Thursday, September 30, 2021

A brilliant essay by Dean Baker on a progressive path with China


The U.S. and China: A Productive Path Forward

The Biden administration, with the overwhelming support of the foreign policy establishment, seems determined to start a new Cold War with China. A new Cold War is likely to be bad news from the standpoint of inequality, world peace, and the climate crisis facing the planet. As with the last Cold War, it is likely to be driven by misunderstandings and deliberate misinformation. With so much at stake, it is important to head off a new Cold War, most importantly by correcting many misconceptions and laying out an alternative more productive path for future relations with China.

I will briefly go through the history of the economic relationship between China and the U.S. in the last two decades. Then I will describe the implications for inequality for the path Biden seems to be pursuing. The last part outlines an alternative more cooperative path for relations with China.

The Trade Deficit with China: Donald Trump’s Phony War

China was admitted to the World Trade Organization in 2000 after a major battle in Congress over granting the country Permanent Normal Trading Relations (PNTR), which was necessary for its admission. Much of the opposition came from the labor movement which argued that opening trade to China would lead a large expansion of the trade deficit, costing manufacturing jobs. Since manufacturing had historically been a source of high-paying jobs for workers without college degrees, this would put downward pressure on the pay of non-college educated workers more generally.

The mainstream of the economic profession ridiculed the idea that expanding trade with China could lead to any substantial job loss. For example, Gary Hufbauer, a prominent trade economist with the Peterson Institute for International Economics, dismissed the “extravagant claims” from the Economic Policy Institute (my former employer) that PNTR for China could lead to a loss of 813,000 jobs.

“The Economic Policy Institute ( has advanced the most extravagant claims about the US bilateral trade deficit with China. Based on a count of 13,000 jobs lost per billion dollars of manufactured imports, the EPI asserts that current trade with China already costs the United States 880,000 high-wage manufacturing jobs. Then, extrapolating the US ITC’s estimate of the one-time percentage import and export trade changes for 10 years, the EPI asserts another 817,000 US jobs will be eliminated through PNTR and Chinese membership in the WTO.”

This dismissive attitude was common in the profession at the time. PNTR passed by a relatively narrow 237 to 197 vote in the House (the Senate margin was much wider). The near unanimous support from the mainstream of the economic profession was almost certainly an important factor in determining the outcome of this vote.

Contrary to the predictions of Hufbauer and other mainstream economists, the trade deficit in goods with China did in fact rise rapidly, growingfrom $68.7 in 1999 to $418.2 billion in 2018.[1]The story behind this increase is not complicated. In simple trade stories, when a country is running a large trade surplus with another country, we expect that the value of the currency of the surplus country will rise relative to the value of the deficit country. This makes the items produced in the surplus country relatively more expensive in international markets, while making the items produced in the deficit country relatively cheaper.

That sort of currency adjustment did not happen for the simple reason that China’s government did not allow it to happen. China’s central bank bought up several trillion dollars of U.S. government bonds and other dollar assets in the first decade of the century.[2]This propped up the dollar, thereby preventing the sort of currency adjustment that we might expect between a country running a large trade deficit and a country running a large surplus.

At the time, many other developing countries also effectively tied their currencies to the renminbi to maintain their competitive position relative to China. When China raised the value of its currency against the dollar, countries like Vietnam and Thailand also raised the value of their currency. This meant that China’s decision to deliberately maintain an undervalued currency meant that other countries also under-valued their currency relative to the dollar, leading to higher trade deficits with these countries as well.

The explosion in the trade deficit let to a sharp drop in manufacturing employment between 2000 and 2007, before the start of the Great Recession. The country lost more than 3.5 million manufacturing jobs between December of 1999 and December of 2007, the official start date of the Great Recession. (It lost another 2.3 million between December 2007 and February 2010, the employment trough of the Recession.)[3]

While manufacturing had been falling as a share of total employment since the start of the 1970s, actual levels of employment had changed little, apart from cyclical fluctuations, until the 2000s. From December of 1970 to December of 1999 the sector lost less than 30,000 jobs. This is shown in Figure 1. By contrast, the job loss associated with the rise in the trade deficit from 1999 to 2007 amounted to more than 20 percent of total employment in the sector. Autor, Dorn, and Hansen (2016) put the job loss associated with trade with China alone at 2.0 million.

The massive job loss in manufacturing had the predictable effect on wages. Many of the higher paying union jobs were the ones that disappeared as the economy became more open to trade in manufactured goods. In other cases, workers were forced to take pay cuts to keep their jobs. The extent to which manufacturing offered higher paying jobs for workers (mostly male workers) without college degrees, declined substantially over this period, as both the number of jobs and wage premium fell sharply.

Figure 2 shows the real average hourly wage for production and non-supervisory workers in the private sector as a whole and for the manufacturing sector. As can be seen, workers in manufacturing enjoyed a 2.7 percent advantage by this measure in 1999. This imbalance flipped as the trade deficit expanded. By 2020, the average hourly wage for production and non-supervisory workers in manufacturing was 7.6 percent below the average for the private sector as a whole.

These numbers measure only money wages and ignore benefits, which still tend to be higher in manufacturing than elsewhere in the economy. However, even when these benefits are factored in, we have almost certainly a sharp decline in the manufacturing premium. In an analysis that attempted to factor in benefits, Mishel(2018) found a 7.8 percent straight wage premium for non-college educated workers for the years 2010 to 2016, in an analysis that controlled for age, race, and gender, and other factors. That compares to a premium for non-college educated workers of 13.1 percent in the 1980s.

The analysis found that differences in non-wage compensation added 2.6 percentage points to the manufacturing wage premium for all workers, but the compensation differential may be less for non-college educated workers, since they are less likely to get health care coverage and retirement benefits. Since the ratio of money wages in manufacturing to the rest of the economy has continued to fall sharply in the years since this analysis, the manufacturing wage premium would almost certainly be far less in 2021.

There is one other important point on the quality of manufacturing jobs that is worth noting here. The unionization rates in manufacturing have plummeted over this period. In 2000, 14.9 percent of workers in manufacturing were union members compared to 9.0 percent for the private sector as a whole. The percent of union members in manufacturing had fallen to just 8.5 percent in 2020, only slightly higher than the 6.3 percent average for the private sector as a whole.

