Tag Archives: economics

The American Dream is Fading, and May Be Very Hard To Revive

30-rk-fam-1955My Comments: From age 10, I grew up in middle America with an educated father, a full time mother and a dog. It was assumed I would go to college, get a job, be self sufficient, and at the very least maintain the same standard of living as my parents.

I achieved that goal but that expectation is fading. The economic threshold promised by higher education is lower than it was when I was in college. We can argue ‘till the cows come home why this is so, but the reality is causing young people to struggle where I did not.

Economic inequality in this country is increasingly dramatic, and in my opinion, the cause of much of the tension we experience and describe as racial, as urban vs rural, as educated vs uneducated, and so on.

If there is a reason to try and preserve the integrity and opportunity for greatness in this country, then our political leaders have to address income inequality or we can kiss our ass goodby.

by Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, Jimmy Narang December 8, 2016

The American dream isn’t dead, but it’s got one foot in the grave, according to new research.

The Washington Post reports that 92% of people born in 1940 earned more money at 30 years old than their parents did when they were the same age.
Researchers say doing better than your parents is the American dream, economically speaking. But for people born in 1980, that percentage had dropped to 51, according to the Wall Street Journal.

That means barely half of today’s 30-somethings are doing better than their parents. People born in the middle class and the Midwest have seen the steepest declines. The New York Times calls it some of the “most eye-opening economics work in recent years,” as well as “deeply alarming.”

A slowing economy alone doesn’t explain the drop off in the American dream, and researchers place the blame largely at the feet of growing inequality.

Over the past 30-some years, nearly 70% of income gains went to just the richest 10% of Americans. Researchers say that if inequality had stayed where it was in 1970, 80% of today’s 30-year-olds would be out-earning their parents.

“We need to have more equal growth if we want to revive the American dream,” researcher Raj Chetty says.

Without addressing inequality, researchers say the economy would need to grow 6% annually to reverse these trends. Donald Trump is only promising to grow it by 3.8% per year; experts say it’s more likely to be closer to 2%. (The American lawn, too, has seen better days.)

25 Reasons To Help Avoid Economic Suicide

pieter-bruegel-the-younger-proverbs-2My Comments: Don’t freak out yet! Yes, this is about economics and for some of you, it might as well be written in Russian or Greek. But it is relevant to your future standard of living. Try hard to at least get through the first paragraph. And let me know your thoughts.

Mark J. Perry Tuesday, February 14, 2017

It’s a scientifically and mathematically provable fact that all tariffs, at any time and in any country, will harm economic growth, eliminate net jobs, destroy prosperity, and lower the standard of living of the protectionist country because tariffs are guaranteed by the ironclad laws of economics to generate costs to consumers that outweigh the benefits to producers, i.e. tariffs will always impose deadweight losses on the protectionist country (see diagram below, and “An economic analysis of protectionism clearly shows that Trump’s tariffs would make us poorer, not greater“). That is, the reality that tariffs always inflict great economic damage and leave society worse off is not a debatable outcome, rather it’s a provable fact, like the law of gravity.

(There’s a chart that goes here. It’s complicated. If you want to see it, visit the source: https://goo.gl/i2rOkZ )

Update: There is plenty of empirical evidence showing that protectionism and tariffs always generate costs to consumers that are far in excess of the benefits to producers (i.e. deadweight costs) see CD posts here, here and here.

The Justification

So why is protectionism being taken so seriously, and given so much credibility, when it’s actually a job-destroying, prosperity-destroying form of economic suicide and an economic death wish?

Here are my top 25 reasons that explain why protectionism is taken so seriously, despite the fact that it’s guaranteed to impoverish America and destroy jobs, not make us “great again”:

