Time for tariffs?

Calls from some quarters for tariffs on Chinese imports to the U.S. are nothing new, but this one in yesterday's Financial Times, from a former University of Chicago professor named Robert Aliber, caught my attention, "Tariffs can persuade Beijing to free the renminbi". Excerpt:

Americans have been patient - too patient - in accepting the loss of several million US manufacturing jobs because of China's determined pursuit of mindless mercantilist policies. The absurdity of the current situation is that China's currency protectionism has more of an impact on American manufacturing employment than US fiscal policy.

The US can help China make the necessary adjustments toward a reduction in imbalances by adopting a uniform tariff of 10 per cent on all Chinese imports, based on their values when they enter the US. Six months after the establishment of this tariff, the rate would increase by one percentage point a month until the Chinese trade surplus with the US declines to $5bn a month.

The precedent is clear. In August 1971 the US adopted a 10 per cent tariff on dutiable imports to induce Japan and several European countries to allow their currencies to float. The measure quickly accomplished its goal - the European countries stopped pegging their currencies immediately and the Japanese allowed the yen to float a week later. The tariff was eliminated after a few months.

[...]

It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods. Virtually all of the goods that the US imports from China could be sourced at home or in Indonesia, the Philippines or South Korea. China would find it difficult to find other foreign markets for the goods that it no longer sold in the US.

The Chinese might huff and puff about US protectionism and threaten that they will no longer finance the US trade deficit - but that chatter would be hollow because the single most important cause of that deficit is Chinese purchases of US securities. Such an initiative by the Obama administration would be much more significant as a jobs-creation measure than anything else it could adopt.

The Chinese authorities can hide behind the smokescreen of American protectionism to undertake the adjustments that some in the People's Bank of China must already recognise is inevitable. The experience of the early 1970s suggests that once the logjam has been broken and imbalances reduced, the Americans and the Chinese can focus on North Korea, Iran and other contentious issues.

The Nobility of Manufacturing

Luke Johnson's columns in the Financial Times are hit-or-miss for me, and mostly misses. But this one Wednesday was one of the hits, "The genuine nobility of manufacturing". A brief excerpt:

There is something authentic, something noble about making physical objects. It appears to me the essence of capitalism. Service and support sectors are all very well, but their output feels so much less tangible than a production business. Moreover, economies need balance: that way they are better equipped to ride out downturns.

[...]

But manufacturing matters not simply because of vaguely romantic notions about creating things. It provides well-paid blue-collar and professional jobs. It generates exports to help offset trade deficits generated elsewhere in the economy. It adds far more value pro rata than service industries. Every major plant fosters clusters of other businesses.

Yes.

This seems so self-evident, that you might think smart soi dissant progressives would embrace the notion. Not Michael Lind though, who, in his Financial Times column last week ("Healthcare can get America working") followed fellow progressive Matt Miller in arguing for eschewing manufacturing in favor of health care as a source of future jobs. Lind gives the same rationale as Miller: manufacturing jobs can be outsourced (as if health care jobs can't be -- and increasingly aren't being - insourced, i.e., filled by immigrant workers). Lind writes, apparently without irony,

Will the health aide be the typical worker of the 21st century, as the factory worker was the iconic figure of the 20th?

If the elites in both major parties don't come up with more coherent responses to the challenges that globalization presents to those who are vulnerable to outsourcing or insourcing (i.e., most private sector workers), they will leave open a large political void. They may not like what fills it.

John Hussman, Kool-Aid, Jonestown, Robot Chicken

In his market commentary today, Dr. Hussman mentions he has re-established his "anti-hedge" of index call options comprising 1% of his equity fund's assets. He then offers this comment:

Frankly, our call option allocation here is something of a paean to a notion – a sustained economic recovery and new bull market – that I have no belief in whatsoever. But at this point, the broad strength in the major indices, even lacking volume sponsorship or favorable valuation, requires that we allow for the possibility of additional investor speculation.

