Is Free Trade Really Dead?

Posted on May 23, 2024 by Joe Weber

Mark Twain might weigh in to the contrary

Ah, what is old is new again.

Consider the fast-expanding battle over free trade. A new piece in The Atlantic argues that a longstanding Washington consensus in favor of relatively unfettered global trade is dead. The author contends the view has been replaced by “a much older understanding of economics, sometimes referred to as ‘political economy.’”

Journalist Rogé Karma maintains in “Reaganomics Is on Its Last Legs” that the new consensus is more mindful of the costs of trade. “The basic idea is that economic policy can’t just be a matter of numbers on a spreadsheet; it must take political realities into account,” he holds. “Free trade does bring broadly shared benefits, but it also inflicts extremely concentrated costs in the form of closed factories, lost livelihoods, and destroyed communities.”

And he suggests that the new anti-trade view is bipartisan. “Congressional Democrats, many of whom vocally opposed Trump’s tariffs, have been almost universally supportive of the increases, while Republicans have been largely silent about them,” Karma writes. “Rather than attacking the tariffs, Trump claimed credit for them, telling a crowd in New Jersey that ‘Biden finally listened to me…’”

But is this really so? In fact, isn’t trade still growing – albeit more slowly and with a few new limits and some fresh political targets, particularly Russia and China? The Boston Consulting Group, in a report titled “Protectionism, Pandemic, War, and the Future of Trade,” predicts that world trade will grow 2.3% per year through 2031. Yes, this is less than the 2.5% projected for global economic growth, but it still represents gains.

And while there has been a slowdown in recent years – driven by geopolitics and COVID-19 – this year could see more than a doubling of trade over last year. “That’s according to the three major international economic organizations – the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO) – which all forecast an uptick in global trade flows in 2024,” reports the World Economic Forum.

Wouldn’t it be more accurate to say that the consensus remains as President Reagan and his barrier-busting trade representative Clayton Yeutter set it, but that it’s been tweaked and is under threat? That’s hardly as sexy a headline but it seems to represent reality better than the somewhat apocalyptic vision Karma sketches out.

Of course, there continue to be bogeymen on the global stage. Back in the mid-1980s Japan was the trade enemy of the U.S. Between protectionist forces in Japan and retaliatory advocates in the U.S., things got quite ugly.

Representative James Jarrell “Jake” Pickle, a Texas Democrat, suggested introducing what he called an “ah-so amendment” in legislation, for instance. This targeted Japanese negotiators whom Pickled said “say ‘ah so’ to everything and then don’t do anything” about trade complaints, as I reported in my book “Rhymes with Fighter.” By April 1987, the brouhaha worsened to the point that Reagan announced plans to slap hefty tariffs on $300 million worth of Japanese electronics exports to the United States, moves that would have doubled the prices of televisions, computers, disk drives, hand-held tools, refrigerators, electric motors, even X-ray film.

Under Yeutter’s guidance, however, Japan and the U.S. largely patched up their differences in time. And that and other steps fueled the huge expansion in world trade that, overall, has been an astonishing success. Not only have poor countries raised their living standards by leaps and bounds in the last quarter-century, but they have done so while wealthy countries have grown richer.

Consider a few numbers: per capita GDP growth in globalizing countries soared from 1.4% a year in the 1960s and 2.9% a year in the 1970s to 3.5% in the 1980s and 5% in the 1990s, according to a 2001 study. Since 2000, a pair of recessions and COVID dampened growth in the U.S., but even so the median income of U.S. households by 2018 had climbed to $74,600. This was 49% higher than its level in 1970, when the median income was $50,200.

Today, China is the main bête noire of both American political parties. Thus we see President Biden imposing tariffs on a bevy of imported goods from China, including a 100% tariff on electric cars, and 25% to 50% duties on a handful of “strategic sectors,” listed in White House fact sheet as including solar cells, batteries, semiconductors, medical supplies, cranes, and certain steel and aluminum products. And we see that former President Trump is threatening to outdo that with 200% tariffs on Chinese-made cars hailing from Mexico, as well as 10% tariffs on all foreign imports and 60% on all imports from China.

Trade has long been a handy cudgel for politicians to wield as they target voters in areas disadvantaged by economic shifts. Consider Michigan and other swing states that both Trump and Biden are courting.

Indeed, despite the overbroad claim of Karma’s piece, it seems clear that critics of global trade are on the ascent, at least rhetorically. Fears about strengthening a growing China and a militarily expansive Russia undergird the worries.

