Tuesday, November 29, 2016

Peas, Stuffed Cabbage Balls, and the No-Camp Camp of Economic Policy

As a recent member of the Septuagenarian Club I am working hard on balance. Old people fall down a lot even when they have not partaken of JD tasting rituals. So working on balance is important if one values his hips, shoulders, and other decaying body parts. Getting depressed yet? Getting old ain’t no picnic you know.

But this piece is not about aging or falling down. It is about restoring balance in economic policy in this country. While it sounds obvious that balance might be an appropriate goal, this conclusion is not shared by everyone and the move towards balance is not easily attained. Stand on one leg and close your eyes and you will see what I mean.

American is very unbalanced. We have our camps. The blue camp likes more government intervention. The blue camp prefers to increase spending and worry later about the debts. The blue camp wants to regulate banks, shadow banks, and various companies. The red camp says they worry about government deficits but often favor tax cuts that create them anyway. The Red camp favors deregulation and generally a smaller intervention by government. And now there is forming a Trump camp. The Trump camp is not so much a camp as it is family of camps with no identifying color.

I kind of like the no-camp camp. The no-camp camp is a little closer to what I might call balance. The no-camp camp can favor more government spending and at the same time propose tax cuts. It believes that somehow lower tax rates and higher spending will not cause the deficit to increase. It also says it wants to reduce many recently imposed government regulations.

How could I like this no-camp camp? If balance enrages extremes then it immediately has strong minuses. Notice that balance means that the blues will scream about a proposed diminishing role of government while the reds yell that the government is still too big. This no-camp camp will quickly enlist enemies from all the traditional camps. This will not be easy to overcome.

Overcoming the negatives shouted by the traditional camps means focusing on the positives gained by each camp from the no-camp camp. More spending on infrastructure is widely viewed to be beneficial on many fronts since it generates income to the working class while it improves productivity. Red and blue will like that one. Tax cuts for the middle class can restore losses in earning power to that group. Blues will like that. Tax cuts for the wealthy should be good for national investment spending and declines in corporate income taxes and should boost the competitiveness of US companies and American cities. Can you hear the reds cheering?

More contentious is how government deregulation can promote jobs and growth in energy and healthcare. But the clear point is that a slowdown of regulation in these areas could produce jobs and income growth. One does not have to be a climate skeptic or a hater of the poor to believe that a temporary hiatus of regulation in those areas might produce important beneficial growth effects. Get the economy humming again and then return to more vigorous ways to remedy global warming and coverage of health care.

What I am suggesting here is that a no-camp camp set of policies provides balance as it contains features that both annoy and amuse everyone. It’s like my mom used to say to me – Larry, eat your peas and then you can have another stuffed cabbage ball. In the distant past the two political parties would compromise on economic policies. Give a little get a little was the slogan. More recently with strong influence by ideological extremes we quit doing that. You can eat the peas or the stuffed cabbage balls. Not both. And the nation has suffered from this standoff.

Many of us don’t like Trump for one reason or another. What I am suggesting is that since Trump has no real connection to either party or ideology, he might be the perfect person to get us back to some much needed balance in policy. I guess we will see in the near future. He has to come through with policies that make some sense. As voters, we need to be ready to eat our peas. Hopefully the meatballs will make it worth our while. 

Tuesday, November 22, 2016

Trickle-Up Economics and Labor Infrastructure

When both parties agree then you know something is wrong. Infrastructure spending (IS) has gained a lot of bipartisan support lately. There is a lot of pressure on Trump and Congress to put together a really big package on infrastructure. What does that mean and is that the best we can do with our money?

The usual support for more IS focuses on simple theories. Paramount is that IS is part of the production and delivery process of goods and services. An improvement in infrastructure will accordingly increase our lagging national productivity. When workers are more productive the nation becomes more competitive.  A second logic is that building more infrastructure takes workers and therefore employment will increase. Third, when those workers have more income they will buy more goods and services thus providing more business and employment for other firms and workers. Can you hear the horns blowing? Who could be against more IS?

The reason people can be against more IS is that the above is simple theory. Put all this into the context of 2017. For any of the above magic to transpire we have to have viable projects and we have to have them pretty fast. Unlike a tax cut which immediately gives a tax payer more money to spend, an infrastructure project has to be planned, approved, contracted, environmental regulations checked, and so on. Shovel ready projects are a joke. This spending could drag on long after my ashes are spread in Biscayne Bay.

And then there is the issue of where this infrastructure might be built. Since Harry Reid is a has-been it probably won’t be done in Nevada. Politicians will be in seventh heaven fighting for the next bridge, road, or waterway. What a glorious boondoggle!

