays recessions occur when policymakers do or say dumb things – the economy no longer has an internal clock akin to the changing of the seasons. Sadly, Fed Chairman Jerome Powell’s mishandling of monetary policy and the president’s tweets and other fits may be enough to send the economy tumbling.

Though I now support the construction of a border wall – it’s the only way to keep unauthorized visitors from setting foot on U.S. soil, applying for asylum and then slipping into the general population – President Trump doesn’t have the votes in Congress. His tweets and pointless government shutdowns offer financial markets the picture of an unstable and fitful leader.

All presidents have issues with the Federal Reserve – higher interest rates make wage gains and votes tougher to get – but other presidents made the most of their concerns known through private meetings. If anything, Mr. Trump’s public pressure compelled Mr. Powell to dig in his heels and deliver a December interest rate increase that financial markets made clear was badly conceived.

Similarly, the president’s inability to thoughtfully counter the liberal media’s constant drum beat that the tax cuts have the economy on a sugar high and his tariffs are harmful create the worst possible karma.

Incompetence at the Fed

Sadly, all of this takes the spotlight off the incompetence at the Fed.

The economy can’t sustain the nearly 4 percent growth accomplished during the middle two quarters of last year. To do so would require annual labor productivity advances greater than 3 percent per year, and I have a better chance of playing shortstop for the Yankees.

With most of the unemployment in labor markets mopped up, growth is slowing to about 2.5 percent to 3 percent. This requires the right business spending – more aggressive application of artificial intelligence and increased spending on training for less-skilled workers and those with redundant skills or frivolous degrees in Peace Studies and Etruscan Art. So far, businesses have been doing those things.

It’s happening in places like Amazon warehouses and at Square Inc. – the folks who make those white gadgets that plug into smartphones to swipe credit cards – to deliver socks and small business loans more effectively and with fewer workers than Target and J.P. Morgan.

Phillips Curve

Still, the Fed economist remains fixated on the Phillips Curve, which says inflation should be rising now when it’s not, and the Fed must continue to push up interest rates into next year and other measures to tighten credit.

On the morning of Dec. 19, stocks were rallying. Then the Fed statement announced a quarter-point increase in the federal funds rate, it would likely raise that rate two more times this year and ultimately take it still higher. Stock prices immediately gave back the gains of the first few hours.

Tax cuts and deregulation have worked wonders for the Trump economy so far, but blunderbuss and incompetence are often more powerful than all the good intentions of mankind.

Later that day, Mr. Powell appeared not to know his own mind or much about economics. He indicated that the federal funds rate was already near its desired level, yet he let the policymaking committee issue the above noted statement.

Moreover, the Fed is selling off its portfolio of mortgage-backed securities, accumulated in the wake of the financial crisis to suppress mortgage rates and add liquidity to markets. At his afternoon press conference, Mr. Powell indicated that now relinquishing that portfolio had no consequences for financial market turbulence.

Reasoning of sophomores

That’s the reasoning of sophomores — the appellation derives from Greek words for wise and fool. How can adding liquidity affect financial markets positively when the Fed is buying mortgage-backed securities but not affect markets negatively when it is selling those?

I must have missed something during my education in economics that is taught at law school, where Mr. Powell got his training.

On his utterances, stocks tanked the afternoon of Dec. 19. If the market ever issued a vote of no-confidence to a Fed chairman that was it.

Most economists do not predict a recession anytime soon but observing this specter, nearly 50 percent of corporate finance chiefs see one beginning by the end of this year. CFOs are the folks – not my learned colleagues plying chalk to blackboard – who will evaluate the efficacy of pursuing new investment projects versus scaling back on business spending and hiring.

Tax cuts and deregulation have worked wonders for the Trump economy so far, but blunderbuss and incompetence are often more powerful than all the good intentions of mankind.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Riding the Roller Coaster Stock Market

The Stock Market Is in a Cyclical Funk for Reasons that Will Pass, Albeit Painfully

 

By Peter Morici

Jan. 2, 2019 (First published at TheWashingtonTimes) 

Holiday parties are fun for economists when the stock market is up and calm – then we are regaled with stories of savvy picks and personal triumphs. When equities head south along the pattern of a rat seeking out of a maze, folks irritably ask – professor, what’s wrong?

My answer is not much.

Two facts should color assessments of the recent market correction: Stocks are undervalued and the outlook for the U.S. economy remains solid.

When stocks peaked in early October, the average price-earnings ratio – the price we pay for company profits – for the S&P 500 index – it captures about 80 percent of publicly traded enterprises – was 21. That was well below the quarter century moving average of 25.

Stocks really inexpensive

Stocks are really inexpensive with average price-earnings ratio even lower as company earnings continue to rise.

The economy is decelerating. The nearly 4 percent growth accomplished during the second and third quarters is not sustainable, but the economy will continue to grow close to 3 percent and is creating more jobs than pessimists thought possible. Factoring in inflation at 2 percent, corporate profits should continue to rise in the high single digits and support increasing stock prices.

Still the market is in a cyclical funk for several reasons, but those are more like a kidney stone that will pass, albeit painfully, than a terminal illness.

Growth prospects abroad are not good and that has driven investors from equities across the globe into Treasuries, driving down stock prices and longer-term interest rates.

China’s slowing economy

It is fashionable in left-leaning financial media to blame China’s slowing economy on President Trump’s trade war, but his tariffs have not had a lot of grip. Most of those are at 10 percent, and since April the yuan has dropped about that much to erase their pricing effects. For years, China has been in a credit bubble with state banks and a shadow lending system on steroids papering over fraudulent bookkeeping – now the bill is coming due.

Europe’s funk is not new. The European Union (EU) has no credible immigration policy or border defenses. About 1.6 percent of Germany’s population are recent refugees, mostly lacking language skills and capable of little more than loitering in railway stations and menial work.

Eurozone restrictions on deficit spending make it virtually impossible for Italy and France to restructure labor-market and business policies for the age of artificial intelligence, robotics and small tech startups. Sensing folly, the U.K. voted for Brexit but Prime Minister Theresa May has conspired with other EU leaders to indefinitely shackle her countrymen to the EU corpse.

It’s important to remember that the imminent drivers of growth and stock market value – artificial intelligence, robotics and small startups that create and exploit those technologies – can happen anywhere, and entrepreneurs will find homes in America, Southern and Eastern Asia and the U.K. if it manages to unshackle itself from moribund European statism.

Trump rally

In America, much of the Trump rally was powered by the FAANG stocks – Facebook, Apple, Amazon, Netflix and Google. Apple is approaching market saturation with iPhones and is in the painful process of developing new business lines to redeploy its substantial capital. Google, Amazon and Facebook face tough antitrust challenges.

Facebook and Google must address privacy and fake news issues and have employees in rebellion against their leadership. Netflix faces a host of new direct-over-the-Internet competitors flogging movies and original content.

Generally, the FAANGs have been more volatile in recent months and declined more than the market in general. The good news is that most of the rest of the market is a downright bargain with price-eaarnings significantly under 20.

The trade war with China has rattled CEOs and investors, but the one thing I know about major trade talks is that if national leaders believe markets will tank if they fail, they will likely find some kind of face-saving agreement to sign, declare victory and go home – and gullible Wall Street will break out into euphoria.

In the short run, the stock market is not the economy – if that were so, the recent market correction would imply unemployment at 7.3 percent not its current 3.7 percent. In the long run, the economy drives the stock market.

In the end, solid economic growth cannot be denied. That is likely where we are headed and then stock prices will recover.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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The Good News about Trump’s Brand of Economics

 

By Peter Morici

Dec. 27, 2018 (First published at TheWashingtonTimes) 

The new year could well demonstrate President Trump’s brand of Republican economics – tax cuts, deregulation and tough policies on trade with China – really works.

In 2018, the president’s policies instigated nearly 3 percent growth, robust jobs creation and rising wages – a combination President Obama’s statism could not deliver. The prevailing narrative among the left-leaning financial press and Democratic Party is the economy is on a sugar high.

Household incomes got a jolt from personal tax cuts and those temporarily accelerated consumer spending. However, newly rising wages and lower gasoline prices – both enabled by Mr. Trump’s policies – are now giving a fresh boost to consumer spending power. Those should keep cash registers ringing well into 2019.

Deregulation is raising labor productivity, and permitting businesses to keep prices in check even as they raise wages. Pulling out the volatile energy food sectors, “core inflation” is flat lining in the range of 2 percent. Federal Reserve Chairman Jerome Powell has the opportunity to heed President Trump’s call for a more cautious interest rate policy.

Relentless disinformation

The left-leaning media and Democrats have been on a relentless disinformation campaign asserting corporate America is pocketing their tax cuts, when they are in fact expanding capacity and adding employees.

It does not show up in large increases in investment spending, because most durable goods (other than cars and cell phones) are getting cheaper adjusted for broader inflation and relative to household incomes and business cash flow.

Want proof? Compare the price of a basic laptop, washer and dryer or color TV to what you or your parents paid 20 or 30 years ago.

As for business equipment and building space, Amazon is installing robots that not only reduce labor and operating costs but that could also slash up to $800 million from capital costs by cutting consumer-order cycle times from 60 minutes to 75 minutes to only 15, shrinking required inventory and reducing warehouse space by 50 percent.

Could you imagine Macy’s getting the same sales out of 50 percent fewer square feet?

