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Are politicians really going to focus more on reworking old trade deals vs. preparing for the rise of the robots?
View related content: Economics, Pethokoukis
Yes, let’s spend time precious time and political capital on dissipating Asian trade shocks and decades-old trade agreements. Meanwhile this (via MIT Tech Review):
In fact, the total inflation-adjusted output of the U.S. manufacturing sector is now higher than it has ever been. That’s true even as the sector’s employment is growing only slowly, and remains near the lowest it’s been. These diverging lines—which reflect improved productivity—highlight a huge problem with Trump’s promises to help workers by reshoring millions of manufacturing jobs. America is already producing a lot. And in any event, the return of more manufacturing won’t bring back many jobs, because the labor is increasingly being done by robots.
Boston Consulting Group reports that it costs barely $8 an hour to use a robot for spot welding in the auto industry, compared to $25 for a worker—and the gap is only going to widen. More generally, the “job intensity” of America’s manufacturing industries—and especially its best-paying advanced ones—is only going to decline. In 1980 it took 25 jobs to generate $1 million in manufacturing output in the U.S. Today it takes five jobs.
The automated, hyper-efficient shop floors of modern manufacturing won’t give Trump much room to deliver on his outsized promises to bring back millions of jobs for his blue-collar supporters.
And here are a few charts from the BCG report cited in the piece:
From BCG:
A number of economic and technical barriers to wider adoption are beginning to fall, however. As a result, a dramatic takeoff in advanced robotics is imminent. We expect that growth in the installed base of robotics will accelerate to around 10 percent annually during the next decade, by which time installations will surpass 4 million. (See Exhibit 1.) Annual shipments of robots will leap from around 200,000 units in 2014 to more than 500,000 by 2025 according to our baseline projection, and to more than 700,000 in a more aggressive scenario. Even so, we project that, by 2025, those installations will represent only about one-quarter of all manufacturing tasks and far less than that amount in other industries and major manufacturing economies. The growth potential over the long term, therefore, should remain immense. … As economic and technical barriers continue to fall, robots are becoming accessible for more companies. The production efficiencies will spread beyond individual factories through entire supply chains, industries, and national economies.
Indeed.
You say ‘wall,’ we say, ‘hyperloop!’: Some thoughts on Trump’s infrastructure plan
View related content: Economics, Pethokoukis
We probably need somewhere between zero and $2 trillion in new and upgraded infrastructure. I have an open mind about this. That said, let me offer some natural skepticism about the sudden rush toward big-time infrastructure spending. First, here is a sober Martin Feldstein in the WSJ the other day:
Journalists and guests look over tubes following a propulsion open-air test at Hyperloop One in North Las Vegas, Nevada, U.S. May 11, 2016. REUTERS/Steve Marcus
Although there appears to be bipartisan support for spending on roads, bridges and other infrastructure, this should be postponed until an economic downturn creates the need for fiscal stimulus. Meanwhile, it would be good to devote those dollars to reducing the national debt while drawing up specific investment plans to be ready during a downturn.
And some excellent points from David Levinson about the Trump plan specifically:
1. Opportunity Costs. The assumption about tax recovery assumes the capital and labor would otherwise be idle. This might be true in a recession. In current conditions, they are working on infrastructure instead of doing something else, so only a fraction of the claimed tax [recovery].
2.) Non Taxable Revenue Sources. Tax credit scheme cuts out many potential sources that don’t pay taxes, like Pensions and Overseas money. In fact, much of the current private investment in infrastructure is supported by international money, which is great (we get the stuff, they get pieces of paper).
3.) Infrastructure tends to be a money loser in this environment. I am not convinced there are that many good investments in infrastructure, not which will pay the rate of return needed to justify the risk. That’s what I think can be discovered with a small pilot [for Trump’s tax credit scheme]. Does anyone actually bite? The problem is not that private infrastructure could not be profitable if everything else where unsubsidized, it’s that everything else is subsidized, which makes it harder for selected projects to be profitable.
4.) Straight-up privatization (long term leases) is simpler. We could just sell or lease off much infrastructure (airports, ports, water utilities, freeway networks) and get a huge up-front lumpsum payment along with continuing revenue. Regulated utilities are a fine model used in most other countries for these services.
And here is a bit more on the privatization option.
Then again, we could always build a hyperloop. Wall, no! Hyperloop, yes?
Will the US get ‘good Trump’ or ‘bad Trump’ on trade?
