Economic

Corporate America needs a 21st century Dragon Lady

Posted on by j.giglio

While successful female business leaders have made headlines in recent years — a Mary T. Berra, Virginia M. Romelty, and Indra K. Nooyi all come to mind — just 5.2 percent of CEOs of companies in the S&P 500 are women.

To reduce this imbalance we need a modern incarnation of the Dragon Lady, a protagonist who is surely among the great characters in American literature. Unfortunately, her real significance has become obscured by the passage of time since she starred in Milton Caniff’s comic strip “Terry and The Pirates,” which he set in turbulent China during the 1930s and 1940s and is now regarded as something of a masterpiece.

It began as a standard newspaper comic strip that followed the adventure story traditions of its time. Terry Lee was a plucky adolescent who ran around China under the watchful eyes of his adult mentor, Pat Ryan. Pat was a two-fisted Black Irish soldier of fortune who was assumed to be an appropriate guardian for Terry because he smoked a pipe, talked in terse ambiguities, played football in college and never displayed any discernable sense of humor.

But all these conventions went out the window when the Dragon Lady appeared.

These days, people think of her as the quintessential Asian temptress, luring men to perdition with her irresistible female wiles. Embodying in full-blooded glory all the primal male fears of women, which they have woven into elaborate horror stories to tell each other in locker rooms, sports bars or their equivalent ever since Old Testament times.

Many contemporary women find this stereotype offensive, and rightly so. But it has nothing to do with the remarkable character Caniff created. Unfortunately, newsprint is highly perishable, so few people today can see for themselves what the Dragon Lady was really all about.

Yes, she was awesomely beautiful. But she never let this genetic accident define her character. She paid no attention to the standard male view that a woman’s physical appearance is the most important thing about her.

Yes, she spent most of her life engaged in various illegal activities. But this was more an expression of her clear-eyed pragmatism than evidence of any moral depravity inherent in her female nature. From her perspective, living outside the law gave her more freedom to be herself than she could ever have enjoyed in any of the conventional roles assigned to women. The Dragon Lady had no patience with this.

It is worth mentioning that Terry and Pat were not above reproach either, since they were seeking a lost gold mine that was obviously not their lost gold mine.

She was a brilliant and sophisticated woman, whose Chinese-English ancestry had made her an outcast to both societies. Highly educated in Eastern and Western cultures, she was wise in the ways of the world and the frailties of its people. Most of all, she choose to live entirely by her own existential set of moral principles that gave no quarter to anyone. All of which made her more than a match for Caniff’s irredeemably wicked multiethnic villains.

He introduced her in 1934 as the strong-willed leader of a pirate gang preying up and down the South China coast. This kind of dominating role in command of an all-male crew was scarcely common among female characters in the American literature of the time. But Caniff made it seem like the most natural thing in the world by emphasizing her cool intelligence, emotional toughness, and Wall Street trader’s ability to balance risks and rewards.

The behavior of many members of the masters of the universe club would suggest that they have limited talent. Many organizations are directed by the can-do-no-wrong man of the extended moment who leaves no indelible trace and will be forgotten long before he will be remembered.

You will know women have finally arrived when there are as many incompetent women in the C-Suite as incompetent men. Ain’t it de troot?

Originally Published: December 23, 2018

 

Short-term thinking costs General Motors, US taxpayers

Posted on by j.giglio

Just after Thanksgiving, General Motors made the jarring announcement that it was closing five factories in Ohio, Michigan, and Ontario, killing the production of several models including the Cadillac CT6, the Chevrolet Cruze compact, the Buick LaCrosse, the Volt plug-in hybrid, and cutting about 14,700 jobs. This is the firm’s largest cost-saving plan since the taxpayer-funded bankruptcy bailout in 2009.

GM received more than $50 billion of taxpayer assistance through the Troubled Asset Relief Program during the financial crisis. While the feds recovered $39 billion, the firm’s management failures cost taxpayers $10.5 billion. General Motors had racked up more than $40 billion in losses since 2005 alone, losses that had little to do with the financial crisis.