Competitiveness issues

Chrysler recently announced it will build a new assembly plant in Detroit at a cost of $1 billion. Back in the late 1980s, when I was working with Lee Iacocca on competitiveness issues, he bragged about putting up the new Jefferson Street Plant for $1 billion.

Over the last 30 years, economy-wide prices have doubled but the cost of a new auto plant appears to be about the same, because the proper application of modern supply-chain management, robots and artificial intelligence cuts machinery and building space requirements rather than adding to them, even as those save labor and enhance quality in making products.

Business spending is up even if brick-and-mortar and machinery spending are not rocketing. Enterprises are devoting a substantial portion of their savings on those items and taxes to training workers to implement, operate and maintain these new systems.

America competitive again

All of this is made possible by making business in America competitive again. Less regulation means less time moving paper and answering to bureaucrats and more time creating great new products and serving customers. Lower corporate taxes increase after-tax profits anticipated from investing in robots, artificial intelligence and a high-powered work force.

Finally, Mr. Trump’s critics hammer endlessly about the alleged negative effects of his tariffs on the auto industry and other manufacturers – in particular, the 25 percent duty on steel and 10 percent levies on aluminum and about $200 billion coming from China.

Detroit’s automakers are crowding all their new vehicle production into trucks and SUVs that benefit from a 25 percent tariff on everything going into a fully-assembled imported vehicle – steel and aluminum, components and software. We don’t see them climbing Capitol Hill to petition for its repeal.

Drop in the value of the yuan

As for other businesses, virtually all of the 10 percent tariff on components has been mitigated by a 9.5 percent drop in the value of the yuan. Most manufacturers who say the tariff is raising the cost of imported parts are either getting duped by suppliers or fibbing to stock analysts who can’t think outside the box.

If Mr. Trump’s tariffs were so tough, manufacturers would not be adding employees at a brisk pace.

The economy can keep on trucking, and 2019 will prove a year of redemption for the Trump economic team if the Fed shows restraint.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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China Is Counting on Its Trade Surplus in Battle for Supremacy

 

Building Its Navy, Investing in Artificial Intelligence and Subjugating Neighbors Requires Dollars

 

By Peter Morici

Dec. 26, 2018 (First published at MarketWatch) 

Resolving differences on trade, investment and industrial policies by March 1, as Presidents Donald Trump and Xi Jinping have resolved, is a terribly ambitious goal considering the complexity of the issues.

More importantly, however, China’s bilateral trade surplus is at the epicenter of its efforts to achieve parity or surpass the United States as the pre-eminent global superpower.

This contest is waged in four theaters – the Korean Peninsula, the South China Sea and broader Pacific and Indian Oceans, the race for dominance in artificial intelligence, and most importantly, the standoff over trade.

Past U.S. presidents appeased Beijing by letting it enable, effectively unchallenged, North Korea’s nuclear weapons and missile programs. Those now pose a direct threat to the U.S. mainland, and Trump has responded by coordinating tough international sanctions.

Unfortunately, China and Russia have enabled North Korea to circumvent critical elements of those sanctions. That permits North Korean President Kim Jong-un to slow walk the denuclearization that was anticipated by the U.S.-North Korean framework agreement.

Beijing’s forces

Festering American preoccupation with the Korean Peninsula distracts attention from the South China Sea, where Beijing’s forces have taken possession, expanded and militarized islands in international waters, and violated the freedom of navigation and the sovereignty of neighboring states.

China is building a navy to challenge American sea power. That shakes confidence among our Southeast Asian friends, and it has established a naval base on the Horn of Africa and has taken possession of a vital port in Sri Lanka.

With the Belt and Road Initiative, China is financing a network of ports and rail connections stretching from China to Europe and duping developing nations, like Sri Lanka, into debt servitude. Importantly, it seeks an undisputed sphere of influence through island nations stretching from Taiwan to Sri Lanka and the Maldives and on to the Horn of Africa.

All of this takes hundreds of billions of dollars to buy, develop and as necessary illegally appropriate Western technology and hardware ranging from port cranes to fighter aircraft to artificial intelligence enabled hardware and software. It’s substantially financed by China’s elaborate trade and industrial policies designed to foster trade surpluses with the United States.

China closes its markets to competitive U.S. products with high tariffs and administrative barriers. American companies seeking to produce directly in China must hand over technology through joint ventures and by establishing product development labs that employ Chinese engineers.

Beijing’s egregious human-rights violations

Firms like Apple and Google, if wishes to return to the Middle Kingdom, must recognize Taiwan as a province of China, turn a blind eye to Beijing’s egregious human-rights violations, help enforce China’s Great Fire Wall, and enable technologies, as needed, to build out Beijing’s population-monitoring and social-credit system.

Now Google is balking at assisting the Pentagon with similar facial-recognition technologies.

China is pouring hundreds of billions of dollars into accomplishing dominance in artificial intelligence and supporting computer hardware – a technological ecosystem that will be the analog in this century to what water power and mechanized mills were in the 19th century and electrification and computerization were in the early 20th century.

Mastery of those technologies established British and then American industrial dominance and provided the wealth for strong armies and navies. Now Beijing is outspending America, outthinking the bureaucracy in Washington, and exploiting American apathy.

$360 billion bilateral trade surplus

Recent polls show Americans don’t see China as a threat. Yet, trade is the linchpin of China’s strategy. Without the $360 billion bilateral trade surplus, China simply would not have the cash to finance all these adventures.

Beijing can’t print yuan by borrowing such sums because even its own citizens don’t want to hold yuan-denominated assets. Once they have made their money they want to invest in the West, making capital controls essential to the stability of China’s fragile financial system and the international value of its currency.

Even with the best of intentions, conforming China’s centrally directed capitalism to Western norms of free-market behavior, as was incorrectly presumed would evolve when it was admitted to the World Trade Organization, would require dramatic cultural changes among its state-owned enterprises and within the Communist Party.

However difficult, those are made practically impossible by the central role that trade surpluses play in financing China’s broader geopolitical ambitions.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Britain Should Just Quit Europe

 

By Peter Morici

Dec. 26, 2018 (First published at TheWashingtonTimes) 

The European Union is failing. Across the continent ordinary folks are rebelling against elites – those modern-day aristocrats who attended the most prestigious universities and have dominated the continent’s center-left parties and governments since World War II.

Liberalism – free trade, open immigration and the social programs and draconian regulations intended to line the pockets of the governing class and mitigate resistance among common folk – has not delivered sustainable economic growth, decent jobs and safe streets.

Professionals in big cities prosper but the working classes in suburbs, smaller cities and rural communities languish under the weight of inequality and creep into poverty. Immigrants corrupt local cultures and incubate crime, and sky-high taxes make starting a business or affording simple necessities torturous.

Europe’s elite – like Stepford wives acquiescing to the whims of husbands – robotically hue to the demands of civil society – unelected, left-wing extremists. The global governance bureaucracies they dominate are now demanding patently unsound environmental measures and more resources to encourage immigration.

President Emmanuel Macron sought to impose a new tax on petrol, which is already terribly expensive in France, to allegedly combat climate change. The bankers in Paris ride the subway but folks in the hinterland must fuel up to get to work or quit their jobs. Most discretionary driving has already been taxed away, and the new levy would have little impact on CO2 emissions and only create more hardships.

Fuel taxes

The gilets jaunes riots resulted, but Mr. Macron reacted like a man controlled by an alien force. When an elderly man in Verdun complained fuel taxes were crushing ordinary people, Mr. Macron reminded him about the need to lower carbon emissions and lectured “when we change things, we shake up habits and people aren’t necessarily happy.”

In other words, let them eat cake!

The EU bureaucracy is now cracking down on duly elected national governments to force Italy to adhere to the euro zone’s unworkable national budget rules, Hungary to take down its border fence and stop enforcing its national immigration laws, and Poland to block its efforts to make its judiciary accountable to Polish values and not the pagan superstitions of civil society.

In Germany, where Chancellor Angela Merkel’s open immigration policies have imposed disastrous economic and social consequences and crime, her designated successor, Annegret Kramp-Karrenbauer, remains committed to the policy and muses Germany “through the social market economy and our system of social partnership, we have a system where many issues and conflicts are always discussed and settled in orderly structures.”

In other words, let them read Kant.

Theresa May

Britons sensing the madness want out, but in Theresa May they have a prime minister who did not support the Brexit referendum. She acceded to every EU demand and promised a huge divorce payment. Now she seeks parliamentary approval for an open-ended transition agreement that would indefinitely impose EU trade policies, regulations and taxes on her countrymen without representation in Brussels.

Not able to keep the U.K. in the EU, Mrs. May would make it a colony.

Britons should read the America’s Declaration of Independence. Dump some tea into the Thames and demand that Mrs. May resign to take a job as a clerk in Brussels. That would save the inconvenience of commuting, which creates terrible carbon footprint anyway.

The new prime minister could inform EU President Jean-Claude Juncker and all the other oligarchs of Europe’s ruling class that on March 29, the date the U.K. is scheduled to leave, his government will declare unilateral free trade with Europe. It would continue to permit EU banks and professionals to do business and work in the U.K. if the EU does the same.

Continent needs London’s financial sector

Brussels can take it or leave it – remember the continent needs London’s financial sector and UK markets as much as the UK industries needs theirs. If the EU doesn’t comply, then London doesn’t pay the $50 billion divorce settlement and makes a hard break.

