Donald Trump's bizarre inaugural address prompted widespread condemnation in the liberal press, in the United States and around the world. This editorial in the New York Times is typical, arguing that the condition of America is nowhere near as dire as Trump portrayed it. It's mostly indisputable, unless you're prepared to resort to "alternative facts", but some of the statements on the economy bear a closer look. Here's a key section:
"Mr. Trump portrayed the nation’s closed factories as having needlessly hemorrhaged jobs to overseas companies. But even as production jobs fell by about five million since 1987, the country’s manufacturing output has increased by more than 86 percent, according to the Bureau of Labor Statistics. Trade is part of the complicated story, but so is automation."
No doubt that's true, but is it really possible to separate the two? Is it possible to imagine that the massive wave of automation that swept over the US manufacturing sector in recent decades, and
swept away so many jobs, would have taken place without the intensification of foreign competition, first from Japan, and then later from China and other newly-industrializing countries? Is it even necessary to try to make the distinction? International competition and free trade are supposed to compel domestic manufacturers to raise their game, and that will almost inevitably involve job losses in certain sectors. In fact, unless that happens, the benefits of free trade that flow from the principle of comparative advantage (see previous post) cannot be realized.
This is not to dispute the virtues of free trade, or to question the numbers offered by the NYT, including that 86 percent rise in manufacturing output, or the steady and impressive decline in joblessness in the decade since the financial crisis began. America is indeed better-off than it was in 1987, or in 2007. However, if you're a newly-unemployed worker, it doesn't make much of a difference to you whether your old job is now being done by a Mexican or by a robot -- or, more likely, by a Mexican operating a robot.
As I've tried to express here a number of times before, even if the benefits from free trade are beyond dispute, the distribution of those benefits must still be seen to be fair, if popular support for open markets is to be maintained. Donald Trump has managed to convince an awful lot of Americans that the distribution of the benefits has been unfair, and that's a large part of what got him into the White House. The chances that he can really reverse what has happened are close to zero, and if he does, he may well do more harm than good, but that's what his supporters are looking for.
Whenever I write about free trade, I think of a woman who sometimes cuts my hair in our neighbouring city of St Catharines. A couple of decades ago, she worked in a canning factory that processed local fruit into juices and preserves. She had a union wage and good benefits. Along came the NAFTA deal; she had to retrain as a hairdresser at her own expense, and now works for something close to minimum wage.
She's one among very many. There were forty canneries in this area not that long ago. Now there are none -- and it's not because we can't grow fruit in the balmy Niagara region any more.
Sunday 29 January 2017
Thursday 26 January 2017
Dividing the spoils
Support for free trade has been ebbing for some time now, and with Donald Trump ensconced in the White House, things are only going to get worse for the dwindling band of true believers. The problem isn't that free trade doesn't bring benefits; the principle of comparative advantage is one of the most robust and demonstrably true in all of economics. Rather, the problem lies in how the benefits get divided up.
In principle a free-trade deal between two countries raises their aggregate income by shifting production to its optimal location. This means that some people have to stop what they were doing before and do something else for which they may receive less compensation, while others shift in the opposite direction. That's to say, there are winners and losers. Notionally, because the overall pie is bigger, the winners can compensate the losers, making everyone better off. The problem is, that never happens. The winners win, the losers lose.
I have a simple illustration of this from my recent travel experience with Air Canada, to the Caribbean and back. I like to travel in business class, because I'm tall, and as I don't travel very frequently any more, it's an affordable indulgence. Until a couple of years ago, the business class fare could buy you a fully reclining seat and a choice of meals. Further back on the plane, everyone was served a meal and a beverage at no extra charge, and there was an entertainment system.
Now, supposedly in response to competition, Air Canada offers its "Rouge" service on these routes. The "business class" seats look as if they were repurposed from Soviet-era Aeroflot, with minimal recline and almost no extra legroom. There's no entertainment system, although they will lend you an iPad loaded up with movies that also mostly date back to Iron Curtain days. The choice of meals has shrunk dramatically. And for this I pay exactly the same fare I paid for much better service a couple of years ago.
Further back on the plane it's even worse. The seats are crammed in tight; there's no food or drink unless you pay for it, and if you want to use an iPad, that's ten bucks. Remarkably enough, the low-cost carriers that Air Canada says it needs to compete with still find a way to give passengers a snack and a drink at no extra cost.
And that's not all. Toronto to, say, Barbados is just under six hours each way. In the old days, the cabin crew flew one way, overnighted on the island and crewed the next day's flight back. Now, they get to serve the flight south, stand at the cabin door while the passengers disembark and the returning passengers board, and then fly right back home. These guys and gals are working up to a fifteen hour shift -- and getting a lower salary and fewer benefits than their counterparts did in the recent past.