Many of the jobs to be eliminated are populated by those who are perpetually in debt, no matter how hard they work. And if you believe senior GM executives will not receive their annual bonuses, then you believe pigs can fly.

The automaker, the leading automobile manufacturer of the 20th century, expects to free up $6 billion in cash flow by the end of 2020, which will enable it to double down on its investment in electric and autonomous vehicles to stay competitive in a fast-changing market and sluggish sales.

The automobile industry is simultaneously facing multiple disruptions. For example, young, environmentally conscious, technology-oriented urban residents increasingly shun car ownership in favor of more convenient, less expensive mobility options. Owning a car and getting a driver’s license aren’t the life milestones they once were.

For years, General Motors has not been building the vehicles American consumers want. As a result, their car lineup has had more misses than hits. It has been slow to respond to competitive pressures and to align firm resources with changing market demands. For example, the rapid rise of Tesla Motors in the electric vehicle market, Toyota gaining market share with its eco-friendly Prius and the subsequent GM bankruptcy suggest that the firm made the wrong decision when it aborted its electric vehicle program in 2002.

In the ultimate irony, General Motors had a head start with electric vehicles. The firm introduced the “Impact,” a concept electric car, at the Los Angeles Auto Show in January 1990. The Impact was met with immediate praise and GM announced that it would become a production vehicle. Based on the proof of concept electric vehicle, the California Air Resources Board passed a zero-emissions vehicle mandate that required all major automobile suppliers to develop them if they wanted to continue to sell in California.

General Motors became the world’s first mass-produced electric vehicle retailer when, in a blaze of glory, it released the EV1 in 1996. The vehicle could only be leased, despite requests by many customers to purchase it.

But in 2002, the firm cancelled the model that might have been its best hope for the future, citing high costs, a limited market for electric vehicles, and the lack of technology to make high-performance cars. GM recalled all the EV1 and, in one of its worst public relations moves, recycled them, meaning the recalled vehicles were taken to Arizona and crushed. The electric powertrain that powered Tesla vehicles was based on the prototype developed for the EV1.

Once again, GM management demonstrated that short-term thinking is extremely costly in the long term. It is a reflection of the firm’s slow adjustment to changing consumer tastes and the failure to tailor the firm’s resources and business strategy to rapidly changing market forces.

General Motors may have been a 20th-century giant with a large past but today its future may be getting smaller. The sands of time may well be running out for the firm to prepare for the automobile industry’s still-uncertain future.

Originally Posted: December 22, 2018

If the American Dream isn’t dead, it’s in big trouble

Posted on by j.giglio

The American Dream is one of the country’s most attractive founding myths. Ask Americans what the term means and they will provide various definitions that are neither true nor false; people are free to define their core concepts as they see fit.

There is no one American Dream; there are many, based on specific circumstances. Historically, definitions have ranged from religious and political freedom to social equality and economic mobility in the hope that everyone would have an equal chance to succeed.

Sadly, the idea that anyone who really wants to can make their way to the top in the United States may be dead. The ordinary working-class individual would have to be living in a commercial to still believe in the American Dream. When you are poor, trying to get a fair share of the American pie can become a burden that only makes you angry and frustrated.

In 1931, the now obscure historian, James Truslow Adams wrote “The Epic of America,” a book that gave one of the first recorded definitions of the American Dream. He was not writing about consumption, buying things you don’t need and can’t afford with borrowed money. He focused on ideals rather than material goods. According to Adams, the American Dream was:

“That dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement. … It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position”.

He was describing a society that values equality and merit are above all else; with hard work, everything is possible. It doesn’t matter where you are from, what schools you went to, or how much money your parents have. What matters is that if you work hard, you can become anything you want. Everyone in America has a chance to pursue his or her personal vision no matter who you are.

Conversely, success is a choice. It’s your own fault if you don’t make it from rags to riches.