Also, the new jobs that have been created in manufacturing since the trough of the Great Recession have overwhelmingly not been union jobs. Until the pandemic hit in March of 2020, we had added back more than 1.6 million manufacturing jobs from the employment trough of the Great Recession in 2010. Nonetheless, the number of union members in manufacturing had fallen by almost 900,000.

This history is important because it shows that trade in general, and with China in particular, did have a very negative impact on the labor market prospects for a large segment of the working class. However, there are two important qualifications to the simple story that Donald Trump and his supporters are inclined to tell.

First, this is not a story of China winning and the U.S. losing. The trade deficit was not about China doing evil things behind the back of the political leadership in the United States. The trade deficit was a story of both U.S. manufacturers outsourcing to take advantage of low-cost labor in China and major retailers like Walmart setting up low cost supply chains as a way to undercut their competition.

The manufacturers that were able to get cheap labor from China were big gainers from the trade deficit, as were Walmart and other major retailers. Also, workers who were not directly affected by the loss of manufacturing jobs, such as doctors, lawyers, and other highly paid professionals, benefitted from lower cost manufactured goods, as well as lower cost services in many areas due to downward pressure on the wages of less-educated workers.

For this reason, it is wrong to treat this period as a story of China winning its trade battles with the United States. China gained from its trade with the United States, but so did the top end of the income distribution in the United States.

The other important qualification is that this history is not reversible. The manufacturing premium for less-educated workers was largely a story of its extraordinary rates of unionization. Now that the sector does not have an especially high rate of unionization, the premium has been largely eliminated. And, as we have added back jobs in manufacturing, they have not been union jobs.

For these reasons, there is little reason to prefer jobs in manufacturing over jobs in any other sector of the economy. In the past, the fact that manufacturing jobs were more likely to be high-paying union jobs was a good reason to focus on preserving them and seeking to make the manufacturing sector a larger share of the economy. This is no longer true.

The Get Tough with China Approach: Protectionism for the Highly Paid

The Biden administration has made clear that it intends to block imports from China in many high-tech sectors. While some restrictions can be justified as necessary to protect military technologies, it is clear that these protections are mainly for economic reasons.

For example, the Biden administration pushed through a billthat would provide more than $50 billion in subsidies to the semi-conductor industry over the next five years. It also is planning a programfor pandemic preparedness would spend more than $40 billion over the next decade developing vaccines, treatments, and tests that could be used in future pandemics. It has also left in place a wide variety of tariffs on Chinese imports, including an 18 percent tariff on solar panels, which is not helping the shift away from fossil fuels.

The subsidies for promoting technology in certain sectors are not necessarily bad economic policy. The U.S. economy has benefitted enormously from publicly supported research and development in a wide range of areas including pharmaceuticals, aerospace, agriculture, and computers and software. There is likely to be a large dividend from future spending on research and development.

The key issue here is who will have control over the products developed with this money and how it is being promoted as a competition with China. At this point, there are not clear guidelines on how the Biden administration envisions ownership rights to the publicly funded R&D he is proposing, but there is little reason to believe that he envisions moving away from the current pattern. As it stands, the government puts up the funds for much of the most important, and risky, research, and then private corporations are able to benefit by claiming ownership of the finished product.

This sort of story can be seen most clearly in the case of Moderna and the mRNA vaccine it developed last year. The Trump administration, through Operation Warp Speed, paid Moderna over $400 million to cover the cost of developing a vaccine and its initial Phase 1 and 2 trials. It then paid over $450 million to pay for the larger Phase 3 trials, in effect fully covering Moderna’s cost for developing a vaccine and bringing it through the FDA’s approval process.

It was necessary for Moderna to do years of research so that it was in a position to quickly develop a mRNA vaccine, but even here the government played a very important role. Much of the funding for the discovery and development of mRNA technology came from the National Institutes of Health. Without its spending on the development of this technology, it is almost inconceivable that any private company would have been in a position to develop a mRNA vaccine against the coronavirus.

In spite of this massive contribution from the public sector, Moderna has complete control over its vaccine and can charge whatever price it wants. It is likely to end up with more than $20 billion in profit from sales of its coronavirus vaccine. According to Forbes, the vaccine had made at least three Moderna billionaires by the middle of 2021, with the company’s CEO, Stephane Bancel, leading the way with an increase in his wealth of $4.3 billion. The company’s market capitalization was almost $180 billion on September 22, up from just over $7 billion before the start of the pandemic.

If this is the model for the way public investments in R&D are treated going forward, then we can expect to see many more millionaires and billionaires created as a result of Biden’s spending. Needless to say, there will be no shortage of economists and other policy types insisting that these extremes of wealth are just the inevitable result of technology, just as there was no shortage of policy types anxious to blame the huge loss of manufacturing jobs in the first decade of this century on technology.

There will be some number of manufacturing jobs created as a result of this initiative. Someone has to manufacture the semi-conductors, vaccines, and other products developed with this funding and there is probably a greater likelihood that these factories will be located in the United States as a result of Biden’s policies.

However, this is not much consolation. With manufacturing no longer providing a substantial wage premium for workers without college degrees, there is no more reason to value manufacturing jobs in these sectors than jobs in warehouses, distribution centers, or health care. With the right institutional support, any job can be a high-paying job, there is no reason to especially prize the manufacturing jobs that might be created through this initiative.

In short, this is yet another path for furthering the upward redistribution we have been seeing for the last four decades. It is ironic that our policy elites have managed to flip 180 degrees on their core economic principles to continue the drive for upward redistribution. In the decade from 2000 to 2010, when “free trade” with China cost millions of manufacturing jobs and put downward pressure on the pay of less-educated workers more generally, free trade was a sacred mantra in elite policy circles.

Now that China is in a situation to pose a real threat in our most advanced industries, costing jobs of engineers, biochemists, and other highly educated workers, our elites are gung ho on a protectionist agenda to confront China. And, we are supposed to believe that it is just a coincidence that the main winners on both sides of this flip are those at the top of the income ladder.