Who are the winners and losers here? It's not the passengers, getting less while paying the same as before. It's not the crew, working harder and earning less. The only winner here is the airline.
International free trade deals are more complicated than this, but the opposition to free trade articulated (if that's the word) by Donald Trump reflects a sense that the benefits are not being properly shared. In Trump's worldview, Mexico is gaining while the US loses out. That's not really true in itself; rather, well-paid US workers are losing their jobs to lower paid Mexicans so that the auto makers can continue to sell the same cars at the same prices as before and reap considerably higher profits. For car buyers, it's pretty much a wash.
As we noted at the outset, the winners in free trade deals -- in this case, the auto makers -- can notionally compensate the losers -- mostly, UAW members. Try telling that to the people of Flint, MI and the many other rust belt communities that have been abandoned to their fate.
Reality is much more subtle than this, of course, but the sense that the spoils of free trade have been unfairly divvied up is surely a major reason why Trump won the election -- even if he is wrongly asserting that it's the Mexicans (and Chinese and others) who are the big winners. It remains to be seen whether he can actually do anything about it. The auto manufacturers, who think in much longer terms than politicians, will be reluctant in the extreme to change their plans in response to Trump's threats. If he responds with his "big border tax" and thereby pushes the domestic auto makers back into financial peril, his economic platform, such as it is, will quickly collapse. Free trade may not have delivered what was promised, but unravelling it will be complicated and perilous.
In principle a free-trade deal between two countries raises their aggregate income by shifting production to its optimal location. This means that some people have to stop what they were doing before and do something else for which they may receive less compensation, while others shift in the opposite direction. That's to say, there are winners and losers. Notionally, because the overall pie is bigger, the winners can compensate the losers, making everyone better off. The problem is, that never happens. The winners win, the losers lose.
I have a simple illustration of this from my recent travel experience with Air Canada, to the Caribbean and back. I like to travel in business class, because I'm tall, and as I don't travel very frequently any more, it's an affordable indulgence. Until a couple of years ago, the business class fare could buy you a fully reclining seat and a choice of meals. Further back on the plane, everyone was served a meal and a beverage at no extra charge, and there was an entertainment system.
Now, supposedly in response to competition, Air Canada offers its "Rouge" service on these routes. The "business class" seats look as if they were repurposed from Soviet-era Aeroflot, with minimal recline and almost no extra legroom. There's no entertainment system, although they will lend you an iPad loaded up with movies that also mostly date back to Iron Curtain days. The choice of meals has shrunk dramatically. And for this I pay exactly the same fare I paid for much better service a couple of years ago.
Further back on the plane it's even worse. The seats are crammed in tight; there's no food or drink unless you pay for it, and if you want to use an iPad, that's ten bucks. Remarkably enough, the low-cost carriers that Air Canada says it needs to compete with still find a way to give passengers a snack and a drink at no extra cost.
And that's not all. Toronto to, say, Barbados is just under six hours each way. In the old days, the cabin crew flew one way, overnighted on the island and crewed the next day's flight back. Now, they get to serve the flight south, stand at the cabin door while the passengers disembark and the returning passengers board, and then fly right back home. These guys and gals are working up to a fifteen hour shift -- and getting a lower salary and fewer benefits than their counterparts did in the recent past.
Who are the winners and losers here? It's not the passengers, getting less while paying the same as before. It's not the crew, working harder and earning less. The only winner here is the airline.
International free trade deals are more complicated than this, but the opposition to free trade articulated (if that's the word) by Donald Trump reflects a sense that the benefits are not being properly shared. In Trump's worldview, Mexico is gaining while the US loses out. That's not really true in itself; rather, well-paid US workers are losing their jobs to lower paid Mexicans so that the auto makers can continue to sell the same cars at the same prices as before and reap considerably higher profits. For car buyers, it's pretty much a wash.
As we noted at the outset, the winners in free trade deals -- in this case, the auto makers -- can notionally compensate the losers -- mostly, UAW members. Try telling that to the people of Flint, MI and the many other rust belt communities that have been abandoned to their fate.
Reality is much more subtle than this, of course, but the sense that the spoils of free trade have been unfairly divvied up is surely a major reason why Trump won the election -- even if he is wrongly asserting that it's the Mexicans (and Chinese and others) who are the big winners. It remains to be seen whether he can actually do anything about it. The auto manufacturers, who think in much longer terms than politicians, will be reluctant in the extreme to change their plans in response to Trump's threats. If he responds with his "big border tax" and thereby pushes the domestic auto makers back into financial peril, his economic platform, such as it is, will quickly collapse. Free trade may not have delivered what was promised, but unravelling it will be complicated and perilous.