In the wake of the Great Recession and the 2008 financial crisis, many people believe the American Dream is dead. The issue of economic inequality has captured the attention of groups across the social and political spectrum; the general public, policy makers, business people, and academicians. Surveys show that more and more Americans believe income and wealth are distributed unfairly.

Few would deny the growing gap between rich and poor in the United States is at historic levels. Wealth and income imbalances have been documented with monotony.

The inconvenient truth is that the richest 10 percent currently own nearly 60 percent of U.S. wealth. The top 1 percent now earns about 30 percent of total income. The top 0.1 percent earns more than 10 percent. According to the Federal Reserve Board 40 percent of Americans can’t cover a $400 emergency expense.

A number of factors have been suggested as important contributors to the widening gap between the “haves” and “have nots” and the increasing concentration of income and wealth. Among them are globalization, technological advances, crony capitalism, lower taxes on the rich, and government policies and programs.

Until these causes and consequences are addressed, there is no realistic hope for dealing with unacceptable levels of economic inequality in the world’s richest country. America will continue to witness the erosion of the middle class and the creation of a permanent underclass that undermines the conceit of a democratic society in which all people have an equal and inalienable right to life, liberty and the pursuit of their own happiness.

Originally Published: November 19, 2018

 

The lesson of the Sears bankruptcy

Posted on by j.giglio

Once the greatest retailer in the modern world, Sears Roebuck, now saddled by debt and declining sales, filed for Chapter 11 bankruptcy on Oct. 15 after 125 years in business. The company was unable to pay $134 million in loans and announced it would close 142 unprofitable stores near the end of the year.

These closings are in addition to 46 others that were expected by next month. That will leave roughly 500 store locations. It is unclear whether the company will survive beyond the holiday season and the bankruptcy reorganization plan.

It was not always like that for the institution that was once regarded as America’s Everything Store. At the top of its game for decades, Sears was regarded as one of the best-managed retailers in the world. It accounted for more than 2 percent of all U.S. retail sales, selling everything from TVs to dresses to lawn mowers. The target customer was the average American, neither the richest nor the poorest 10 percent.

The often-overlooked thing about the company is that it was a technological wonder, the Amazon of its day. It pioneered supply chain management, store brands, catalogue retailing, and credit card sales, all of which are critical to the success of today’s most admired retailers.

Sears planted the seeds of its demise when it jumped from one strategy to another in the 1980s. For example, it acquired the financial services firm Dean Witter in 1981 and tried to sell investment products as well as power saws under the slogan “From Stocks to Socks”. Customers could not reconcile the new image with the old. Inconsistencies like these confused customers and undermined Sears’ credibility and reputation.

While the firm shed Dean Witter in the 1990s, another big challenge loomed. It had to deal with heightened competition from big-box stores such as Walmart and Target throughout the 1980s. Sears was late to grasp the power of discounting and later the rise of online shopping. The company failed to understand that retailing was changing and, like other old-economy, big-name retailers such as Toys “R” Us and A&P, it failed to change with the times.

In 2005 the company merged with Kmart, which was headed by hedge-fund manager Edward Lampert. He believed that merging the two firms, with a combined 355,000 employees and more than 3,500 stores in 2006, would make them strong. At the beginning of 2018, that workforce totaled less than 68,000 across fewer than 700 shops. The bankruptcy threatens to put these employees out of work and throw the financial security of its 100,000 pensioners into doubt.

Lampert’s strategy was to run the company like a hedge fund, cutting spending on advertising, inventory, and store improvements, as well as spinning off many of Sears’ best properties into a real estate trust he controlled. Over the past decade, the company sold or spun off many of its most valuable brands, such as Craftsman tools and Lands’ End clothing to stay afloat and pay the bills as it lost sales to Walmart, Target, Home Depot, and Amazon with its endless online catalog. All this hastened Sears’ decline.

