Fed will cause unnecessary harm to the US and world economy this year

from Mark Weisbrot

Here are eight predictions for the coming year, in accordance with a hallowed tradition that I have previously not honored. If some of the supporting facts below seem unfamiliar, it could be because they have not received the attention they deserve. But they are real, and links to sources are provided. First, some good news about the US economy:

1. Inflation will likely continue to fall until it becomes obvious that it is no longer a serious concern. Inflation (as measured by the Consumer Price Index) has already fallen precipitously over the past five months: annualized inflation has been 2.5 percent (July through November), as compared with 11.8 percent for the preceding five months (February through June). If this looks surprising, it’s because the number most reported in the media is for November 2021-November 2022, which is 7.1 percent. This is true, but not as informative about what’s been happening more recently.
2. The Fed will continue to harm the economy by raising interest rates unnecessarily: That’s the bad news. The economy will slow, and unemployment will rise; the latest survey of economists finds a 70 percent probability of a recession. But, whether it’s technically a recession or “just” a slowdown, the pain will be real for many employees and job-seekers. Sadly, the Fed has actually caused most of the US recessions since World War II by raising interest rates.
   

Labor Day: US labor’s future may depend on monetary and fiscal policy

from Mark Weisbrot

Labor Day is a good time to reflect upon how American workers have been doing — especially the majority who have been left behind for most of the past 40 years. From 1979 to 2018, the median wage has grown by just 11.6 percent. If we compare this to prior decades, e.g., 1948 to 1979, that increase was 93.2 percent. These two facts tell a big part of the story of a social transformation that is both inexcusable and historically unusual: a high-income country becoming vastly more unequal, as most workers’ pay fails to rise with most of the gains in productivity that has accompanied their work.

Then came COVID, which has disproportionately harmed and killed lower-wage and Black workers. Hopefully, the current wave will subside and pass soon, as more people are vaccinated. But the struggle for equality and decent living standards in the world’s richest country continues even through the pandemic.

Fortunately, there have been some recent changes in national economic policy that could vastly change how the next 40 years look. But only if we can keep them.

These changes are in monetary and fiscal policy. Monetary policy is set by the Federal Reserve, which generally determines how many people are unemployed. Here is the current chairman of the Fed, Jerome Powell, speaking to the Senate in February about the wonders of pre-pandemic, 3.5 percent unemployment:

Why partisanship will increase in the Post-Trump Era

from Mark Weisbrot

• There is a gigantic and increasingly unbridgeable divide on economic policy.

Many are hoping that when Trump — one of the most divisive US presidents in the past century or more — leaves office, the historically elevated levels of partisanship in US politics will at least begin to subside. But the opposite is vastly more likely.

There are short- and intermediate-run, as well as long-run, reasons for this result that have little to do with the Trump phenomenon. Most importantly and immediately, there is a gigantic and increasingly unbridgeable divide on economic policy. And the outcome of this ongoing fight will have an enormous impact on the lives and livelihoods of most Americans.

First and foremost, there is fiscal policy: the federal government’s use of spending and taxation, in this case to facilitate an economic recovery. The Republicans will try to block most helpful spending as much as possible, perhaps most importantly as a fundamental part of their political strategy. They learned something from the Great Recession of 2008–2009. They fought and reduced Democratic stimulus plans — which were not big enough to begin with — as much as possible. The end result was that unemployment in October 2010 was still at 9.4 percent; and millions more jobs were lacking if we look at the decline in employment since the recession, rather than at the unemployment stats only.

Trump’s trade war with China: Is it about to end?

from Mark Weisbrot

The latest de-escalation of the trade war with China — with exemptions from some tariffs on both sides — has left markets uncertain as to whether it will end before there is serious escalation. But if I were managing a hedge fund, I would bet on it.

To see why, we must start with Trump himself. Distraction is Trump’s modus operandi; this was true for his 2016 campaign and he must have concluded from its success that this was also the best way to govern. Trump’s trade wars are therefore best understood as a set of distractions. The end result doesn’t matter all that much to him politically, and is therefore not worth that much political risk.