Sunday 15 January 2017
Going south
Away soon for our annual trip south -- this year, to the land of rum and reggae. Posting should resume just before month end.
Tuesday 10 January 2017
Optimism reigns at the Bank of Canada
For decades, Canadian federal governments have been trying to reduce the economy's dependence on the United States as a trading partner -- to absolutely no avail. The behemoth to our south still accounts for upwards of 70 percent of Canada's goods exports, just as it did when Justin Trudeau's daddy was Prime Minister.
So you'd think that the election of a mindlessly protectionist President would trigger a wave of pessimism among Canadian businesses, right? Well actually, not right, according to the Bank of Canada's Business Outlook Survey, published on Monday. The Bank finds that after two years of "overall modest activity" (that's one way of putting it), business prospects have improved, reflecting "building domestic demand, a supportive export outlook and an expected recovery in energy-related activity".
These three factors are, in fact, closely related. The improvement in domestic demand reflects the waning impact of the oil price shock, and the supportive export outlook is largely attributable to the exchange rate weakness which that shock triggered. Businesses are uncertain about the implications of the election of Donald Trump, but fears of protectionism appear, at least for the moment, to be outweighed by optimism about the potential benefits of the new administration's planned infrastructure spending. It is all but certain that any infrastructure initiatives launched by Trump will have stringent "Buy America" provisions, so this optimism may well prove unjustified.
The Survey highlights several developments that could, in the fullness of time, push the Bank toward some degree of policy tightening. Capacity pressures are absent for the moment, but there are signs that they could begin to emerge. There are rising indications of labour shortages in certain regions. Input and output prices are set to rise as the impact of the weakened exchange rate continues to be felt and as firms begin to feel emboldened to rebuild profit margins. Inflation expectations are edging higher, though they remain at the lower end of the Bank's target range.
None of these developments suggests that the Bank will be raising rates at any time this year, even as the Federal Reserve continues to tighten. However, the deliberately upbeat tone of this survey, after many quarters of unalloyed gloom, suggests that the Bank is starting to prepare the ground for less accommodative policy, perhaps in the first half of next year -- though of course, all bets will be off if the incoming administration unleashes the chaos that seems to be Donald Trump's stock-in-trade.
So you'd think that the election of a mindlessly protectionist President would trigger a wave of pessimism among Canadian businesses, right? Well actually, not right, according to the Bank of Canada's Business Outlook Survey, published on Monday. The Bank finds that after two years of "overall modest activity" (that's one way of putting it), business prospects have improved, reflecting "building domestic demand, a supportive export outlook and an expected recovery in energy-related activity".
These three factors are, in fact, closely related. The improvement in domestic demand reflects the waning impact of the oil price shock, and the supportive export outlook is largely attributable to the exchange rate weakness which that shock triggered. Businesses are uncertain about the implications of the election of Donald Trump, but fears of protectionism appear, at least for the moment, to be outweighed by optimism about the potential benefits of the new administration's planned infrastructure spending. It is all but certain that any infrastructure initiatives launched by Trump will have stringent "Buy America" provisions, so this optimism may well prove unjustified.
The Survey highlights several developments that could, in the fullness of time, push the Bank toward some degree of policy tightening. Capacity pressures are absent for the moment, but there are signs that they could begin to emerge. There are rising indications of labour shortages in certain regions. Input and output prices are set to rise as the impact of the weakened exchange rate continues to be felt and as firms begin to feel emboldened to rebuild profit margins. Inflation expectations are edging higher, though they remain at the lower end of the Bank's target range.
None of these developments suggests that the Bank will be raising rates at any time this year, even as the Federal Reserve continues to tighten. However, the deliberately upbeat tone of this survey, after many quarters of unalloyed gloom, suggests that the Bank is starting to prepare the ground for less accommodative policy, perhaps in the first half of next year -- though of course, all bets will be off if the incoming administration unleashes the chaos that seems to be Donald Trump's stock-in-trade.
Friday 6 January 2017
Canadian jobs data: good? Yes. Believable? Maybe
Canadian jobs data for December are remarkable. The economy reportedly added 54,000 jobs in the month, compared to an economists' consensus that effectively called for no change. This made 2016 the best year for job creation since 2012.
