Tuesday, May 28, 2019

Guest Blogger John Manzella Don’t Blame Trade and Immigration for America’s Problems

I often hear people talk about their difficulties in finding a meaningful job or keeping up with increasing healthcare, housing and education costs. These concerns, along with rising income inequality and a shrinking middle class, are provoking anger. For many, trade and immigration have become convenient villains. But that narrative is wrong. Let me tell you why.

Income inequality, which is partly a reflection of the growing gap between lower and higher skilled workers, has risen steadily in the United States since the 1970s. In fact, the economic gap between the rich and poor is higher here than other advanced economies, according to the Pew Research Center. This has resulted in a shrinking middle class that no longer represents the majority of Americans.

What’s gone wrong?

American free-market capitalism has generated the greatest economic growth the world has ever seen, but it has not benefited all of us equally. As I stated in a recent article, in an effort to improve economic outcomes for all Americans, it’s essential to continually improve our system of free-market capitalism — not move toward a more socialist-like model that empowers left-leaning politicians to make decisions that should be made by the market.

It’s just as important not to accept oversimplified solutions to complex problems presented by far right or far left-leaning populist leaders. Unfortunately, support for the far right and left is growing and has contributed to greater polarization in the United States. This is further dividing Americans and making it more difficult for Congress to compromise to pass necessary legislation.

This polarization trend isn’t just an American problem. A recent report published by the Organization for Economic Co-operation and Development (OECD), a global policy forum, indicates that over the past 30 years, middle class households worldwide have experienced dismal or no income growth. This has fueled perceptions that the current socio-economic system is unfair and has led to greater support for extreme left and right ideologies and politicians that embrace them.

But that’s not all. Stated by the Pew Research Center, across 27 countries surveyed, 51% are dissatisfied with the way their democracy is functioning, compared with 45% who are satisfied.

It’s time to take a deep breath and not buy into emotionally appealing solutions from populist leaders who often scapegoat trade and immigration as the causes of America’s problems. In doing so, keep the following points in mind.

First, problems associated with rising income inequality, a shrinking middle class, and the inability to find meaningful work has much to do with lower and middle-skilled jobs being eliminated by automation and the increasing demand for higher skilled workers.

Moving forward, 14% of existing jobs could disappear as a result of automation in the next 15 to 20 years, plus another 32% are likely to change radically as individual tasks are automated, says a recent report by the OECD. Other organizations say nearly half of existing jobs could vanish, mostly affecting lower to middle-skilled workers.

To adapt, a well educated labor force should be a top national priority equal to the effort that put a man on the moon. Importantly, students need the ability to pay for technical or university level educations without incurring unreasonable debt. And employees of all ages need to engage in life-long learning.

History reveals that after fast-emerging technologies destroy jobs, more new ones are created. Although we don’t know what the new jobs will be, we do know they will require highly skilled workers.

Secondly, don’t scapegoat trade.

Automation, not trade, accounted for more than 85% of U.S. job losses in manufacturing from 2000 through 2010, according to the Center for Business and Economic Research at Ball State University. Although trade has contributed to some job losses, it has provided far greater benefits.

Today, nearly half of all U.S. exports are sold to our 20 free trade agreement partners — which only represent 6% of world consumers. To boost job-creating exports to the rest of the world, we need more, not fewer, free trade agreements.

Thirdly, immigrants don’t steal American jobs, they help fill them.

Immigrants help fill vacant American jobs at all skill levels. But the worker shortage is getting worse. According to Korn Ferry, the U.S. skilled worker deficit could result in $1.75 trillion in lost revenue annually for American companies by 2030. In light of this, legal immigration should be expanded, not reduced.

Furthermore, American colleges and universities attract the best and brightest students the world has to offer. However, after graduation we send them home to compete against us. Allowing more foreign graduates to remain here to support our companies or start new ones would benefit our economy.

Immigrants also add to America’s population and consumer base. Germany and Japan, for example, have negative population growth rates. This puts downward pressure on their economic prospects.

The United States has problems. But trade and immigration aren’t to blame for them. Americans, as well as others around the world, need to look past the simplified and often emotionally-charged solutions presented by far right and far left-leaning populists or our problems will only get worse.