It is also important to note that motivating this agenda as a way to confront China inevitably poses risks. As the U.S. seeks to shore up an anti-China economic and military front with its allies in Europe and Asia, there will always be a risk that mistakes and mis-judgements can turn a Cold War into an actual war.

While rational people would recognize that any full-scale war between China and the United States would be disastrous for both countries and the world, political actors can get forced into positions from which it is difficult to backdown while preserving their careers. The greater the background level of hostility between the two countries, the greater the likelihood that miscalculations can lead to actual war.

A Better Path: Cooperation in Developing Technologies to Save the Planet

We can choose a better path in dealing with China going forward. Instead of wasting resources in military competition, and bottling up technologies in trying to gain economic advantage, we can look to have a path where we try to maximize cooperation between the superpowers, bringing in most of the rest of the world in the process.

The idea of sharing knowledge, rather than locking it down for private profit with patent, copyrights, and related protections, goes in the exact opposite direction of public policy for the last four decades. Nonetheless, it is important to get it on the table as pole in public debate. People have to recognize that there is an alternative to the path that Biden appears set on taking the country, which would have very different implications for both our dealings with China and also inequality in the United States.

The cooperative alternative would involve sharing technology, especially in areas where the world has a clear shared interest, such as limiting the damage from global warming and containing the pandemic, a well as health care more generally. The basic logic would be that the United States, China, and other countries we pull into the system would commit to spend a certain amount of money to supporting research in the designated areas based on their GDP and per capita income.

For example, we could require that a rich country like the United States would contribute 1.0 percent of its GDP to research and development, or roughly $210 billion a year, based on 2021 GDP. Middle income countries like China might be expected to contribute a smaller share of their GDP, say 0.5 percent. For China, that would come to $130 billion a year (on a purchasing power parity basis) based on its 2021 GDP. Poorer countries might be expected to make a token contribution, or pay nothing at all.

Obviously, it would be necessary to negotiate the exact formulas. There would also need to be some mechanism for dealing with countries that refused to participate, perhaps applying something like patent monopolies to countries that remained outside the network. (I outline some of the issues that would have to be dealt with hereand in chapter 5 of Rigged [it’s free].)

There are issues that would be difficult to hammer out in trying to work out arrangements for sharing along these lines, but the process of synchronizing rules on intellectual products is also very difficult now. The Trans-Pacific Partnership almost certainly would have been finalized at least two years sooner if not for the battles over the intellectual property rules that would be included in the pact.

The potential gains from this sort of sharing of knowledge and technology are enormous. Instead of looking to lock up new discoveries behind patent monopolies, a condition of getting funding should be that all results are posted on the web as quickly as possible, so that researchers around the world could benefit. The Bermuda Principles, of posting results on the web nightly, which the scientists working on the human genome project adopted, would be a useful model.

The idea that science advances most rapidly when it is open should not seem far-fetched. We benefit from having as many eyes as possible on new discoveries and innovations so that researchers can build on successes and uncover flaws.

We got some great examples for this view in the pandemic. Pfizer reportedin February that it had found a way to alter its production process that cut it production time by 50 percent.  It also discovered that its vaccine did not have to be super-frozen at minus 94 degrees Fahrenheit, but instead could be kept in a normal freezer for up to two weeks. It also discovered in January that its standard vile contained six vaccine doses, not the five that it had expected, causing one sixth of its vaccines to be thrown out at a time when they were in very short supply.

Imagine Pfizer had open-sourced its whole production process. These discoveries would almost certainly have come considerably sooner, allowing many more people to be vaccinated. There are undoubtedly other efficiencies that could be discovered both about Pfizer’s vaccine and the vaccines produced by other manufacturers, if engineers around the world could review their production methods.

Of course, the biggest gain from having open-sourced the technology would have been that manufacturers around the world would have been able to produce all the vaccines. We likely could have had enough vaccines for the whole world by the first half of 2021. This could have saved millions of lives, and prevented hundreds of millions of infections.

This logic applies to health care more generally. Why would we not want every researcher in the world to have full access to the latest developments in the areas where they work. Are we worried that a researcher in China or Turkey might develop an effective treatment for a particular cancer or liver disease before researchers in the United States? There doesn’t seem an obvious downside to going this route.

The same applies to climate technology. We should want researchers to be able to quickly build on each other’s innovation in wind and solar energy, as well as energy storage. Slowing global warming is a shared crisis. We should want to do everything possible to develop the best technology and to have it installed as widely as feasible.

There are other areas of research where cooperation may prove more difficult. For example, we may want to keep more control over communications technologies that could have military uses. But, at the very least, health care and climate are two major areas of research where both China and the U.S., as well as the rest of the world, can benefit from having shared and open research. And, if we can successfully implement a system of cooperative technology development in these two areas, we should be able to find other areas of the economy where we can adopt similar systems.

There also is an important potential side benefit to going this route. Back in the 1990s, when we were debating more open trade between the United States and China, many advocates of the trade path we took argued that China would become more liberal and democratic if it had a strong growing economy. The argument was essentially that there was link between capitalist economies and liberal democracies.

In retrospect, that argument has not held up very well. China has seen very strong growth for the last four decades. Its economy is more than five times as large as it was when it was admitted to the WTO in 2000.  Yet, China is no one’s image of a liberal democracy. It’s not even clear that it has become more open in the last two decades.

This history should make anyone cautious about making broad claims on political evolution in China as a result of its economic progress, but there is an important difference about the route outlined here. If China were to engage in large-scale exchanges of knowledge and research in health care, climate, and possibly other areas, it would mean that tens of thousands of their researchers were in regular contact with their counterparts in the United States and other liberal democracies.

Most of the actors in China’s manufacturing export boom in the first decade of this century were low-paid (by U.S. standards) and relatively uneducated workers in factories. In this story of collaborating in some of the most sophisticated areas of technology, the main actors are highly educated and relatively well-paid workers. They will be the parents, siblings, and children of the people holding positions of political power in the country’s government. It is reasonable to believe that they might have more influence in pushing for a more open and liberal society than poorly educated workers in a textile factory.