The story of Sears’ demise is another cautionary tale about the ruthless process of creative destruction – new innovations driving out old ones. Once again an established company fell victim to the “creative destruction” – a term coined by Joseph A. Schumpeter, an economist working in the first half of the 20th century – of new entrepreneurs.

Technology and customer tastes change and provide opportunities for competitors, especially those regarded as “too small to worry about”, to develop new strategies that are better aligned with the altered industry landscape and ultimately eat established players’ lunch (and breakfast and dinner).

All in all, not a pretty story. One that once again proves that nothing is forever; not now, not ever.

Originally Published: October 21, 2018

Concentration of power benefits the haves

Posted on by j.giglio

In the continuing controversy over economic inequality in the United States, the focus is on such factors as the decline of organized labor, tax cuts for the well off, outsourcing of American manufacturing jobs overseas, and the substitution of capital for labor. But the lack of competition in many sectors of the economy is also a powerful driver of disparity, redistributing income and wealth from consumers generally to the affluent.

As with lengths of skirts, lapels on men’s suits, and other more or less important customs, there are also fashions in markets. Over the last two decades, many firms have been consolidated across the U.S. economy. Oligopolies are common and concentration is increasing in numerous industries.

Many markets are now oligopolies, in which a small number of companies account for most sales. In major industries from telecoms, social media and internet search to retail, airlines, beer, pharmaceuticals, hospitals, banks, the American public has seen a few giants come to dominate. What competition does exist is among just a few participants, not exactly the type described in textbooks.

These firms use their market power to increase prices, drive down wages and assert greater authority over workers. They find ways to deter new firms by creating and maintaining barriers to entering the market, and use economies of scale to exercise strong leverage over suppliers. In addition to raising prices relative to what they would charge in a competitive market, these powerful companies may also reduce quality or convenience, modifying product features and reducing customer discounts. All this leads to a transfer of wealth from buyers to sellers.

It should not be overlooked that consolidation of market power also concentrates political power, thanks to the lobbying muscle of oligopolistic companies. Economic and political power can be mutually reinforcing. As things stand, market power gives these companies the resources to protect their competitive advantages and leverage their advantages through the political process buying the all-important access.

Take the $2.5 trillion health care industry, where rising prices are partially driven by increased consolidation. Consider the large number of hospital mergers that limit competition among hospitals. Today, many Americans today live in areas where there is little such competition.

The same is true in other economic sectors. Merger mania in the airline industry has resulted in eight majors combining to create four giant carriers over the past decade. Not to be ignored is the fact that a handful of large institutional investors such as BlackRock, Vanguard, Fidelity, and State Street are among the top shareholders for all four major airlines. Given the huge extent of common ownership in the U.S. airline industry, it is not surprising that the price wars of the 1990s have ended and profits are on the rise as companies may refrain from competing aggressively when their competitors have the same large shareholders.

Consider the drastic increase in banking industry concentration, where too big to fail banks, instead of getting smaller, are pretty much taking over the financial universe. The five largest banks in the U.S. – JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and US Bancorp – have about $7 trillion in assets. That’s nearly 45 percent of the industry’s total. The other 55 percent of assets are divided among 6,000 institutions, according to the Federal Reserve. The top-10 banks’ share of the deposit market has increased from about 20 percent to 50 percent from 1980 to 2010.

Looking beyond individual industries affected by excessive market power, the bad news is that this concentrated power leads to concentration of wealth and income, and contributes to increasing economic inequality because the returns from market power go disproportionately to the wealthy, like company shareholders and senior executives.

God love them, for they are reaping rewards to which ordinary Americans have no access. Amen.

Originally Published: October 13, 2018

2008 recession is anything but ancient history

Posted on by j.giglio

If you think you have heard it all before about the 2008 financial meltdown, then you need to listen more closely. Enough is never enough when it comes to learning about what caused the crisis and the recession that followed.

This month marks the 10th anniversary of the financial crisis that devastated Wall Street and Main Street. While the autumn leaves were falling in September 2008, months of uncertainty crystallized to spark a financial panic.