This article was nationally syndicated by Tribune News Service/Tribune Content Agency and appeared in the Chicago Tribune and newspapers across the United States.

Tuesday, May 21, 2019

China's Currency

We have been having so much fun lately talking about trade wars and Trump's taxes, I thought we might get back to data graphs and mundane topics like exchange rates. Some of you have been getting less than required sleep lately so I hope this helps.

Below is a graph my friend Fred (at the St. Louis Fed, https://fred.stlouisfed.org/ ) helped me create. It has data on two key exchange rates -- the dollar/yuan and the dollar/euro rates. The data goes from January 2005 to March 2019. The data are monthly so you see 14 years of monthly data points.

Why do we bother with exchange rates in a macro blog? Was it because someone had a little too much JD? Perhaps. But we love to talk about exchange rates for several reasons. First, whenever the dollar appreciates against another currency, that means the currency of the other country gets weaker and foreigners would want to buy fewer US goods (assuming prices didn't change in the meantime). It also means that Americans or people holding dollars will find the goods and services we buy from other countries are less expensive. This improves the inflation rate in the US and tilts spending away from America. Knowing whether the dollar value is going up or down, therefore, helps us know more about changes in the inflation and growth rate in the USA.

I could write a book on exchange rates but I see some of you have already fallen asleep. The good news is that Davidson, Von Hagen, and Hauskrecht (Macro for Business: The Manager's Way of Understanding the Global Economy, Cambridge University Press) will be out in the bookstores in January 2020. So you will have lots of pages you can read soon.

Let's dispense with why exchange rates are important and look at what the graph might be telling us.The first thing to know about the chart is that each data point shows the percentage change in the exchange rate changed over the past year in each month. The second point is that a movement upward on the graph implies an appreciation in the value of the Chinese yuan or the euro (and therefore a depreciation of the dollar.)

We can see some years that showed significant dollar depreciation -- 2007-08, 2011, 2013,  and 2017.

Of course, you also see that the values of these currencies are highly variable. Lots of peaks and valleys. That disputes a widely held notion that the Chinese peg their currency against the dollar -- always keeping it depreciated against the dollar. The common hills and valleys shared by the euro and yuan (against the dollar) dispute any special activity by the Chinese on their currency since 2005. If anything, the yuan has the greater variance of the two.

We can see a distinct period of dollar appreciation from the end of 2013 through early 2017. Since then, the dollar has been highly volatile falling and then rising again.

Of course, you could take a longer view and note that since its trough in 2008, the dollar has been on an upward climb at least through 2017. The hump in 2018 interrupts the trend toward a higher dollar but one wonders if the trend will soon reappear.

Clearly, this little picture helps us to see why inflation has been so tame in the US economy.  And it might show why, if it continues, the US could be in for a period of slower economic growth.

I checked with other exchange rates and the truth is, the dollar has generally risen against most currencies. So much for the China story. The US dollar has been rising for global reasons, and China has had very little to do with that. Perhaps it is a testament to the strength of the US economy relative to other countries after we all escaped the worst economic cycle since the Great Depression.

Tuesday, May 14, 2019


I got into a discussion about Bernie Sanders with a dear friend of mine. He thought I should look more closely at Sanders' positions. I went to Bernie's web site, did several other searches, and finally did one on democratic socialism. 

What follows below is what I said in an email back to my friend (I did edit it a bit more here). 

Letter starts here....

Sanders definitely says he does not want Leninism but he also calls capitalism a lot of bad names.

Then he says the following.

“Democratic socialism means that we must create an economy that works for all, not just the very wealthy” 

That sounds nice but it has the following problems when not followed by more specifics…

First, it is plain wrong. It implies that the current system works only for the very wealthy. That is plain silly. The current system has plenty of problems as it relates to income distribution and poverty – but capitalism has been good for a lot of people for a long time. Fix it yes. Say it is all for the wealthy is silly.

Second, note that the statement says nothing about what the new system would look like or its philosophical principles. What guides this democratic socialism a la Sanders?

