China’s power over US interest rates

Posted on by j.giglio

While the Greek debt crisis and the Iran nuclear deal are all the buzz in the media, you may have noticed a major selloff on the Shanghai Stock Exchange over the last several weeks. There are global implications when the stock market of the world’s second largest economy is out of control, and the impact could be felt right here in the U.S.

China is a country of superlatives. Its population of more than 1.3 billion is larger than that of any other country. Its foreign reserves are about $4 trillion. The Chinese government owns $1.27 trillion in United States bonds.

As recently as the early 1990s, China was a minnow on the global trading stage, now it is the world’s largest exporter. It has helped lift hundreds of millions of citizens out of poverty and its per capita GDP has more than tripled since 1980.

Now that China has established itself as an economic powerhouse fueled by rapid growth, its foreign policy is becoming increasingly aggressive. It is asserting territorial claims over much ofthe South China Sea and their cyber-attacks on both business and government networks in the United States are creating a potential bipolar global rivalry with America just as the Cold War with the Soviet Union did.

China has evolved a system of state capitalism since the government began to introduce some market forces into the economy in the late 1970s. But the government is still the dominant economic actor despite all of President Xi Jinping’s rosy rhetoric about allowing markets forces to play a decisive role in allocating key resources and investment decisions.

The last two months have felt like a rollercoaster for the estimated 90 million retail investors in the Chinese stock market. With the government hoping companies would raise capital in the stock exchanges rather than seeking bank loans, novice investors bought stocks on margin with huge amounts of borrowed money, helping to create a stock bubble and runaway bull market.

Over the last several weeks the Shanghai Stock Exchange was down 30 percent. While no single factor appeared to spark the selloff, analysts attribute it to fear of slowing economic growth and the worldwide slowdown in demand for Chinese exports.

Fearing the slide might cause the economy to fall off a cliff, it was met with heavy-handed intervention by Beijing. The government cut interest rates, suspended trading for 1,400 companies, banned short sales, prohibited major shareholders from selling shares to stop the selling stampede and halted new initial public offerings.

The United States had better hope China doesn’t decide to bail out its stock market and stimulate its economy by starting to cash in some of its United States bond holdings. If that happens, U.S. interest rates will rise whether the Federal Reserve likes it or not. Of course, Japan and OPEC may step up and buy the U.S. debt if interest rates rise and U.S. bonds become more attractive.

The Chinese government’s tight control of the stock markets is not exactly consistent with allowing market forces to allocate financial resources. It’s unclear whether a government-dominated economy can have a free stock market.

International Monetary Fund chief Christine Lagarde recently said that, “China is still learning how stock markets work.” And that learning curve could have a big impact here on the other side of the world.

Originally Published: August 8, 2015

America’s own Greece- Puerto Rico

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While much attention has been focused on the Greek drama, out-of-control debt is rearing its ugly head closer to home. The small island of Puerto Rico is in a bad way; the lyrics may be different but the melody is the same.

The governor of Puerto Rico dropped the bombshell last month that there is no way the island can pay its $72 billion in public debt. He pledged to begin developing a debt restructuring plan.

Since the financial meltdown of 2008, debt is like a canker spreading across the globe. The Greek analogy may be overused, but in one respect it is relevant. Greece and Puerto Rico are among many governments with too much debt and not enough economic growth to generate the tax revenues needed to cover it.

Short of a federal bailout, the island will be unable to repay its debt between now and the Second Coming. To paraphrase Margaret Thatcher: “Puerto Rico has run out of other people’s money”.

Puerto Rico is by far the most indebted American territory or state, owing $20,400 per capita. Since 2005, the island’s economy has shrunk by about 10 percent. Its unemployment rate is above 12 percent; more than double the national average. Since government benefits are more lucrative than a minimum wage job, just 40 percent of the adult population is working or looking for work. The U.S. labor participation rate is 63 percent.

Moreover, high labor costs have proven onerous for many businesses. Generous overtime provisions, excessive paid vacation benefits and job security regulations that are more costly than on the mainland all magnify employment costs and kill the demand for labor. The island’s population has also declined from 3.8 to 3.5 million since 2005 as Puerto Ricans leave for Florida and other parts of the U.S.

