Op-Ed Analysis

The Optimists May Be Right (about Productivity and Economy)

By Peter Morici

April 19, 2018-

In January, Wall Street investors were optimistic tax cuts would sustain economic growth and the Trump bull market. As spring arrives, the world has proven decidedly more uncertain.

The administration has not articulated end game goals for the trade standoff with China. President Xi Jinping is offering some concessions but his commitment to industrial policies that target vital American industries remains clear and menacing. An all-out trade war could disrupt global supply chains, nix planned investment spending, stall both economies and tank stocks.

The Facebook imbroglio raises prospects of tighter regulations on the tech sector, and the kind of Washington overreach that gave us Dodd-Frank, which crippled regional bank lending and substantially slowed the Obama recovery.

Along with President Trump’s vitriolic remarks about Amazon, those combined to take the stock market well off its January highs. And now Federal Reserve Chairman Jerome Powell could face the tough choice of easing back on planned interest rate hikes to keep the economy growing or accelerating those to keep inflation from flying out of control but pushing America into a recession.

The March jobs report indicates businesses continue to hire at a nice clip – the three-month average is 202,000 and wages were up only 2.7 percent on a year over year basis. Along with productivity growth at its recent pace of about 1 percent a year, that should keep inflation right in line with the Fed’s 2 percent target.

Indeed, core inflation – prices less the volatile food and energy sectors – has been hovering at just about that pace.

This wage and price performance puzzles economists. Unemployment at 4.1 percent is quite low, and even in the interior in places hard hit by globalization – for example, Indiana, Iowa and Nebraska – economic development officials report businesses scurrying to find workers.

This is hardly new – we have heard reports of worker and skill shortages for many months – but those hardly seem to show up in the wage or consumer price inflation statistics.

During the recent recovery, four factors have kept inflation in check – the revolutions in shale oil and advanced recovery technics, non-oil commodity prices depressed by excess capacity from the overhang of the Great Recession, expanded competition from inexpensive imported manufactures and increased retail competition enabled by Internet commerce – but those mostly have run their course.

Investors are pushing smaller U.S. oil producers to finally turn profits and domestic oil prices are up, broader import prices are now rising at a 3.6 percent annual clip and stronger global growth has pushed up costs for critical items like building materials.

The housing sector is particularly squeezed. The combination of tighter building codes, higher material prices and shortages of essential skilled workers keep new home construction below pre-recession levels and are boosting new home and resale prices.

Amazon and other Internet retailers have eliminated many of the weaker brick and mortar competitors, and now must squeeze better margins out of their supply chains or expand into other activities to grow. For example, Amazon is both raising prices and expanding into package delivery, drones, ocean freight and a host of other activities.

Stronger productivity growth could mitigate all these pressures on inflation.

White House economists are confident that deregulation, business investment prodded by tax cuts and deregulation will restore the lost era of strong productivity gains – those averaged 2.3 percent a year from 1947 to 2009.

Economists mostly sort into two camps – those who believe the post-World War II period was exceptional and those at the White House and a few others (count me in) who believe the best is yet to come – that artificial intelligence and robotics is about to break loose progress on the scale of the Industrial Revolution.

That’s why the former see tax cuts as primarily demand stimulus and after a brief period of stronger growth, the economy slowing to a pace in line with the Obama recovery. In contrast, the White House and a few others see growth speeding up to about 3 percent longer term.

We can’t wholly relive the Reagan-Clinton decades, because of slower adult population growth and the effects of expanded entitlements on labor-force participation among prime-working-age adults.

However, if the optimists are right about productivity, the Trump economy will be saved and the Fed will have a lot easier time than many expect.

Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and five-time winner of the MarketWatch best forecaster award.


Here’s Why Trump Needs a More Realistic Approach to Trade with China

By Peter Morici

April 16, 2018-

President Trump does not take on small tasks – confronting North Korea after predecessors kicked the can, reforming taxes and business regulations and now America’s corrosive trade deficit.

Nothing he does is without drama – repeatedly shaking up the White House staff, personal legal troubles, and tariffs that aggravate allies and the moribund WTO.  Yet, the economy has proven resilient – stocks notwithstanding,  consumer confidence and business activity are strong, and forecasts for economic growth in 2018 are close to 3 percent.

To keep his promise to resurrect communities decimated by globalization, he has to do a lot more to address America’s flood of imports than slap tariffs on aluminum and steel.

Reawakening shuttered factories in the vast expanse between Manhattan and the Silicon Valley requires halving the $650 billion trade gap. That’s what it will take to sustain growth in excess of 3 percent, bring in tax revenues to tame budget deficits and rein in foreign borrowing that threatens another financial meltdown.

Otherwise, the Democrats will take back control, and we know what their brand of economics does to working class Americans-diminished lives, opioid addiction and the indignity of government charity.

China accounts for more than 60 percent of the trade gap, and it’s not cheap labor that’s harpooning American industry.  Beijing has been carefully guiding investment toward mid-technology activities like auto parts and targeting high tech industries like microprocessors and artificial intelligence-the latter is increasingly abundant in new products across a broad span of new products.

For those, Beijing’s mercantilism is key-vast subsidies, high tariffs and a myriad of administrative barriers to imports that compel U.S. firms to invest in China to sell there, forced joint ventures on U.S. firms establishing facilities in China that virtually guarantee technology theft and state-directed industrial espionage.

Competing with China is like playing football against a team outfitted with guns and knives.

Enforcing U.S. trade laws and relying on the WTO is hardly an answer. The U.S. has imposed more than 150 antidumping and subsidy duties, but WTO rules require riffle shots-narrowly focused measures that hardly match the breath and systemic scope of Chinese commercial aggression.

WTO rules were written to police the protectionism of governments overseeing market economies and are not well applied to a central authority puppeteering state owned enterprise and private firms with substantial communist party participation in their management.

Once again, China and the United States are engaged in discussions to permit more U.S. exports and stop the abuse of American MNCs investing there. And once again Beijing is floating limited, as opposed to comprehensive reforms-and without credible enforcement.

If China is not more forthcoming, the Trump administration is readying another set of unilateral measures. Some make sense-for example, imposing restrictions on Chinese investments in American technology sectors that mirror those imposed on U.S. firms in China-but others don’t.

The administration is threatening tariffs on $150 billion in Chinese exports to offset U.S. losses from intellectual property piracy-against a $335 bilateral deficit, that’s chump change.

We have learned that targeted trade actions don’t change Beijing’s behavior. Chinese exporters find ways around those-for example, by routing goods through third counties, either cleverly disguised or incorporated into other products.

And Beijing can easily retaliate against Mr. Trump’s targeted tariffs by levying duties on U.S. agricultural products like pork, sorghum and soybeans from states that went for Mr. Trump in 2016. Causing discomfort for China’s unelected President Xi is more difficult.

It would be better to prepare broad measures aimed at rebalancing trade if China will not provide a specific timetable and credible measures to eliminate the trade deficit.

The United States could require licenses to import Chinese goods. Exporters could be issued resalable import permits equal to the value of their sales in the Middle Kingdom. Those wishing to purchase items from China would then bid for these through an online marketplace-similar to eBay. Those would be purchased by those businesses and consumers placing the highest value of products from China.

Phasing in this regime over three years would give businesses time to adjust but still create crises for Beijing policymakers and the WTO. That’s what it’s going to take to reorder our relationship with China and reform the WTO.

Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and five-time winner of the MarketWatch best forecaster award.

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