The crisis, the worst financial downturn since the Great Depression, was triggered by the bursting of a housing price bubble that had been fueled by increased risk in mortgage lending. As a result, millions of Americans lost their jobs, homes, or both.

The crisis had many causes, including too much irresponsible borrowing, foolish investments, the credit bubble that resulted from loose monetary policy, the housing bubble, national housing policies and non-traditional mortgages, relaxed mortgage lending standards, credit ratings and securitization, financial institutions’ concentrated risk, leverage and liquidity risk, 30 years of deregulation, securities firms converting from partnerships to corporations and perverse compensation incentives.

Scratch the familiar refrain of greed as a cause. Greed has been a constant in human affairs for millennia. It was not a new attribute in the lead up to the crisis.

Today the economy is strong, according to official measures. The United States Bureau of Economic Analysis estimates that GDP growth reached 4.1 percent in the second quarter of 2018. Consumer confidence is high and financial markets are flirting with records. The housing market, the epicenter of the crisis, has recovered in many places. Add low unemployment and things are looking good.

Wall Street has profited every year since the recession ended in 2009. Average Wall Street compensation, consisting of salary and bonus, hit $422,000 in 2017, 13 percent higher than the previous year, according to the New York State Comptroller.

In contrast, the latest Census Bureau data shows that the median income for American employees was $59,039 in 2016. Last month the average hourly wage rose 10 cents, to $27.16, according to the Bureau of Labor Statistics. While that was the largest gain since 2009, the increase was roughly equal to inflation, which eats away at purchasing power.

The crisis strikes some people as ancient history. Others, who saw their net worth wiped out are still trying to recover. They want Old Testament justice for the financial institutions that got bailed out from their reckless behavior while ordinary people suffered and continue to tread water thanks to ongoing wage stagnation. The hope is that as it gets hard to fill jobs with the country approaching full employment, wages will go up and the average American will enjoy the recovery.

While many analysts hesitate to blame American families for contributing to the financial crisis, they did play a role, aided and abetted by bankers and mortgage brokers. To put their role in context, consider that highly risky mortgages were attractive, given that real wages in the United States had been stagnant since the early 1970s.

People came to understand the power of leverage, which had previously been available only to wealthy investors. No-down payment mortgages with adjustable rates reduced their initial costs, providing the opportunity to improve their standard of living and enjoy wealth appreciation.

The assumption was that housing prices always increase. The rising value of the house would allow them to refinance and upgrade to a fixed-rate mortgage. When the housing bubble burst, many families were ravaged.

An economy that is strong for some continues to have harmful effects on the physical and emotional health of ordinary Americans. The results are a permanent state of outraged class warfare, declining social mobility, a shrinking middle class, and widening income inequality.

There is much to be mad about and plenty of blame to go around. Wall Street was the ultimate beneficiary of the Great Recession, not Main Street.

Originally Published: September 23, 2018

Too big to jail

Posted on by j.giglio

Sept. 15 is the 10th anniversary of Lehman Brothers declaring bankruptcy. It was a day after the global money markets seized up, turning a worldwide daisy chain of financial institutions into a ticking bomb. In the wake of the bankruptcy, it seemed likely that the United States financial system as a whole would cease to operate, a financial blackout that would render paychecks, credit cards, and ATMs useless.

Lenders, including large companies, financial institutions, and money market funds, suddenly hoarded cash in the face of growing losses and threats to their own sources of credit. They no longer knew which borrower was a good risk, so they treated all of them as bad risks.

The world experienced the worst financial crisis since the Great Depression of the 1930s and the economy plunged into deep recession. The Federal Reserve and Treasury Department misjudged the scale of the fallout from Lehman’s bankruptcy.

The failure of Lehman Brothers started a chain reaction in financial markets, as it was the first true test of the “too big to fail” hypothesis. Whereas Bear Stearns was sold to JP Morgan in March 2008, Lehman failed to find a buyer in time. The federal government refused to provide financial assistance and the company was forced into bankruptcy. Lehman was the fourth largest investment bank, and its failure sent huge waves across global financial markets. Market volatility peaked, and for some time it seemed that no bank was safe.