But to trade-watchers this is an old story. When Yeutter and Reagan were opening the doors to world trade in the mid-1980s, they ran into buzzsaws from politicians of all stripes as well as from assorted industries. In an early epic battle, for instance, American shoemakers demanded protection from cheap foreign imports. But Reagan told Congress in a message and Yeutter in a memo that he wouldn’t inflict a cost of about $3 billion on American consumers by limiting such imports. The president fretted that if he granted protection to shoemakers, other industries would line up for similar shields, hurting consumers. “Protectionism often does more harm than good to those it is designed to help,” the president said. “It is a crippling ‘cure,’ far more dangerous than any economic illness.”

Of course, the North American Free Trade Agreement, for which Yeutter set the table with a pioneering trade deal with Canada, became a huge bugaboo for protectionists before and after it was enacted in 1992. Maverick presidential contender H. Ross Perot made news that year for referring to the “giant sucking sound,” a phrase referring to the jobs that he said NAFTA would destroy. Years later, Trump made attacking NAFTA a key part of his first presidential campaign.

But, surprisingly, as president in December 2019, Trump transformed the deal into the U.S-Mexico-Canada Agreement (USMCA). That pact actually boosted trade and deepened cooperation, while adding some crucial modernizing elements.

Trade advocates, moreover, have also long recognized that some industries are so strategic and sensitive that letting them settle into the most economically congenial countries is risky. In the 1980s, Japan was accused of dumping semiconductor chips on the world market in a bid to dominate the industry, so Yeutter et al. cut a market-sharing deal that preserved U.S. supremacy. Fast-forward to Biden: he championed legislation designed to keep U.S. semiconductor makers dominant in the business.

Still, it would be a mistake to argue that trade going forward won’t be different. If anything has threatened frictionless trade, it has been the vulnerability of the global supply chain, something thrown into sharp relief by COVID-19. When Americans and other westerners couldn’t get badly needed personal protective equipment (masks) and medical supplies (ventilators, respirators, and dialysis machines), they saw in life and death terms the risks of what might be called excessive economic interdependence.

As the BCG report maintains, U.S. government efforts to promote domestic manufacturing and encourage companies to diversify supply chains started during the Trump Administration and are continuing under the Biden Administration. It cites such measures as the U.S. Inflation Reduction Act, the USMCA and the U.S. CHIPS Act, all of which aim in part to lessen the country’s trade dependence on China.

Of course, as classic economic theory teaches, no one country can or should do everything economically. If low-cost countries have comparative advantages in various areas, it still makes sense for them to exploit those, even to the disadvantage of some domestic industries elsewhere. Not all boats rise, but most do.

Nonetheless, there is reason to fret about the eagerness with which some leaders – in the U.S. and elsewhere — embrace economic nationalism. As a couple World Bank economists noted in a February blogpost, “Global trade has nearly flatlined. Populism is taking a toll on growth,” trade could prove to be “anemic” in coming years. “Trade growth will improve this year, but it will still be half the average rate in the decade before the pandemic,” economists M. Ayhan Kose and Alen Mulabdic wrote. “In fact, by the end of 2024, global trade will register the slowest half-decade of growth since the 1990s.”

They noted that many countries have lost their taste for trade deals. “In the 2020s so far, an average of just five agreements have been signed each year—less than half the rate of the 2000s,” the economists observed. “Their appetite for trade restrictions, meanwhile, seems insatiable. In 2023 nearly 3,000 trade restrictions were imposed across the world—roughly five times the number in 2015. Not surprisingly, the protracted weakness in trade has coincided with a pronounced slowdown in investment.”

Back in the day, Yeutter and Reagan prevailed in their battles against protectionists. Whether the successors to Biden and Trump will do so in time isn’t clear. But it seems too early to write an obit for market-opening moves just yet. As Mark Twain wrote upon reading news accounts of his death in 1897, “The report of my death was an exaggeration.”

For Chinese students, history is personal

Posted on July 24, 2017 by Joe Weber

“I have a sister who is eleven years older than I. Actually, I heard from my mother that I should have another sister who is just one year old than I. I asked my parents and grandparents a lot times about where did she go or did she die. From my mother’s mood, I guess she didn’t die but she was abandoned by my parents. Why? Because at that time, my family was so poor to afford three children, and boys mean more than girls to a family which I completely disagree with. Thus, I have never seen her in my life. I wish she would live better than I and we could meet each other again. I am looking for her, I hope I can find her.”

Their stories, like China’s history for the last three generations (and longer), are remarkable. Some are heartbreaking. Others are heartwarming. Still others, like those of many of my students in Nebraska, are surprisingly upbeat. The variety in their life stories – again, as is also true of my students in Nebraska – is stunning.