1. The false belief that trade is a zero-sum game (win-lose), when in fact it’s win-win.
2. The costs of protectionism to consumers are mostly hidden.
3. The benefits of protectionism to producers are easily identifiable and visible.
4. The jobs saved by protectionism are observable and visible.
5. The jobs lost from protectionism are not easily observable or visible.
6. The benefits of protectionism to individual producers are very high (e.g. $300,000 annual increase in revenues per sugar farm from trade barriers for foreign sugar).
7. The costs of protectionism to individual consumers is very low (e.g. $5-10 per year in higher sugar prices per person due to sugar tariffs), although the costs in the aggregate of protectionism are very high.
8. The costs of protectionism to consumers are delayed over many years.
9. The benefits of protectionism to producers are immediate.
10. Producers seeking the benefits of protectionism are concentrated and well-organized.
11. Consumers paying the costs of protectionism are dispersed and disorganized.
12. There is a huge political payoff to politicians from protectionism in the form of votes, political support, and financial contributions from protected domestic firms and industries.
13. There is a huge political cost to politicians who attempt to remove or lower trade barriers in the form of lost votes, support and financial contributions from previously protected domestic producers.
14. The pathological, but false obsession that exports are good.
15. The pathological, but false obsession that imports are bad.
16. The fact that most Americans work for a company that produces a single product or group of similar products (e.g. cars, steel, textiles, appliances) and are therefore favorably disposed to supporting protectionist trade policies that benefit their employer and industry.
17. The fact that American consumers purchase hundreds, if not thousands of individual products, goods and services, and are therefore unlikely to be fully aware of the negative effects of protectionism or be motivated to fight protectionism.
18. Many Americans think that exporting US products is patriotic.
19. Many Americans think that importing foreign products is unpatriotic.
20. The false belief that trade deficits are a sign of economic weakness.
21. The false belief that trade surpluses are a sign of economic strength.
22. The fact that protectionism is guaranteed to create economic deadweight losses is not easily understood, nor are those losses easily observable or measurable.
23. The general lack of economic literacy among the general public.
24. The general lack of economic literacy among politicians, or their intentional disregard for the economics of protectionism in favor of enacting public policies that help them get re-elected.
25. The failure to recognize that most imports are inputs purchased by American firms, which allow them to be as competitive as possible when selling their outputs in global markets.
26. Taken together, the 25 reasons above help us understand the popularity of protectionism, despite the fact that it’s guaranteed to inflict great economic harm. Protectionism is popular primarily for political reasons, not economic reasons. To paraphrase Thomas Sowell, the first lesson of international economics is that free trade makes us better off and protectionism makes us worse off.
27. The first lesson of politics when it comes to international trade is to ignore the first lesson of international economics, and impose protectionist trade policies when they further the political interests of short-sighted elected officials. When politicians can count on the economic illiteracy of the general public and their blind patriotism to “Buy American,” the political payoffs from protectionism are too tempting to ignore despite the reality that it’s a form of economic suicide.
28. And because the benefits of tariffs to producers (and jobs created or saved) are concentrated, immediate and visible, while the costs to consumers (and jobs lost) are diffused, delayed and invisible, it’s pretty easy to understand why protectionism is popular, even though the economic costs far outweigh the economic benefits (i.e. deadweight losses result) and it’s therefore ultimately a form of self-inflicted economic poison.

Why China Doesn’t Need The U.S. For Trade

USA ChinaMy Comments: China First! Are you OK with China leading the world through the 21st Century? While I have issues with the politics of Steve Forbes, I have no issues with the credibility of Forbes Magazine, who published this article by Winter Nie.

Now that Trump has ceded global economic leadership to China, it’s important to now understand what has to happen in this country for us to maintain the economic role we still have, much less once again ride to the top.

Consider this: price is the number assigned to something you want to buy. As a ten year old, if I wanted a piece of bubble gum that came with a picture of a baseball player, I had to give the store person 5¢. The same principal applies today when I gas up my car; I give them about $2.30 for every gallon I need.

Right now that $2.30 is much less than it was a couple of years ago, principally because there are a lot more gallons of gas available for me to buy. The demand has not shrunk but the supply has increased. Ergo the price went down.

Starting a trade war with China, given the state of our mature economy today, is going to mean we lose. There is only one way we might win and that’s to embrace immigration. With hundreds of thousands of additional people available for low end jobs, the price of labor will go down, and the US will grow. At the same time, in order for the Trump voters to gain what they want, they will have to be educated, or re-educated, so they can move into the higher paying jobs that will result from growth.

Unless you’re OK with China leading the world through the 21st Century.