Of course there are things that some of his donors might actually want to win from this fight with China: stricter enforcement of patents to benefit the pharmaceutical giants who also gouge American consumers out of hundreds of billions of dollars annually; or greater access for US bankers to China’s financial sector. But Trump’s main goal at this point is to get reelected. And the bulk of his big donors — including the biggest contributors to the Republican Party ― don’t want this fight to drag on.

IMF reforms can make things worse: The case of Ecuador

from Mark Weisbrot

When people think of the damage that the high-income countries ― typically led by the US and its allies ― cause to people in the rest of the world, they usually think of warfare. Hundreds of thousands of Iraqis lost their lives as a result of the 2003 invasion, and then many more as the region became inflamed.

But the rich countries also have considerable power over the lives of billions of people through their control over institutions of global governance. One of these is the International Monetary Fund. It has 189 member countries, but the US and its rich-country allies have a solid majority of the votes. The head of the IMF is by custom a European, and the US has enough votes to veto many major decisions by itself ― although the rich countries almost never vote against each other.

Let’s take a look at a recent IMF loan to see what the problem looks like. In March, Ecuador signed an agreement to borrow $4.2 billion from the IMF over three years, provided that the government would adhere to a certain economic program spelled out in the arrangement. In the words of Christine Lagarde ― the IMF’s managing director at the time ― this was “a comprehensive reform program aimed at modernizing the economy and paving the way for strong, sustained, and equitable growth.”

Who is to blame for Argentina’s economic crisis?

from Mark Weisbrot

Argentines remember the role the IMF played in the last depression. They also remember the improvement in their lives under Kirchnerism.

What are we to make of Argentina’s surprise election results on August 11, which jolted pollsters and analysts alike, and roiled the country’s financial markets? In the presidential primary for the country’s October election, the opposition ticket of Alberto Fernández trounced President Mauricio Macri by an unexpected margin of 15.6 percent.

The Fernández coalition attributes its victory to Mr. Macri’s failed economic policies, blaming him for the current economic crisis, recession and high inflation. Mr. Macri, by contrast, blames the fear of a future government of Kirchnerism — his label for the opposition — for the postelection financial turbulence as well as the problems of the economy since he took office more than three and a half years ago. He argues that both the markets and the people have everything to fear from such an outcome.

This disagreement is not just an academic argument, nor one specific to Argentina. It is a recurring, almost archetypical debate during economic crises that spill over into political contests. In recent years — in Britain, Spain, France, Greece and other countries where failed economic policies faced left-of-center challengers — Mr. Macri’s refrain was a frequent line of attack by incumbents.

Tariffs are a bad response to an imaginary border crisis

from Mark Weisbrot

Donald Trump won the presidency–despite losing the popular vote by 2.8 million—with a campaign that careened wildly from one distraction to another. He has clung to this as a Twitter and governing strategy ever since. As there are 190 countries in the world, and the United States trades with most of them, trade wars so far have provided a shovel-ready supply of such diversions. So, here we are: Last Thursday, just in time to distract from the more potentially violent foreign ventures that are not going very well (Iran, Venezuela), Trump announced plans for a new set of tariffs against Mexico.

This trade war is different from other trade wars: It’s not about trade. It’s not even about “trade” in the expanded, grossly misleading but commonly used definition that includes the intellectual property and investors’ “rights” that Trump is fighting for against China. It’s just Trump telling Mexico that they must stop the flow of migrants across our southern border or he will impose a 5 percent tariff beginning June 10 and increasing to 25 percent by October.

Unsurprisingly, this strategy has met with an unusual level of resistance from Republicans in Congress, as well as from other allies with deep pockets and money to lose if the war escalates, such as the U.S. Chamber of Commerce and Business Roundtable. Late Tuesday, after the president told Republicans that they would be “foolish” to try to stop him, The New York Times reported that Republican senators have warned the White House they could “muster an overwhelming majority to beat back the tariffs.” So it’s not clear yet whether this plan will actually take effect.