The transition would be painful for Britain, but Europe will still need London’s financial sector to enable its follies – European banking would no more move from London to Frankfort than American banking would move to San Francisco if Manhattan became an independent country. Anyway, the future is in artificial intelligence and other such stuff where the U.K. will do a lot better unchained from EU dysfunction.

Italy and others would follow. It’s only a matter of time.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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GM’s Shareholders – not Trump – Should Be Calling for Barra’s Head

 

GM Has Been Late to Every Automotive Innovation

 

By Peter Morici

Dec. 17, 2018 (First published at MarketWatch) 

It is ironic that General Motors CEO Mary Barra has drawn the ire of President Donald Trump and members of Congress for announcing plant closures in Michigan, Ohio and Canada when it is her shareholders who should be calling for her head.

Barra claims she is responding to shifts in car-buying habits away from sedans toward SUVs, and wants to move aggressively into electric vehicles, hybrids and self-driving platforms. But these are the fifth round of layoffs in 14 years.

The truth is that Japanese auto makers can sell sedans at a profit, and GM can’t. And GM is struggling to compete on its home turf in SUVs too.

Five years ago, sedans were half of U.S. auto sales, but those now capture only about 35%. And all the major auto makers must grapple with the plateauing of annual U.S. light vehicle sales at a bit more than 17 million.

SUVs are bigger and more expensive but improvements in the engine and vehicle design have greatly reduced the gas-mileage penalty imposed on drivers that choose those over sedans. And vehicles of all kinds are more durable these days.

Advances in metallurgy, fuels and lubricants

Thanks to advances in metallurgy, fuels and lubricants – these industries are more high-tech than most folks recognize – and better design, engines last a lot longer now – over 200,000 miles as compared to half that a few decades back.

Consequently, car buyers are paying for the gas and keeping vehicles longer to compensate for higher SUV price tags.

Options like Zipcar and Uber, inexpensively delivered meals and groceries, and Amazon Prime free more young people from the necessity of car ownership. Increasingly, those living in cities and congested close-in suburbs with access to decent public transportation for commuting are opting to skip car ownership.

Still, the battle for the sedan and smaller SUV markets indicates just how vulnerable GM and Ford remain to more agile foreign competitors. Since 2015, sales of Impalas are down about 49% and sales of Fusions are down about 45%, whereas Toyota Camry and Honda Accord sales are down only 20% and 19%.

Japanese sedans simply deliver more value, reliability and verve, and don’t think for a moment the problem does not repeat where car buyers are heading.

Best-selling vehicles

The three best-selling vehicles in America are still U.S. pickup trucks – the Ford F-150, Chevy Silverado and the Dodge Ram – but those are followed by Japanese SUVs – the Nissan Rogue, Toyota RAV4 and the Honda CR-V.

Ford and Chrysler already announced they are effectively pulling out of the sedan market and with GM’s exit, Asian auto makers and Volkswagen will have a clear path to most of the remaining 5 million sedans sold here. And those are often the first cars young folks own and a gateway for manufacturers to hawk their SUVs as careers mature and incomes rise.

The U.S. tariff on sedans is only 2.5% but SUVs and trucks benefit from a 25% levy.

When announcing the recent jobs cuts, GM carped that the recent steel tariff was costing it about $1 billion, but I did not hear Barra offer to give up her truck/SUV tariff if the steel duty were dropped – that’s the hypocrisy of Detroit.

It’s going to get worse – a lot worse.

Late to the party

Barra is betting that electric vehicles and autonomous drive are coming fast, but GM has been late to the party with just about every major innovation that instigated change in what Americans buy since the 1970s. Chrysler pioneered the minivan and SUV, and Honda, Toyota and Nissan were first with contemporary front wheel drive, hybrid and all-electric vehicles.

GM’s most basic problem is a culture of mediocrity among its top managers and the difficulties of competitively producing vehicles in United Auto Workers organized plants. It is important to remember Japanese competitors make sedans in the United States profitably without a unionized workforce.

Whereas the Japanese aim to make best in class vehicles, GM executives are happy to settle for good enough. For a long time now, good enough has been not enough, and the matron of this culture of failure, Barra, should be shown the door.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Why Millennials Are Chilling the Housing Market

 

By Peter Morici

Dec. 7, 2018 (First published at TheWashingtonTimes) 

Holiday party season is fast approaching and just as doctors are button-holed for free advice on all manner of ailments, economists – especially those who write for the newspapers – get cornered about the stock market and with complaints that millennials are reluctant to buy homes and slowing the market.

Houses are neither too expensive nor a bargain. Like most assets, it depends on what you own. For example, even with the recent stock market swoon, investors holding Amazon and Apple over the last five years are a lot better off than those who put faith in General Electric and IBM.

Average national home prices are up about 10 percent from their pre-financial crisis peak, and that’s roughly in line with inflation. However, attractive neighborhoods have boomed near the centers of thriving coastal cities and those interior hot spots like Denver and Dallas that are also hubs for the technology, financial services and oil and gas industries.

Millennials gravitate to those locales for jobs and cultural amenities. It’s a lot easier to leave work at 6 p.m., afford the tickets to see a Knicks game at Madison Square Garden and be up for work the next day living in Flat Iron in Manhattan than far out Commack on Long Island.

Millennials in those places find homes too pricey – especially considering their much larger student debt than was carried by their parents – and simply rent. Consequently, the home ownership rate for those ages 25 to 34 is about 19 percent lower than when their parents were the same age. It’s even lower for those choosing to live and work close to city centers.

Reasons

A lot of the reasons offered, other than home prices and student debt loads, are specious. For example, married folks with children are more inclined to buy than rent, but millennials are postponing marriage, children and home ownership for common reasons.

A young single person earning $60,000, netting $40,000 after taxes and carrying a $60,000 student loan is a less attractive partner for marriage and less able to afford a first child than one who is debt free – especially in big cities where child care is so steep. And they are equally handicapped in the housing market.

The housing boom of the post-World War II era was based on cheap land and transportation, and tolerance to drive. Most of the inexpensive undeveloped land close to urban centers is long gone and prices for starter homes further away are deceptively low.

Gasoline may be inexpensive these days but driving 60 miles round trip instead of 30 is not. And Detroit automakers and their foreign rivals have powered their financial rebound by loading cars with hot new features, pushing bigger vehicles and jacking up prices.

Three-hour commutes require longer, more expensive stays at day care and after-school sitters for younger children, and leaving teenagers unsupervised until 7 p.m. And more reliance on handymen, house cleaners and lawn services as time for do-it-yourself becomes terribly scarce.

Not as sturdy

Homes a bit closer to center cities built in the closing decades of the 20th century are not as sturdy as those built earlier. Composite siding, windows constructed from mold-susceptible plantation pine and cheap furnaces often confront new buyers with big replacement bills during early years of ownership.

Far out starter homes, somewhat closer-in but not-so-well-built structures and residences more proximate to jobs but in poor school districts may carry more affordable sticker prices but won’t be appreciating a whole lot.

The logical solution is to increase housing density near city centers – even places like New York have neighborhoods with substantial yards and space for infill development and areas that could be cleared for high-rise condominiums. However, over the last two decades, baby boomers have persuaded city officials to throw up tougher land-use rules and building codes that limit development.

Millennials are more skittish than were their parents about taking the plunge – marriage, kids, houses – but that’s a rational response to land scarcity and childhood experiences. They are old enough to remember the financial crisis, anemic recovery, and parents or friends losing jobs and homes.

For them renting is a hedge. Perhaps not the best choice – homeownership in desirable neighborhoods is still the best way for ordinary folks to build wealth – but understandable if not the optimal solution.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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The Melting Away of General Motors

 

By Peter Morici

Dec. 5, 2018 (First published at TheWashingtonTimes) 

General Motors is gradually disappearing – like a block of ice on the hot pavement of an August day.

Recently, it announced a fifth major round of layoffs in 14 years. Eight thousand salaried and 5,700 production employees, as it shutters plants making the storied Chevrolet Impala and five other sedans and withdraws to mostly specializing in trucks and SUVs.

CEO Mary Barra says she wants a more agile company capable of moving aggressively into electric vehicles, hybrids and self-driving platforms. The truth is that Japanese automakers can sell sedans at a profit but GM can’t.

Five years ago, sedans were half of U.S. auto sales, but those now capture only about 35 percent. And all the major automakers must grapple with the plateauing of annual U.S. light vehicle sales a bit more than 17 million.

SUVs are bigger and more expensive, but improvements in the engine and vehicle design have greatly reduced the gas mileage penalty imposed on drivers who choose those over sedans. And vehicles of all kinds are more durable these days.

Metallurgy, fuels and lubricants

Thanks to advances in metallurgy, fuels and lubricants – these industries are more high-tech than most folks recognize – and better design, engines last a lot longer now and run more than 200,000 miles as compared to half that a few decades back.

Consequently, car buyers are paying for the gas and keeping vehicles longer to compensate for higher SUV price tags.

Options like Zipcar and Uber, inexpensively delivered meals and groceries and Amazon Prime free more young people from the necessity of car ownership. Increasingly, those living in cities and congested close-in suburbs with access to decent public transportation for commuting are opting to skip car ownership.