Winter Nie | February 7, 2017, in Forbes magazine

During his election campaign, President Donald Trump threatened to impose 35% to 45% tariffs on Chinese imports to force China into renegotiating its trade balance with the U.S. The immediate result of that would be a fierce trade war that America would almost certainly lose. And while we don’t know yet whether Trump will follow through with this threat, his abandonment of the Trans Pacific Partnership (TPP) in his first few days in office is an indication that he is not shying away from his campaign pledges.

Trump is now entering uncharted waters. He has already demonstrated his ignorance of Asian affairs when he publicly accepted a phone call from Taiwan’s president, Tsai Ing-wen, in December, and shortly afterwards announced that he didn’t understand the “One China” policy, or why he should respect it. His abandonment of the TPP will simply accelerate China’s displacement of America as the world’s leading economic power.

For the moment, China has decided to wait for the U.S. to make the first move. A trade war would be problematic for the region, not least for South East Asia, which would be most likely to suffer negative fallout as a major trade partner to both the U.S. and to China. But it would not be a disaster for China, mainly because the U.S. needs China more than vice versa.

Unfortunately for Trump, it’s not the 1980s anymore. Twenty years ago, the situation might have been different. China was dramatically underdeveloped, and it wanted access to Western technology and manufacturing techniques. China has most of what it needs now, and what it doesn’t have it can easily obtain from vendors outside the U.S. While the American market looked enticing a few decades ago, it is relatively mature, and today the newer emerging market countries have become much more interesting to Beijing.

The fastest growing markets for the best items China produces, like laptop computers and cell phones, are in developing regions such as India, Latin America, and Africa. In contrast, China itself is a market that the U.S. can hardly ignore. By the end of 2015, Chinese consumers had bought 131 million iPhones. The total sales to U.S. customers during the same period stood at only 110 million. And iPhones are only a small part of U.S. exports. Boeing, which employs 150,000 workers in the U.S., estimates that China will buy some 6,810 airplanes over the next 20 years, and that market alone will be worth more than $1 trillion.

Were Trump to start a trade war, the most immediate effects would probably be felt by companies like Walmart, which import billions of dollars of cheap goods that are bought mostly by the people who voted Trump into office. The prices on almost all of these items would quickly skyrocket beyond the reach of the lower economic brackets—not because of manufacturing costs, but because of the tariffs. The result would be an economic war of attrition that China is infinitely better positioned to win.

China’s foreign currency reserves now stand at more than $3 trillion. In contrast, the U.S. has foreign exchange reserves that hover at around $120 billion. Trump’s tariffs would automatically trigger penalties against the U.S. in the World Trade Organization (WTO), and might even lead to the WTO’s collapse, which would lead to higher tariffs against U.S. exports. While it might take a while for that to happen, the turmoil would be catastrophic for American business and employment. China, on the other hand, would emerge relatively unscathed.

In fact, the importance of the U.S.-China relationship is already being challenged by other players. Apple’s iPhone sales in China are running into competition from local Chinese manufacturers, and Samsung is more than happy to fill any void that the Chinese can’t deal with. Likewise, the Chinese would happily shift their trillion dollars in future aircraft purchases to Airbus, a European firm that is already building a plant in China to finish assembly of large, twin-aisle jets. As for automobiles, most Chinese would just as soon drive a Mercedes, BMW, or Lexus as a Ford.

Both China and leading economic experts hope that a trade war won’t happen. The American political system is relatively mature with checks and balances, but with a president who often acts uniquely based on his own beliefs regarding complex issues, almost anything is possible.

Opinion: This Market Bubble is About to Burst

bear-market-bearMy Comments: Yesterday, I decided it was time to think about moving my clients out of cash and back into the markets. At least with some of their money. Now, once again, I’m not so sure.

If you are retired, or about to be retired, and have the ability to control the investments made inside your retirement accounts, it’s a time to be very cautious. Missing a little upside to protect yourself against a serious downside is, I think, a smart move.

Published: Feb 8, 2017 | Mark D. Cook | Moneywatch

The U.S. stock market at this level reflects a combination of great demand, great complacency, and great greed. Stocks are clearly in a bubble, and like all bubbles, this one is about to burst.

What do previous financial bubbles have in common with this one? There are many similarities, but one in particular is the real estate bubble of the mid-2000s that led to the 2008 global financial crisis. Then, extensive real estate buying overwhelmed supply. People were borrowing even more than 100% of the cost of the real estate, using creative means of financing never seen before in U. S. credit markets.