Again, anyone should be very cautious in making strong claims about how a particular economic policy will lead China to a path of liberal democracy. But it is reasonable to believe that having relatively privileged actors in its economy in regular contact with their counterparts in the West could have a positive impact on the country’s politics from the standpoint of promoting liberal democratic values.

There is one group that is likely to be a loser from going this path of cooperative technological development: the most highly paid scientists and engineers, as well as CEOs and shareholders of the companies that are directly affected. To be clear, under a system along the lines outlined here, there is every reason to believe that accomplished researchers would still be well-paid, with the most successful likely getting high six-figure or even seven figure salaries. There would still be plenty of profits available to companies that contract to do research in these areas, just as companies that contract to design weapon systems for the Pentagon can make very healthy profits.

However, we would probably not see the vast fortunes that many individuals and companies have earned based on their patent monopolies. For example, we would probably not see scientists earning multi-billion fortunes that the top executives at Moderna were able to pocket in the pandemic. We also would be less likely to see a company’s stock increase more than 2000 percent in a year and half, adding $170 billion to its market capitalization.

The smaller paychecks at the top, coupled with the elimination of all the waste associated with the patent system, will effectively mean higher paychecks at the middle and bottom. By my calculations, if we sold all prescription drugs in a free market, without patents or related protections, we would spend around $80 billion a year. That is a saving of $420 billion, or $3,000 per family, compared with the $500 billion a year that we now spend on drugs. That translates into a lot of additional money in the pockets of low- and middle- income people as a result of lower health care spending.

In short, going the route of cooperative development of technology with China is likely to not only reduce tensions between the world’s two super-powers, but can be a major factor in reversing the upward redistribution of the last four decades. It can very directly lead to less money going to those at the top end of the income distribution and increased real wages for those at the middle and the bottom.

Another Trade Policy for the Rich? We Won’t Get Fooled Again

In the 1990s and 2000s the leadership of both political parties pushed trade policies that were quite explicitly designed to redistribute income upward. They put U.S. manufacturing workers in direct competition with low-paid workers in China and other developing countries, while largely protecting the most highly educated workers.

The predicted and actual effect of these policies was to put downward pressure on the wages of manufacturing workers, as it cost millions of jobs in the sector. Since manufacturing had historically been a source of relatively well-paying jobs for workers without college degrees, the drop in pay and loss of jobs in this sector put downward pressure on the wages of non-college educated workers more generally.

As we move into a new decade, we are being promised a sharp turn to protectionist policies, with the protectionism most directly protecting some of the most highly paid and highly educated workers in the U.S. economy. As a side benefit, we are told that this protection will mean more manufacturing jobs, although the sector no longer provides a substantial wage premium over jobs in other sectors.

Our political elites were able to get their way in pushing their trade agenda in the 1990s and 2000s, with devastating consequence for millions of workers. The consequences of their new agenda could be even more devastating since it is not only a path designed to further the upward redistribution of income, but also a path designed to put us in continual conflict with the world’s other major superpower.

We were fortunate that the first Cold War never lead to direct conflict between the United States and the Soviet Union, although it did lead to proxy wars that killed millions and cost trillions. We should not go down the same path again.

[1]Many people have argued that the official bilateral trade figures overstate the actual deficit because much of the value-added in goods imported from China comes from other countries. The classic example is an Apple iPhone which might be assembled in China and then imported into the United States. Our trade figures would count the full value of the iPhone as an import from China.

While this does lead to an overstatement of the value of our imports from China, there is also an understatement for an analogous reason. When we import items from Japan, South Korea, or even Europe, it is likely that some of the value added came from China. It is likely that the overstatement from counting the full value of finished goods imported from China exceeds the understatement from not counting the value added in goods imported from third countries, it does not make sense to just count one source of bias in determining the size of the trade deficit.

[2]China’s buying of dollar assets has often been referred to as currency “manipulation.” This word implies that China’s actions were somehow undercover and secretive. In fact, China quite explicitly pegged its exchange rate to the dollar and openly intervened to support this peg. It would be more accurate to say that China “managed” its exchange rate.

[3]There was a bizarre argument in policy circles as to whether the massive loss of manufacturing jobs from 2000 to 2007 was due to trade or technology. This argument was always strange (how can a trade deficit – which is not caused by rapid growth – not imply fewer jobs in manufacturing?), but it has gotten even stranger over time. To believe that the massive job lost from 2000 to 2007 was due to technology, it would be necessary to believe that somehow technology didn’t cause job loss in manufacturing from 1970 to 2000, or in the years since 2010, but somehow in the years when we saw a rapid rise in the trade deficit, technology was causing large-scale job loss in manufacturing.

China’s Power Crunch Steals Macro Limelight

via Randy Shannon from

"Yet another growth shock."

That's how Goldman described China's worsening energy crunch on Tuesday.

You could also call it the latest blow to macro sentiment at a time of gathering headwinds.

In a new note, Hui Shan cut the bank's growth outlook for the world's second largest economy to 0% for Q3. That's a sequential projection. YoY, the Chinese economy likely expanded 4.8% this quarter, Goldman said. Their full-year projection is now 7.8%, down from 8.2% previously.

You can make this story as complicated or as simplistic as you like, but the bottom line is that between Beijing's efforts to meet environment targets, pandemic effects and a coal supply shortage, there's not enough power.

Factories are being compelled to curtail operations at a time when rampant supply chain disruptions are already upending the global economy. Mandates aimed at cutting electricity consumption will invariably weigh on growth in key provinces, and at the worst possible time.

Growth was already decelerating and between sub-50 prints on both the official and Caixin non-manufacturing PMIs and an extremely poor read on retail sales for August, it seems highly unlikely that the services sector is in a position to pick up the slack.

"It presumably was not the intention of policymakers to provoke a sharp tightening, at least when the [environmental] goals were initially formulated [but] the peculiar nature of the COVID shock has made the economy more energy-intensive, at least temporarily," Goldman said, adding that "the boom in exports has boosted energy-intensive manufacturing industries [while] efforts to reduce coal-fired related emissions and a reduction in coal imports have affected supply levels at least on the margin, contributing to a sharp increase in prices."