View related content: Economics, Pethokoukis
Right now Trumponomics seems like a deck of 52 wildcards. And perhaps this is most true when it comes to trade policy, the very heart of his agenda. Wall Street analysts are either taking their best guesses or setting it aside for now.
Here is Goldman Sachs: “On trade, our working assumption is an increase in the average tariff rate by about 4pp, equivalent to roughly one-third of the overall impact of the tariff hikes on China and Mexico that Trump had proposed in the campaign.”
And JPMorgan: “We have not explicitly factored in protectionist trade policies, but they are a downside risk to growth.”
Paul Ashworth of Capital Economics looks at things through the lens of “good Trump” vs. “bad Trump.” First, some optimism:
There is a relatively benign scenario, in which China and Mexico offer modest concessions to the US that Trump can point to as a victory. The Japanese agreed to voluntary export restraints in the 1980s to avoid the imposition of more disruptive tariffs by the Reagan administration. Trump will certainly come under pressure from congressional Republicans and corporate lobby groups to take a soft line on trade.
And the more pessimistic scenario:
Beyond the next 12 months, however, we still wonder whether a Trump administration might end up lurching back to a tougher approach on trade at some point during his first term. … There is a downside scenario in which, struggling with a still misfiring economy, plummeting approval ratings, and perhaps even a dysfunctional relationship with Congress, Trump might try to deflect attention from those troubles by switching the blame to foreigners and their “exploitative” trade policies. It isn’t going to happen in 2017, but it could be a risk for 2018 to 2020. The US economic cycle is already looking long in the tooth and, by the time the fiscal stimulus and Fed tightening has run its course over the next couple of years, a recession would be a distinct possibility. That would be the obvious trigger for a renewed lurch toward protectionism.
Furthermore, the importance of taking a tough line on trade to win the industrial rust belt States won’t have gone unnoticed by other potential presidential candidates for 2020. If Trump sticks to a much softer line on trade for the next few years, he will leave himself open to a serious challenge in the next election. It could be a Republican primary challenger or it could be a Bernie Sanders-style Democrat. They
would be able to campaign on the basis that Trump had not delivered on his tough talk on trade. In addition to hammering Trump on trade, a Democratic challenger in 2020 could also exploit Trump’s tax cuts for the rich and offer an alternative much more progressive tax system which, they will argue, could correct some of the inequality that globalisation has exacerbated.The upshot is that we think it is too early to sound the all clear on trade protectionism. Trump will start with more modest steps and, assuming that China and Mexico are keen to dampen tensions, they could offer some modest concessions that allow everyone to walk away without losing face. But Trump might still take a harder line on trade further into his four-year term, particularly as a way of deflecting criticism if the economy is misfiring and/or his popularity is plummeting. Although it would only make a bad economy worse, imposing a blanket tariff could be politically helpful. Furthermore, even if Trump doesn’t take a tough line, maybe the President that follows him will.
I would advise Team Trump to look at a new report from my colleague Derek Scissors on US-China trade policy. One takeaway:
China’s accession to the WTO did considerable harm to US manufacturing employment 15 years ago. The main problems now are that American comparative advantage is being blunted by China’s intense protection of state-owned enterprises and equally intense theft of intellectual property. … Diagnosing the wrong ills will lead to the wrong cures. The US should not try to balance the trade deficit or sanction China for having the wrong currency policy. Instead, the US should sanction Chinese firms that benefit from stolen intellectual property, postpone a bilateral investment treaty, and not grant market economy status until China becomes a much better partner.
Is this how we could bring back the superfast, inclusive growth of the 1990s?
View related content: Economics, Pethokoukis
In a new report, McKinsey outlines a policy agenda addressing five key areas that could “produce real GDP growth of 3.1 to 3.5 percent per year over the next decade. By 2025, they could add $2.8 trillion to $3.8 trillion to annual GDP. This rate of growth would essentially re-create the productivity-driven boom of the 1990s.”
From the report:
The five opportunities are not meant to be exhaustive by any means, but they are areas in which the McKinsey Global Institute has already focused extensive research and where we see room for substantial economic impact within a decade. In addition, we have conducted dozens of interviews with CEOs across multiple industries, and their input has informed our view of where progress could be achieved.
The first two are related to technology and trade, both of which have caused a great deal of economic anxiety and job churn. Rather than trying to fend off these forces, the United States has to embrace them as necessary ingredients of growth in the new global economy and retool its policies and labor market accordingly. But while some firms and workers have done very well by adapting to these shifts and pushing them forward, it is important to acknowledge that the gains have not been widely shared. Getting more Americans to participate in the opportunities associated with digitization and foreign trade and investment will allow them to share the productivity and growth benefits that can result—and stepping up efforts to support the workers who are caught up in industry transitions will ease the economic and societal stresses.