But debt is debt, which means it is a liability that someone is responsible to repay. That obligation was totally absent in the minds of borrowers and lenders alike — until demand dried up and reality hit.

How is this similar to the market now? The Federal Reserve has created an environment of low- to almost non-existent returns on bank saving accounts, and in the process it ruptured the savings mentality that had been a foundation of American society. People once could live within their means and make a habit of saving some of their income for retirement. They expected banks to pay a rate of interest to savers that was fair and consistent.

When this was no longer the case, people with savings chased returns in riskier areas including stocks, as well as not saving as much. Indeed, the saving generation has been forced into stocks, in which they do not have deep-seated faith. They will take the first opportunity to return to their savings ways again.

Three factors substantiate the view that this market is in a bubble. Each factor warns that stocks are in extremely overbought territory.

The first factor is the CCT indicator. This indicator is a proprietary internal measurement of the general volume of the New York Stock Exchange. The measurements take into account the institutional participation as a ratio of the overall volume. Also measured is the duration of heavy block buying in rallies.

The sum total of all the measurements now shows the lowest bullish energy ever — even lower than in 2008, just before the market crash.

The second factor is the sluggish VIX  (S&P Volatility Index) and the persistence of readings just above 10. These overbought readings indicate a pressure to return to higher levels, thus requiring downside volatility to neutralize the pressure. The longer this persists, the greater the downside pressure.

The third factor is a short-term daily indicator called the 1.5% one-day decline, which signals a pending environment change in chart patterns. The U.S. market has now gone three months without a 1.5% one-day decline. This is the longest period in the record-keeping history of this indicator — and a sign of imminent danger. Bubbles burst.

The Biggest Losers in Trump’s Potential Trade War

My Comments: It’s been hard to tell if the mistakes coming out of the White House are simply the result of the learning curve necessary to be competent or whether it’s the result of overt incompetence. But I do think it’s increasingly clear that Donald Trump is in over his head.

The person most likely in charge now is Steve Bannon, who reminds me of a James Bond villain, trying to take over the world. Nothing coming out of the White House, despite the rhetoric that it will all clear up soon, suggests it’s in our best interest as citizens. I don’t see him as an evil person, but his motivation is to ultimately do what is in Steve Bannon’s best interest, and we’ve given him the keys to the kingdom. There’s very little we can do about it. Yet. This writer is too wishy washy; we will all lose if we concede the economic high ground.

Ronald Brownstein Jan 30, 2017

If Donald Trump’s aggressive moves on the international economy spark a trade war, the American communities that will lose the most in absolute terms are the giant metropolitan areas, largely along the two coasts, that are most deeply integrated into global markets.

But in proportional terms, the biggest losers from a trade war would be small and midsized cities, almost entirely in interior states, that are heavily dependent on exports of manufacturing goods or energy products.

That distinction between the communities with the greatest absolute and proportional stake in access to global markets emerges from an important analysis of exports’ role in local economies that was released Monday by the Metropolitan Policy Program at the Brookings Institution.

That contrast frames the political risk of Trump’s flurry of moves to raise barriers against imports and withdraw from U.S.-led efforts to open markets around the world—for instance, abandoning the Trans-Pacific Partnership agreement across Asia and demanding a renegotiation of the North American Free Trade Agreement with Mexico and Canada.

If Trump’s moves ultimately reduce trade flows and squeeze exports, the biggest U.S. losers will include not only big metropolitan areas that almost entirely supported Hillary Clinton in November, but also the smaller places that provided the core of Trump’s support. “You have to tell both parts of that story to get the full local picture,” said Joseph Parilla, a Metropolitan Policy Program fellow who specializes in local economies, particularly their connection to the global market.

In the new analysis, Parilla and Mark Muro, the Metropolitan Policy Program’s director of policy, produced data on trade flows at the county and metropolitan-area level that quantify this split-level picture.

On the one hand, they found that although Trump won about five-sixths of all U.S. counties, the counties that supported Clinton accounted for 58 percent of all American exports in 2015. The counties that backed Trump only generated 42 percent of all American exports. That’s in line with earlier Brookings calculations that Clinton’s counties accounted for about two-thirds of the nation’s total economic output.

