Monday, April 25, 2016

Free Trade, or Protectionism?

Sydney M. Williams

Thought of the Day
“Free Trade, or Protectionism?”
April 25, 2016

“A day will come when there will be no battlefields, but markets opening to commerce and minds opening to ideas.”
                                                                                                            Victor Hugo (1802-1885)

It’s a hostile world. Global economies are in a funk. Central bankers offer “free” money, yet economies stagnate. The benefits of capitalism and globalization, which have done so much to eradicate poverty and enhance living standards, are debunked. Cyber threats menace our defense systems, electric grid, as well as our aviation and banking industries. Drones, which can be used to carry explosives, threaten commercial airlines. Failed policies in the Middle East have created a refugee crisis in Europe. The Middle East has devolved into two apparently irreconcilable camps – Shia Iran and Sunni Saudi Arabia. From the Baltic to the South China Sea, Russia and China are testing the United States. Islamic terrorism poses threats on four continents, bringing with it (not unnaturally) xenophobic fears of Muslims. Anti-Semitism is resurgent in Europe. Amidst this fusillade, leading candidates for President of the United States are turning toward protectionism and away from globalization.

Protectionism refers not only to international trade. It was the reason behind Teddy Roosevelt’s dismemberment of “Trusts.” It is manifested in Washington, where cronyism places the interests of politicians (and their business and union counterparts) above that of the people. Protectionism, the antithesis of free trade, inhibits growth, keeps prices high and produces stagnation. Wherever it appears, it fails the long-term economic well-being of the nation. The ghost of Smoot-Hawley should frighten us all, as its signing in 1930 preceded a downward spiral into a world-wide depression. Former Presidential candidate Jon Huntsman once noted: “When America closes its doors, so does everybody else. We are the primary engine of growth in the world; we are the only beacon of free trade and open markets.” Amen!

The argument against free trade is that it is unfair – good jobs get lost – and that it serves manufacturers more than workers. Currency wars, it is argued, increase the competitiveness of other countries at the expense of the U.S. While there is some truth to those allegations, the facts and consequences are more complicated. It has been said that an undervalued Chinese Yuan was behind that country’s economic boom during the 1990s. That may be right, but our economy also did well during that period and American consumers benefitted from low-priced, imported goods. Trade deficits widened, but that is an accounting entry, not a debt obligation. Competition and reasonable regulation mean lower manufacturing costs, which translate into lower product prices, which in turn benefits consumers. And, increased incomes in exporting countries provide markets for products and services produced in the United States. Tariffs and taxes on imports would hurt, not help, consumers.

All free economies are dynamic, which means they are disruptive, as Joseph Schumpeter noted in his theory of creative destruction years ago. Would the communication revolution of the last thirty years have been possible if AT&T were still a government protected monopoly? To survive, businesses must adapt to changing landscapes. Consider the garment industry: Mills were once a fixture in New England towns, like the one in which I grew up. For fifty years, ending in the aftermath of the Second World War, New England-based cotton and woolen mills moved south where labor and business conditions were more favorable. The consequence was dislocation. But, like water seeking its own level, people adapted and new businesses sprouted. It is this dynamism, with its winners and losers, that make work this system that has done so much for the world’s poor. While most adapt, not everyone does well, and change does not lift all boats. Government can help. It should provide relief where necessary. More importantly, it can ensure good schools and build infrastructure. It should demand that equality of opportunity be available to all. But, most important, government should create an environment friendly to entrepreneurs and businesses. Government provides relief, but businesses create jobs. Government should acknowledge that competition is good and that it should be constant. Businesses compete with businesses, towns compete with towns, states with states and nations with other nations. Life is ever-changing. If it stops, it stagnates. To see the consequence of what happens when change is not permitted, look at Cuba.

Thomas Piketty, the leftist, French author of Capitalism in the Twenty-First Century, noted that free trade without progressive taxation will cause too much disruption and give rise to nationalistic and identity politics. But he also acknowledged: “Protectionism does not produce wealth, and free trade and economic openness are ultimately in everyone’s interest.” We have a progressive individual tax system, but corporate tax rates in the U.S. are the highest in the developed world. And the complexity of our tax code benefits the wealthy and the largest of our businesses. (As a non sequitur, in terms of nationalism, as we see in Europe, identity politics is not solely a function of trade disputes; it can also result from a failure to effectively confront Islamic terror and from a poorly-scripted response to the refugee crisis.)