And then even if some projects get started, what about the spending multiplier theory? The employment-spending-more employment-more spending theory assumes everything else is the same. In 2017 our nation is deep in debt. Our firms are not expanding. Perhaps construction workers will pocket some money, pay off some bills, and the story ends there.

And finally – tada – what about cause and effect? Is our slow growth these days really caused by potholes? I don’t think so. But one major thing many of us agree is that growth is very much impacted by slow labor supply growth, a mismatch of skills, and generally a poorly-functioning labor market. So why not focus on that? If that is the real problem then more IS is really what liberals usually call trickle down. Why wait years if not decades for an uncertain trickle? No prostate jokes please!

Instead we can use some or all of that IS money to improve our work situation. We could seriously fund training, retraining, and relocation. Rather than spiffy highways we could create the world’s employment champion. Wouldn't it be cool if global companies starting moving to America because we have the world's most outstanding employees for the 21st century?

We know that transition is a constant. If we know that renewables will take a larger share of national and world production, why not have the world’s best labor for that? If we know that the GIG economy is employing more and more millennials, then why not shout to the world that the best labor for that is right here in the USA? If Internet security is going to be a global challenge for the foreseeable future why don’t we have the best minds trained here? Healthcare? Entertainment? Whisky? (You didn't think I was going to leave out JD did you?)

If labor is the problem in this country then it ought to be solution. We need to stop wringing our hands and most of all – we need to stop thinking that the best we can do is use company subsidies to improve the labor market. Companies may or may not decide to spend a subsidy on labor.

And of course notice what there is no trickle down if we focus directly on the labor market. Helping people do better in the labor market has immediate impacts on their employability. It makes them more productive, competitive, and valuable. Perhaps we could call this trickle up economics since the benefits start with the workers and then radiate outward to more successful and competitive companies.

Finally when I say labor I don’t mean labor unions. A sincere focus on training, retraining, and relocation means we are strengthening workers for what they want – better pay, improved mobility, and more sustainable jobs and careers. Labor unions can get on board but this idea is not about enriching union bosses. Remember when we decided as a nation to put a man on the moon. We had a clear focus and we made it happen. America can be the training ground for a revolutionary new center of employment readiness. I'd rather see us spend a lot of money in that way than on infrastructure boondoggles. 

Tuesday, November 15, 2016

Elections, Friends, and Families

I am bleary-eyed from reading so many articles about the aftermath of last week’s elections. My quick takeaway is that many sturdy trees have given up their lives. And yet, as is always true about the future, everything we say today is speculation. 

Uncertainty always exists but in this case today uncertainty is on steroids. I am supposed to give a speech about the economy on Thursday. What could I possibly say that wouldn’t be completely wrong in two weeks? Bartender, one JD on the rocks for my friend Lauren please. 

Then I got a text from a very good friend who I won’t name to protect his reputation. This dear friend noted to me how so many of his friends were having fights with their colleagues and families. It reminded me of when I was a young guy during the Vietnam War days. Families were splitting apart. The nation was coming apart. Then my dear friend said that he was so happy that despite our political differences we could continue to be civil and friendly to each other.

Of course, that was like a love arrow piercing my heart. How nice that someone who disagrees with much of what I write could extend a kindness at a time when many of his other friends and colleagues were no less than Vlad the Impaler driving stakes through the hearts of their friends!

So it made me think. How many political conversations held before election day went nowhere because one or both of the participants began with an insult. I am not accusing the left or the right because the same behavior was observed for both. The tenor of the situation was an accusation that the person at the other end of the conversation was either evil or stupid for saying even one good thing about a particular politician. How can two people have a conversation if at least one of those persons starts off by saying the other one is either stupid, immoral, or a bootlicker? How?

Is the hair standing up on the back of your neck? Of course – Trump is the devil. He hates blacks, Hispanics, foreigners, gays, and so on. Of course – Hillary is corrupt and a liar to boot. How could a human being from plant Earth say even one good thing about either of these people?

Good question Larry! But the truth is that if you think that way you have been duped by politicians. There is more than one side to these two politicians. I know they are lousy – both of them. But you people who bought into these extreme caricatures of Trump and Clinton got duped. Nothing is that simple.

Am I saying you have to do back flips for Trump? Not at all. You can fight him tooth and nail on every policy he advocates. What I am saying is that it is not worth demeaning your friends and your friendships over politics. Think about the proportionality. Every morning you wake up and you kiss the dog and pet your wife. You go to work and interact closely with colleagues. You have beers with your buddies. That's your real life. Then you turn on your favorite channel and watch the so-called news. Or you read the newspaper or check your favorite website. And then your blood pressure rises and you start cursing like a sailor.