Still, it’s worth looking at the underlying reality of the “border crisis” that Trump has labelled a “national emergency” and which the tariffs purport to address—as well as how tariffs would actually affect that reality.

Tariffs are a bad response to an imaginary border crisis

from Mark Weisbrot

Donald Trump won the presidency–despite losing the popular vote by 2.8 million—with a campaign that careened wildly from one distraction to another. He has clung to this as a Twitter and governing strategy ever since. As there are 190 countries in the world, and the United States trades with most of them, trade wars so far have provided a shovel-ready supply of such diversions. So, here we are: Last Thursday, just in time to distract from the more potentially violent foreign ventures that are not going very well (Iran, Venezuela), Trump announced plans for a new set of tariffs against Mexico.

This trade war is different from other trade wars: It’s not about trade. It’s not even about “trade” in the expanded, grossly misleading but commonly used definition that includes the intellectual property and investors’ “rights” that Trump is fighting for against China. It’s just Trump telling Mexico that they must stop the flow of migrants across our southern border or he will impose a 5 percent tariff beginning June 10 and increasing to 25 percent by October.

Unsurprisingly, this strategy has met with an unusual level of resistance from Republicans in Congress, as well as from other allies with deep pockets and money to lose if the war escalates, such as the U.S. Chamber of Commerce and Business Roundtable. Late Tuesday, after the president told Republicans that they would be “foolish” to try to stop him, The New York Times reported that Republican senators have warned the White House they could “muster an overwhelming majority to beat back the tariffs.” So it’s not clear yet whether this plan will actually take effect.

Still, it’s worth looking at the underlying reality of the “border crisis” that Trump has labelled a “national emergency” and which the tariffs purport to address—as well as how tariffs would actually affect that reality.

Labor has lost much in past four decades, and Fed threatens recent gains

from Mark Weisbrot

This Labor Day, the vast majority of Americans who need to work for a living still have a long way to go before they recover what they have lost over the past four decades. The real (inflation-adjusted) median wage is only about 10 percent above what it was in 1979.

As economist Dean Baker has noted, we can also see part of this transformation of the United States into a more shamefully unequal society if we look at the distribution of national income between profits and labor. If not for this redistribution from wages to profits from 2000 to 2016, the average worker would have an additional $4,000 per year in annual income.

This historic redistribution of income and wealth was the result of choices made by our political leaders and decision-makers. They chose to maintain higher interest rates ― and levels of unemployment ― than necessary. They subjected workers to increasingly harsh international competition while protecting highly paid professionals and CEOs. They increased protectionism for patent holders, including pharmaceutical companies who charge tens of thousands of dollars for cancer drugs that would sell for a small fraction of these prices in competitive markets. They changed labor law so that unions’ bargaining power would be reduced to levels not seen for most of the twentieth century. 

The Transatlantic Alliance will survive Trump

from Mark Weisbrot

Every week, and often more than once a week, there is another article in the major media or in foreign policy publications about the demise of the post-World War II Anglo-American world order. These analyses typically single out the Transatlantic Alliance between the US and Europe ― two of the world’s largest economies ― for special concern and anxiety as the underpinning of this world order. Not surprisingly, President Trump’s wildly fluctuating comments on NATO (despite the fact that he is expanding it), his unprecedented rudeness to European leaders, and his friendliness with Putin at the Helsinki summit have all added to the angst.

The basic story behind this moaning and melancholy is that the leaders of America put together a “rules-based” system based on “open markets” and democracy (the two are sometimes seen as synonymous) that has fostered prosperity and relative stability. The United States was the only sizable industrial economy to emerge not only unscathed, but with its economy doubled in size, following World War II. While others might have taken advantage of this unrivaled power for their own gain, the story goes, America’s beneficent rulers constructed a world order for the good of everyone. Trump is seen as a threat to its continued existence.  

The threat of a trade war is overblown ― real war is far more likely

from Mark Weisbrot

Talk of trade wars and falling skies has taken up much space in the media since Donald Trump first announced tariffs on imported steel and aluminum on March 1. But such fears are highly exaggerated, which should not be surprising in a country where the benefits of a succession of misnamed “free trade” agreements have been grossly exaggerated for decades. Within weeks of announcing the tariffs, the administration had already exempted most of the major suppliers of steel and aluminum to the United States  —including the European Union, Brazil, Argentina, South Korea, and Australia, along with Canada and Mexico.