Populist candidates take on visible and popular causes, real or perceived. Jobs, or rather the lack of well-paying jobs, is one concern; another is inequality. It is claimed that unfair trade agreements have shipped good American jobs overseas. An inundation of cheap labor from south of the border, it is said, competes with American workers, pressuring wages. Carrying the banner of the distraught and disenfranchised have been Donald Trump and Bernie Sanders who have blamed globalization for the economic woes we face. When Bernie Sanders recently picked up delegates in Michigan, Kansas and Colorado, Hillary Clinton veered left toward populism, toughening her stance on trade. She is now against the Trans-Pacific Partnership (TPP), a treaty she once referred to as the “gold standard.” She wants to re-do NAFTA, an agreement signed by her husband in December 1993. As for equality, there is no such thing (and never can be) in terms of outcomes. The strong will always dominate the weak. And that is true for nations as well as individuals. The vast majority of those living in Cuba, Russia or China are only equal in the poverty of their lives. Individual success depends on desire, effort and talent, and a government that allows people to rise, to live their dreams. Equality of opportunity is the goal we should all seek. And that depends, first, on education – a system that puts the child first and one that recognizes the value that competition, in the form of charter schools and vouchers, etc., can bring, especially to inner-city and poor, rural schools.

Victor Hugo’s ideal may never be reached; it probably never will. Nevertheless, like must goals that are elusory, like Stuart Little’s quest to save Margalo, the search is important. And that is because free trade and individual freedom are, if not synonymous, at least symbiotic. We should aim for the ideal, no matter how elusive. As Stuart noted: “…somehow, he felt he was headed in the right direction.”

But are we headed in the right direction? I wonder. When economies undergo change, dislocation arises. And, sensing an exploitable void, guileful politicians swarm. They ignore the fact that change is natural…and necessary. Economic growth benefits all. Sailing ships gave way to steamships. Blacksmiths turned into grease monkeys; stenographers became extinct, as dictating machines proliferated. The abacus was retired for the calculator, and cell phones morphed into smart phones. Progress, in a free society, will not be denied. Unless a president exercises excessive powers, it will be accommodated, or its advocates will ride roughshod over those who try to hold it back. There is a role for government in all this, but it should be based on the Chinese adage: it is better to teach a man to fish, than to give him a fish. As for the question in the title, the answer is obvious.

Monday, April 18, 2016

"The U.S. - Values & Self Interest"

Sydney M. Williams

Thought of the Day
“The U.S. – Values & Self Interest”
April 18, 2016

“…all reality hinges on moral foundations.”
                                                                                                       Martin Luther King (1929-1968)
                                                                                                       “Rediscovering Lost Values,” February 28, 1954

Nations operate in what they perceive to be their self-interest. It’s not always a good thing. When the Nazis marched into Czechoslovakia and Poland in 1939, it was under the policy of Lebensraum, the claimed need for food that those fertile lands offered. The people of Poland and Czechoslovakia and the Allies disagreed. When nations’ interests clash, differences must be decided diplomatically or war ensues, as happened in Europe in 1939. It has always been that way and, likely, always will.

But sometimes a nation’s interest serves the world’s.  In the wake of World War II, America’s self-interest – guided by our values – benefitted not only ourselves and the nations who had allied with us, but the people of those countries we helped defeat. In a recent history, Harry & Arthur, Lawrence Haas, a Senior Fellow at the American Foreign Policy Council, tells of the remarkable working relationship between newly sworn-in President Harry Truman and Michigan Senator Arthur Vandenberg, then the leading Republican on the Senate Foreign Relations Committee. According to Mr. Haas, a former member of Al Gore’s staff, the Marshall Plan, the Truman Doctrine, NATO and the U.N. Charter would have been impossible without the collaborative efforts of the two men. This was bi-partisanship at its best, relying on fundamental American values – to help those in distress, by serving our own interests. The consequence: the west saw seven decades of economic growth, Germany and Japan became economic powerhouses and the world saw the most rapid eradication of poverty it had ever known.

Things have changed. We have abandoned our magnanimous perch. Our values are on trial. A belief in moral relativism has replaced a sense of national self-confidence that had been driven by moral certitude. Political extremism has meant that our nation’s self-interest has been subsumed within the wants of party hacks; and immediate self-gratification has replaced the values needed for moral leadership. Republicans: consider the effects of the war in Iraq? Democrats: think of the consequences of the attack on Libya, and the rise of ISIS in Iraq and Syria? Keep in mind, 9/11was an attack on western civilization by Islamic jihadists – a fact that has all but disappeared from our collective memories. Non-threatening euphemisms used to describe those terrorists (and others since) have undermined a focus on the awfulness of what they did, and what they are still capable of doing.

As part of the Administration’s bid to rid the world of nuclear weapons, John Kerry became the first Secretary of State to visit Hiroshima, the site of the first of two Atomic Bombs dropped on Japan by the United States. Its purpose was to end a war that had killed an estimated 60 million people. In the guest book, Mr. Kerry wrote: “War must be the last resort – never the first choice.” Good words, but what he could have added is that it is not weapons that create devastation, it is the people, governments and policies behind them. It is the values and morality of people, reflected in their leaders, that causes nations to act as they do. Had the Japanese Imperial Army not invaded China, had they not attacked and invaded Singapore, had they not attacked Pearl Harbor there never would have been the devastation of Hiroshima and Nagasaki. Truman’s decision was morally right. Again, it served our interests and the worlds’.