Merrill Lynch, the third-largest investment bank, rushed to sell itself to Bank of America that same weekend. Even Goldman Sachs and Morgan Stanley felt the shock and quickly tried to raise capital. The Federal Reserve allowed those two banks to change their charters and become bank holding companies which facilitated their funding via the discount window at the Federal Reserve.

On September 16, the federal government rushed forward with an initial $85 billion in taxpayer cash to bail out AIG, the nation’s largest insurance company. The very next day the nation’s largest money market fund was forced to “break the buck”, that is, report a share value of less than a dollar. The firm’s stake in debt securities issued by Lehman Brothers, with a face value of $785, million was essentially worthless. As a result, the share value fell to 97 cents. (Gasp.)

In the biggest bank failure in United States history, federal regulators seized the assets of Washington Mutual, the sixth largest U.S. bank, on September 27. JP Morgan acquired Washington Mutual’s bank deposits, assets, and their troubled mortgage portfolio from the Federal Deposit Insurance Corporation for $1.9 billion, making it the largest U.S. depository institution.

The crash brought together many forces: stagnant wages, widening inequality, anger about immigration and, above all, a deep distrust of elites and government. The road to recovery has been long for ordinary workers since those white-knuckle days of September 2008, resulting in a wave of nationalism, protectionism, and populism.

The ordinary American scraped by in the aftermath of the crisis, while Wall Street bankers soon returned to wealth and profitability, continuing their well-upholstered lives. The bankers were able to avoid accountability for the financial institutions they ran crashing the economy by trading trillions in fraudulent securities tied to risky or even certain-to-fail mortgages. No senior executive ever had to plea to criminal charges.

Policymakers and prosecutors took the view that prosecuting senior bank executives would cause too much collateral damage to employees, customers, other banks, and the economy. In 2013, then-Attorney General Eric Holder told the Senate Judiciary Committee that he was “concerned that the size of some of these (financial institutions) becomes so large that it… become[s] difficult… to prosecute them when we are hit with indications that… if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

In short, they were too big to jail.

Originally Published: September 8, 2018

Fiat’s Sergio Marchionne leaves a legacy worth remembering

Posted on by j.giglio

Many CEOs know how to soar, but few know how to land the plane. One exception was Sergio Marchionne. The Canadian-Italian leader was one of those dynamic, old school executives who was grounded and anchored in reality, a rarity in the contemporary world. He died on July 25 at the age of 66.

Marchionne first saved FIAT and then did the same thing five years later when FIAT took control of Chrysler from the United States government and turned the combination into a profit generator.

He took the driver’s seat at a battered and indebted FIAT in June 2004, an accountant and tax specialist who described himself as a corporate fixer. He had no previous automobile industry experience and was FIAT’s fifth CEO in less than two years.

Thus began his first remarkable turnaround. FIAT was near death when Marchionne became CEO. It was heavily indebted, had suffered huge losses, and was running out of cash. He took dramatic measures to get FIAT off its knees and return it to financial health, including shuttering factories, laying off thousands of employees, and cutting the time it took to bring new models to market from four years to just 18 months.

A key issue for FIAT was its relationship with General Motors. In 2001, the two had entered into a partnership that gave FIAT a put option to sell the 80 percent of the company it still owned to GM. Sergio Marchionne decided to play hardball, persuading GM to pay $2 billion to sever its ties and end its troubled alliance with FIAT. General Motors paid that huge sum not to buy FIAT.

Equally important, he dismantled the bureaucracy and focused on developing leaders, promoting high-potential young managers to senior positions, creating a flat organizational structure, and linking and leveraging information and knowledge throughout the firm. He constantly reminded the organization that he could not make all the decisions and created an entrepreneurial environment. By 2005, FIAT had returned to profitability.