The overall export imbalance reflects Clinton’s dominance in the metropolitan areas that are most firmly integrated into global markets. In 2015, Brookings calculated, 15 U.S. metropolitan areas each generated at least $25 billion in exports. That list is topped by New York ($132 billion), Los Angeles ($98 billion), Houston ($80 billion), Chicago ($63 billion), Dallas ($59 billion), and Seattle ($51 billion). And it extends through Boston and San Francisco (about $41 billion each); Detroit ($38 billion); Philadelphia and Miami (about $31 billion each); Washington, D.C., San Jose, and Atlanta (about $27 billion each); and Portland ($25 billion).

These are all places that have accelerated their growth by steering into the jet stream of the global economy. “The big cities, one of the reasons they are so big is that they have figured out how to provide products and services that have a lot of global demand, and they have been able to build a lot of wealth because they are doing things that very few other places in the world can do,” Parilla said. “New York in finance and L.A. in media, and Houston in energy and Seattle in aerospace and tech, and San Jose in a range of technology and advanced-manufacturing sectors—these are absolutely global hubs for these advanced, traded industries. And a lot of the country’s wealth is invariably [generated] in those places.”

They are also almost all places where Clinton trounced Trump last fall. Overall, Clinton won 88 of the nation’s 100 largest counties, even slightly more than Obama did in 2012. In that way, a Trump turn toward protectionism would represent another offensive against the interests of major metros that overwhelmingly rejected him—a pattern evident in his attacks on so-called sanctuary cities, his drive to repeal the Affordable Care Act, and his demand for an investigation of voter fraud focused on urban areas.

But as Muro and Parilla show, the trade picture is more complex. Although the big metropolitan areas generate the most exports, selling to the world is often proportionally more important to smaller places. In fact, the Brookings analysis found that while the Clinton counties accounted for most of the nation’s absolute export volume, exports accounted for a larger share of the total economic output of counties that Trump won (13 percent) than of those that Clinton carried (10 percent).

The metropolitan areas where exports account for the largest total share of local economic output are smaller and midsized communities that are almost all hubs for either manufacturing or energy production. These places read like a recap of Trump’s campaign-travel itinerary: Columbus, Elkhart, Kokomo, and Lafayette in Indiana; Racine, Fond du Lac, and Sheboygan in Wisconsin; Lake Charles and Baton Rouge in Louisiana; Waterloo, Iowa; Hickory and Rocky Mount in North Carolina,; and Midland and Battle Creek in Michigan. The list of metropolitan areas where exports provide the greatest share of total gross domestic product doesn’t reach a big city until Seattle—which ranks about 40th.

For the big, mostly blue-leaning metropolitan areas, a turn toward protectionism is a relatively unambiguous threat. “This is pretty clearly negative for those places,” Parilla said. Not only do they depend on selling to global markets, but they also “benefit from the fact that people from all over the world come to these places because they see these locations as the best destination to advance their economic prospect.“ Protectionist trade policies, reinforced by immigration limits, could stanch those flows.

For smaller communities at the foundation of the Trump coalition, the ledger is more complex. Many of those smaller places, Parilla notes, would initially welcome a more protectionist trade policy, on the belief that it will force manufacturers now relocating or building new facilities abroad to reinvest in the United States. The downside for them is less visible, but potentially more consequential: the cost to their local economies if retaliation from other nations, or simply a diminished effort to open other markets, leads to fewer sales from American firms to the world.

“When you start to [assess] what the motivation is … [for] the new administration, they were brought in to respond to a lot of these smaller communities,” Parilla said. “And [a protectionist approach] is just really dangerous [for them] because of how export-intensive some of them are. The bet, obviously, on their part is [that] it is going to be beneficial—that more production is going to concentrate in these places as a result of us closing ourselves off. But that takes a zero-sum view of trade. And if you play that out and you suggest there is going to be retaliatory measures—and overall global trade becomes less and less an important part of what drives our economy—then the most export-intensive places stand to see some changes in their economy.”

For example, a protectionist approach might save jobs at one factory, but those policies could eventually mean another employer down the road doesn’t hire new workers, or lays off existing ones, because their export markets contract.