I've posted here innumerable times about the unreliability of the Canadian Labour Force Survey, and certainly a result like this one deserves plenty of caveats. Did the economy really add 81,000 full-time jobs in a single month, after several years in which full time employment has been relentlessly replaced by part-time work? Precedent suggests that the January data will see a sharp reversal in the full-time jobs data, which will leave us as much in the dark as ever about what is really going on.
Rather than listening to me blithering on even longer about this, I encourage you to amuse yourself by scrolling through the comments section of the linked article. The sourpuss reactions to the numbers began immediately: "McJobs"; "all December retail jobs that have already disappeared"; "how many of those jobs required post-secondary education". One commenter then went to the trouble of posting the actual breakdown, which strongly suggested that the jobs were in fact concentrated in skilled, white-collar sectors of the economy. Think that stopped the nay-sayers? Think again!
I've posted here innumerable times about the unreliability of the Canadian Labour Force Survey, and certainly a result like this one deserves plenty of caveats. Did the economy really add 81,000 full-time jobs in a single month, after several years in which full time employment has been relentlessly replaced by part-time work? Precedent suggests that the January data will see a sharp reversal in the full-time jobs data, which will leave us as much in the dark as ever about what is really going on.
Rather than listening to me blithering on even longer about this, I encourage you to amuse yourself by scrolling through the comments section of the linked article. The sourpuss reactions to the numbers began immediately: "McJobs"; "all December retail jobs that have already disappeared"; "how many of those jobs required post-secondary education". One commenter then went to the trouble of posting the actual breakdown, which strongly suggested that the jobs were in fact concentrated in skilled, white-collar sectors of the economy. Think that stopped the nay-sayers? Think again!
Thursday 5 January 2017
Free trade follies
Still more than two weeks until Donald Trump becomes POTUS 45, but we can already see how he intends to use the Oval Office: as a bully pulpit, a term coined by his predecessor Teddy Roosevelt. His tweeted threats to Boeing (over the cost of a new Air Force One) and to Carrier, Ford. GM and, just today, Toyota, over jobs moving to Mexico from the United States, seem to portend a major change in the historic relationship between a Republican White House and big business.
There has been a wide variety of reactions to the Trump Trade Twitter-storm, but one surprising thing is the relative absence of voices prepared to come to the defense of free trade as such. Trump may be leading the charge here in his inimitable way, but he's by no means out of touch with the zeitgeist, even among academics. Herewith a short sampling of reactions over the past few days.
First, a surprising reaction from Paul Krugman. Writing just after Christmas in the New York Times, Krugman warned that the trade war threatened by Trump during the campaign was already under way. However, he believes that this will "probably not" push the world economy into recession. Why is this surprising? Well, it's long been believed that it was US protectionism, in the form of the Smoot-Hawley Tariff Act, which turned the Wall Street Crash of 1929 (a problem) into the Great Depression (a calamity).
Krugman, a diehard Keynesian, doesn't see it that way: "protectionism didn't cause the Great Depression", he asserts. Instead, it was the inappropriate austerity measures taken in the US and elsewhere that did that, right up until FDR's New Deal. That's arguable -- both factors probably played a role -- but the interesting thing here is that Krugman is in effect validating what seems likely to be Trump's economic policy. The crackdown on free trade is already visible, but the other key element is sure to be an expansionary fiscal policy that will make FDR look like a piker. And here we have a left-leaning Nobel Prize winner telling us that this may well be a successful formulation!
Moving on, we find my old friend Dennis DesRosiers, who has been running an automotive consulting firm in Toronto since the days of the Edsel. (Sorry, Dennis!). Dennis is the closest thing to a free trader that we find during this little tour d'horizon. He told the local media that forcing producers to build cars in the high-wage USA won't promote economic growth: "tariffs sound good on paper, but they increase prices for consumers", which prevents them from buying.
DesRosiers is not wrong here, but that's not the whole story. The people who used to earn $40 an hour plus benefits at the huge GM plants in my neighbouring city of St Catharines, Ontario are now on minimum wage in call centres, always assuming they have work at all. They can't afford to buy GM cars any more, either, even if those cars are now being made in Mexico by workers making a fraction of the wage.
Here, in fact, we get a bit of a clue to why the bloom is off the free trade rose. The benefits of well-paid, skilled work haven't been transferred lock, stock and barrel from unionized workers north of the border to grateful Mexicans. The work has gone south all right, but much of the benefit has gone into the pockets of the automakers and their shareholders. There can be no real doubt that globalization and free trade have been major factors behind the massive rise in wealth inequality in the past three decades.