In 2008, the global automotive industry was in a deep crisis. The following year, Mr. Marchionne found himself in a familiar situation. FIAT struck a deal with the United States government to take on the ailing Chrysler group and save several hundred thousand jobs in exchange for providing small-car technology. There was much skepticism about his ability to turn the firm around and grow the combined FIAT Chrysler into a profitable global automaker.

Marchionne chose an office in the industrial engineering department on the fourth floor of Chrysler’s headquarters, sending a clear message that he was accessible and wanted to be where the action was. He understood that Fiat Chrysler Automobiles was too large and complicated for one person to lead, and that human capital is a scarce strategic resource.

Just as he had done at FIAT, Marchionne fired most of the top management at Chrysler in 2009 and installed a dozen newcomers. By the end of the year, almost no one from the previous senior leadership team remained.

As he explained, “It is not a matter of how good they are at their jobs; it is a matter of change. I can spend 12 months arguing with them about what and how to change, but this won’t work and will take a lot of time. I look for the youngster. They don’t have seniority, they don’t play the corporate habits; they’re pure.”

The chain-smoking, espresso drinking CEO was direct and demanding, requiring his senior managers to be available 24/7 to match his own commitment. Like other successful executives he focused on setting stretch goals, developing a clear strategy, constantly communicating it, and ensuring proper execution of the strategy – all while managing to stay cool.

The combined Fiat Chrysler Automobiles group’s stock price nearly quadrupled over the past four years of his stewardship. Last year, the firm posted $4.4 billion in pre-tax profits.

Grazie mille.

Originally Published: August 18, 2018

A safety net for the looming trade war

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Much has been written about the continuous maelstrom of trade and tariffs. Articles are legion and lengthy, and the onslaught of words is entirely shorn of humor. Is the difference between trade and “free trade” the same as the difference between love and “free love?” Many of these articles fail the memory test.

Unlike academic arguments, debates about trade and tariffs are waged at a pitch of high intensity because the stakes are so high. Often overlooked is Trade Adjustment Assistance, a program with avid supporters and fierce critics.

Trade Adjustment Assistance is the primary policy response to dislocations caused by trade and globalization. This federal program provides assistance to workers who have involuntarily lost their jobs to foreign competition, either because their jobs moved outside the United States or because of an increase in directly competitive imports. It also assists those whose hours and wages are reduced as a result of increased imports, whether or not that had anything to do with a trade deal. Congress created the program as part of the Trade Expansion Act of 1962, but it was little used until the Trade Act of 1974 eased eligibility requirements.

Trade Adjustment Assistance offers eligible recipients a variety of benefits and reemployment services. It provides expanded unemployment insurance benefits, two years of job training, job search and relocation allowances, tax credits for health insurance coverage, wage insurance for workers over 50 years of age and related subsidies.

The legislation was initiated by President John F. Kennedy as a way of building domestic support for multilateral trade negotiations. The program has undergone changes through the years. Since free trade policies are expected to bring overall economic gains, there is a rationale for providing assistance to workers whose jobs are sacrificed for the greater good. Put differently, benefits of free trade, which are diffused throughout the economy, exceed its costs, which are concentrated. The winners should compensate the losers and help train or retrain American workers to become more competitive.

The original legislation faced strong opposition, but, with labor’s backing, Trade Assistance Adjustment became law. Trade Adjustment Assistance has been the necessary political price for keeping free trade on track, the sop to displaced domestic workers.

Critics of the program are wont to complain that despite its generosity, the program has been ineffective. For example, one study of Trade Adjustment Assistance recipients shows that their incomes after returning to work were no better than those of returning workers not eligible for Trade Adjustment Assistance.

Fairness is also an issue. Why should someone get special assistance after losing a job because of trade, but not if they lose a job because of changes in technology and consumer preferences, domestic competition or simple business failure? After all, they still have bills to pay.