Parilla acknowledges that it’s difficult for local officials to keep that broader perspective in mind when trade’s losers are so much more visible than its beneficiaries. But the Brookings data showing the heavy reliance on trade in the smaller cities, he said, make clear that “what might incentivize production for one industry … might be limiting opportunities for another.” And that’s why a protectionist lurch that seemingly favors Trump’s small-town bastions over the Democratic-leaning major metropolitan areas might ultimately hurt both types of communities.

Trade Is Not the Driver of Major Job Loss

laborforce-us-1987_2016My Comments: This chart shows the decline, in relative terms, of the number of people who define the US labor force over the past 30 years. Without population growth, it’s very hard to maintain economic strength.

So I find myself strangely untroubled by President Bannon, the avowed Leninist now more or less running the White House. The immigration rule last week was a shock and awe event, very deliberately created to result in chaos and confusion.

I don’t have a problem so much with the strategic efforts to “drain the swamp” and the resulting reassessment of the fundamental assumptions that underlie everything done at the Federal level. Those assumptions started in the 1930’s, followed us after WWII, resulting in a globalized free market where global standards of living have risen. But in the US, a large segment of the population felt left behind, which is why the Democratic Party is now in disarray.

We were long overdue for a political event that allows us to re-evaluate and allow community values to be talked about and resolved. The longer between events, the more likely they are to be dramatic and mind-boggling for the populace. Consider me shocked, awed and mind-boggled.

I do have a problem, however, with the apparent new assumption that we don’t need immigration to ‘make America great again’. It won’t happen unless and until we bring in millions of new immigrants to replace the aging labor force we now have. On the other hand, the Trump Administration has given the rest of us an opportunity to define and articulate how we want society to evolve over the next fifty years or more. That’s a good thing.

By Robert Samuelson | January 30, 2017

Trade wars, encouraged by President Trump, are inching closer. The White House has rejected the Trans-Pacific Partnership (TPP), an agreement involving 12 Asian-Pacific countries, including the United States, Japan, Malaysia and Vietnam. It is threatening to do the same with the North American Free Trade Agreement (NAFTA) by slapping a 20% duty on Mexican exports to the United States. All this is advanced in the name of bolstering U.S. manufacturing jobs, which are regarded as being sacrificed to imports and “unfair” foreign trade.

There’s only one problem: It isn’t true.

Contrary to popular opinion, trade is not a major cause of job loss. It’s true that U.S. manufacturing has suffered a dramatic long-term employment erosion, sliding from roughly one-third of nonfarm jobs in 1950 to a quarter of jobs in the early 1970s to a little less than 9% now, according to economist Bradford DeLong of the University of California at Berkeley in an essay posted on Vox. But the main cause is automation.

Note that manufacturing’s decline began in the 1950s and ’60s, well before the onset of annual trade deficits. In these years, we ran trade surpluses as Europe and Japan recovered from World War II. The first postwar U.S. trade deficit occurred in 1971. But since then, haven’t we been hurt by our trading partners’ predatory trade policies and “offshoring” by U.S. multinationals?

You can be excused if you answer “yes.” We are constantly bombarded with images of shuttered factories and the message, implicit or explicit, that these plants closed because they couldn’t compete with imports. This happens. It’s not a myth. But the effect is overstated. We’ve lost perspective.

In his essay, economist DeLong makes a novel argument to demonstrate that automation and new technologies are the biggest causes of job destruction. Suppose, he says, we examine Germany, the world’s powerhouse exporter. It seems to have done everything right. It has first-rate workers and engineers; it benefits from a weak euro (which make its exports cheaper); it has routine trade surpluses. If any country should have maintained its share of manufacturing jobs, it should be Germany.

It hasn’t. Instead, says DeLong, “it has seen the same pattern as the U.S.” — that is, a steady decline of manufacturing jobs as a share of the total. From 1971 to 2012, German manufacturing employment fell from about 40% of the total to roughly 20%. About one-third of the decline reflected the closing of wildly inefficient factories in the former East Germany, but the rest reflected the normal “shedding” of workers at less efficient firms. Fewer workers were “needed to make each car, each refrigerator, each chair” than in the past. That’s true for the United States as well.