Until 2006, Puerto Rico’s economy was kept afloat by tax incentives for American pharmaceutical, textile, electronic and other firms that manufactured there. When the tax breaks disappeared in 2006, it contributed to the loss of 80,000 jobs. Puerto Rico’s economy has been in free fall ever since. The weak economy drives the middle class to the U.S., the shrinking population results in a smaller tax base and the beat goes on.

Puerto Rico’s bonds, unlike those of states or municipalities, are exempt from federal, state, or municipal taxes everywhere in the United States. Thanks to this competitive advantage, they were quite attractive to bond funds and investors in the highest tax brackets. More than 180 municipal bond funds have at least 5 percent of their portfolios in Puerto Rican bonds. Many hedge funds and distressed debt buyers stepped in to buy Puerto Rico’s bonds at deep discounts as the island’s economy worsened and its credit rating dropped below investment grade in early 2014.

Unlike municipalities, states and Puerto Rico are barred from seeking bankruptcy protection. The Governor has appealed to Washington to change the law so the island can seek bankruptcy protection, buy time to restructure debts and get its fiscal house in order.

Chapter 9 of the bankruptcy code allows a company or municipality to get new financing from markets while continuing to function as debts are restructured or written down. The importance of orderly debt restructuring was in evidence during the recent bankruptcy process that helped Detroit to restructure its $18 billion in debt.

Without allowing Puerto Rico access to the partial remedy of bankruptcy, the island has no chance of pulling out of its death spiral. Like Greece, Puerto Rico is stuck in a vicious cycle and badly needs structural reforms to set the economy on a sustainable path. The challenge is to grow the economy while at the same time fixing its public finances.

There is one lesson to be learned from Greece: Expect Puerto Rico’s fiscal crisis to get worse if debt restructuring and the implementation of reforms to make the island economically competitive are delayed.

Originally Published: August 1, 2015

Greece’s failed economy should be lesson for U.S.

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Since the European Union (EU) was created, no member has skated as close to insolvency as Greece. The country teeters on the brink once again, drowning in debt. The crisis confronts the EU with its worst dilemma since the creation of the euro.

The Greek crisis also holds important lessons for the United States. We have our own debt problems, with the ratio of public debt to GDP climbing 40 percentage points to 105 percent since 2008. It would be far better to get our fiscal house in order and make structural reforms today, when there’s time to craft trade-offs rather than under duress when creditors are in danger of losing faith.

The immediate causes of the Greek crisis are clear. In 1992, members of the European Commission signed the Maastricht treaty which formed a more comprehensive EU, including a common currency . The Euro was launched in 1999.

Greece didn’t initially meet the fiscal criteria for joining the currency union. But in May 2000, the European Commission declared that the Greek fiscal deficit, including interest, was only 1.6 percent of GDP, inflation was only 2 percent; and the country met all the Maastricht requirements except for its government debt, a shortcoming that was hardly unique among member states.

Greece joined the euro zone in 2001 and when the markets opened, yields on Greek bonds fell to an all­ time low. The newfound perception of Greek debt as safe could most likely be attributed to investors believing that, by joining the euro zone, Greece had acquired an implicit European guarantee on its debt.

This enabled Greece to borrow money at very cheap interest rates. It borrowed plenty and embarked on an expansionary fiscal policy. This rapid growth in borrowing and spending was similar to the cheap credit that fueled the American housing bubble. One symbol of Greek extravagance was the 2004 Olympic Games, which cost almost three times the original estimate.

In the wake of the 2008 global financial crisis, the Greek economy slowed as tourism and shipping suffered from the decline in global trade. After a deep and prolonged recession, the economy has contracted by more than one quarter and unemployment now exceeds 25 percent. Today Greece’s debt is 180 percent of its GDP and will never be repaid without generating tax revenue from major economic growth.

To make matters worse, the Greek government misled the international community about its debt. When a new government took power in 2009, it announced that the deficit that has been projected to be around 5 percent would actually be about 12.7 percent.

Greece had been understating its deficits for years, raising alarms about the integrity of the country’s finances. The previous government had apparently been cooking the books, which shattered any faith that international investors might have had in the Greek economy and government.

Suddenly Greece was shut out of the financial markets. By the spring of 2010, it was veering toward bankruptcy. Two of the three international credit rating agencies cut ratings on Greek bonds to junk status and warned that further downgrades were likely.