The other three opportunities are about investing for the future. Eighty percent of the US population lives in cities or the surrounding metro areas. Transportation infrastructure and affordable housing are issues that make a huge difference to their quality of life, their productivity, and their disposable income. At a time when the demand for skills is changing rapidly, creating churn in the job market, we also highlight the need to invest in the nation’s workers, who need more effective education and training systems and clearer pathways to good jobs. Finally, we look at how to make the entire economy more resource efficient, an endeavor that can reduce costs for households and businesses, and offer more opportunity for investment and innovation.
As far as identifying some key growth opportunities, I think this report really nails it. Moreover, I like that it sets a high target — but one that is not fantastical. No 6% growth targets or some such. Even just 3% would be pretty great.
Here’s why the Trump tax cuts would be nothing like those under W. and Reagan
View related content: Economics, Pethokoukis
Goldman Sachs makes an excellent point here:
At the start of the last two Republican administrations that succeeded Democratic administrations, in 1981 and 2001, Congress also enacted large tax cuts. However, the fiscal situations in those previous periods were much different than the current circumstances, as shown in Exhibit 1. First, in 1981 and 2001, the ratio of debt to GDP was fairly low by historical standards, whereas it is currently fairly high, though stable.
Second, projected revenues in those periods were at the top end of the historical range, as share of GDP, and projected to exceed the top of the post-WWII range. In 1981, this was due to “bracket creep”, where the interaction of high inflation with non-indexed dollar thresholds pushes taxpayers into higher-rate tax brackets. In 2001, this was due to strong real growth expectations. Currently, revenues are projected to remain within the historical range over the next few years, about 1% of GDP above the post-war average.
Third, the budget balance in 1981 and 2001 was projected to be significantly positive (a surplus of 2% and 3.3% of GDP respectively). CBO currently projects that the budget will run an average deficit of 3.4% of GDP.
And this table illustrates the fiscal differences over the decades (though it ignores how interest rates were much higher back 1981):
Trying to figure out what Trump really thinks about the Fed
View related content: Economics, Pethokoukis
Fed boss Janet Yellen’s congressional testimony this morning apparently answered one big question:
Ms. Yellen quashed speculation that she may step down next year following the election of Mr. Trump, who called the chairwoman “highly political” earlier this year and accused her of keeping interest rates low to try to help Democrats. Ms. Yellen has refuted such accusations. Asked about the possibility she may leave before her four-year term as chairwoman ends on Jan. 31, 2018, Ms. Yellen said: “It is fully my intention to serve out that term.”
So despite Donald Trump’s stinging and unprecedented attack on the Fed chair, she’s sticking around.
Janet Yellen testifies before a Congressional Joint Economic hearing on Capitol Hill in Washington, DC, U.S. November 17, 2016. REUTERS/Gary Cameron.
That certainty is particularly important given possible Trump plans to inject considerable fiscal stimulus into an economy a) long into its current expansion and b) perhaps near both its growth potential and full employment. There could be huge ramifications for both the US and global economies. As such, what will President Trump do when Yellen’s term expires? Capital Economics explores the possibilities:
A perfectly reasonable argument can be made that Trump will want to take the Fed in a more hawkish direction. His adviser David Malpass has been a big critic, not only of low interest rates but the Fed’s asset purchases too. If Trump adopts that line, we would expect to see a much more hawkish Chair in 2018, possibly accompanied, if Congress agrees, by a formal switch to a rules-based policy framework. That would be a particularly adverse scenario for bonds, especially if the additional monetary tightening included a sell-off of the Fed’s asset holdings.
Nevertheless, an equally reasonable argument can be made that, ironically given his campaign trail criticism, Trump is still a “low interest rate guy” and could either opt to give Yellen another term as Chair or replace her with someone even more dovish, with interest rates held down for political purposes. Trump has already crossed so many other red lines that it would be foolish to assume simply that he would respect central bank independence.
I think it’s a “pick ’em” situation.
The Minneapolis Plan: Is this the Wall Street reform plan we’ve been waiting for?