[...]

[E]stablishing investment exposure here with anything but call options amounts to a game of trying to “ride” the market higher and to get out before it returns to or below current levels. With the market strenuously overbought already, that game strikes me as exquisitely difficult to get right. Hence the use of a modest allocation to call options only, without closing our downside hedges.

Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP. That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.

Dr. Hussman, who I assume didn't grow up drinking Kool-Aid¹, misspells the name of the drink. For those who are unfamiliar with this beverage, here's a Kool-Aid commercial from the 1970s:



And here are few spoofs of those Kool-Aid spots by the guys at Robot Chicken². You Tube only had this Russian-dubbed version, but you don't need to understand Russian to get the joke (though it does help to know that, in the middle skit, the characters have just survived a nuclear war in a fallout shelter); you just have to have seen one of the original commercials:




¹The phrase "drinking the Kool-Aid" of course comes from the mass suicide at Jonestown, but according to Wikipedia, the cult members drank poisoned Flavor Aid, not Kool-Aid.

²I just discovered this show recently, which is often funny and original. It includes a lot of parodies that will resonate with Gen-Xers.

Friday's Jobs Numbers

Mohamed El-Erian's op/ed in Friday's Financial Times seemed like too-gloomy a piece to link to on the eve of a holiday weekend, so I've waited until now to do so: "American jobs data are worse than we think". Excerpt:

Notwithstanding its recent surge, the unemployment rate is likely to rise even further, reaching 10 per cent by the end of this year and potentially going beyond that. Indeed, the rate may not peak until 2010, in the 10.5-11 per cent range; and it will likely stay there for a while given the lacklustre shift from inventory rebuilding to consumption, investment and exports.

Beyond the public sector hiring spree fuelled by the fiscal stimulus package, the post-bubble US economy faces considerable headwinds to sustainable job creation. It takes time to restructure an economy that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers. This will disrupt consumption already reeling from a large negative wealth shock due to the precipitous decline in house prices. Consumption will be further undermined by uncertainties about wages.

This possibility of a very high and persistent unemployment rate is not, as yet, part of the mainstream deliberations. Instead, the persistent domination of a “mean reversion” mindset leads to excessive optimism regarding how quickly the rate will max out, and how fast it converges back to the 5 per cent level for the Nairu (non-accelerating inflation rate of unemployment).

The US faces a material probability of both a higher Nairu (in the 7 per cent range) and, relative to recent history, a much slower convergence of the actual unemployment rate to this new level.

Even former perma-bull Larry Kudlow, who was talking about "mustard seeds" months before Bernanke mentioned anything about "green shoots" couldn't put much of a positive spin on the numbers. On Real Clear Politics, Kudlow wrote:

I do the best I can to be optimistic about our nation's future. But realistically, the current picture is not particularly good.

Geography as Destiny?

John Mauldin's latest "Outside the Box" piece is a column by Peter Zeihan of Stratfor, The Geography of Recession. In a time when many of us are thinking about the challenges the U.S. faces, Zeihan reminds us of some of our geographic blessings, and contrasts American geography with that of some other powers. Below are a couple of excerpts.

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world's largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.

Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world's largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake.

[...]

The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.

Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory.

Zeihan doesn't mention the impact of demography in his column, but, in the most extreme example, it's worth remembering that what is now the U.S. had all of the same geographic advantages but wasn't an economic power before European settlement.

Zeihan's comments on China's geography are worth excerpting too, but to keep this post from getting too long I'll do so in a separate post.

The image above comes from Zeihan's column.

First Trust's First Quarter GDP Estimate

In their Forbes column today ("Brace Yourselves for First-Quarter GDP") Brian S. Wesbury and Robert Stein of First Trust Advisers estimate that Q1 GDP contracted at a 4.2% annual rate (preliminary Q1 GDP data will be released tomorrow). They see the uptick in consumer spending and draw down in inventories in the first quarter as good signs going forward, and predict that GDP will be flat in Q2 and will grow at a 3% annual rate in Q3.