The International Monetary Fund, European Central Bank, and European Commission issued the first of two bailouts for Greece, which would eventually total about 240 billion euros ($264 billion). Now, Greece is back in the soup and needs another $86 billion euros ($94 billion).

The lenders extended the bailout package in exchange for the Greek government agreeing to implement deep budget cuts, steep tax increases, and labor and pension reforms to make Greece a more attractive place to do business. But many believe these austerity measures alone will only quicken the shrinking of the Greek economy without providing debt relief.

If the United States is to avoid being in similar straits someday, we must learn some important lessons about borrowing to consume, living beyond our means and failing to invest in the productive capacity of our economy.
 

Originally Published: July 25, 2015

Reasons so many politicians don’t tell the truth

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More than a dozen Republicans and a handful of Democrats have announced they are running for their party’s 2016 presidential nomination. The campaign will flood the airwaves with grand promises that ought to be taken with a large dose of salt. Americans should have learned by now that telling the truth is a liability in politics. Perhaps one reason truth is a liability is that, to paraphrase T.S. Eliot, Americans cannot bear too much reality.

The candidates will talk endlessly about a long list of profound problems facing the country. They will remind everyone that until quite recently, the U.S. was widely regarded as an irresistible juggernaut, dominating the global landscape and that it must continue to lead in a world it has helped to make more dangerous. They will simplify the complex demands of pressing, interconnected problems as if each can be solved simultaneously despite constrained resources and the need to engage in trade-offs.

But turning their promises into reality will require something that has been sorely missing in recent years: a strategy.

Leadership is required to make hard choices in a systemic, coordinated, considered manner. Everyone’s wants and needs can never be satisfied, regardless of the rosy campaign rhetoric. Some things are more important than others, even though politicians are reluctant to be explicit. An overarching strategy can identify and prioritize what is important.

The American people will decide who among these candidates has the shortest learning curve and best grasps the challenges facing the country as it comes to terms with new economic, social, and geo­ political realities such as the erosion in U.S. economic dominance and increasing global economic parity. Sure, some fraying at the edges of America’s economic hegemony was to be expected since it spent much treasure in planting the seeds of market capitalism as part of the fight against communism. Is it any wonder that others are catching up?

America’s domestic and foreign issues are tightly connected. For example, a weak economy leaves America in an appreciably weaker position to pursue foreign policy goals and keep its citizens secure. The voters must answer a fundamental question: who is capable of crafting the kind of overarching strategy that has been missing as America have stumbled from one crisis to the next?

Anyone running an enterprise knows that strategy matters. At its core, strategy is about creating and exploiting competitive advantage and adapting to the external environment; the ability to do something the competition cannot do based on your unique set of resources and strengths. How will these candidates make good on their promises and use America’s strengths to capitalize on external opportunities, while mitigating the threats and minimizing weaknesses in an increasingly competitive, dangerous, complicated and fluid global environment?

The good news is that America has plenty of strengths to leverage. Consider it is the world’s largest exporter of food; it has a per capita GDP over five times that of China; it has 17 of the world’s top 20 research universities; it has robust capital markets; and an entrepreneurial culture that excels in the kind of technological innovation that has made it possible to produce enough energy to be on its way to self­ sufficiency. Also, America has more favorable demographics than any of its most important economic competitors. And it is the economy that keeps American strong and powerful.

A grand strategy doesn’t have to be perfect; it just has to avoid being so wrong that it can’t be put right. Recent history teaches that it makes more sense to adapt strategy along the way than to try and control the dynamic global environment, only to stumble from crisis to crisis, stretching and wasting precious resources along the way.

Given the rough and tumble of global competition, it might also be wise to remember Mike Tyson’s observation: “Everyone has a plan until they get punched in the mouth.”

Originally Published: July 18, 2015

Obama free trade isn’t so free for US

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The fight for fast track legislation to allow President Obama to negotiate the secretive Trans-Pacific Partnership trade deal is over. After pulling out all the stops to push the deal through Congress, the President signed legislation giving him the authority to negotiate the trade agreement and put it before Congress for a straight up-or-down vote with no amendments allowed.

Americans are told that free trade is the best strategy for advancing global economic development, reducing poverty and achieving world peace. There is a lot to be said on behalf of the utopian dreams of free traders if you ladle enough frosting on the cake to compensate for its shortcomings. But if we want to help the American middle class -the stated goal of virtually  every politician -we would pursue different policy priorities.