It is true that a new President will impact the lives of many people – maybe even you. But it is also true that the impact on society is a lot less on you than what happens when you ruin your relationship with your mother or your best friend or your boss. And for what?

“For what?” is the real question. Recall Mr Obama passing Obamacare without a single Republican vote. Recall him making numerous regulatory changes without help from Congress. I was opposed to many of those things. But I didn’t jeopardize my friendships by calling friends and family idiots. After all, they have been in my family or been friends for a long time. We have disagreed many times. But I never dismissed them with the easy phrase like “you must be an idiot to support Obama.”

Now the shoe is on the other foot. Actually I am not sure what foot the shoe is on because Trump does not fit into any easy category. But surely as soon as he gets rolling you are going to hate some of the changes he pushes. Maybe you will be surprised and like some of it. Maybe you won't. When you don’t agree you can oppose them with vigor but at least have the decency to respect those who don’t agree with you. The world is a complicated place. Your friends and family have a right to their own opinions. Try to change their minds if you want. But don’t dismiss them simply because they disagree with you. You can always replace your old friends with new ones who will always agree with you. But that sounds pretty boring and sad to me. 

Tuesday, November 8, 2016

The Gravity of Globalization

Much is being written lately about globalization. Free traders love to see more cross border activity. Non-Free traders wish international trade would be less prevalent. Belgian Walloons tried to stop a free trade agreement between Europe and Canada. I was once in Seoul when a monk set himself on fire and died to protest the coming FTA between S. Korea and the USA. Free trade and globalization have become a central focus in the current US presidential campaign.

Much of the debate has to do with politics and ideological warfare applied to trade. But it helps to know that there are basic economic forces to explain both the rise and the fall of globalization. These basic economic forces have been described by using something called a gravity model. Gravity is the force that attracts a body toward the center of the earth or toward any other physical body having mass. As Charlie would say – gravity is the thing that keeps us from falling off the earth. It is also the thing that causes bird poop to come down on unsuspecting heads. The pull of gravity between two bodies is proportional to the masses of the bodies and inversely proportional to the distance between them. Two large bodies close by have a lot of gravitational pull. Two distant small bodies would have little pull.

Economists have applied gravity models to economic issues. St. Paul and Minneapolis are two cities in Minnesota. Bloomington Indiana and Palo Alto California are also two cities. A gravity model predicts that there would be more trade between the larger close cities St. Paul and Minneapolis than between the smaller distant cities Bloomington and Palo Alto. To apply this basic theory to globalization we need to better define the terms mass and distance as they relate to trade.

Mass refers to economic size but it should be the relevant economic size. For example, if two distant small cities were very specialized art centers – then you might expect a lot of trade in art objects between those two cities. Or if two large close cities had a mountain in between them, then that object might impede trade between the two. Dig a tunnel or build a road through the mountains and the situation changes. Much more trade would be expected.

These ideas are easily applied to globalization. While the physical distance between countries and cities did not change in the 1990s, the distance measured in economic terms did. For one thing technology great reduced the costs of communication and transportation in the last 25 years. For another, the fall of the Soviet Union and the demise of many dictatorships in Latin America allowed people in dozens of countries the legal right to trade. Technology and political change were tantamount to pulling nations much "closer" together or removing a mountain. As they came closer they discovered the benefits of trade.

Harvesting low hanging fruit is easy. But once the easy to reach apples are gone, you need a ladder to get the higher ones. The picking process gets more challenging and more costly the farther up you go. The same happened with globalization. It was easy to get rid of thousands of tariffs. Those tariffs hindered growth in most countries so the politics of tariff removal were easier. When world economic growth picked up and countries dropped many trade restrictions, it seemed like most people in most countries benefited. Today it is harder to see how technology or politics would change again so dramatically so as to make international trade even more seductive. It was hard to see the things that might change in the future that would make serious dents in the costs of distance.

And then it got harder to agree on liberalization. The tariffs that were left (on the higher branches) were the ones that offered protection to a country’s farmers or steel makers. But tariff protection was not enough to satisfy some free traders. If barriers to goods could be beneficial, then why not remove obstacles to trade in services (like airlines, banking, healthcare, and so on)? If restrictions on cross-border investing and mergers and acquisitions seemed unfair, why not remove those barriers too?  If laws did not protect ones ownership of intellectual or other property then why not make it harder for foreigners to easily pirate your patents and copyrights?

Once the low hanging fruit was gone, the remaining trade barriers were much harder to remove. With no earth-shaking transportation/communications inventions expected it is harder to convince voters of the needs for freer trade. This is why the so-called Doha Round of the World Trade Organization remains unsigned though negotiations started in November 2001. The average person says something like – yes, we want the benefits of trade but we do not want to be exactly like other countries. We don’t want a one world government. We don't want our our national champions weakened. 