Apparently, the diplomatic spat with Australia is making the situation worse. "China stopped buying the highly energy-efficient Newcastle grade from Australia starting last year," Bloomberg noted.

Beijing's "zero tolerance" COVID policy already had macro watchers worried. Strict adherence to draconian containment measures led to two high-profile port disruptions over the spring and summer, testing the global shipping industry anew.

Ultimately, exports were undaunted but signs of "friction" are painfully easy to spot. Shipping rates have skyrocketed, for instance (figure below, from BofA).

This has some concerned ahead of the holiday shopping season in the West. The factory curbs are almost sure to make things worse.

Take Clark Feng, who spoke to Bloomberg Monday, for example. Feng "buys tents and furniture from Chinese manufacturers to sell overseas," the linked article explained, before noting that "electricity curbs in the eastern province of Zhejiang, where the company is based, have dealt another blow to businesses [while] fabric makers in the province that are suffering production halts have started to hike prices and postpone taking new overseas orders."

That short anecdote neatly encapsulates the multi-faceted problem as it's manifesting "on the ground," so to speak.

Nomura's Ting Lu, who last month characterized China's property crackdown as a kind of "Volcker moment," now sees the economy shrinking on a QoQ basis. "With market attention laser focused on Evergrande and Beijing's unprecedented curbs on the property sector, another major supply-side shock may have been underestimated or even missed," he wrote, in a new piece which contained the following useful recap:

In September 2020, President Xi Jinping announced that China would reach peak CO2 emissions before 2030 and carbon neutrality by 2060. After that, the State Council and several ministries set ambitious 2021 targets for cutting energy intensity and energy consumption. Enforcement is key, and the real game changer came in mid-August, when the National Development and Reform Commission (NDRC), China's state planner, announced that 20 mainland Chinese provinces failed to achieve their goals on cutting either energy consumption or energy intensity in H1 this year. These 20 provinces account for 70.2% of China's GDP and 73.5% of the secondary sector. News flow seems to suggest that these regions need to remedy this shortcoming over the remainder of this year, and some major cities in the economic powerhouses of Jiangsu and Zhejiang provinces have already rolled out draconian measures to suspend the operation of many factories.

And, so, factories are closing down, either because local governments are ordering them to or else because they don't have any power.

Nomura's YoY Q3 and Q4 GDP forecasts are now 4.7% and 3.0%, respectively, down from 5.1% and 4.4%. The bank's annual GDP growth projection for this year is 7.7%, a touch below Goldman's.

As the figure (on the left, above) shows, Nomura sees GDP growth of -0.2% QoQ in Q3. "Even with these cuts, we see more downside risk to our forecasts," the bank warned.

In addition to supply shocks associated with green measures, energy and soaring factory-gate inflation, Nomura reiterated (in the same report) that China also faces a trio of "major negative demand shocks." These are familiar. One is new COVID waves, another is a potential property meltdown and a third is a prospective deceleration in export growth.

Needless to say, the situation is fluid. All of this comes amid Xi's sweeping regulatory crackdown on everything from big-tech to ride-hailing to food delivery to actors' pay.

Goldman called uncertainty around Q4 "very large." "A lot of this comes down to the stance of both macro and regulatory policy," the bank remarked, citing the possibility that Beijing could take measures "to stabilize housing sector activity and stretch out the deleveraging in the property sector." It's also possible, Goldman said, that Xi could order a "temporary relaxation of regulatory pressures to meet energy use targets."

Who knows. What we do know is that this is yet another potentially gale-force macro headwind at a time when some developed market central banks, including the Fed, are keen to dial back stimulus.

On Tuesday, the PBoC's Yi Gang said the Chinese economy is expected to maintain a potential growth rate of between 5% and 6%. He also said central banks should avoid asset purchases as much as possible. QE, he remarked, could damage market functioning.

For their part, Nomura cautioned that this is no small matter. "The power-supply shock in the world's second-biggest economy and biggest manufacturer will ripple through and impact global markets," the same cited report warned.

"I believe global markets will feel the pinch of a shortage of supply from textiles, toys to machine parts," Ting Lu said. "The hottest topic about China will very soon shift from 'Evergrande' to 'Power Crunch.'"

Randy Shannon

Enlighten Radio:Talkin Socialism: "WE HAD A DEAL"

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Tuesday, September 28, 2021

Abolish the debt ceiling before it commits austerity again: The GOP used the debt ceiling to force spending cuts in 2011. It can’t be allowed again. [feedly]

Abolish the debt ceiling before it commits austerity again: The GOP used the debt ceiling to force spending cuts in 2011. It can't be allowed again.

In a political system beset by many stupid and destructive institutions, the statutory limit on federal debt might be the worst. The debt limit:

  • Measures no coherent economic value. The measure of debt it targets is not inflation-adjusted, would perversely make the debt situation look worse if there was a reform to Social Security that closed that program's long-run actuarial imbalance, and ignores trillions of dollars in assets held by the federal government.
  • Has no relationship to any economic stressor facing the country—over the past 25 years, as the nominal federal debt rose from $5 trillion to $22.7 trillion, debt service payments (required interest payments on debt) shrank almost in half, from 3.0% of GDP to 1.8%.
  • Can cause real damage if it's not lifted in the next couple of weeks. It would only take a couple of months of missing federal payments due to the debt ceiling to mechanically send the economy into recession—and that's without assessing damage it would cause from financial market fallouts.
  • Has been used time and time again to enforce misguided austerity policies. The 2011 Budget Control Act (BCA) grew directly out of a GOP Congress threatening to not raise the debt ceiling absent spending cuts. The BCA provided an anti-stimulus about twice as large as the stimulus provided by the American Recovery and Reinvestment Act (ARRA—commonly known as "The Recovery Act") and is largely responsible for the sluggish recovery from the Great Recession.

Given all of this, the debt ceiling should be abolished or neutralized in absolutely any way politically possible. It serves no good economic purpose and plenty of malign ones. Below we expand on these points.

