Op-Ed Analysis


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.