Still, the battle for the sedan and smaller SUV markets indicates just how vulnerable GM and Ford remain to more agile foreign competitors. Since 2015, sales of Impalas and Fusions are down about 49 percent and 45 percent, respectively, whereas Toyota Camry and Honda Accord sales are down only 20 percent and 19 percent.

Japanese sedans simply deliver more value, reliability and verve, and don’t think for a moment the problem does not repeat where car buyers are heading.

Best-selling vehicles

The three best-selling vehicles in America may still be U.S. pickup trucks – the Ford F-150, Chevy Silverado and the Dodge Ram – but those are followed by Japanese SUVs – the Nissan Rogue, Toyota RAV4 and the Honda CR-V.

Ford and Chrysler already announced they are effectively pulling out of the sedan market and with GM’s exit, Asian automakers and Volkswagen will have a clear path to most of the remaining 5 million sedans sold here. And those are often the first cars young folks own and a gateway for manufacturers to hawk their SUVs as careers mature and incomes rise.

The U.S. tariff on sedans is only 2.5 percent, but SUVs and trucks benefit from a 25 percent levy.

When announcing the recent jobs cuts, GM carped that the recent steel tariff was costing it about $1 billion, but I did not hear Mrs. Barra offer to give up her truck/SUV tariff if the steel duty was dropped – that’s the hypocrisy of Detroit.

Going to get worse

It’s going to get worse – a lot worse.

Mrs. Barra is betting that electric vehicles and autonomous drive are coming fast, but GM has been late to the party with just about every major innovation that instigated change in what Americans buy since the 1970s. Chrysler pioneered the minivan and SUV and Honda, Toyota and Nissan contemporary front-wheel drive, hybrid and all-electric vehicles.

GM’s primary expertise, like the other American carmakers, is in the internal combustion engine, transmissions and to some extent the effective use of metals and plastics, aerodynamics and general platform architecture.

As Tesla recently demonstrated, the latter are easily copied even by novices, and GM, Ford and Chrysler have to buy knowledge where it counts – electric motors, batteries and various forms of artificial intelligence software – either through vendors or pricey acquisitions.

It is important to remember that the carriage companies of the 19th century generally did not become the modern automakers – those emerged from younger, less hidebound companies.

Google’s Waymo is introducing its autonomous drive, ride-hailing service, similar to Uber, in Phoenix, and it has frequently been out in front of established automakers.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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A Sensible Way to Fix the Student Loan Problem

Young People Have Too Much Debt and Not Enough Marketable Skills

 

By Peter Morici

Nov. 26, 2018 (First published at MarketWatch) 

Ten years after the financial crisis, banks may be safer and the economy more resilient but many young people are saddled with huge student-loan balances. Too many are stuck in low-paying dead-end jobs, delaying marriage and children, and may never own a home.

The financial crisis brought home two fundamental realities. Low interest rates, flooding financial markets with liquidity and an $831 billion stimulus package would not quickly create high-quality jobs, and many good-paying opportunities for semi-skilled workers and college graduate generalists were permanently lost.

Simply, the economic contraction accelerated many of the structural changes in the broader economy and labor markets that globalization and technological innovations-computerization, automation and artificial intelligence-were imposing.

President Barack Obama responded by encouraging young people to borrow to attend college and graduate school. That took millions off the jobless rolls and aimed to upgrade the quality of the labor force.

That strategy did not work quite as well as expected.

Math and reading skills

To send most everyone to college, nearly everyone has to receive a college-preparatory high school education. Pressures to “pass them through” resulted in what even The New York Times admits are counterfeit high-school diplomas. Fewer than 40% of secondary school graduates have the math and reading skills to do college-level work.

State governments – pressured by rocketing Medicaid costs, the needs of K-12 education, and flagging tax revenues – slashed support for higher education and raised public college tuition. That enabled private colleges and for-profit schools to do the same and compelled bigger student loans.

Faced with tight budgets and pressures to absorb inadequately qualified applicants, colleges and universities lowered standards.

About 70% of high-school graduates now enroll in two or four-year programs, student-loan balances now top $1.5 trillion, but many young people don’t get the quality education they are promised.

Standardized tests indicate four years of college often adds little to students’ analytical abilities and four in 10 college graduates lack the critical thinking skills necessary for entry-level professional work.

Exaggerated claims

These problems are particularly acute but by no means isolated among for-profit colleges. Often, those use exaggerated claims and easy access to student loans to sell the least sophisticated young people – those from economically and ethnically disadvantaged families – expensive and useless programs.

Consequently, more than 40% of young college graduates remain stuck in jobs that don’t require a college education, and more than 3.6 million graduates live below the poverty line.

President Donald Trump gets good and bad grades. His emphasis on apprenticeships that pay students, leave them without debt and after a year or two provide most with opportunities that pay better than the $50,000 the average new college graduate earns is admirable. However, his efforts to roll back Obama’s crackdown on for-profit colleges are not flattering.

To clean up the overhang of student debt, it’s time for some good old-fashioned debt forgiveness. After all, if Presidents George W. Bush and Obama could bail out the banks and General Motors and restructure lots of home mortgages, Trump should be able to rescue young people who got into a mess by doing what their government encouraged them to do-borrow large sums for college.

This could be partially financed by going after the resources of for-profit colleges and mainstream universities that admitted unqualified students and watered down curriculum.

Reformative consequences

A few bankruptcy auctions for the properties of second-rate schools and tort judgments against endowments of revered institutions would have the same reformative consequences as suing negligent corporations that hawk shoddy products.

Going forward, though, more responsible behavior by all could be encouraged by having colleges and universities directly participate in the financing of student debt – as things now stand, the federal government guarantees a considerable share of outstanding student debt and is the biggest potential loser.

In particular, universities and banks could each be required to contribute half of the capital behind student loans. Colleges and universities could be permitted to float tax-free bonds, similar to industrial-revenue bonds issued by state and local governments, secured by their endowments and properties.

With skin in the game, admission and graduation standards would rise and when endorsing student loans, college financial aid offices would be incentivized to scrutinize the selection and content of majors to ensure the marketability of graduates.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Trump Is Right to Focus on the Trade Deficit

It Will Take More than Tariffs to Change Behavior of Mercantilist in Germany, Japan and China

 

By Peter Morici

Nov. 19, 2018 (First published at MarketWatch) 

The U.S. foreign trade deficit has totaled nearly $600 billion over the past 12 months.

President Donald Trump is correct to focus on the trade deficit.

His critics are quick to point out that Americans don’t save enough to finance domestic investments – new buildings, machines and software to expand businesses, and new homes – and government deficits. We finance the shortfall by selling assets to foreigners: Treasuries, other securities, real estate, and hard business assets.

Put differently, private individuals, businesses and the government spend more on goods and services than the nation produces. The trade deficit provides the difference and is paid for by selling IOUs and assets to foreigners.

Hence, if the trade deficit is a problem, Americans created it by spending too much.

More foreign borrowing

The recent tax cut surely drove up the budget deficit and will require more foreign borrowing and bigger trade deficits. The Trump administration did the country a disservice when it predicted the recent tax cuts would increase growth and tax revenues enough to pay for lower tax rates.

I know of no fiscal stimulus – neither President Barack Obama’s massive spending nor Trump’s even bigger tax cuts – that created a large enough jolt to growth to generate enough new revenue to pay for lower rates. If such an example exists, it is indeed a rare bird that inhabits a very special ecosystem.

That’s why the federal deficit was about $780 billion in fiscal year 2018 and will likely exceed $1 trillion in 2019.

If we used most of the nearly $600 billion we annually raise by selling bonds and business assets to foreigners to create new businesses, it might be useful. Instead, we are using it to live beyond our means, and what we owe foreigners will soon reach levels that caused economies like Spain to collapse.

Sooner or later, as the trade deficits get bigger and bigger, doubt sinks in about the ability to pay and creditors pull the plug.

Purposefully omit

In all this economists are relying on basic accounting identities – the domestic savings deficit must equal foreign capital inflows must equal the trade deficit.

What they purposefully omit is that causality can run in the opposite direction – that’s malpractice!

If the federal government freed up constraints on domestic energy development – eliminated regulatory obstacles to pipeline construction and offshore drilling – oil production would rise, net imports of energy and the trade deficit would fall, gross domestic product and tax revenues would increase, and the government budget deficit would fall.

Similarly, were Trump’s tariffs successful at opening up the Chinese market to more U.S. products, the trade deficit would go down. The jolt to domestic demand would boost U.S. GDP and tax revenues, and the budget deficit would fall.

However, proponents of a muscular trade policy, like Peter Navarro, do the nation a disservice by claiming trade wars are easy to win – especially when they advocate slapping tariffs on our allies instead of just China and a few others.

Can simply retaliate

When the U.S. economy was nearly half the global pie, we might have been able to dictate terms, but these days it is about one-sixth and other players can simply retaliate and go around the United States.

Witness the Trans Pacific Partnership moving ahead without us, and the European Union and Japan negotiating a rather comprehensive free-trade pact that includes concessions on product standards Obama could not obtain in his failed trans-Atlantic negotiations.

Mercantilism is so much a part of the fabric of the other three big economies – Germany, China and Japan – it is going to take more than some tariffs to move them to reform. Instead, they will just play with each other.

If Trump’s objective is to ultimately force our trading partners into genuine free trade, Navarro may be more genius than he realizes. He is inspiring free trade among the other players that sadly locks us out.