On the other hand, advocates argue that Trade Adjustment Assistance has provided badly needed assistance to more than 2.2 million workers who lost their jobs to globalization since the Trade Act of 1974 and is an essential complement to the broader trade agenda. They point to data showing that nearly 77 percent of program participants found employment within six months of completing their training. They are silent on the quality of the jobs and whether they have a positive effect on wages for program participants.

While the United States may gain from free trade policies at the macro level, the losses are concentrated and inflict real distress on affected workers. Free trade has cut consumer costs, reduced poverty around the world and helped multinational corporations prosper; the United States should take care of workers who have paid the price.

Regardless of the dimensions of the coming trade and tariff wars and chaos in the international trading system, some version of Trade Adjustment Assistance is essential to provide a safety net, not just a fig leaf, for those who inevitably bear the cost of trade and tariff policies.

Originally Published: July 28, 2018

 

 

No doubt about it, China doesn’t play fair on trade

Posted on by j.giglio

Trade issues are not everyone’s idea of a good time. With so many demands on their attention, ordinary Americans are wary of the truth quotient in commentary on the subject. They are cautious about separating the genuine from the meretricious comments from corporate America, which is concerned about maximizing shareholder wealth rather than doing the right thing for the majority of Americans.

General Motors has warned that President Trump’s threats to impose a 25 percent tariffs on imports of cars and car parts are projected to cost the auto industry billions of dollars, could raise some car prices by nearly $6,000 and result in fewer American jobs and a smaller GM. In contrast, a Ford Motor Company spokesperson said they believe they are somewhat insulated from the proposed tariffs because their most profitable vehicles are built here.

Currently, vehicles imported to the United States face a 2.5 percent tariff. Cars built in America face a 10 percent tariff when they are shipped to the European Union and a 25 percent tariff when they head to China.

During the financial crisis, the feds put $49.5 billion of taxpayer money into the GM bailout and the taxpayers ultimately lost an estimated at $10.5 billion. The firm has remained profitable since then. In retrospect, the bailout should have included provisions requiring that a portion of future profits go to fully repay taxpayers. Government Motors could also have been required to build automobiles and auto parts in the USA.

The automaker sold 4.04 million vehicles in China in 2017, a third more than the 3.02 million it sold in the United States. Last year represented the sixth consecutive year that China was General Motors’ largest market.

GM and other multinational companies headquartered in America view China’s emerging middle class as the world’s largest market for their products. The firm’s future growth relies as much on China as it does on how the automaker responds to emerging disruptive technologies such as electric and autonomous vehicles, and changing patterns of car ownership and use that will ultimately force the modification of its current business model.

Multinationals are concerned that the tariffs will cause the Chinese government to retaliate by imposing bureaucratic rules and regulations that could cause them to lose market share. China used this approach to roll back Japanese automakers’ market share during a dispute with Japan over contested islands in the East China Sea.

When China was violating the World Trade Organization rules on subsides for wind turbines, General Electric and other firms that were in the business were reluctant to bring a dispute to the WTO for fear of Chinese retaliation. It was the United Steel Workers who ultimately brought it to the WTO.

It is hard for multinational corporations to resist the temptation to placate the Chinese. China doesn’t have to send lobbyists to walk the halls of Congress, they just have the multinationals do what they want.

It is implausible to argue that China does not engaged in unfair trade practices. China is a one-party communist dictatorship. It is not bound by the political constraints of a democratic government with a constitution that imposes presidential term limits and secures the rights of free speech and association.

This political structure enables China to promote state subsidized industries such as steel, aluminum, and solar panels that have flooded global markets, depressed prices, and shut down hundreds of manufacturing plants, all in violation of World Trade Organization rules. Along with currency manipulation and stealing intellectual property, China’s actions amount to a thumb on the scale.

“Free” trade is a concept that works in classrooms insulated from the harsh realities of unfair practices and policies. They ignore predatory practices by foreign governments who view trade as a competition between nations and play dirty to grab a competitive advantage for their industries.

Like that of multinational corporations, China’s position on trade will be based on maximizing their own interest

Originally Published: July 14, 2018