This suggests that President Trump, though he may achieve some high-visibility victories in preventing large firms from moving factories abroad, will struggle to influence overall job trends. About 98% of the 252,000 U.S. manufacturing firms have fewer than 500 workers, reports the National Association of Manufacturers. These firms will do whatever they can to improve competitiveness. Since 1950, DeLong says, only 5% or less of manufacturers’ job losses reflect trade agreements, including China’s entry into the World Trade Organization.

So what did Trump get by killing TPP? Most economic analyses suggest that TPP would give its member countries a slight boost in economic growth by lowering tariffs and streamlining regulations. By 2030, U.S. incomes would be 0.5% higher and incomes in Vietnam — a big winner — would be 8% higher, estimates a study for the Peterson Institute. That modest boost is gone.

“But the real benefit of TPP went beyond trade,” says economist Russell Green of Rice University, “it was about leadership in Asia.” A trading alliance led by the United States would provide a counterweight to China’s influence. The opposite has happened, says Green. Leaders in the other 11 countries made difficult political decisions to ensure the TPP negotiations succeed. By “throwing it in the trash,” Trump has earned their distrust.

Will TPP’s collapse foster a new trading system built around China, not the United States? Will Trump’s abdication of leadership of an open and rules-based system inevitably lead to more trade conflicts, as countries adopt protection and mercantilist policies (tariffs, export subsidies and preferences for domestic goods)?

We don’t know, but the prospects today are greater than yesterday. Already, some disappointed TPP countries are indicating interest in strengthening ties with China, says Jeffrey Schott, a trade expert at the Peterson Institute. He puts Australia, Canada, Chile, Peru and New Zealand in this group.

So what Trump gets from his trade crusade is a (false) rallying cry for more U.S. jobs. What the United States gets, if anything, is less clear.

Maintain a Level Playground

money mazeMy Comments: This is about a soon to be imposed rule that applies to those of us who provide professional advice about the money you are accumulating for your retirement. It’s called the Department of Labor Fiduciary Standard rule and it’s long overdue.

As a financial planner, my role is to identify the existential threats you face in retirement and help you find solutions. For this I get paid from time to time. It might be instructive to understand the reason why I believe the rule is needed and ultimately expanded. With Trump now in the White House, there’s going to be shouting all up and down Wall Street to get rid of it.

Here’s some deep background. The greatest economic threats to the health and welfare of the world I leave to my grandchildren will come from income inequality or the disparity between the haves and the have-nots. I’ve written about this before and will again.

This income inequality is pervasive across the planet. I believe it’s the root cause of almost all conflicts between countries and their respective societies. If the disparity is great enough, economic incentive to succeed diminishes and society unravels. Why go on jihad and kill a bunch of infidels if you already have a good job, have plenty to eat and a home in which to raise your children?

Early last century, a political movement surfaced that we called communism. It arose in Russia and the Soviet Union and said ‘to each according to his needs’. It was a rejection of free enterprise and capitalism, which at the time said every individual has the ability to rise above others and have ‘more than what he needs’.

However, the intervening years proved that without an economic incentive, individuals rarely rise to any level, never mind enough to satisfy their needs. Without the ability to dream of success, people simply fail if there is no motivation to excel.

The other side of the argument says capitalism provides an unfettered ability to ‘succeed’, and at the extreme, allows total disregard for the aspirations and dreams of others playing the same economic game. Any barrier imposed by society to limit unfettered ability is deemed contemptible and must be removed.

But society, by definition, includes rules that we’ve come to accept as being in the best interest of society. We have no issue being required to drive on one side of the street, as opposed to whichever side we like on any given day. We have rules against stealing and causing bodily harm. These rules are accepted and no one argues against them. But suggest that bankers and stock-brokers be required to act in their clients best interest, with rules and regulations and penalties if you don’t and before you know it, the wailing starts.

A fiduciary standard says you are legally required to provide advice that is in your clients’ best interest. It’s not about denying some the opportunity to succeed any more than it’s about making sure none of us ‘has more than we need’. I should not be allowed to steal from you by giving you advice that is in my best interest and not your best interest. I may not ‘earn’ quite as much, but I will not suffer either.