To say that everyone benefits from free trade is misleading. Trade creates winners and losers and every American deserves to know the details buried in these deals. The benefits of the North American Free Trade Agreement and other trade deals have not been shared as broadly as promised.

Economists, businessmen and politicians, the most devoted acolytes, say technological advances lead to increased productivity, which means fewer workers are needed to get the job done. Yes, we have substituted capital for labor. But we have also substituted cheap offshore labor for American workers and the result is that Americans are losing jobs, their wages are stagnating and the middle class is coming apart at the seams.

How countries trade and whether they benefit from it are important questions. Starting with Adam Smith, economists have emphasized specialization and exchange as essential to increasing productivity and raising living standards.

The economic argument for free trade relies on the principle of comparative advantage developed by David Riccardo in 1817. His quaint theory, which built on Smith’s work, remains the cornerstone of free trade economics. So what in simple terms is comparative advantage?

Let’s assume that Lady Gaga, the world-famous entertainer, also happens to be a world- class typist. Rather than both entertaining and typing, she should specialize in entertaining, where her comparative advantage is greatest and she could maximize her income. This key insight is still endorsed today by the overwhelming majority  of economists.

Americans who lose their jobs are becoming less rich so people in foreign countries can be less poor. In the aggregate, people are better off, but domestic workers bear the cost. It should be clear by now that on the home front, free trade contributes to rising inequality, wage stagnation, and lost jobs .

The gains from trade are often widely dispersed, while the losses are concentrated. The extent to which offshore outsourcing is responsible for some of our current labor market woes has become highly contentious in recent years.

Perhaps it is time to adopt a national strategy that can make the American economy grow fast enough to produce decent jobs for every member of the American family who wants to work. How about if we start by investing in our broken infrastructure so it can generate economic growth instead of hamstringing it, and educating our children so they become world leaders in something besides sports?

Then we just might become internationally competitive again, and restore our economy to full employment while we’re at it

originally published: July 11, 2015

US must confront the new realities

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The 21st century has witnessed the death of the old world economic order and the birth of a new one. America remains the world’s military superpower but Brazil, Russia, India, China and others are challenging our economic pre-eminence.

The parade of 2016 presidential candidates will offer short-form solutions unconstrained by resource limitations. They will blame others and predict impending doom if they are not elected. And the political rhetoric will surely be accompanied by nostalgia for the golden economic age of the decades that followed World War II.

But America’s dominance in the decades following World War II was a function of unique circumstances. Europe lay in ruins in 1945. In the rest of the world, cities were shattered, economies devastated and people were starving. In the two years after the war, the vulnerability of countries to Soviet expansionism heightened the sense of crisis.

The postwar economy was quite successful by any standard. The American middle class enjoyed higher wages from the end of World War II until the mid-1970s. Real wages, after inflation, continually rose until 1973. But that was when the United States accounted for a disproportionate share of the global economy, nearly two-thirds of the world’s gold reserves, and the dollar was the world’s reserve currency.

Prosperity was the governing theme of the postwar era. During those years, gross domestic product grew 140 percent and real (inflation-adjusted) per capita income doubled. Living standards improved to the point where the large majority of Americans could describe themselves as middle class.

The United States made the economic recovery of Western Europe and Japan a national security priority. Two basic motives guided policy.

Primo, the United States was increasingly concerned about the ambitions of the Soviet Union that had imposed communist governments on Eastern Europe and their threat to Western democracies.

Secondo, the United States believed stable, prosperous, democratic governments would serve as ramparts against Soviet expansion and bind these countries to us.

To restore Europe’s economic infrastructure, President Harry S. Truman signed what became known as the Marshall Plan in April 1948. Over the next four years the plan delivered $13 billion to modernize industry in 16 European countries. This funding, which translates into $103 billion in today’s dollars, enabled Europe to rejuvenate its domestic markets as well as export its way to economic recovery. By contrast, Afghanistan still can’t stand on its own after receiving about $110 billion in assistance.

The Marshall Plan along with cutting American tariffs by 35 percent to accommodate and promote foreign imports, which provided Americans with cheap foreign goods, supported the development of stable democratic governments in Western Europe. It also provided markets for American goods and services, a grand example of vendor financing.

The United States also developed and helped finance a comprehensive economy recovery program for Japan. The war had devastated the country and terminated almost all of its foreign trade.