My students in a summer course at the Shanghai University of Finance and Economics shared their brief autobiographies as an initial assignment. I assign the task to get a sense of their writing skills and to get to know them a bit. I ask where they hope their studies will take them and what they want to get out of the course. As in Nebraska, I find a blend of young-adult idealism, hopefulness and candor in their work.

Some of their stories are extraordinary, though, and they open a window onto China’s recent history:

“All of the members in my entire family are born in Shanghai, and my grand grandparents and grandparents, they came through the Cultural Revolution, which is also mentioned in the yesterday’s Ted video. During that ten years, it seems like nobody need to work, according to what my grandfather have told me, and the national economy backed off. National income lost about 500 billion yuan, according to the online statistics, and people’s living standards and personal education has been destroyed. While my grandparents suffered a lot because of the chaos in the upper politics, my parents and I have already got the great benefit from the reform and opening policy. All of us are well-educated and have more working opportunities than ever no matter how fierce the competition is in today’s job market. Those who are about the similar ages as me, which are also called millennials professionally, actually enjoy the fruits that the great development in China has brought us.”

Their tales also shed light on China’s present and future:

“I was born in a little village in Zhejiang province. My mother and my father are all local residents in this village, but they came to Shanghai to set up their own business when I was about two … My mother and my father are retailers selling glasses in Shanghai. Their business is successful now. They have expanded their business to eight chain stores now which was unimaginable at the beginning of the business, because my grandfather and grandmother are all farmers with little income and they had little money for the business when they first came to Shanghai, a city full of opportunities and attractiveness to them at that time.

‘My parents lived a tough life at the beginning of their business. My father was once time cheated by his fellow-villager when his business just started to improve, who suddenly disappeared with all my father’s savings… I really admire them for setting up their own business so successfully…. But things aren’t going well these years. The industry has been going downhill since the rise of E-business in Chinese. One of the chain stores has been shut down because it wasn’t able to earn profit. I was asked to help at the day the store was shut down .The store was decorated beautifully and it cost a lot, but at that day they had to be moved out of that store … My parents told me that it was harder and harder to run a business nowadays…. They plan to shrink their business and end it when they retire. This arises my interest in business and economics, and that is why I chose to enter Shanghai University of Finance and Economics.”

Some come from very modest backgrounds, as the children of farmers:

“I know how many people in China are still in poor today, cause I know how many people are still struggling for a better life. Chinese people, especially the farmers, are trying their best to fight against corruption of the government, discrimination of the citizen, destruction of the bad weather, low price of agricultural products, low pay in the factories, the inequality of education.

“There are too many things we need to do, and I want to contribute to the positive changes of my family, my homeland, and my country. I got much help from the society, and I want to do something helpful to society, that’s where my worth lies… I want to get a wider vision. I want to know more about the world I used to hate business as I think that it is just a chase for money, but now I think that only through business can our people get wealthy, so I want to know more about the business world, what’s it like, how does it work, how can we work in the process and make people get wealth through the process.”

Others, hailing from comfortable backgrounds, expect to do even better than their parents in life:

“I come from a well-off family. My father is a salesperson who lacks high-level education but is pretty experienced in marketing in the environmental protection industry. I am very proud of him and he is my hero who built up from nothing and made every effort to offer the best to my family. My mother is the woman who stands at the back of him. She works more than a housewife would do and takes good care of both my father and me. Since I was little, I have travelled a lot with my parents around the country partly thanks to the requirement of my father’s job. In the rest of my life, I would love to walk farther, enjoy more beautiful sceneries and accompany my parents to travel all over the world with the gratitude they brought to me in my childhood. To be a better one, man needs to experience more.”

Their powerful stories make me want to serve them better as a teacher, even of a short-term course. If I can provide some insights into economics and business, I may give them something that helps them long after their school days end. Such is my hope and ambition anyway.

Idealism: a global phenomenon

Posted on December 10, 2011 by Joe Weber

Idealism knows few national boundaries.

Students at Tsinghua University and other schools in China would see eye-to-eye (better, heart-to-heart) with many in the U.S. on this. A 22-year-old grad student of mine in Beijing showed this in spades in a recent English-language speech competition. Her outrage at injustice, her sympathy for those in distress, and her hopes for change could make her a soulmate of my 23-year-old daughter back in Chicago. Continents, oceans or economic and political systems seem not to separate them intellectually.

My student – call her “Blossom” – took on Apple Computer, a company hugely popular in China. She faulted its reliance on Chinese suppliers whose working conditions have been linked to suicides, workplace fatalities and illness-inducing toxic chemicals. Her anger at conditions she branded “inhumane” was palpable and she was unsparing in her criticism, saying Apple had failed in its social responsibilities. She also took aim at fellow Chinese, bemoaning the idea that contestants at speaking competitions, blind to problems, have routinely extolled Steve Jobs for how he “thought differently and changed the world.”