Overview of the debt ceiling

The U.S. Treasury draws on banking accounts at the Federal Reserve to fund federal governmental activities—remitting paychecks to federal government employees, sending Social Security checks, reimbursing doctors for treating Medicare-covered patients, paying defense contractors and interest to bondholders and so on. These accounts are fed on an ongoing basis by both tax revenues and the proceeds from selling bonds (debt). But, because the United States has a statutorily imposed limit of how much outstanding debt is allowed, once this limit is reached on issuing new debt, Treasury can no longer sell bonds and deposit these proceeds, and hence accounts at the Federal Reserve will dwindle as they are only now fed by ongoing taxes, which are insufficient to cover all spending. This limit is being rapidly reached and by mid-October (current guesstimate) the Treasury accounts will be too small to finance that day's governmental activities.

The debt ceiling measures no coherent economic indicator

The statutory debt ceiling is a completely arbitrary value—there has never been any economic justification for any of its historical values and it is raised (or suspended periodically) purely based on congressional whim. It is not indexed for inflation, even as federal government payments (like Social Security checks) are so indexed.

Further, it measures gross debt, which includes debt the federal government owes itself. The biggest difference between the debt held by public and gross debt is the Social Security Trust Fund (SSTF). To help pre-fund the now-arrived retirement of the Baby Boomer generation, for years the Social Security system taxed current workers more than what was needed to pay current beneficiaries. The surplus was credited to the SSTF. As dedicated Social Security revenues fall a bit short of benefits in coming decades, the system (as designed) will draw down the SSTF.

But this means that in those years that saw the SSTF rise, this actually inflated measures of gross debt. And it means, for example, that proposals to narrow the long-run actuarial shortfall of the Social Security system would actually see us hit the federal debt limit sooner. How can that make sense?

Finally, the gross debt also excludes the roughly $2 trillion in financial assets (mostly student loans) held by the federal government. Any measure that aims to measure the balance sheet health of an entity probably shouldn't ignore trillions of dollars in assets.

The debt ceiling has no relationship to genuine economic stressors

Higher interest payments that put stress on the federal government's ability to pay and raise the cost of capital for private businesses is the entire economic reason to keep an eye on public debt. But interest rates have collapsed as debt has risen. In 1996, gross federal debt stood at $5.2 trillion. By 2019, it was at $22.7 trillion. Yet in 1996, debt service paymentsthe interest costs needed to be paid on outstanding debt—were 3.0% of GDP, but by 2019 they were just 1.8%. The reason why interest rates have collapsed while debt has grown is simply that both variables have been driven by pronounced economic weakness over most of the post-2000 period. But the larger point is that the level of gross federal debt has no reliable relationship to any economic stressor faced by governments or households, so hinging something as high stakes as a hard limit on the federal governments' legal ability to borrow on this measure makes no sense.

The debt ceiling will cause a recession if it's allowed to bind spending in coming months

Currently, the Congressional Budget Office (CBO) forecasts a budget deficit of just under 12% of GDP for 2021. The Bureau of Economic Analysis (BEA) indicates much of this was front-loaded—federal government borrowing averaged 16% of GDP for the first six months of the year. For the rest of the year, assume borrowing averaged about 8% of GDP. This is the gap between tax revenues and spending, so if no more borrowing is allowed due to the debt ceiling, it is de facto a measure of how much spending would have to be cut. A spending cut of 8% of GDP is a mammoth shock, and to have it slam into the economy in an instant would be spectacularly damaging.

For comparison, the much-touted private-sector "deleveraging" (an abrupt swing from borrowing to saving) that led to the Great Recession in 2008-09 was about a 9% contraction in spending as a share of GDP—but that was spread over more than two years. This means that the mechanical shutdown of spending caused by hitting the debt ceiling would be sharper and larger than the one that led to the Great Recession. Worse, as the negative fiscal shock ripples through the private economy, the austerity becomes self-reinforcing. Say that in the first month, the 8% of GDP cutback in federal spending has a multiplier of 1.5, so economic activity in that month is slowed by 12% of that month's GDP in total. (While it's true that multiplier effects may well not happen right away, illustratively this is the dynamic we're facing.)

With GDP and incomes 12% lower, tax collections will fall by roughly 4% of GDP. So the next month, not only the original cutback in spending will be needed, but the new and lower tax collections will ratchet down spending even more—and pretty quickly! Normally the federal budget acts as an automatic stabilizer when recessions hit—taxes fall and spending rises and debt increases, all of which spurs economic activity. But a recession caused by an arbitrary legal rule that spending cannot exceed (falling) taxes means that the budget would actually act as an automatic destabilizer.

If the spending cutbacks occur for a month, say, and then federal transfers make up for the lost month, then lots of the damage could be undone pretty quickly. But not all of it. The multiplier effects—the consumption foregone because, say, the workers at diners serving the retirees who didn't go out to eat for a month because their Social Security checks didn't come—will not be made up by subsequent government payments.

Finally, all of this is just a description of the strictly "mechanical" effects of hitting the debt ceiling. The ripple effects stemming from distress in financial markets that would be sparked by missing interest payments on Treasury bonds and bills could be extreme as well. But these mechanical effects are useful to keep in mind when some misleadingly claim that the Treasury can "prioritize" payments to bondholders and hence the US can avoid technical "default." Besides being likely impossible for both logistical and legal reasons, prioritizing interest payments to bondholders just means defaulting even more heavily on Social Security beneficiaries, doctors' reimbursements for seeing Medicare and Medicaid patients, federal contractors' bills, and all other federal payments. And "prioritizing" some payments over others doesn't change the grim mechanical arithmetic run through above.

The debt ceiling is an austerity trump card

People often invoke the damage done by the 2011 showdown over the debt ceiling. They point to stock market losses, increases in "economic uncertainty" indices, and estimates of how much higher interest rates went in the showdown's aftermath. But, they tend to miss what was by far the greatest damage done by the 2011 debt ceiling episode: the passage of the Budget Control Act (BCA), a relatively unknown piece of legislation to the lay public, but one which delivered an anti-stimulus to the U.S. economy about two times as powerful as the stimulus provided by the Obama administration's Recovery Act in 2009.