Buyer's Remorse

From Jim Cramer's open letter to the White House yesterday:

I favored Obama over McCain because I thought Obama to be a middle-of-the-road Democrat, exactly the kind I have supported all my adult life, although I will admit to being far more left-wing during my teenage years and early 20s.

To be totally out of the closet, I actually embrace every part of Obama’s agenda, right down to the increase on personal taxes and the mortgage deduction. I am a fierce environmentalist who has donated multiple acres to the state of New Jersey to keep forever wild. I believe in cap and trade. I favor playing hardball with drug companies that hold up the U.S. government with me-too products.

But these are issues that we have no time for now, on the verge of a second Great Depression. This is an agenda that must be held back for better times. It is an agenda that at this moment is radical vs. what is called for. I am proud to have voted for the Obama who I thought understood the need to get us on the right path, and create jobs and wealth before taxing it and making moves that hurt job creation — certainly ones that will outweigh the meager number of jobs he’s creating.

Most important, I believe his agenda is crushing nest eggs around the nation in loud ways, like the decline in the averages, and in soft but dangerous ways, like in the annuities that can’t be paid and the insurance benefits that will be challenging to deliver on.

So I will fight the fight against that agenda. I will stand up for what I believe and for what I have always believed: Every person has a right to be rich in this country and I want to help them get there. And when they get there, if times are good, we can have them give back or pay higher taxes. Until they get there, I don’t want them shackled or scared or paralyzed. That’s what I see now.

The photo of Jim Cramer accompanied his essay on his Mainstreet.com site.

Q2 GDP Was Even Higher than Brian Wesbury Predicted

Last month, First Trust economist Brian Wesbury estimated that the U.S. economy grew at at a 3% annual rate in the second quarter ("Did the U.S. Economy Grow at a 3% Annual Rate in Q2?"). Today the Commerce Department reported that the economy grew at a 3.3% annual rate in Q2.

Did the U.S. Economy Grow at a 3% Annual Rate in Q2?

Brian Wesbury of First Trust thinks so. This was his rationale, in his Monday Morning Outlook PDF:

Below we set out the components of real GDP that
comprise our 3% forecast for Q2.

Personal Consumption: We already have full
consumption data for April and May as well as auto sales
and retail sales for June. The only piece missing is June
services. We estimate real consumption grew at a 2.0%
annual rate in Q2. With consumption accounting for 70%
of GDP, real PCE will contribute 1.4 points to real GDP
growth (1.4 equals 70% of 2).

Business Investment: Data through May show
business investment in equipment and software was
unchanged in Q2. However, business construction
continued to boom, suggesting overall real business
investment will grow at about a 6% annual rate in Q2.
With business investment accounting for about 10% of
GDP, this translates into 0.6 points for real GDP growth
(0.6 equals 10% of 6).

Housing: Data on home building suggests a decline
at about a 23% annual rate in Q2. Given that the sector
makes up roughly 4% of GDP, this translates into a drag
of 0.9 points on real GDP growth (0.9 equals 4% of 23).

Government: Federal defense spending and public
construction at all levels of government were unusually
strong, suggesting gov’t spending accounts for 0.5 points
worth of real GDP rather than the 0.3 or 0.4 trend.
Trade: The inflation-adjusted trade deficit has been
shrinking rapidly. Even assuming no additional
improvement in June, net exports will add about 2.0
points to real GDP growth.

Inventories: We assume businesses around the
country reduced stockpiles at an annual rate of $37
billion, the largest reduction since the 2001 recession,
resulting in a drag of 0.6 points to growth.

Second Quarter GDP: = 3.0%

At the end of last year, Wesbury was one of the few economists predicting that the U.S. would avoid recession in 2008. So far at least, he has been right.