View related content: Economics, Pethokoukis
I like very much the idea of using higher capital requirements to end “too big to fail” and bailouts, and promote overall financial stability. And so does Minneapolis regional Fed boss Neel Kashkari, who goes even further. It will surely spark much debate and analysis. This from the WSJ:
Federal Reserve Bank of Minneapolis President Neel Kashkari on Wednesday recommended a hefty increase in capital requirements for the country’s biggest financial institutions, a de facto call for breaking up the big banks. The recommendations are part of a 50-page report that comes after a nearly yearlong effort by Mr. Kashkari to explore ways to end the problem of “too big to fail” banks, which could leave taxpayers on the hook if the financial system were to come under threat again. …
Mr. Kashkari’s plan calls for banks with more than $250 billion in assets to hold common equity equivalent to 23.5% of risk-weighted assets. The equivalent leverage ratio would be 15%.
In addition to higher capital requirements, Mr. Kashkari’s plan calls for the Treasury secretary to certify that a bank doesn’t pose a systemic risk to the financial system. For every year that Treasury cannot give such certification, a bank will face additional common equity requirements of up to 5% of risk-weighted assets each year, with a cap of 38%. “We believe that these automatic increases in capital requirements will lead banks to restructure themselves such that their failure will not pose the spillovers that they do today and thus will not lead to bailouts,” the report says.
Other key components of the plan include a tax of at least 1.2% on large “shadow banks,” or financial institutions such as hedge funds and mutual funds, to discourage the use of debt. Mr. Kashkari also calls for regulatory relief for community banks.
Here are two slides explaining how the “Minneapolis Plan” works vs. the current regulatory structure:
Beyond tax reform: A few ideas on the entrepreneurial way to faster US economic growth
View related content: Economics, Pethokoukis
I have some problems with “The Entrepreneurial Way to 4% Growth,” a Wall Street Journal op-ed. First, I think the headline overpromises what better policy can achieve over the longer term. (At least if you assume government productivity stats more or less have things correct.)
U.S. dollar notes are seen in front of a stock graph in this November 7, 2016 picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration
First, increase economic growth. More businesses start when GDP expands at 4% rather than 2%. Existing businesses look for new markets, often turning to young companies for innovative ideas. … Mr. Trump should also focus less on Silicon Valley, which already receives disproportionate attention from Washington. This sliver of the nation’s entrepreneurs—high-tech companies and the venture-capital investors who fund them—has shaped the narrative of entrepreneurship for too long. … Government must also widen the scope of innovation by stepping back and letting the market find the future. By promoting trendy ideas and subsidizing politically favored companies, government dampens diversity in creative business ideas. … The new president must also make it possible for local banks to get back in the business of financing startups. For 200 years, community lenders were the principal source of capital for startups. … Mr. Trump can also reverse regulatory sprawl and cut government-imposed requirements that add to every entrepreneurs’ costs and risks.
Not that any of that stuff is bad. But nothing here is unexpected. Of course policy ideas don’t need to be novel. Nor does originality necessarily equate with effectiveness. Yet I think some good ideas are missing (although they may be found within more general prescriptions, I guess). Among them: a) boosting (very) high-skill immigration, b) fighting anti-growth housing and building policies in high innovation cities, c) labor market reforms such as limiting non-compete agreements and lessening the burden of occupational licensing.
Also nothing here about patent and copyright reform. This is one my favorite quotes, from Nobel Prize-winning economist Edmund Phelps in his book “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change”:
But now the economy is clogged with patents. In the high-tech industries, there is such a dark thicket of patents in force that a creator of a new method might well require as many lawyers as engineers to proceed … Copyright has only recently seen controversy. … The passage by Congress in 1998 of the Sonny Bono Act lengthening copyright protection by 20 years — to author’s life plus 70 years — prevents wider use of Walt Disney’s creations and prevent wider use of performances copyrighted by the record companies. The length of the copyright term may be be deterring new innovation that would have had to draw on products at Disney and EMI. Members of Congress have a private interest in lengthening copyright and patent protections since they can expect to share in the big gains of the few without paying for the small costs borne by the rest of society.
I would also suggest “16 ideas from Marc Andreessen for a more dynamic US economy.”
Why the coming changes in US economic policy could ‘destabilize’ global markets — and then the American economy itself
View related content: Economics, Pethokoukis
The president and Congress have a vote on US economic policy. Spend more here, tax less there. And so does the Federal Reserve. The impact of the latter has, up until now, received far less attention than the former. But that is changing.