Our founders knew the tyranny of governments managed by fallible men. They understood that power corrupts. They trusted institutions more than individuals, so they added checks and balances. They ensured a rule of law. They realized habitable society requires civility. They knew that tolerance of intolerance is morally wrong. It doesn’t make one xenophobic to be disgusted by a Muslim culture that enslaves women, and which punishes those women who dare expose an arm. We are not prejudiced because we see evil in the beheading of “infidels,” or in those who spread their religion through jihad. Moral and cultural relativism blind us to evil. It prevents us from acknowledging that cultures can be morally wrong.

Today, as a nation, our values have drowned in a sea of relativism. It is a nice to bring together the mothers of black youngsters killed by police, as Hillary Clinton did last week. But should we not also address the far greater prevalence of black-on-black crime? Should we not also gather those mothers and wives of the 40-odd policemen killed in the line of duty in 2015? An absence of moral certitude raises questions. Why is an unborn a “person” when the mother is threatened with the Zika virus, but a fetus when discussed by Planned Parenthood? With transgenders, we should respect their wishes to be of a sex different from the one with which they were born. But, in the same vein, is it right for them and their supporters to deny us the respect we give them? In most public buildings, it is either impractical or too expensive to construct two extra sets of bathrooms – one for transgender females and another for transgender males; and then one for women who prefer to pee only with biological females and another for males who prefer to urinate with those who can stand beside them. To whom should we cater – a vocal minority, or a silent majority? Commonsensical preferences do not make one a bigot.

Where national self–interest is most visible is in foreign affairs. But, how have we done in recent years? As the United States, it is in our interest that the number of democracies around the world expand; instead, the number has shrunk[1]. As a nation that has thrived on a market economy, it is in our interest to promote global trade; instead, trade agreements are under attack by members of both parties. As an exemplar of democratic capitalism, it is in our interest to further the system that has lifted untold millions from poverty; instead we find ourselves pilloried for inequality. As a country that embodies meritocracy, it is in our interest to encourage the talented, foreign-born to immigrate to this country; instead, we have an immigration policy that welcomes illegals and makes it difficult for those who are qualified and educated from entering the country. As a beacon of hope that symbolizes freedom and democracy, it is in our interest to show the world the spirit of unity, self-reliance, strength and leadership; instead, politics has become toxic – we are divided: people are increasingly reliant on the state; students are encouraged to seek safe places when uncomfortable with words or phrases, spoken or written; overseas we have opted to “lead from behind.” In all that we do and in how we live, we are best off in a world at peace; instead, we have a newly combative Russia and a provocative China. Their aggression, along with persistent Islamic jihadists’ attacks on western culture, has made the world more dangerous.

What will it take to restore our national self-esteem, that we are a good nation filled with good people, one that exemplifies fairness and equality? We are not perfect, we have some bad people and there are things we can do better, but, tell me, where else would you rather live?

[1] Freedom House reported that 2015 saw the ninth annual decline in countries’ freedoms.

Tuesday, April 12, 2016

"Interest Rates - 'The Great Game'"

Sydney M. Williams

Thought of the Day
“Interest Rates – ‘The Great Game’”
April 12, 2016

“If I owe you a pound, I have a problem; but if I owe you a million, you have a problem.”
                                                                                                John Maynard Keynes (1883-1946)

I am not an economist, but it is clear that the path we are on leads to an unhappy place. It is determined by wishes and hopes, not reality and facts. I write about debt. And I write about interest rates that are set by government, not determined in the marketplace. Price fixing, whether by consortiums, monopolies or government and whether for goods, services, wages or money, is generally not wise. Hidden behind Islamic terrorists, the interminable presidential nominating process, corruption, and the hypocrisy of political correctness looms a debt crisis that has been abetted by artificially low interest rates. Approximately eight trillion dollars has been added to our national debt since the financial crisis and the “great recession” ended almost seven years ago.

To put what has happened in perspective: In 2000, U.S. Federal debt was $5.7 trillion. The Ten-year government bond yielded 6.6 percent. That debt and those rates supported a GDP of $10.3 trillion. At the end of 2015, U.S. Federal debt was $18.2 trillion; the Ten-year yielded 2.1%, while GDP was $17.9 trillion. In other words, while GDP expanded at a compounded annual rate of 3.8%, Federal debt grew at 8%, more than double that of economic growth. Despite debt tripling in those fifteen years, federal interest expenses remained about the same – thanks to a compliant (and not so independent) Federal Reserve. Shortly after his inauguration, President Obama caustically noted: “I found this national debt doubled, wrapped in a big bow, waiting for me as I stepped into the Oval Office.” Mr. Obama has returned the favor with interest, pardoning the pun. Since 2009, GDP growth has slowed further, while Federal debt has persisted, increasing at double the rate of economic growth. The situation is untenable. If deficits are not reduced and interest rates not allowed to rise during recoveries, what happens when the next recession hits?