Third, reading his other materials one can infer that the new system will tackle every social problem we know and offers a government solution. He is very clear about all the ways government will tell companies what to do – and what rich people can do with their wealth and income. He is not very clear about how far the government can or should go with respect to the balance between private markets and government. Is there a rule or principle guiding this balance? 

Fourth, while he lists all those helpful programs he offers nothing that I can see as to how we get from point A to point B. It’s like a religious plea for salvation but never once offering a realistic guide as to the negative externalities that get generated when you try to change all that stuff. Besides transferring income and wealth what can really be done to seriously improve the lives of families? Do we really know how to solve all these problems? Any of these problems?

Fifth there is no reassuring analysis about how one actually creates a more equal society when we know that government can be as corrupt as the private sector. Will we really help all those people when rich people are not exactly going to sit around and thank Bernie for redistributing their incomes?

One more point. Saying all this about Bernie does not mean that there are not any ways to make changes that improve people’s lives. Maybe Bernie is the opening bid? Maybe Bernie will help us find a better middle ground? 

In that case, let him dream all he wants but we would hope the government and the people will see that marginal change is both necessary and possible. We would hope that people can separate the dreams from the realities.

That’s all I've got for the time being. Thanks for telling me more about Bernie. I plan to spend some time in the next year trying to figure out who might be a decent leader for our country.

letter ends here.....

The above is what I sent to my friend. I look forward to more conversations in the future. 

Tuesday, May 7, 2019

Real GDP Q1 2019

The annualized percentage change in real GDP was announced by the US government recently. Real GDP rose by an annualized 3.2% in the first quarter of 2019. Like all the similar announcements, this one will be revised several times before we settle on how much real GDP rose in Q1 2019.

In the meantime we are stuck with interpreting the 3.2%. Mostly we want to know if it represents a change from the past. Many people were quite happy with a number like 3.2%. It sounds good and it tastes nice like a nice JD old fashioned. If the number had been 1.2% we would have scowled and worried that something might be seriously wrong with the US economy.

So I decided to take a look at quarterly real GDP over the past 10 years. The data I present begins in Q1 of 2010 and stretches through Q1 2019. Thus we have 109 data points in those 9 plus years.

The data are presented graphically for you below. At the far right is the 3.2% of Q1 2019. Looking back across all the points you quickly notice that the 3.2% is neither the highest nor the lowest number  on the chart. In 2014 there were clearly some better results. Looking across you can count 13 quarters when real GDP grew by more than 3.2%. So one point to make is that the 3.2% is strong but not any sort of peak.

What else jumps out at you from the chart?

One thing is the volatility. The average one-quarter change was about 2.3%. So the 3.2% was well above the average. But does it mean next quarter or future quarters will be above the mean? Notice all the ups and downs in the chart. There are at least 10 episodes in which the real GDP change increased only to be followed by one or more decreases. Notice the two peaks in 2014. Following those peaks were about two years in which the rate generally declined.

Two points so far. The 3.2% is well above the mean quarterly change but it is not especially strong. Second, a rise in real GDP growth is not necessarily followed by more growth.

Third, since early 2016, the graph does start to look different. There is less volatility and there does seem to be a general upward trend in quarterly growth rates. This might give the expectation that this trend will continue with quarterly increases of at least 3% or more.

Some of you are fidgeting because you know that thinking about the future of the economy ought to bring in real cause and effect. If post 2015 is different, then why is it different? I am sure Trump's people will disagree with Obama's. Is the post 2015 performance the result of Obama's policies finally maturing after a long adjustment from a major economic recession? Or does the post 2015 growth register changes brought in by Trump's administration?

Politics aside, it is not easy to answer these questions. Maybe the dots have nothing to do with Obama or Trump? And of course, it is also possible that the post 2015 apparent upward trend will begin to vanish in July when we get the Q2 2019 numbers.

I stick with my love of persistence. Without one of the risk factors turning the world on its head, I like the idea that employment growth causes spending which causes output which causes more employment, spending, output, and employment.

I can't be sure of exactly why post 2015 real GDP growth is rising but I do think momentum could carry us for a while.