In the meantime, watch the prices of soybeans and corn and the impact on profits at GM and Ford. GDP growth will slow a bit next year from its recent hot pace if Trump fails to reach some kind of accommodation with the TPP and EU.

Trade wars are easy to win – for the other guy.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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The Indications that 3 Percent Growth Is Possible

 

By Peter Morici

Nov. 14, 2018 (First published at The Washington Times) 

President Trump’s tax cuts and deregulation are delivering as promised. Over the last year, GDP is up 3 percent.

Left-leaning analysts in the media warn that can’t last. They argue consumer demand will soon slack off, investment spending is disappointing and businesses won’t be able to find workers needed to keep expanding.

Americans have been spending their tax cuts prudently and have lots of firepower in reserve. As a share of the household income, credit card debt is well below the levels reached prior to the financial crisis.

Expected surges in new home and auto sales are not materializing, because millennials (24-38 years old) and their younger siblings often prefer living in cities.

They are not enamored with colonials, big lawns and long commutes, and place greater emphasis on urban amenities and unique experiences – restaurants and delivered meals, rock concerts and vacations, higher-end groceries and wine, smartphones and personal assistants, and the like.

That’s why your local Whole Foods is so crowded. Apple and Samsung have been able to add new features to cell phones and boost prices. Netflix’s sales keep rising and many of the big technology companies are rushing into movie and TV production.

Administration economists expected tax cuts along with deregulation to boost investment spending, but we are not seeing huge increases in the dollar value of new buildings, machines and software purchased by businesses.

Instead, digital technologies are enabling business to use those assets much more efficiently, and they are hiring more and increasing investments in employee training to boost worker productivity.

Added jobs

Over the year ending in September, the economy added 204,000 jobs a month and that jumped to 250,000 in October, even as businesses continued to lament shortages of skilled workers. In particular, those related to the digital transformation of just about everything from farms to factories to e-commerce fulfillment centers.

This payroll jump was possible with unemployment sinking to 3.7 percent, because the share of the prime working age adults either working or looking for work fell during the low-wage Obama years and now is rising again. That can provide 200,000 additional workers a month into 2020 when adult participation would reach pre-financial crisis levels.

Over the past year, private sector wages were up 3.1 percent – well ahead of inflation. And when businesses were recently asked where they were putting their corporate tax cut savings, 49 percent said increasing capital investment and 34% increasing employee training, whereas only 32 percent and 17 percent said increasing shareholders dividends and stock buybacks.

Businesses are automating and applying artificial intelligence throughout the economy – from ticket kiosks at mover theaters to Uber replacing dispatch centers at taxi services. They aren’t laying off many workers but instead increasing what they produce at an accelerated pace with a rising headcount.

Businesses are placing particular emphasis on training up less skilled workers for more sophisticated roles. Blue Apron is sending line workers to a 10-month coding academy – this radical retraining program enables former line workers to become web designers and in some cases triple their incomes.

Apprenticeship program

Along the same lines, President Trump has greatly expanded the Labor Department’s certified private-sector apprenticeship program and obtained corporate pledges to create 6 million training opportunities. The former are not just in traditional building trades but also in technology, manufacturing and business services. Many pay about $15 an hour during training and average starting salaries of $60,000 for 87 percent of those who successfully complete these programs.

All these efforts become apparent in surging productivity. This year, output per worker has been increasing about at a 2.5 percent annual pace, and that’s very much in line with the pre-Obama era and the robust recoveries engineered by Presidents Reagan and Clinton.

We will need that kind of productivity growth to keep up 3 percent growth, because the adult population is only growing at about 0.5 percent a year. Once all the adults sidelined by the Obama malaise are coaxed back into the labor force that growth can only provide about 65,000 new hires each month.

With the revolution in robotics and artificial intelligence, and new corporate and federal commitments to worker training, 2.5 percent annual productivity growth, rising wages and an economy expanding 3 percent a year are clearly within our grasp.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Why Democrats Must Accomplish Something

 

By Peter Morici

Nov. 12, 2018 (First published at The Washington Times) 

Democrats won a narrow House majority appealing to minorities, college-educated women and suburbanites who want solutions to problems in their daily lives, not a revolution.

The Great Blue Wave of radical progressivism, which promised gains of 40-plus seats, never materialized. Democrats who snatched Republican seats were largely moderates who ran on clean governments and incremental improvements to health care and other nettlesome issues – not promising to relentlessly oppose or impeach President Trump.

Health care costs are spinning out of sight, because the Affordable Care Act enables drug companies, hospitals, large insurers and large group practices of medical specialists to monopolize and impose outlandish prices in national and regional markets.

Democrats must give up the fantasy of socialized medicine based on confiscatory taxes on upper-income Americans. European societies accomplish “free health care” by heavily taxing the folks that use it – working and middle-class folks – and regulating prices.

Congressional oversight

Republicans must wake up to the hard reality that competition in these markets is rigged. Congressional oversight should cast a discerning focus on monopoly exploitation to coax a reluctant Justice Department to start prosecuting abusers. Both parties need to fashion legislation that requires drug companies, hospitals, insurers and medical professionals to benchmark prices against those fetched in prosperous northern European countries with insurance-based payments systems.

An increasingly urban society requires better commuter-mass transit and intercity connections. Financing infrastructure runs smack into the exorbitant costs imposed by cumbersome regulatory and permitting procedures by federal, state and local agencies. Engaging Mr. Trump on regulatory reform and encouraging a special dialogue with governors about prohibitive construction costs would help.

Still, trillions more dollars are needed but the federal deficit is already too big and someone has to pay – namely transportation users through higher gas taxes and transit fees. Many members of Congress reflexively balk at such solutions, but Democratic leaders Nancy Pelosi and Chuck Schumer may be able to triangulate the issue with Mr. Trump.

On immigration, the movement toward a commonsense compromise to realign U.S. policy to place great emphasis on admitting immigrants with skills in short supply, a greater capacity to quickly assimilate and attributes less threatening to struggling rural communities has some bipartisan support, but little enthusiasm from the Democratic leadership and their more strident acolytes.

Illegal DACA program

The U.S. Supreme Court may soon permit Mr. Trump to end President Obama’s illegal DACA program and that would force reluctant Democrats to the table on broader reforms. If they balk, those young people face deportation and neither party should count on twisting that spectacle to its advantage-incumbents of all stripes may end up with bulls-eyes on their backs.

On trade and the broader economy, Democratic congressional leaders like to exploit Mr. Trump’s missteps – for example, putting tariffs on bicycle parts but not bicycles that force U.S. manufacturers to offshore even more and his indiscriminant targeting of our allies with tariffs.

However, many Democrats in Congress recognize China’s criminal behavior is a menace to American prosperity and security. A steady, private dialogue that links their support for congressional approval of the new North American free trade deal to Mr. Trump trading in his spray gun for a more focused trade rifle would help broaden their party’s appeal to working-class voters.

Economy doing quite well

President Trump’s economy is doing quite well – growing at a 50 percent better pace than either Messrs. Bush or Obama could manage – and it is starting to finally lift the wages and overall circumstances of lower income Americans.

Able-bodied adults on the sidelines are rejoining the workforce, but to maintain an elevated pace of growth without running into crippling shortages of engineers, technicians and other skilled workers requires Democrats to support immigration reform and make the recent tax cuts permanent.

That will require the Democrats to shelve their tropism for higher marginal taxes on upper-income Americans and for the president to give up on yet more budget busting tax cuts. Alternatively, both sides could go after the “carried interest” tax break for Wall Street’s financial engineers – those levy lower capital gains tax rates on income that should rightly be classified as wage income for their professional efforts.

All this may disappoint the combative political instincts of Mrs. Pelosi and President Trump. But winning long-term majorities – holding power by governing effectively – requires moving to where the American people really stand – in the pragmatic center.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Stocks Remain the Best Choice for Small Investors

Despite Ups and Downs, Equities Remain Essential for Long Term Goals

 

By Peter Morici

Nov. 5, 2018 (First published at MarketWatch) 

October produced unnerving turbulence for equity investors. Now, the Democrats, likely flexing more muscle on Capitol Hill, bring new uncertainties. But for the ordinary investor, equities remain the most essential tool for accomplishing long-term financial goals like a secure retirement.

In recent years, big-tech stocks have accounted for the lion’s share of stock gains but virtually every hot tech company faces new challenges. Facebook and must bear added costs to ensure user privacy, police content for foreign interference, and cope with additional government oversight.

Along with Google, those social media enterprises’ basic business model – mining user data to sell ads and information to market analytic firms – will require more self-discipline or encounter new regulation.

Netflix is bracing for the publication of a Wall Street Journal investigation into its workplace practices. Amazon and Google have attracted antitrust scrutiny for their treatment of business partners. Apple is casting about for new businesses, because it doesn’t have any hot new gadgets and iPhones are approaching market saturation.

Stock valuations are a bit below the 25-year average.

Even with the lofty valuations of glamour tech stocks, the trailing 12-month price-earnings ratio for the S&P 500, which accounts for approximately 80% of publicly traded U.S. equities, is about 22 and below its 25-year average of 25.

Overall, with the economy continuing to grow at about 3% a year in real terms and 5% to 6% nominally, the fundamentals point up for equities, but progress will depend on more lift in the valuations of traditional companies.