The problem is not limited to the Federal government. State and local municipalities, with tax receipts down, demands on resources up and interest rates low, have increased debt. Making things worse are structural problems within states: Infrastructure is crumbling. Entitlements are ballooning, with the gap between benefits promised and assets on hand nearing a trillion dollars, according to Pew Research. (The Cato Institute puts the federal government’s unfunded liabilities related to Social Security, Medicare and Medicaid at $70 trillion.) Corporate debt exceeds $29 trillion, with leverage at a 12-year high. Because of myriad government hindrances, corporate debt has not been used for investment, but for stock-buybacks, dividends and mergers. Consumer debt, at $12.12 trillion, is approaching the levels of 2008, despite mortgage debt being more than a trillion dollars below where it was at that time. Since the federal government took over student loan programs in 2009, student debt has increased from $700 billion to $1.2 trillion, with 43% of debt holders currently in arrears or in default. What will happen to local governments, businesses and individuals when interest rates rise, as is inevitable?

The Federal government has set the trap. Low interest rates are the bait that attract borrowers. Investors, savers and taxpayers are the prey. Granted, the Federal Reserve has less ability to dictate long rates than short rates, but numerous quantitative easing (QE) programs have successfully kept long rates artificially depressed. Once rates normalize, which they will, the victims will be those that borrowed short to lend long (banks), as well as investors who bought long-dated bonds; the latter stand to lose capital.

Congress and the Administration have dallied. They have focused on what they deem more pressing issues: ensuring those claiming to be transgenders have access to bathrooms of their choosing; setting aside a million or so acres for windfarms, lest tens of thousands die of heat prostration; providing “safe places” for students whose delicate sensibilities find certain words and phrases offensive; and helping the armed forces remove the dreaded designation ‘man’ from all job titles. They should have hastened to reform our tax and regulatory systems. Both parties need to address rising transfer payments and declining infrastructure investments. It is fiscal reform that is needed, not catering to ephemeral concerns. It is the economy that requires support – something central bankers cannot do in isolation. High tax rates and indecipherable regulations, combined with low interest rates, have consequences. One has been the plethora of corporate inversions; another, the hiding of money in tax-havened accounts, and a third, the widening wealth gap, the last a function of low interest rates and rising asset prices. Restraints have been placed on job-creating businesses, while they have been removed from government.

The Fed, according to the New York Times, is in a “patient mood.” With the pace of economic growth “modest,” and the global economy weak, they “worry about raising rates too soon.” They are in a box. The domestic economic recovery, which began only a few months after Mr. Obama took office, is about to enter its eighth year – long in the tooth for post-War recoveries. Mr. Obama does not want to see a recession begin on his watch; so he is likely to encourage the Fed to take no chances by normalizing rates. Leave that for the next president. Mr. Obama takes pride in the number of jobs added over the past seven years – about eleven million – but makes no mention that was from recession lows, and that given demographics, our economy should, in the normal course of events, add about a million jobs annually. While work-force participation rose last month from 63.5% to 64%, it still remains mired at levels not seen since the 1970s. Wage growth has begun to show modest signs of improvement, but median household income remains below where it was in 2008. The question for the Fed: When recession next hits, how far do you lower rates when they are already at zero?

The ‘Great Game’ refers to the rivalry and wars that played out in north-central Asia, during the 19th Century, between the British and Russian empires for supremacy in that god-forsaken region. It was the source for many of Rudyard Kipling’s stories and provided opportunities for George MacDonald Fraser’s unforgettable character, “Flashman.” The game being played today, not just by the Federal Reserve, but by central bankers around the world – passing on, delicately but deliberately, buckets filled with waste – is as foolhardy and dangerous as that played on the northern frontiers of India and Afghanistan a hundred and fifty years ago. I don’t want to imply that deficit spending is always a bad thing. During recessions, government must step in to help right a foundering ship. And I certainly don’t want to belittle the great good done by Henry Paulson, Ben Bernanke and Tim Geithner in late 2008 and early 2009. Without their aggressive responses, the credit collapse could well have turned into something far worse. But times have changed. It seems to this observer that the goal today of every central banker (and political leader) is to get to the end of his or her scrum without disaster – not to fix what needs mending – then pass on to the next a situation more fragile than that inherited.