It seems likely the Trump White House and the GOP-dominated Congress will push through some manner of “pro-growth” fiscal stimulus. Then it will be time for the Yellen Fed — assuming it’s still the Yellen Fed — to respond. Goldman Sachs is guessing the Federal Reserve will raise the federal funds rate “substantially more than implied by market pricing.” And that will put upward pressure on interest rates globally. As such, Goldman sees risks “skewed to the downside.” A threesome of risks, in particular:
First, much remains unclear about the economic policies of the incoming Trump administration, and the positive initial market reaction could reverse if the policy mix looks more unfavorable than now widely assumed. Second, Europe could re-emerge as a source of political risk, with the French election at the top of the list of concerns. Third, a stronger dollar could lead to renewed pressure on emerging markets, especially China.
But that analysis may not fully capture the potential macro-risks. Here is AEI’s Desmond Lachman on the upcoming changes in US fiscal and monetary policy — and the potential fallout:
There are two reasons to think that a rapid normalisation of US interest rates could be very destabilising to the global financial markets. The first is that we currently appear to have a global debt bubble as indicated by the fact that about $13tn in sovereign debt, or a quarter of the global sovereign debt market, bears negative interest rates at a time that most major central banks have a 2 per cent inflation target.
The second is that there would seem to be gross mispricing of credit risk in high-yield debt markets, the European sovereign debt market, and the emerging market sovereign and corporate debt markets. A striking indication of such mispricing is the fact that a country with as compromised economic and political fundamentals as Italy can currently borrow at a lower rate than can the US government.
One would think that there is the real risk that a rapid normalisation of US interest rates could cause both a bursting of the global sovereign debt bubble and a more dramatic repricing of credit risk than occurred after the Bernanke “taper tantrum” in 2013. If that indeed were to occur, it is more than likely that the US would be hit by an external shock that could derail its economic recovery.
Lachman fleshes out this views in a new paper, by the way. In addition, I asked how he might alter this scenario if he thought Summersian “secular stagnation” theory pretty much had the story right:
I think that if I bought the secular stagnation story I would be even more convinced that we are heading for real trouble in the global economy for at least two reasons: [First], if we had secular stagnation how could the world grow its way out of its debt problem?
Second, if we had secular stagnation, then the Trump fiscal stimulus would make it all the more certain that we would be heading for higher inflation which would force the Fed to raise policy rates at an even faster rate than they are now thinking. It would also cause the dollar to keep rising which would be very bad for emerging market economies that have borrowed a lot in US dollar terms.
My basic thinking is that the world has a major bond bubble and a major mispricing of credit risk. Higher US policy rates or a bad result in the Italian referendum could cause those bubbles to burst. We are already seeing a very big sell off in the global bond market.
Making iPhones in America: A reality check
View related content: Economics, Pethokoukis
As Donald Trump said during the presidential campaign, “I’m going to get Apple to start making their computers and their iPhones on our land, not in China. How does it help us when they make it in China?”
Now many of the responses to this assertion have focused on the cost issue. A domestically assembled iPhone would cost more. As this WSJ graphic shows:
So the manufacturing cost would increase by nearly 50%. But that calculation doesn’t fully capture the complexity of Trump’s demand. As the WSJ pieces go on to outline:
A stiff tariff on Chinese imports could accelerate the migration of electronics factories from China to lower-cost Asian countries like Vietnam, rather than boosting U.S. electronics production, some analysts warn. …
While U.S. electronics companies already manufacture high-end, lower-volume products such as the Apple Mac Pro in the country, President Obama and Sen. Bernie Sanders have questioned whether mass-produced electronics—and specifically the ever-popular iPhone—can also be made profitably in the U.S.
The answer, experts say, is that while iPhone assembly in the U.S. is theoretically possible, it is highly improbable because of the difficulty of relocating assembly and other parts of Asia’s sprawling electronics chain to the West. While iPhones are designed in California, Apple sources memory chips from Korean suppliers and displays—which are the most expensive component in the iPhone—from Japanese suppliers, then uses Taiwanese companies such as Hon Hai Precision IndustryCo. and Pegatron Corp. to assemble iPhones in mainland China. Apple also uses U.S. suppliers to make components such as glass and radio-frequency parts in the country.
Mr. Trump “wouldn’t be able to finish (such a move) during his presidency,” said Sanford C. Bernstein’s Alberto Moel.
Supply-chains aren’t a huge issue in real estate development or reality television. Also keep in mind the growing role of automation in the manufacturing process, a topic completely ignored during the campaign.
For more on this topic:
China, Apple, and Donald Trump’s economic nostalgia
Republicans have declared war on Apple. It will totally backfire.
What has Donald Trump’s business experience taught him about how capitalism works?