Consumer products like Unilever and Kimberly-Clark, after a nadir, are exercising pricing power, and much overlooked auto makers have been marking gains, as sales volumes level, by increasing technology content and pushing up average vehicle prices.

Of course, uncertainty abounds about the future of the economic recovery.

J.P. Morgan made headlines recently by placing the chance of a recession sometime in the next two years at more than 60%. And the International Monetary Fund has marked down its forecasts for global growth from 3.9% to 3.7%, blaming trade disputes, rising interest rates and the like.

The facts are large businesses are allocating significant shares of their tax-cut windfalls to capital expenditures and employee training, and that should boost productivity to keep the economy going even with labor shortages. And most developing-country businesses beyond China are hardly affected by U.S. tariffs and borrow too much when U.S. interest rates are low – they don’t take into adequate account investment activity of similar businesses in other emerging economies and overcapacity results. And too much money is siphoned off by inept and corrupt government bureaucracies.

The Fed will continue raising the federal funds rate into next year but if it stops at 3%, the U.S. recovery should continue quite a bit longer.

For most folks, stocks and high-quality bonds, CDs and similar fixed-income instruments are the most reasonable places to save for retirement and other long-term goals. Over the last 50 years, the S&P 500 has outperformed 10-year Treasuries 2 to 1, and no credible argument has been offered why that should change over the coming decades.

Picking the next Apple or Amazon or timing the market is virtually impossible for small investors. Ordinary folks should put most of the money they won’t need over the next 10 years for emergencies or big expenses like college tuition, a new roof or a down payment on a house into a low-cost S&P 500 index fund, such as those offered by Vanguard or USAA – or a similarly broad-based, low-cost portfolio.

Perhaps place 20% in an index fund for global equities, excluding U.S. equities – sometimes U.S. stocks race ahead of sound companies abroad and other times foreign stocks do better.

Then as retirement approaches, gradually move about half of that money into fixed-income vehicles with maturities of less than three and up to five years. The length of the ladder will depend on annual cash needs, as retirees don’t want to be selling stocks when values are down.

Essentially, that is what Angela and I did, and approaching 70, we work only as much as we like.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Why Trump’s Economic Program Will Boost Wages Soon

 

By Peter Morici

Nov. 2, 2018 (First published at The Washington Times) 

Throughout the economic recovery, wages have grown slowly and adjusted for inflation, have been nearly stagnant. This has frustrated both Presidents Obama and Trump, but gains in real compensation should accelerate if we stay with the Trump economic program and impose more transparency about what employers pay workers.

Most fundamentally, pay adjusted for inflation can’t rise faster than labor productivity, because human resources are the largest component of business costs. Runaway wages would merely instigate large increases in the prices that workers would then pay for goods. That’s why the Federal Reserve watches wages so closely as unemployment falls and is raising interest rates.

Since 2009, labor productivity has advanced 1.1 percent annually. That is significantly less than prior economic expansions going back to 1960.

Higher corporate taxes in the United States than abroad discouraged investments in business assets like factory equipment, computers and software but also in worker training. Aggressive banking, environmental and diversity regulations that Mr. Obama imposed came with high compliance costs and slowed down businesses. States and cities have actually forced down labor productivity – negative productivity growth – in home construction with more aggressive building codes.

Artificial intelligence and robotics

Job losses from artificial intelligence and robotics are not new. Those are merely extensions of the efficiencies gained through mechanization, electricity and computerization that began in the 19th century.

As innovations displace workers, those can create big leaps in productivity and more rapid economic growth if workers are trained for the new jobs that emerge. However, the majority of money spent on secondary education is on college preparation and at colleges and universities on liberal arts or general education of some kind. Those priorities have not given us adequate numbers of technologists. Everyone from the engineers to maintenance technicians needed to run modern factories and offices.

In addition, workers during both the Obama-Trump recovery have received less than half of the gains in labor productivity in the form of higher compensation. They simply got a bigger share of productivity gains during prior recoveries dating back to the 1960s.

Globalization

Globalization has made it difficult for workers to bargain for wage gains – even those that don’t make goods that compete with imports. If an appliance factory in a moderate-sized city can’t raise wages because of imports from China and South Korea – and especially if those products benefit from government subsidies and artificially depressed currency values – dry cleaners, restaurants and so forth are under much less pressure to raise wages, too.

Liberals blame the decline of unions but the shift away from factory work and other standardized manual occupations to office work – where employees vary more in their job classifications and tasks – makes collective bargaining for pay more difficult. Some college professors have unions but pay disparities among faculty with similar records are legend. Those hired most recently simply earn more than those who have been around five or more years.

Data compiled by the Atlanta Federal Reserve Bank show that workers who switch jobs accomplish larger wages gains than those that don’t. However, since the financial crisis, employees are more inclined to hold on to secure positions and avoid buying and selling homes to move between cities to take better paying jobs.

Requiring businesses to make available information about the salaries of all employees across broad job classifications or salary ranges would help encourage greater equity in pay among and between men and women.

Trump tax cuts

More broadly though, the Trump tax cuts are having traction and should start showing up in paychecks soon – if the Fed does not smother the recovery by raising interest rates too much.

When businesses were recently asked where they were putting their corporate tax-cut savings, 49 percent said increasing capital investment and 34 percent said increasing employee training, whereas only 32 percent and 17 percent, respectively, said increasing dividends to shareholders or stock buybacks.

We are starting to see evidence that along with deregulation those priorities are boosting productivity growth. And efforts to open foreign markets and contain competition from subsidized imports should help offset downward pressure on wages from globalization.

Similarly, Mr. Trump’s emphasis on apprenticeships for high school graduates across a broad range of white- and blue-collar occupations should alleviate skill shortages.

If coupled with greater transparency about what employees are paid, those could rebalance the economic equation even more decidedly in the favor of workers again.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Immigrants and the Economy

 

Trump Gets Tough with Immigrants on Welfare

 

By Peter Morici

Oct. 30, 2018 (First published at The Washington Times) 

Liberals have stonewalled President Trump on immigration reform and encouraged an illegal migrant invasion from the south. This leaves him little choice but to deny green cards or extensions of temporary visas to immigrants that access federal entitlements programs.

About 44 million immigrants reside in the United States. About 65 percent of visas are granted based on family ties, 15 percent to those possessing skills in short supply and the remainder mostly through a lottery for under-represented countries and refugees.

Thanks to the abuses of chain immigration – naturalized citizens and green card holders sponsoring relatives who in turn pull in other relatives – the immigrant population tends to be considerably older, less educated and less employable than the native born population.

Liberals are fond to tell us that immigrants add to economic growth. They take service jobs that make the lives of better educated Americans more comfortable.

Many work in STEM disciplines and start new businesses, but about half come with only basic skills, do not easily assimilate and drive down wages in semi-skilled occupations. Visit Dulles Airport and observe how many airport and airline personnel speak English with a foreign accent.

Thanks to affirmative action their children jump to the head of the line – at the expense of many native-born Americans – when competing for government jobs and places at selective universities.

Those are significant reasons why Donald Trump was elected. If liberals want to paint him as racist and illegitimate, then they tar many of their own countrymen bigots and traitors. To resist everything he proposes only serves to raise resentment and anti-immigrant fervor.

It is difficult for well-educated Americans, especially those who work and live harmoniously alongside highly-trained immigrants, to appreciate how important the language spoken on Main Street and prevalence of local foods and traditions are to folks who don’t have the same advantages. If blue-collar Americans can’t get a remedy by electing a president who promises a more reasonable, less threatening immigration policy, then democracy has failed.

America needs more skilled immigrants to grow rapidly and compete internationally. Mr. Trump and members of both parties in Congress have proposed reforms that would significantly curtail the lottery and limit family reunification visas to immediate relatives – spouses and minor children. Those would make U.S. rules similar to Canadian and Australian policy.

These reforms would permit American employers to recruit more skilled immigrants in areas where Americans are not available. And would reduce pressures on communities where wages are pushed down and local cultures are threatened by globalization.

Sadly, in the spirit of “Resist Trump” and crassly seeking Hispanic and Asian votes, Democrats are blocking reform legislation.

Democrats in Congress incite anarchy by encouraging states and cities to violate the constitutional supremacy of federal law and forbid local police from cooperating with federal immigration authorities. Some flirt with shutting down Immigration and Customs Enforcement altogether.

In recent years, immigration from Mexico has subsided but endemic violence in Central America and further south is pushing poorly educated migrants to head north.

Mexico offers many asylum and, with Spanish the prevalent language, a more hospitable climate to work. However, migrants continue their journey to access generous U.S. social welfare benefits – as do many folks who obtain visas from Africa and Asia through chain immigration.

About half of all immigrants qualify for means-tested programs. Under Mr. Trump’s new proposed regulation, a green card or other changes in status – such as extending temporary visas – would be denied immigrants that in the past, now or in the future are likely to access food stamps, federal housing subsidies, Medicaid and similar programs. Exceptions are provided for legitimate refugees and children.

A blunt tool, this policy would alter the composition of immigration in the direction advocated by both Democratic and Republican reformers in Congress but denied thanks to the obstructionist Democrats disappointed that Hillary Clinton is not president.

Liberals protest that legal immigrants would be reluctant to access benefits for elderly dependents and their children. That is likely, however, they might cast an eye on the recent circus they created around the nomination of Brett Kavanaugh and then look into the mirror.