The BCA's caps on federal spending explain a large part of why this spending in the aftermath of the Great Recession was the slowest in history following any recession (or at least since the Great Depression). This federal spending austerity fully explains why the recovery from the Great Recession was so agonizingly slow. If this spending had instead followed the normal post-recession path, then a return to pre-recession unemployment rates would've happened 5-6 years before it finally did in 2017.

The BCA was the GOP demand for raising the debt limit in 2011, and the Obama administration acquiesced to it. The leverage provided by the debt limit led directly to the worst recovery following a recession since World War II. If the debt ceiling manages to fatally wound prospects for the budget reconciliation bill wending its way through Congress now, we'll see history repeat itself, with fiscal policy turning sharply contractionary in mid-2022 as the boost from the American Rescue Plan (passed earlier this year) begins quickly running out. This leverage the debt ceiling provides to those looking to enforce austerity is its greatest—and often most-overlooked—danger.

The debt ceiling needs to be abolished—either formally or effectively

Given all of this, it is obvious that the U.S. should join the vast majority of rich countries around the world who don't have a debt ceiling. It would be most straightforward if Congress would abolish it straightaway. Alternatively, if a large-enough group of members of Congress demand that the reconciliation bill raise the debt ceiling to some laughably large number ($100 trillion? $500 trillion?), this would effectively abolish it (for arcane procedural reasons I don't understand, under the rules of budget reconciliation the only change that can be made to the debt ceiling is to raise it).

If Congress won't act sensibly, the Biden administration should act unilaterally. There is plenty of support for citing the fact that Congress has given the executive branch conflicting instructions, and, hence the administration is free to choose which path it follows. Congress's taxing and spending instructions require the administration to issue debt to cover the shortfall, yet the debt ceiling would bar debt issuance. One of these congressional "decisions" must be ignored, so, the administration should decide. A more-fun solution—one that highlights the stupidity of the debt ceiling—is minting the trillion-dollar platinum coin. I'm a fan, mostly because of the educational value of it, and because it treats the debt ceiling as a problem with the contempt it deserves.

However it is done, it is imperative to not just squeak through this latest crisis. Either Congress or the Biden administration needs to do future policymakers a huge favor and render the debt ceiling moot forevermore. It's already done enough damage.

 -- via my feedly newsfeed

Pandemic economic woes continue, but so do deep structural problems, especially the long-term growth in the share of low wage jobs [feedly]

A provocative and sober take on the future of work in the high tech world. I take a somewhat more optimistic view if policy moves along a socialist road -- but that's a vortex away, as Wm Blake wrote. 

Pandemic economic woes continue, but so do deep structural problems, especially the long-term growth in the share of low wage jobs

Many are understandably alarmed about what the September 4th termination of several special federal pandemic unemployment insurance programs will mean for millions of workers.  Twenty-five states ended their programs months earlier, with government and business leaders claiming that their termination would spur employment and economic activity.  However, several studies have disproved their claims.

One study, based on the experience of 19 of these states, found that for every 8 workers that lost benefits, only one found a new job.  Consumer spending in those states fell by $2 billion, with every lost $1 of benefits leading to a fall in spending of 52 cents.   It is hard to see how anything good can come from the federal government's willingness to allow these programs to expire nationwide. 

The Biden administration appears to believe that adoption of its physical infrastructure bill and $3.5 trillion spending plan will ensure that those left without benefits will find new jobs.  But chances for Congressional approval are growing dim.  Even more importantly, and largely overlooked in the debate over whether the time is right to replace the pandemic unemployment insurance programs with new spending measures, is that an increasing share of the jobs created by economic growth are low-wage, and thus inadequate to ensure workers and their families an acceptable standard of living. 

For example, according to another study, the share of low wage jobs has been steadily growing since 1979.  More specifically, the share of workers (18-64 years of age) with a low wage job rose from 39.1 percent in 1979 to 45.2 percent in 2017.  For workers 18 to 34 without a college degree the share soared from 46.9 percent to 61.6 percent over the same tyears. Thus, a meaningful improvement in worker well-being will require far more than a return to "normal" labor market conditions.  It will require building a movement able to directly challenge and transformation the way the US economy operates.  

The importance of government programs

The figure below provides some sense of how important government programs have been to working people.  Government support was truly a lifeline for working people, delivering a significant boost to total monthly personal income (relative to the February 2020 start of the pandemic-triggered recession), especially during the first months.  Even now, despite the fact that the recession has officially been declared over, it still accounts for approximately half the increase in total monthly income.   

The government's support of personal income was anchored by three special unemployment insurance programs–the Federal Pandemic Unemployment Compensation (FPUC), Pandemic Emergency Unemployment Compensation (PEUC), and Pandemic Unemployment Assistance (PUA). 

The FPUC was authorized by the March 2020 CARES Act and renewed by subsequent legislation and a presidential order. It originally provided $600 per week in extra unemployment benefits to unemployed workers in states that opted in to the program. In August 2020, the extra payment was lowered to $300.

The PEUC was also established by the CARES Act. It provided up to 13 weeks of extended unemployment compensation to individuals that had exhausted their regular unemployment insurance compensation.  This was later extended to 24 additional weeks and then by a further 29 weeks, allowing for a total of 53 weeks.  The PUA allowed states to provide unemployment assistance to the self-employed and those seeking part-time employment, or who otherwise did not qualify for regular unemployment compensation.

Tragically, the federal government allowed all three programs to expire on September 4th. Months earlier, in June 2021, 25 states actually ended these programs for their unemployed workers, eliminating benefits for over 2 million.  Several studies, as we see next, have documented the devastating cost of that decision. 

The cost of state program termination

Beginning in April 2021, a number of business analysts and politicians began to aggressively argue that federally provided unemployment benefit programs were no longer needed.  In fact, according to them, the programs were actually keeping workers from pursuing available jobs, thereby holding back the country's economic recovery. Using these arguments as cover, in June, 25 states ended their participation in one or more of these programs. 