Inasmuch the advancement of free trade and free trade agreements has become even more political and ideological. As we move to closer economic integration, the benefits of the potential trade are fuzzier and the costs of trade in terms of reduced national independence and stability seem scarier.

Further global trade integration is not impossible. It is just tougher. It is made even more difficult in an epoch of slow world growth. In a slow growth world economic mass is not increasing and it is harder to believe that trade will raise all boats. But it is easy to see the risks to any nation that lowers its barriers. In a world where growth is strong, there is less to lose. Growth means people are doing better, worry less, and are more willing to try something that makes them even better. Without much stronger economic growth I find it very hard to envision a world in which globalization advances. 

Tuesday, November 1, 2016

Alan Blinder and Those Hateful Republicans

Every week I wonder where and when the inspiration will hit for my next spout. I had finished my morning bowl of Rice Krispies and JD and was well into my favorite newspaper, the WSJ, when the inspiration came. As often happens I can’t stop myself from reading columns written by Alan Blinder, economics professor at Princeton. I especially love the pictures but this time he supplied the words that make writing this blog so much fun. The title of the article (WSJ, page A15, October 25, 2016) is “It’s Not the Economy Stupid. It’s the Political Gridlock.”

The main point of the article is that if voters and other people are not happy in the USA it is because of politics. The economy is just spiffy. It is the politicians that make us feel unhappy about our lives. And guess which ones are persona non grata? You got it. Those pesky Republicans did it.  I felt at first relieved that if I wanted to accuse someone for my irritable bowel I now know exactly who to blame. But then after thinking about it for about 10 seconds I realized that Professor Blinder was either kidding us or he was just plain wrong. Or maybe he was hoping that his column would sway voters to the Democrat party. You will have to ask him which explanation is correct for wasting our time on his article on October 25th.

Blinder begins by quoting some well-known polls that show that people think the US is on the wrong track. Then he launched into the most one-sided discussion since Paul Winchell spoke to Jerry Mahoney about birth control. Blinder quoted all the economic indicators we are already familiar with. For example, who doesn’t already know that the unemployment rate is around 5%? Or that the stock market is much higher than its trough  in 2009? Of course, anything that might puncture his carefully constructed happy balloon was somehow ignored. Are people unhappy with zero interest rates? I think so. How do the recent stock market highs compare to highs before 2009? Not so great. The absolutely worse business capital spending and productivity increases that one can remember are not cause for indigestion? Export sales make us itchy. Even those at his former employer, the Fed, are lamenting the plight of souls who are still struggling despite a 5% unemployment rate. Most people just shrug when an economist explains that the economy has not grown so slowly for so long since the Great Depression. And even Fuzzy was not alive in the Great Depression.

To discount the economy as a major source of the country’s poor mental attitude is just plain wrong. But like most liberals these days Blinder doesn’t much care about the truth because he is all about politics and about making sure that liberal candidates get elected. Which gets me to the second part of his story. Blinder believes that our dissatisfaction with the USA today is not due to the economy but rather is due to “The fact that Republicans have blocked almost everything and proposed very little.” That’s it in a nutshell. Case closed. 

Lucky for George Bush, Alan Blinder is not blaming everything on him. Now it is all Republicans who make our people so unhappy. Spread the blame baby. Blinder cites Obamacare as evidence of Republican resistance. But Obama, with a huge majority rammed the largest change in social policy in decades down our collective pie-holes without one Republican to support it. Wow – who is the cause of political dysfunction there?  And please note the headlines reporting huge increases in Obamacare premiums. The Democrats created this monster – and now our negativity is the fault of Republicans?

And how can Blinder talk about blocking by Republicans? If the Republicans had a NFL team they’d be penalized for missing too many blocks – not too few. Listen to Obama make speeches today about all he has accomplished during his eight years. Listening to him you would think he was Abe Lincoln, Teddy Roosevelt, and General George Patton combined. He got Dodd-Frank. He got energy regulation. He stopped a pipeline. He stopped a recession. He contained ISIS. And there were examples of bipartisan support for a Doc Fix, a Highway Bill, a budget deal and so on.

No, Obama and the Democrats did not get everything they wanted. Yes, they met a determined opposition at every turn. But come on folks. Every President without a clear Congressional majority has had to fight tooth and nail. And that is as it should be since the absence of a majority government says that the country lacks agreement on key issues.

In summary, Blinder is very wrong to de-emphasize the role of a slow economy and to exaggerate the negative consequences of Republican resistance to a Democratic president. An honest appraisal would admit two things – it is the economy and it is a dysfunctional Federal Government that make us unhappy. Unfortunately extremes in both parties make the rest of us pay for their harmful antics.