It should not be overlooked that it was with America’s help that the world became a more prosperous and competitive place, which has indeed put downward pressure on wages as footloose companies take advantage of the information technology revolution to disperse supply chains contributing to the erosion of middle-class wages in the face of low-cost competition.

If America wants to maintain its status as the world’s economic superpower, it is time to jettison the addiction to past achievements and focus on new realities: The world is experiencing dramatic technological change and we face economic competition from millions of people around the world who are happy to work for a fraction of Americans’ wages.

We must get serious about issues that are the very foundation of American exceptionalism such as combating economic inequality and declining living standards for the shrinking middle class. If we don’t, Americans will have to drastically adjust their expectations about growth and opportunity and step back from our special place in the world.

originally published: July 4, 2015

How to manage pension liability

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Americans today exist amid the tension between hope for better times and the scars of the worst financial crisis since the Great Depression. Among the fiscal challenges we face are states and cities that are struggling to keep up with their promise to set aside enough money to fund public employees ‘defined benefit pension plans as those governments also struggle to recover from the longest economic downturn since the 1930s.

As difficult as it will be to live up to their pension promises, governments must avoid the temptation to increase their contributions to pension systems by raising taxes on average Americans. This would only deepen the wounds of those hit hardest by the 2008 financial crisis and subsequent Great Recession.

While corporate America has shifted to defined contribution retirement plans, most state and local government employees still participate in defined benefit plans. There is plenty of evidence that these plans lack the funds to make good on the promises made to public employees, but little evidence that structural reforms are being implemented.

Defined benefit plans promise a set monthly payment during retirement. Major challenges of managing these plans include estimating future retiree obligations and making accurate assumptions about variables such as length of service, future salary levels, retiree mortality and expected return on pension fund assets

Investment returns are critical, since investment earnings account for the majority of public pension financing. Any shortfall must be made up by increasing contributions or reducing benefits. One common flaw in pension plan management is undervaluing liabilities by assuming unrealistic rates of returns on pension assets.

Even small changes in rates of return can have a significant effect on assets. A Congressional Budget Office study found that with an 8 percent projected rate of return, unfunded liabilities amounted to $700 billion for state and local pension plans. If the projected rate of return dropped to 5 percent, the unfunded liability more than tripled to $2.2 trillion.

Public pension funds generally assume a high rate of return. For example, many base pension contributions on an assumed 7.75 percent annual return on fund investments, which is difficult to achieve in a near-zero interest rate environment.

Since actual returns have been less than the assumed rates, unfunded liabilities have increased.

There is no consensus on how best to deal with this crisis and preserve the sustainability of public pension plans. Since the 2008 financial crisis, nearly all states have enacted changes to make their defined benefit pension plans more solvent. Common options for overhauling the plans range from increasing employee contributions to benefit reductions, including cost of living adjustments and increases in eligibility requirements such as increasing the retirement age for new employees.

A handful of states have passed reforms that replace defined benefit plans with some version of defined contribution plans for new employees. Others have borrowed money through the issuance of pension obligation bonds, floating tax-exempt bonds at low interest rates in the hope of investing the money in securities with higher yields.

Still other states have changed their asset allocation mix to generate higher returns, investing in alternative investments such as private equity, real estate, hedge funds, commodities and derivatives. But along with higher expected returns, these investment vehicles also bring greater risk.

As part of the struggle to deliver promised benefits, some pension plans have begun to focus on investment management fees. For example, the California Public Employees’ Retirement System, the country’s biggest state pension fund with about $300 billion of assets, announced plans earlier this year to cut back on the $1.6 billion in management fees it paid to Wall Street firms last year.

Tough choices are needed to get public pension funds plans back on track. But in the current economic environment, increasing governments’ contributions to the plans by raising taxes on average taxpayers who have already taken a beating in recent years should be avoided at all costs.

originally published: June 27, 2015

America’s $4.7 trillion pension liability problem

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The average American still feeling the effects of the Great Recession can be forgiven for not being riveted on the fact that state and local governments across the country are facing another fiscal crisis in the form of a public pension “tsunami” of epic proportions. Fixing the problem will require fundamental changes to public retirement plans.