China’s retaliation was minuscule: It announced tariffs on just $3 billion in US goods, or 0.13 percent of American exports. The Chinese, like most of the world, know that Trump’s recent actions don’t really represent the long-term trade policy of the United States. That policy is generally made by corporations, working through the best Congress that money can buy. It’s true that Trump contributed to the collapse of the proposed Trans-Pacific Partnership agreement. But its defeat was more the result of a quarter-century of organizing and public education, including by environmental, labor, public-health, and other public-interest groups — not to mention the strong public opposition to it expressed in the fact that TPP opponent Bernie Sanders took 46 percent of the Democratic primary vote. America had reached the point where even longtime supporters of the agreement such as Hillary Clinton were forced to renounce it. (And speaking of long-term US trade policy, it’s worth noting that Trump has since talked about possibly joining the TPP after all, once again displaying the shallowness of his convictions.) 

The International Monetary Fund’s world economic outlook in theory and practice

from Mark Weisbrot

The International Monetary Fund (IMF) released its biannual “World Economic Outlook” (WEO) today, presenting a 300-page overview of the world economy and where it might be going. The Fund is one of the most powerful and influential financial institutions in the world. Despite the fact that this flagship publication, and the Fund’s hundreds of PhD economists, missed the two biggest asset bubbles in US and world history (the stock market bubble in the late 1990s and the housing bubble that triggered the Great Recession), the WEO is taken very seriously and contains much valuable data and analysis.

The fall WEO is relatively upbeat for the world economy in the short run but is more worried about downside risks in the medium term. It lists a number of concerns that anyone who cares about social or economic justice, or progress, would be concerned with, such as:

the recent surprisingly slow growth of nominal wages, which reinforces a longer trend of stagnant median wages, rising income inequality, and job polarization such that middle-skill but well-paying jobs have become increasingly scarce.

And the Fund argues that “governments should also consider correcting distortions that may have reduced workers’ bargaining power excessively” and “promote an environment conducive to sustainable real wage growth” as well as 

Curb your enthusiasm: Macron is just the beginning of a new fight for France and Europe

from Mark Weisbrot

The media response to the French election reads like some people had too much cannabis. From the first paragraph of a front page news analysis of the New York Times: “It was globalization against nationalism. It was the future versus the past. Open versus closed.”

Let’s not get carried away. It’s great that Marine Le Pen, whose National Front party with deep racist roots that go back to French collaborators during the Nazi occupation, as well as French colonialism, was defeated by a large margin of the votes cast. There were no signs that she had any realistic chance of winning, but people were understandably nervous after the Brexit and Trump votes. On the other hand, her 34 percent of the vote was about twice that of her father in 2002, who ran against the conservative Jacques Chirac. And abstentions this time were higher than in any French election since 1969; together with blank or spoiled ballots, 34 percent of the electorate chose none of the above.

Most importantly, if the “global open future” of France and Europe is going to be like the recent past, then the National Front and similar movements are still going to have some growth potential. Because it is primarily the economic policies of Europe, including France, over most of the past decade, that have allowed the National Front to progress from a marginalized boil on the body politic to what is now treated as a legitimate, serious opposition party. 

How the Eurozone damaged French politics — and this year’s presidential election

from Mark Weisbrot

As France heads into the second and final round of its presidential election on Sunday, a number of observers have compared the choice between the far-right candidate Marine Le Pen and centrist neoliberal Emmanuel Macron with the Trump-Clinton contest of 2016. There are similarities: Le Pen, who is politely called xenophobic, like Trump represents an anti-immigrant, right-wing nationalism combined with some populist appeals. Macron is a former investment banker and economy minister under the current Socialist government who, like Hillary, is widely seen as too close to powerful financial interests.