Want more of the same – nominate for president another distasteful candidate who calls hard-pressed blue-collar workers deplorable or an anarchist on the socialist left of the Democratic Party.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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How Republicans Gave their Advantage on Health Care to the Democrats

ACA becomes More Popular Even as the Republicans Weaken It

 

By Peter Morici

Oct. 29, 2018 (First published at MarketWatch) 

Conventional wisdom says Americans vote their pocketbooks. That’s why health care offers Democrats an advantage in the midterms, despite the strong economy and the shortcomings of the Affordable Care Act.

President Barack Obama’s signature achievement, the ACA promised to provide insurance coverage for virtually all Americans, lower costs and let folks keep their old insurance policies.

But, by the end of his presidency, about 27 million non-elderly adults remained without coverage-including many working poor in the states that had not adopted Medicaid expansion but also millions of others who found health insurance too expensive even with federal subsidies.

In 2018, the Republican Congress repealed the unpopular individual mandate. However, the requirement that large employers must provide insurance still stands, and it now costs about $20,000 for employers to purchase a family policy.

Overall, Americans now pay even more for hospital stays, doctor services and drugs, because the ACA permitted hospitals and drug companies to monopolize markets. Doctors and other providers increasingly find it necessary to work for hospitals instead of independently.

By requiring insurance policies purchased by employers and individuals through government exchanges to meet inflexible criteria – and by forcing insurers to accept all applicants without charging older Americans and those with pre-existing conditions appropriately higher rates – many insurers across the country left local markets. They simply could not adequately spread the risk of getting stuck with too many older or sick folks in their pools of subscribers.

This encouraged insurers to merge – larger companies can more easily manage the risks of higher-cost subscribers – and bargain effectively with hospitals, doctors and drug companies. However, the hospitals one upped them by merging to form what are effectively regional monopolies and persuaded many more doctors to work directly for them as employees.

Groups like NewYork-Presbyterian and Johns Hopkins Medicine in Maryland now enjoy significant market power, and have jacked up fees for everything from MRIs to outpatient visits. As importantly, they have forced even large insurers like Cigna into restrictive contracts that prohibit them from creating less-expensive policies that require patients to use other more reasonable hospitals.

Primary-care physicians who have managed to maintain private practices still find themselves bargaining for fees with the uninsured patients and accepting payments that hardly cover their overhead, and millions of Americans are still one illness away from financial calamity.

Americans now spend about nearly 20%of gross domestic product on health care – about 70% more than in other industrialized countries. Whether through mandatory private insurance as in Germany or single state-run providers as in the U.K., just about everything is a lot less expensive-a knee replacement, a doctor visit and drugs-because European governments recognize health markets routinely fail and regulate prices.

The 2017 GOP plan that passed the House but could not muster a majority in the Senate would have rearranged subsidies a bit. It would have given the states more latitude in administering Medicaid, which is now the principle mechanism for helping the working poor, and eased requirements on insurers to cover pre-existing conditions by creating risk pools at the state level.

For many ordinary Americans the fear of having their coverage canceled when a major illness strikes is paramount. About 75% don’t want the Republicans monkeying with ACA provisions regarding pre-existing conditions, and Democrats have used that to put the Republicans on the defensive.

As importantly, the Republican plan did not offer Americans much hope of saving money on health care with their so-called reforms or with the powers the Trump Administration already has at its disposal. Namely, through market reforms that break up hospital monopolies and impose price regulations for drugs or through antitrust enforcement.

Since the 2016 election, public sentiment has flipped from 44% viewing the ACA favorably to 50%, while the percentage viewing it unfavorably has fallen from 47% to 40%.

Democrats are running campaign ads lauding the ACA twice as frequently as Republicans run ads attacking it. These are the largest share of the Democrats’ ad budgets overall. In 2010, the opposite was true when the Republicans won the house by attacking the ACA.

The Democrats may not offer a credible plan for fixing the high prices Americans pay. It doesn’t matter, because the GOP hasn’t delivered.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

 

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China Unlikely to Embrace Free Trade with Americans

 

By Peter Morici

Oct. 26, 2018 (First published at Toronto Sun) 

American manufacturers and farmers victimized by China’s mercantilism and retaliatory tariffs had better settle in for a long trade war. Beijing is not likely to cave quickly to President Donald Trump’s demands.

At issue are China’s notorious barriers to competitive foreign products – high tariffs and a maze of administrative obstacles and industrial policies that promote indigenous technology-intensive activities through subsidies, requirements that foreign companies form joint ventures and transfer technology to access its markets and rampant theft of foreign intellectual property through state-assisted industrial espionage and counterfeit goods.

Frustrated that negotiations – such as the Mar-a-Lago process – failed to yield meaningful offers from China, Trump levied 25% tariffs on $50 billion of imports from China this summer. In September, he added 10% on another $200 billion and in January, those are expected to escalate to 25%.

China responded by cancelling high-level bilateral talks and appears to be content to ride out Trump. Beijing sees him struggling with Democratic obstructionism in Congress and is likely banking on a big setback for Republicans in the midterms and Trump’s eventual defeat in 2020.

It sees Mexico and South Korea accomplishing deals with Trump that will hardly move the needle on their trade balances with the United States, Canadians and Europeans resisting his pressure and American economists predicting grave harm to the U.S. economy from Trump’s aggressive policies.

Selective liberalization

Since June 1, the yuan is down more than 7% -potentially obviating most of the effects of the 10% tariff on $200 billion. China’s provincial governments and state banks can ladle on subsidies and no-payback loans to keep businesses afloat and exporting. And Beijing can undertake selective liberalization to attract foreign investors.

At stake is not merely the $350-billion bilateral trade imbalance but who achieves global leadership in fields like artificial intelligence, robotics, supercomputing and human brain-computer interface.

Democrats on the Hill and leaders in Europe and Japan recognize the potential for these technologies to drive economic growth, create and destroy millions of jobs, alter espionage and warfare, and change relationships between citizens and governments.

Western leaders don’t like how China is using predatory trade and industrial policies to seize leadership – and what it will do with it – anymore than do Trump trade hawks Peter Navarro and Robert Lighthizer. Differences with U.S. allies are over tactics.

Industry leaders almost always dislike changes in the regulatory environment. They adjust investments to protectionist policies and are now objecting strenuously to the change in U.S. policy toward China. We ran into the same problem back in the 1980s and ’90s when we liberalized trade in the North American auto sector – the Big Three had configured their investments to conform to pre-NAFTA production requirements imposed by Mexico and Canada to access their markets. Now, the Business Roundtable is screaming about Trump’s use of tariffs to open China.

Staying power

Ultimately, China has enormous staying power. It has huge dollar reserves, it can selectively liberalize to attract the investments it considers vital, and divert what it sends to U.S. markets to Europe, Japan and other destinations.

Then it is up to the Europeans and Japanese to act. They are insisting on negotiations in the World Trade Organization. We have been talking with Beijing for the better part of three decades about liberalization and it simply does not want to embrace Western norms.

At that point, Trump, or whoever succeeds him if he loses the 2020 election, could manage the commercial relationship with China absolutely – tougher tariffs and quotas to force down the trade deficit, strong financial sanctions and limits on Chinese students at U.S. universities. And demand that our trading partners expel China from the WTO lest the United States withdraw from the global trading body.

Quite simply, America may have to abandon any hope of free trade with China.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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America May Have to Abandon Free Trade with China

China Is Unlikely to Embrace Western Norms on the Economy

 

By Peter Morici

Oct. 22, 2018 (First published at MarketWatch) 

American manufacturers and farmers victimized by China’s mercantilism and retaliatory tariffs had better settle in for a long trade war. Beijing is not likely to cave quickly to President Donald Trump’s demands.

At issue are China’s notorious barriers to competitive foreign products – high tariffs and a maze of administrative obstacles and industrial policies that promote indigenous technology-intensive activities through subsidies, requirements that foreign companies form joint ventures and transfer technology to access its markets, and rampant theft of foreign intellectual property through state-assisted industrial espionage and counterfeit goods.

Frustrated that negotiations – such as the Mar-a-Lago process – failed to yield meaningful offers from China, Trump levied 25% tariffs on $50 billion of imports from China this summer. In September, he added 10% on another $200 billion and in January, those are expected to escalate to 25%.

China responded by canceling high-level bilateral talks and appears to be content to ride out Trump. Beijing sees him struggling with Democratic obstructionism in Congress and is likely banking on a big setback for Republicans in the midterms and Trump’s eventual defeat in 2020.

It sees Mexico and South Korea accomplishing deals with Trump that will hardly move the needle on their trade balances with the United States, Canadians and Europeans resisting his pressure, and American economists predicting grave harm to the U.S. economy from Trump’s aggressive policies.

Yuan is down

Since June 1, the yuan is down more than 7% -potentially obviating most of the effects of the 10% tariff on $200 billion. China’s provincial governments and state banks can ladle on subsidies and no-payback loans to keep businesses afloat and exporting. And Beijing can undertake selective liberalization to attract foreign investors.

For example, Exxon is working on a deal for a petrochemical complex in Guangdong without the usual joint-venture partner. Beijing can roll back these policies after tensions ease but it is miscalculating.