According to Standard & Poor’s, 32 states are confronting budget shortfalls in fiscal 2015 and/or 2016. One contributor to those ills is growing unfunded public pension liabilities that now range as high as $4.7 trillion nationwide according to a report from State Budget Solutions, a non-profit organization that advocates for state budget reform. The unfunded liability works out to about $15,000 per person.

Public employees have been promised more than state and local governments can ever afford to pay and taxpayers are on the hook for the shortfalls. Many retirement plans are not setting aside enough money  to make good on their promises to current and retired state employees. Some, such as Detroit and Stockton, Calif., have already declared bankruptcy; countless public pension systems are in dire shape.

Moody’s dropped Chicago’s bond rating to junk status after the Illinois Supreme Court overturned state pension reforms. That means the Chicago taxpayers will be paying higher interest rates on the money the city borrows.

Last week the New Jersey Supreme Court ruled that the state did not have to increase its contribution to ensure the solvency of its ailing pension system. Politicians there found that shifting liabilities into the future by underfunding pensions was a convenient way to deliver on promises of low taxes and richer retirement benefits.

In Massachusetts, unfunded state and local pension and retiree health care liabilities total around $75 billion.

Most state and local governments in the United States offer defined-benefit pension plans to which both employees and employers contribute. The plans are supposed to provide public employees with guaranteed income, creating a financial liability for taxpayers when workers retire. Under this type of plan employees accrue the right to an annual benefit usually determined as a percentage of a worker’s average salary over the final years of employment multiplied by the worker’s years of service.

Under this arrangement, the employer is responsible for determining how much to set aside for employees’ retirement fund and how to invest it. Government (taxpayers) assumes the risk of coming up with the extra money if there is a shortfall. Government has several basic options in that case: they can raise taxes, make budget cuts, or default on their obligations. Given the magnitude of pension liabilities, some states may seek a federal bailout as was done for Wall Street and the automakers.

In contrast, the defined contribution plans that now prevail in the private and not-for-profit sectors empower employees to save for their own retirement and manage their own investments. A defined contribution plan transfers investment risk from the employer to the employee.

These are the simplest, most transparent, portable and straightforward pension plans. The employee and employer both contribute, the employee decides where to invest the funds and bears responsibility for investment risk. Upon retirement, there is often an opportunity to cash out with a lump sum payment or to select an annuity whereby payments are made to the retiree over a specified period.

However bad the problems are now, the pension situation is likely to get worse as politicians continue to “kick the can down the road,” the cliche that describes politicians’ response to virtually every fiscal crisis. One thing that would help would be to replace current defined benefit plans with a defined contribution plan for new public employees as Georgia, Michigan, Utah, and Oklahoma have done.

Such a move would minimize the risk of one major but often forgotten stakeholder: taxpayer.

originally published: June 20, 2015

Cost of being wrong about trade is paid by American workers

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President Obama, powerful business and government elites, special interests and reflexive free trade advocates are working hard to garner congressional support to consummate the ambitious and furtive 12- nation trade agreement known as the Trans-Pacific Partnership (TPP). This is a big deal; linking 40 percent of the world’s economy- so big that it has been negotiated in secret.

We are told that free trade means the unimpeded flow of goods, services, capital and labor across international markets. In this best of all free trade worlds, consumers get the lowest prices.

This is all well and good for American consumers, but what about the increased unemployment and reduced wages free trade also brings? Unless consumer prices have fallen by more than the average worker’s income in recent decades, this may not be such a great deal.

In the real world, critics say the TPP is more like managed trade than free trade. America’s trading partners engage in currency manipulation to make their exports cheaper and U.S. exports more expensive than if exchange rates were determined by market forces. Consequently, some lawmakers worry that currency manipulation by trading partners is an important cause of the large and growing U.S. trade deficit, and will further injure domestic industries and workers. For them, many of the arguments for free trade are just globaloney.

Japan, a member of the proposed TPP deal, is by its own admission a currency manipulator. Its leaders want a relatively low exchange rate for its currency, the yen, because it makes their goods and services cheaper in the United States. Automakers and other manufacturers believe such currency manipulation constrains sales of American products.

Here is a simple example: The Japanese central bank prints more yen and then buys assets denominated in dollars. This increases demand for the dollar, which increases its value while at the same time driving down the value of the yen. By manipulating their currency Japan is subsidizing its exports by making them cheaper and placing a hidden tariff on imports. The U.S.-Japan goods trade deficit reached $78.3 billion in 2013, costing U.S. workers thousands of jobs. The U.S. is acquiescing in outsourcing the value of the dollar to a trading partner who wants to win jobs and gain higher incomes for their people.