But one significant difference is that if Hillary had won the US presidency in 2016, she would most likely have tried to win some net improvements in the living standards and economic security of the majority of the electorate — including working class and poor people — who voted for her. The same cannot be said for Macron in France. His public platform has been vague, but insofar as it has a discernible trend, it is in the same direction that the country has moved over most of the past decade. That has included large public pension cuts, labor law reform that has weakened the bargaining power of unions and made it easier for employers to dismiss workers (including the Macron Law, as it is called, of 2015), and spending cuts.

Could a leftist bring growth back to France?

from Mark Weisbrot

If the first round of the French presidential election on Sunday is now too close to call, that’s partly because of Jean-Luc Mélenchon’s last-minute surge in the polls. The media describe him as a populist from the far Left, and as he has risen, attacks on him have intensified.

One common criticism is that his economic proposal to jump-start growth in France while reducing mass unemployment and inequality is pie in the sky.

Is it, though?

Mr. Mélenchon would certainly face significant political hurdles if elected, including the need to build political support for his program in Parliament. But the French economy, despite serious problems, could sustain, as well as benefit from, his proposals.

He wants to reduce unemployment from 10 percent, its current level, to about 6 percent over the next five years, partly by increasing government spending by some 275 billion euros, or about 2.3 percent of GDP. The money would go to major public spending in renewable energy and environmental projects, housing and antipoverty programs, as well as toward lowering the retirement age and increasing wages in the public sector.

Mr. Mélenchon’s critics say that France is already living beyond its means. The French enjoy a level of economic security and living standards that most Americans can only dream about: universal health care, free childcare and public-university education, a 35-hour workweek, higher life expectancy, and lower per capita energy consumption and greenhouse gas emissions. The new government, say people who oppose Mr. Mélenchon’s views, will have to focus on reducing the public debt.

But the numbers do not bear them out.

NAFTA has harmed Mexico a lot more than any wall could do

from Mark Weisbrot

President Trump is unlikely to fulfill his dream of forcing Mexico to pay for his proposed wall along the United States’ southern border. If it is built, it would almost certainly be US taxpayers footing the bill, with some estimates as high as $50 billion. But it’s worth taking a step back to look at the economics of US-Mexican relations, to see how immigration from Mexico even became an issue in US politics that someone like Trump could try to use to his advantage.

NAFTA (the North American Free Trade Agreement) is a good starting point. While it has finally become more widely recognized that such misleadingly labelled “free trade” agreements have hurt millions of US workers, it is still common among both liberal and right-wing commentators to assume that NAFTA has been good for Mexico. This assumption is forcefully contradicted by the facts.

If we look at the most basic measure of economic progress, the growth of GDP, or income, per person, Mexico ranks fifteenth out of 20 Latin American countries since it joined NAFTA in 1994. Other measures show an even sadder picture. According to Mexico’s latest national statistics, the poverty rate in 2014 was 55.1 percent ― actually higher than the 52.4 rate in 1994. 

Italy’s political troubles have deep economic roots

from Mark Weisbrot

Much of the media, and the analysts on which it relies, have provided a misleading narrative on the current political problems in Italy, following Sunday’s “no” vote on a referendum on constitutional changes. It has been lumped together with Trump, Brexit, the upsurge of extreme right-wing, anti-European or racist political parties and “populism,” ― which in much of the media seems to be code for demagogic politicians persuading ignorant masses to vote for stupid things. “Stupid things” here is defined as whatever the establishment media doesn’t like.

Of course we do not have a detailed map of why various Italian voters rejected the proposed constitutional changes. The most obvious explanation is that Prime Minister Matteo Renzi, who has been in power since February 2014, had promised to resign if the people voted no. This mobilized all of his political opponents, including those within his own party.

Those who wanted to defend Renzi had a hard sell. He was not offering a future for the country, and especially for the young people who most overwhelmingly voted “no.”  Unemployment is at 11.6 percent, and youth unemployment is more than 36 percent. Of the unemployed, most are long-term unemployed, having been out of work for more than a year. And there are big regional disparities, with parts of the generally less-well-off South having been harder hit since the world recession. 