This new rule is but one step on the playground of life that I hope will work to diminish the economic disparity I spoke about above. That effort has to start with a level playing field. It’s in the best interest of society and can happen within the context of a capitalist framework.

Theo Anderson | December 29, 2016

The income gap between the classes is growing at a startling rate in the United States. In 1980, the top 1 percent earned on average 27 times more than workers in the bottom 50 percent. Today, they earn 81 times more.

The widening gap is “due to a boom in capital income,” according to research by French economist Thomas Piketty. That means the rich are living off their wealth rather than investing it in businesses that create jobs, as Republican, supply-side economics predicts they would do.

Piketty played a pivotal role in pushing income inequality to the center of public discussions in 2013 with his book, “Capital in the Twenty-First Century.” In a new working paper, he and his co-authors report that the average national income per adult grew by 61 percent in the United States between 1980 and 2014. But only the highest earners benefited from that growth.

For those in the top 1 percent, income rose 205 percent. Meanwhile, the average pre-tax income of the bottom 50 percent of workers was basically unchanged, stagnating “at about $16,000 per adult after adjusting for inflation,” the paper reads.

It notes that this trend has important political consequences: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”

But the authors also note that the trend is not inevitable or irreversible. In France, for example, the bottom 50 percent of pre-tax income grew by about the same rate — 32 percent — as the overall national income per adult from 1980 to 2014.

The difference? In the United States, “the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions and an eroding minimum wage,” the paper reads.

President-elect Donald Trump’s administration promises at least four years of policies that will expand the gap in earnings. But a few glimmers of hope are emerging at the local level.

The city council of Portland, Oregon, for example, recently approved a tax on public companies that pay executives more than 100 times the median pay of workers. The surtax will increase corporate income tax by 10 percent if executive pay is less than 250 times the median pay for workers, and by 25 percent if it’s 250 and over. The tax could potentially affect more than 500 companies and raise between $2.5 million and $3.5 million per year.

The council cited Piketty’s “Capital in the Twenty-First Century” in the ordinance creating the tax. Steve Novick, the city commissioner behind it, recently wrote that “the dramatic growth of inequality has been fueled by very high compensation of a few managers at big corporations, as illustrated by the fact that 60 to 70 percent of people in the top 0.1 percent of income in the United States are highly paid executives at large firms.”

Novick said that he liked the idea when he first heard about it because it’s “the closest thing I’d seen to a tax on inequality itself.” He also said that “extreme economic inequality is — next to global warming — the biggest problem we have in our society.”

Investing in children

There is also hopeful news in the educational realm. James Heckman, a Nobel Laureate in economics at the University of Chicago who has spent much of his career studying inequality and early childhood education, recently published a paper that lays out the results of a long-term study.

In “The Life-cycle Benefits of an Influential Early Childhood Program,” Heckman and others report that high-quality programs for children from birth to age 5 have long-term positive effects across a range of metrics, including health, IQ, participation in crime, quality of life and labor income.

Predictably, perhaps, the effects of the programs weren’t limited to children. High-quality early childhood education also allowed mothers “to enter the workforce and increase earnings while their children gained the foundational skills to make them more productive in the future workforce,” a summary of the paper reads.

“While the costs of comprehensive early childhood education are high, the rate of return of [high-quality programs] imply that these costs are good investments. Every dollar spent on high quality, birth-to-five programs for disadvantaged children delivers a 13 percent per annum return on investment.”

The research is important because early childhood education has bipartisan support. Over the summer, the Learning Policy Institute released a report that highlighted best practices from four states that have successful early childhood education programs. Two of them — Michigan and North Carolina — are swing states in national politics. The others are Washington and a solidly red state, West Virginia.

Although it isn’t a substitute for other policy tools to address inequality, like progressive taxes, early childhood education has strong bipartisan support because it produces measurable payoffs for both children and the economy. One study found, for example, that the economic benefit of closing the educational achievement gaps between children of different classes would be $70 billion each year.

Early childhood education fosters an “increasingly productive workforce that will boost economic growth, provide budgetary savings at the state and federal levels, and lead to reductions in future generations’ involvement with the criminal justice system,” the Economic Policy Institute recently noted. “These benefits will, of course, materialize only in coming decades when today’s children have grown up. But the research is clear that they will materialize — and when they do, they are permanent.”