On the other hand, there are those who see the trade deficit in a positive light as it provides foreigners with dollars that they recycle by bingeing on United States Treasury debt, thus financing federal budget deficits.

Opponents of the current deal complain that, among other things, it does not address currency manipulation, which subsidizes Japan’s exports and taxes American ones. A bipartisan amendment that would have cracked down on countries that manipulate their currencies was offered by Senator Rob Portman, R-Ohio, and Senator Debbie Stabenow, D-Michigan, during the Senate consideration of the TPP, but it failed by a narrow 51-48 vote.

The Obama administration has done a good job of sealing itself off from any discordant feedback, threatening to veto the bill if the amendment passed.

Wages for American workers have been stagnant for decades and the U.S. economy has kept going by substituting growth in consumer debt for growth in consumer income.

The essential unanswered question about TPP is whether the aggregate benefits of lower prices to American consumers that leave them allegedly with more discretionary income offset job losses for the American worker and displacement of American industries.

It’s easy to be wrong about the answer to this question when the costs of being wrong are paid by others – namely the American worker.

originally published: June 13,2015

 

Laboring over Obama’s trade deal

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For those who came in late, President Obama has forged a rare alliance with Senate Majority Leader Mitch McConnell of Kentucky and congressional Republicans to push the Trans-Pacific Partnership (TPP), a proposed regional free trade agreement among the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The deal has been developed in secret so the American public is on the outside looking in. Based on what has been leaked, there are apparently 29 chapters in the TPP, but only five deal with traditional trade issues such as tariffs. The rest are about intellectual property, financial regulations, labor laws, and rules for health, safety and the environment.

Sen. McConnell said that: “By passing this legislation we can show we’re serious about advancing new opportunities for bigger American paychecks, better jobs, and a strong economy.” But in fact it is the TPP’ s labor law provisions that may be particularly problematic for American workers and, by extension, our country’s economy.

While many people believe free trade is generally a fine idea, some have escaped its gravitational pull. Opposition to this deal comes primarily from the president’s own party, many of whom contend that “better American jobs” is a fatigued phrase with a truth quotient somewhere near zero.

Nothing will blind them to the fact that the United States has run consistently high trade deficits for more than three decades, ranging from of $35.1 billion in 1983 to $505.5 billion in 2014. The cumulative deficit over this period is in the trillions, even as American wages have been flat or declining. This is the trading profile of an 18th century British colony.

They argue that growing trade deficits have been a drag on economic growth; that putting the United States in direct competition with low-wage countries has slowed job creation and put downward pressure on wages.

According to the office of the United States Trade Representative, “The president has always made clear that he will only support trade agreements that include fully enforceable labor standards, which we are pursuing in TPP”.

But Massachusetts Sen. Elizabeth Warren is among those who believe this is utter nonsense. She has forcefully raised the question of whether what is proposed in the agreement is in fact achievable. Her IS­ page report, “Broken Promises,” reviews labor standards over two decades of free trade agreements and documents in detail the use of child and forced labor, intimidation of union activists, restrictions on free speech and assembly, discrimination against women and other deplorable working conditions. The report plainly states that: “The United States does not enforce the labor protections in its trade agreements.”

A 2014 Government Accounting Office report also detailed the failure to enforce labor provisions in free trade agreements. Based on these reports, assurances that it will be different this time are hardly persuasive.

This reality cannot be ignored. Labor abuses are not waiting to be found, like eggs at an Easter egg hunt. Who is going to police labor standards in other TPP countries, especially those with weak judicial systems? Are the “best and the brightest” in the federal government going to ensure workplace compliance in foreign countries when they can’t even control the number of undocumented immigrants who overstay their visas here in the United States?

The TPP’s Investor-State Dispute Settlement mechanism enables foreign corporations to sue governments for lost profits using special tribunals of private attorneys in secretive proceedings, yet workers don’t have a comparable tool to address labor standard violations.

Free trade only works when the exchange is an equal one, when all the players operate under the same rules, including labor policies. If they don’t, American workers face unfair competition, and domestic jobs and industries are sacrificed to trading partners with pools of exploitable labor.

originally published: June 6, 2015