Lastly let's meet Jerry Dias, head honcho of Unifor, the current name for the old Canadian Auto Workers Union. Dias sees Trump's assault on outsourcing as an entirely positive thing for his members and for the Canadian auto industry. After all, he notes, Trump's attacks have all been on Mexico, with Canada not getting so much as a mention.
Well, so far, at any rate. It's tempting to remind Dias of the old lament that dates back, I think, to the rise of the Nazis -- you know, the one that begins, "First they came for the Communists, but I'm not a Communist, so I just sat back and did nothing to help", and ends "And then they came for me, and by then there was nobody left to help me". If Trump sees his bullying is working -- and maybe even more if he fears it isn't -- it's astoundingly naive to think that he will stop with Mexico.
The whole world is likely to be in the firing line, and if that is the case, then it's not just Jerry Dias that's naive: so too, I'd argue, is Paul Krugman. The world is much more trade dependent now than it was in the 1930s, and so the kind of trade disruption that Trump seems so blithely willing to trigger stands to be much more destructive. Can a domestic infrastructure program offset that? I'm not sure that's a good bet.
There has been a wide variety of reactions to the Trump Trade Twitter-storm, but one surprising thing is the relative absence of voices prepared to come to the defense of free trade as such. Trump may be leading the charge here in his inimitable way, but he's by no means out of touch with the zeitgeist, even among academics. Herewith a short sampling of reactions over the past few days.
First, a surprising reaction from Paul Krugman. Writing just after Christmas in the New York Times, Krugman warned that the trade war threatened by Trump during the campaign was already under way. However, he believes that this will "probably not" push the world economy into recession. Why is this surprising? Well, it's long been believed that it was US protectionism, in the form of the Smoot-Hawley Tariff Act, which turned the Wall Street Crash of 1929 (a problem) into the Great Depression (a calamity).
Krugman, a diehard Keynesian, doesn't see it that way: "protectionism didn't cause the Great Depression", he asserts. Instead, it was the inappropriate austerity measures taken in the US and elsewhere that did that, right up until FDR's New Deal. That's arguable -- both factors probably played a role -- but the interesting thing here is that Krugman is in effect validating what seems likely to be Trump's economic policy. The crackdown on free trade is already visible, but the other key element is sure to be an expansionary fiscal policy that will make FDR look like a piker. And here we have a left-leaning Nobel Prize winner telling us that this may well be a successful formulation!
Moving on, we find my old friend Dennis DesRosiers, who has been running an automotive consulting firm in Toronto since the days of the Edsel. (Sorry, Dennis!). Dennis is the closest thing to a free trader that we find during this little tour d'horizon. He told the local media that forcing producers to build cars in the high-wage USA won't promote economic growth: "tariffs sound good on paper, but they increase prices for consumers", which prevents them from buying.
DesRosiers is not wrong here, but that's not the whole story. The people who used to earn $40 an hour plus benefits at the huge GM plants in my neighbouring city of St Catharines, Ontario are now on minimum wage in call centres, always assuming they have work at all. They can't afford to buy GM cars any more, either, even if those cars are now being made in Mexico by workers making a fraction of the wage.
Here, in fact, we get a bit of a clue to why the bloom is off the free trade rose. The benefits of well-paid, skilled work haven't been transferred lock, stock and barrel from unionized workers north of the border to grateful Mexicans. The work has gone south all right, but much of the benefit has gone into the pockets of the automakers and their shareholders. There can be no real doubt that globalization and free trade have been major factors behind the massive rise in wealth inequality in the past three decades.
Lastly let's meet Jerry Dias, head honcho of Unifor, the current name for the old Canadian Auto Workers Union. Dias sees Trump's assault on outsourcing as an entirely positive thing for his members and for the Canadian auto industry. After all, he notes, Trump's attacks have all been on Mexico, with Canada not getting so much as a mention.
Well, so far, at any rate. It's tempting to remind Dias of the old lament that dates back, I think, to the rise of the Nazis -- you know, the one that begins, "First they came for the Communists, but I'm not a Communist, so I just sat back and did nothing to help", and ends "And then they came for me, and by then there was nobody left to help me". If Trump sees his bullying is working -- and maybe even more if he fears it isn't -- it's astoundingly naive to think that he will stop with Mexico.
The whole world is likely to be in the firing line, and if that is the case, then it's not just Jerry Dias that's naive: so too, I'd argue, is Paul Krugman. The world is much more trade dependent now than it was in the 1930s, and so the kind of trade disruption that Trump seems so blithely willing to trigger stands to be much more destructive. Can a domestic infrastructure program offset that? I'm not sure that's a good bet.
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