For example, Henry McMaster, the governor of South Carolina, announced his decision to end his state's participation in the federal programs, saying: "This labor shortage is being created in large part by the supplemental unemployment payments that the federal government provides claimants on top of their state unemployment benefits."

Similarly, Tate Reeves, the governor of Mississippi, stated in a May 2021 tweet:

It has become clear to me that we cannot have a full economic recovery until we get the thousands of available jobs in our state filled. . . . Therefore, I have informed the Department of Employment Security to direct the Biden Administration that Mississippi will be opting out of the additional federal unemployment benefits as early as federal law allows—June 12, 2021.

The argument that these special federal unemployment benefit programs hurt employment and economic activity was tested and found wanting.  Business Insider highlights the results of several studies:

Economist Peter Ganong, who co-authored a paper that found the disincentive effect of benefits was small, told the [Wall Street] Journal: "If the question is, 'Is UI [unemployment insurance] the key thing that's holding back the labor market recovery?' The answer is no, definitely not, based on the available data." 

That aligns with other early research on the impact of benefits ending. CNBC reports that analyses from payroll firms UKG and Homebase both found that employment didn't go up in the states cutting off the benefits; in fact, that Homebase analysis found that employment declined in the states opting out of federal benefits, while it went up in states that chose to retain benefits. In June, Indeed's Hiring Lab found that job searches in states ending benefits were below April's baseline.

In July, Arindrajit Dube, an economics professor at University of Massachusetts Amherst, found that ending benefits didn't make workers rush back. "Even as there was a clear reduction in the number of people who were receiving unemployment benefits — and a clear increase in the number of people who said that they were having difficulty paying their bills — that didn't seem to translate, at least in the short run, into an uptick in overall employment rates," Dube told Insider at the time.

Dube, along with five other researchers, examined "the effect of withdrawing pandemic UI on the financial and employment trajectories of unemployed workers in [19] states that withdrew benefits, compared to workers with the same unemployment duration in states that retained these benefits." 

They found, as noted above, that for every 8 workers who lost their benefits, only 1 found a new job.  And for every $1 of reduced benefits, spending fell by 52 cents—only 7 cents of new income was generated for each dollar of lost benefits. "Extrapolating to all UI recipients in the early withdrawal states, we estimate these states eliminated $4 billion in unemployment benefits paid by federal transfers as of August 6 [2021].  Spending fell by $2 billion and earnings rose by $270 million.  These states therefore saw a much larger drop in federal transfers than gains from job creation."

An additional 8 million workers have now lost benefits because of the federal termination of these special unemployment insurance programs.  It is hard to be optimistic about what awaits them, given the experience of the early termination states.  And equally important, even if the "optimists" are proven right, and those workers are able to find employment, there is still reason for concern about the likely quality of those jobs given long-term employment trends.

The lack of decent jobs

There is no agreed upon definition of a low wage job.  David R. Howell and Arne L. Kalleberg note two of the most popular in their study of declining job quality in the United States.  One is to define low wage jobs as those that pay less than two-thirds of the median hourly wage.  The other, used by the OECD, is to define low wage jobs as those that pay less than two-thirds of the median hourly wage for full-time workers.

Howell and Kallenberg find both inadequate.  Instead, they define low wage jobs as those that pay less than two-thirds of the mean hourly wage for full-time prime-age workers (35-59).  Their definition sets the dividing line between low wage and what they call "decent" wage jobs at $17.50 in 2017.  As they explain:

This wage is well above the wage that would make a full-time (or near full-time) worker eligible for food stamps and several dollars above the basic needs budget for a single adult in most American cities, but is conservative in that the basic needs budget for a single adult with one child ranges from $22 to $30).

The figure below, based on their definition, shows the growth in low wage jobs for workers 18-34 years of age without a college degree (in blue), all workers 18-64 years of age (in gold), and prime age workers 35-59 years of age (in green).  Their dividing line between low wage and decent wage jobs, equivalent to $17.50 in 2017, is far from a generous wage.  Yet, all three groupings show an upward trend in the share of low wage jobs.  

The authors then divide their low wage and decent wage categories into upper and lower tiers.   The lower tier of the low wage category includes jobs that pay less than two-thirds of the median wage for full-time workers, which equaled $13.33 in 2017.  As the authors report:

Based on evidence from basic needs budgets, this is a wage that, even on a full-time basis, would make it extremely difficult to support a minimally adequate standard of living for even a single adult anywhere in the country. This wage threshold ($13.33) is just above the wage cutoff for food stamps ($12.40) and Medicaid ($12.80) for a full- time worker (thirty-five hours per week, fifty weeks per year) with a child; full-year work at thirty hours per week would make a family of two eligible for the food stamps with a wage as high as $14.46 and as high as $14.94 for Medicaid.  For this reason, we refer to this as the poverty-wage threshold.

The lower tier of the decent wage category includes jobs that pay less than 50 percent more than the decent-job threshold, which equaled $26.50 in 2017.  The figure below shows the overall job distribution in 2017.

The following table shows the changing distribution of jobs over the years 1979 to 2017 for all workers 18 to 64, for workers 18-34 without a college degree, and for workers 18-34 with a college degree.

While the share of upper-tier decent jobs held by workers 18 to 64 has remained relatively stable, there has been a notable decline in the share of workers with lower-tier decent jobs.  Also worth noting is the rise in the share of poverty-level low wage jobs. 

Perhaps most striking is the large decline in the share of decent jobs held by workers 18 to 34, those with and those without a college degree.  The share of poverty level jobs held by those without a college degree soared from 35.7 percent to 53.5 percent.  The share of low wage jobs also spiked for those with a college degree, rising from 22 percent to 39.1 percent, with an increase in the share of both low-wage tiers.

This long-term decline in job quality will not reverse on its own.  And, not surprisingly, corporate leaders remain largely opposed to policies that might threaten the status quo.

So, do we need a better unemployment insurance system? For sure.  Do we need a better funded and more climate resilient social and physical infrastructure?  Definitely.  But we also need a dramatically different economy, one that, in sharp contrast to our current system, is grounded in greater worker control over both the organization and aims of production.  Lots of work ahead.

 -- via my feedly newsfeed