At stake is not merely the $350 billion bilateral trade imbalance but who achieves global leadership in fields like artificial intelligence, robotics, supercomputing and human brain-computer interface.

Democrats on the Hill and leaders in Europe and Japan recognize the potential for these technologies to drive economic growth, create and destroy millions of jobs, alter espionage and warfare, and change relationships between citizens and governments.

Regarding the latter, Beijing has imposed an Orwellian order to quell minority opposition and impose strict adherence to behavioral norms in its Western provinces and elsewhere with facial recognition and ubiquitous cameras – don’t jaywalk if you want to rent an apartment!

Western leaders don’t like how China is using predatory trade and industrial policies to seize leadership – and what it will do with it – anymore than do Trump trade hawks Peter Navarro and Robert Lighthizer. Differences with U.S. allies are over tactics.

Industry leaders almost always dislike changes in the regulatory environment. They adjust investments to protectionist policies, and are now objecting strenuously to the change in U.S. policy toward China.

Business Roundtable is screaming

We ran into the same problem back in the 1980s and ’90s when we liberalized trade in the North American auto sector – the Big Three had configured their investments to conform to pre-NAFTA production requirements imposed by Mexico and Canada to access their markets. Now, the Business Roundtable is screaming about Trump’s use of tariffs to open China.

Ultimately, China has enormous staying power. It has huge dollar reserves, it can selectively liberalize to attract the investments it considers vital, and divert what it sends to U.S. markets to Europe, Japan and other destinations.

Then it is up to the Europeans and Japanese to act. They are insisting on negotiations in the World Trade Organization. We have been talking with Beijing for the better part of three decades about liberalization, and it simply does not want to embrace Western norms.

At that point, Trump, or whoever succeeds him if he loses the 2020 election, could manage the commercial relationship with China absolutely – tougher tariffs and quotas to force down the trade deficit, strong financial sanctions, and limits on Chinese students at U.S. universities. And demand that our trading partners expel China from the WTO lest the United States withdraw from the global trading body.

Quite simply, America may have to abandon any hope of free trade with China.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Powell Has Lost His North Star and the Fed Is Flying Blind

Fed Risks Raising Interest Rates too Much as the Compass Spins Wildly

 

By Peter Morici

Oct. 15, 2018 (First published at MarketWatch) 

 

Federal Reserve Chairman Jerome Powell is in an unenviable position. Folks expect him to fine-tune interest rates to keep the economy going and inflation tame but he can’t make things much better – only worse.

Growth is nearly 3% and unemployment is at its lowest level since 1969. What inflation we have above the Fed target of 2% is driven largely by oil prices and those by forces beyond the influence of U.S. economic conditions – OPEC politics, U.S. sanctions on Iran, and dystopian political forces in Venezuela and a few other garden spots.

When the current turbulence in oil markets recedes, we are likely in for a period of headline inflation below 2%, just as those forces are now driving prices higher now.

Overall, long-term inflation has settled in at the Fed target of about 2%. The Fed should not obsess about it but keep a watchful eye.

Amid all this, Powell’s inflation compass has gone missing. The Phillips curve, as he puts it, may not be dead but just resting. To my thinking, it’s in a coma if it was ever alive at all.

That contraption is a shorthand equation sitting atop a pyramid of more fundamental behavioral relationships. Those include the supply and demand for domestic workers and in turn, an historically large contingent labor force of healthy prime-age adults sitting on the sidelines, the shifting skill requirements of a workplace transformed by artificial intelligence and robotics, import prices influenced by weak growth in Europe and China, and immigration.

Of course, Mariner Powell has his North Star – what economists affectionately call R* (R-Star), but it is no longer at a fixed position in Powell’s sky.

R* is the federal funds rate that neither encourages the economy to speed up or slow down. However, with businesses needing much less capital to get started or grow these days and for decades China and Germany-the second and fourth largest economies globally-racking up current account surpluses and savings to invest abroad, it is no wonder the forces of supply and demand have been driving R* down to historically low levels.

With long-run inflation at 2%, current estimates put the nominal R* at a bit below 3%. That’s just three more quarter-point rate increases away.

Overshooting could kill the recovery but how is Powell to know?

Miner Powell’s canary has gone AWOL. Historically, economists and financial types have looked to the yield curve for the warning croak that the economy is headed for recession.

When I wrote about a flattening yield curve on MarketWatch early last December, the 10-year less 30-day Treasurys was about 120 basis points. Now it’s about 100, and folks are even more nervous.

Although the gap is supposed to tell us about investor expectations for growth-a wide spread meaning optimism and a narrowing gap the threat of recession – these days, long rates are significantly affected by factors quite beyond the U.S. economy.

Increasingly, the dollar is the currency of payment for import contracts – 40% of imports worldwide are invoiced in dollars even though the United States is only about one-tenth of the market. And populist movements in Europe and political uncertainty elsewhere have driven private-asset managers and savers into dollars. Consequently, foreign private actors – not just foreign central banks – have a ravenous appetite for Treasurys and dollar-denominated deposits.

The economists at the Fed are really econometricians bent on estimating all these relationships with ever-more-complex statistical techniques but they only have historical data. The parameters keep shifting, and historical information can only inadequately tell us their values.

All the Fed can do is feel its way with an eye toward price pressure in the core. In the 1950s, we hit unemployment below 3%, and it could go much lower than 3.7% without much inflation.

We have strong reason to believe the equilibrium short-term rate is no more than 3% – though on that Chairman Powell is agnostic. And if we take Federal Open Market Committee policy statements and the plot chart at face value, Powell and his colleagues intend to drive the federal funds rate to well above that by 2020.

That’s dangerous stuff.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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The Fourth Industrial Revolution Will Beget a New Politics

Technologies of the Future Are What’s Driving Trump’s Trade Policies

 

By Peter Morici

Oct. 8, 2018 (First published at MarketWatch) 

 

Now playing on your handheld devices and in more robust growth is the Fourth Industrial Revolution – mobile computing, intelligent and remarkably dexterous robots, and the gradual fusion of human intelligence, artificial intelligence and machines. It will profoundly alter how the economy grows and American politics.

The first three waves of industrialization – water power and steam to mechanize production, electric power to facilitate mass production, and electronics and information technology to automate production – were terribly dependent on massive investments in plant and equipment.

Robust economic expansions have been defined by consumers’ willingness to splurge on big-ticket items like cars and homes, and businesses’ appetite for grand projects – Fulton’s steamboat, railroads, auto factories and highways, and most recently, shale oil and pipelines.

All that is changing.

The economy is now on track to register 3% growth in 2018 for the first time in a dozen years but auto and home sales are flat and corporate investments in hard business assets – factories, machines and computers – are hardly rocketing.

Businesses have learned to use capital and human resources much more efficiently. Productive young professionals seem to be more interested in being near the hubs of intellectual activity – city cores – and buying new gadgets and streaming services than owning a home, big lawn and the latest hot car.

Businesses are dropping the college degree or certificate from technical school as a requirement for many positions. To the dismay of academics, kids seem to be learning as much that is useful in this new economy playing on their smartphones and laptops as they do in the classroom.

At the cutting edge, Google was launched with $25 million in 1999 and grew into a $23 billion enterprise in five years. Now finding that two-year colleges don’t impart the technology skills businesses require, Google is offering eight and 12-month certificate programs through Coursera that connects graduates with employers like Bank of America, Walmart and GE Digital.

Productivity growth, after languishing during the Obama presidency, is taking off again. This permits businesses to offer low-skilled workers opportunities for bigger pay increases, often through in-house training programs. As many businesses automate, they are training semi-skilled line workers to maintain machines and even become software engineers.

All this is happening, just as Generation Z – those born after 1996 and raised in the jaws of the financial crisis – is entering the labor force. They are more focused on career and financial success, more sober (they don’t party nearly as much) and even more tech savvy than Millennials who preceded them.

More diverse – little more than 50% are white. Raised by Baby-Boom moms in non-traditional careers, they are more comfortable with women and men working side-by-side and in racially mixed groups.

All this spells change for the faculty at universities, businesses and the political class.

Young folks are bargaining with colleges and often selecting the best value as opposed to the most prestigious choice – or skipping college altogether – and forcing universities to trim costs. Some MBA programs and law schools are downsizing.

Businesses can’t discriminate-workers and good skills are too scarce – and young employees won’t tolerate it. That will be bad news for the new age Democrats like Alexandria Ocasio-Cortez who are reskinning Hillary Clinton’s identity politics.

Similarly, the anti-Trump wing of the GOP’s obsessions with the sanctity of the WTO and tariffs on automobiles and agricultural commodities are tragically misplaced. Just about anything of value can be made or grown on any continent these days.

What really matters is the artificial intelligence that goes into cars, the genetics of the seeds, and the apps in your palm. That’s what is driving Trump’s trade policy – look at the extensive protections for American intellectual property in the deal just struck with Mexico and Canada.

President Donald Trump grasps all this in ways his critics can’t comprehend, or is backing into it thanks to Federalist Society screening his judicial nominations and Ivanka promoting Labor Department apprenticeship programs.

The GOP may well get skewed in the midterms and Trump denied a second term but history tends to focus more on presidential accomplishments – deeds that changed the direction of the country or defined progress – than on character flaws.

It will speak of a man who saw a new age coming but was vilified by those invested in the past.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

Seattle business consultant Terry Corbell provides high-performance management services and strategies.