Can the Venezuelan economy be fixed?

from Mark Weisbrot

The international media has provided a constant fusillade of stories and editorials (not always easily distinguished from each other) about the collapse of the Venezuelan economy for some time now. Shortages of food and medicine, hours-long lines for basic goods, incomes eroded by triple-digit inflation, and even food riots have dominated press reports.

The conventional wisdom has a set of predictable narratives to explain the current economic mess. “Socialism” has failed ― never mind that the vast majority of jobs created during the Chávez years were in the private sector, and that the size of the state has been much smaller than in France. The whole experiment, it is said, was a failure from the beginning. Nationalizations, antibusiness policies, populist overspending during the years of high oil prices, and then the collapse of these oil prices since 2014 sealed Venezuela’s fate. The downward spiral will continue until the chavistas are removed from power, either through elections or through a coup (most pundits don’t seem to care which). 

The stock market’s fear of Trump could be final nail in his coffin

from Mark Weisbrot

Republican nominee Donald Trump’s embarrassments and scandals keep piling up, from his Twitter meltdown last Friday night to The New York Times revelations that he could have gotten away without paying income taxes for the past 18 years.

These may have some impact on the race, although it’s tough to guess how much. But a recent piece in the Times about Trump’s potential influence on the stock market could really take some votes away from him, if it happens to go viral.

The article, by economist Justin Wolfers, estimates that a Trump victory on Nov. 8 will take 10 to 12 percent off of the value of the stock market. It’s a crude estimate, but the logic appears to be sound. He bases it on the performance of stock market index futures on the evening of the September 26 presidential debate. To summarize very briefly, when Trump was doing badly in the debate — e.g., when Democratic nominee Hillary Clinton was hammering him about his tax returns and prediction markets indicated that his chances of winning the election were falling — the stock market index futures went up. The correlation is strong enough to extrapolate an estimated impact of an actual Trump win.

There are many people currently planning to vote for Trump on Nov. 8 for mostly personal monetary reasons. Some of these people may share his opponents’ views that Trump is unqualified to be president, to put it politely, and neither like nor trust him personally. But they will vote for him, and often any Republican, because they figure their taxes will be lower than under a Democratic government. Call it “vote buying,” if you will; this is a core constituency of the Republican Party.

Will the IMF become irrelevant before it changes?

from Mark Weisbrot

The neoliberal reforms it has imposed on countries around the world have been disastrous.

The UK’s vote in June to leave the European Union, combined with an extraordinary backlash against trade agreements as manifested in the US presidential election, has set off an unprecedented public debate about globalization and even some of the neoliberal principles that it embodies in its current form. It is therefore of great relevance to look at what is happening to one of the most powerful promoters of neoliberal globalization in the world economy: the International Monetary Fund.

An article in the June issue of the IMF’s quarterly magazine, Finance and Development, raised a lot of eyebrows in Washington policy circles. “Neoliberalism: Oversold?” was the title, and the authors presented some evidence in the affirmative, for at least some important neoliberal policies. To most of us, it was like an op-ed from Donald Trump titled “Insulting Your Opponents: Oversold?”

Neoliberalism refers to a set of policies that the IMF has been promoting all over the world for decades. These include tighter fiscal and monetary policies (sometimes even when the economy is weak or in recession); an indiscriminate opening up of countries to international trade and capital flows; the abandonment of state-led industrial and development policies; privatization of public enterprises; and various forms of deregulation, including financial.

It’s not exactly a household word in the United States, but in South America in the 21st century, for example, most of the winning presidential campaigns were against it. There were some solid reasons for their opposition: During the last two decades of the 20th century, when neoliberal reforms were being implemented, income per person in Latin America barely grew. Whereas in the previous two decades — when governments did most of the things that neoliberalism was designed to reverse — income per person nearly doubled.

If we look at the world as a whole during the decades of neoliberal reform (1980–2000), there was also a sharp slowdown in economic growth in the vast majority of low- and middle-income countries, as well as a decline in progress on such indicators as life expectancy and infant mortality. So yes, neoliberalism appears to be worse than oversold.