“Blossom” went further. She faulted globalization, pointing her young finger at big companies and consumers alike. “Multinationals choose suppliers with the cheapest labor and the highest efficiency, regardless of their safety standard,” she argued. “Customers care about the ink of ‘designed in Cupertino’ or the Silicon Valley, instead of the words right below it, ‘Made in China.’ Globalization institutionalizes global ignorance.”

And she called for change. Supplier information – accidents, suicides, etc. – should be made public, she argued. Invoking Justice Brandeis’ contention that sunlight is the best disinfectant, she argued, “the multinationals would be embarrassed and therefore [would pressure] the supplier to change.” Policing by government and NGO advocacy groups should be encouraged. And, she added, “As consumers, every one of us can do our bit: keep watch for suspect brands and refuse to consume immoral products.” Indeed, “Blossom” argued that every iPhone should come with a photo of its assembler. “That could serve as a reminder that an actual, living, breathing person used their own hands to help make this product. Let’s give the cold technology a human face. We will all be better off for it.”

In fairness, I must note that Apple does seem troubled by its subcontractors. It applies a code of conduct to suppliers, audits their behavior and says worker protections and factory conditions have improved at many facilities throughout its supply base. Problems, however, persist, according to reports by the company itself, as relayed by the Telegraph. Underage workers, excessive hours and other problems evade even Apple’s efforts to drive change — something that may reflect different cultural attitudes among nations, as well varying levels of economic development. Remember that capitalism is still young in China, poverty is rampant, and it took the West decades to outlaw the practices that trouble Westerners and “Blossom” alike.

Nonetheless, I’m blown away by how like my youngest child this young Chinese woman is. Reared in a country whose values seem so foreign, “Blossom” brings a kind heart and a keen eye to the world she sees around her – just like my Abi. My daughter now works to help homeless people in Chicago get back into the social system. She supported Occupy Chicago. Her criticisms of global capitalism – which we often argue about — throb with an idealist’s heart just as big as “Blossom’s.”

As globalization grows and such young people take on bigger roles in the system in coming years, I expect they will bear the torch for change. I hope they do so, whether they work within or outside multinationals. While we graybeards may quibble with some of their arguments and solutions, their passions for justice and decency should inspire us all. Over time, life may cool the fires they now burn with — but I’m in no hurry to see that happen. And I hope the Ab and “Blossom” someday can meet to see how much more unites them than divides them.

Cojones at Standard & Poor’s

Posted on August 6, 2011 by Joe Weber

You’ve got to hand it to the folks at Standard & Poor’s. It took cojones to stand up to the Treasury Department and give an honest assessment of U.S. debt and the problems of dysfunctional government. The downgrade to AA+ doesn’t make up for the misses the outfit was guilty of in the financial crisis and doesn’t atone for its seemingly willing blindness to the fool’s paradise we were living in. But its clear-eyed view of the shadows on our horizon now is worth a bundle.

The big question, though, is whether it will make a difference. The U.S. will not default, no matter how keen the GOP pols are to use threats such as that. Investors know that and they won’t flee Treasury securities. Where would they go anyway? Investors have known the same things S&P has known for months and still the yields on Treasurys are at historic lows. Putting money into the government bonds is safer than any bank, and that won’t change anytime soon, as even our tut-tutting creditors in China know.

Still, the grand game of “chicken” will continue in D.C. for the rest of the year, at least, and the downgrade could make a difference in how the game is played. The Gang of 12 – the bipartisan panel that is supposed to decide our financial fate – will have S&P’s jaundiced judgment to bear in mind as they go through their ideological faceoff. As they try to resolve problems that should have been dealt with in recent weeks, the prospect of a continued low rating, or even a further downgrade, could focus their minds on the consequences of fiscal mismanagement and dithering. Their debate, too, could keep a dead hand on the markets.

Politics, and the prospects of ousting a President, will weigh heavily on those folks, no doubt. The temptation to deny President Obama a victory – a financial resolution that would serve the country well – will be just about irresistible for half the panel. Maybe S&P’s independent judgment will prove to be a bracing slap of cold water, a reminder that the bloodsport that politics has become does have real consequences outside the Beltway. Voters could make judgments about mismanagement similar to that S&P folks made and simply throw all the bums out.

But it is too easy to cast this drama as simply a matter of gaining political advantage. This is much more than just naked opportunism. This fight is over the real and yawning ideological gulf between the parties. It is all about the longstanding argument over the size and role of government that has colored every election since at least the Reagan days. The Californian shook up prevailing wisdom in D.C. and made people believe government was the problem, not the solution – a view that is echoed decades later by the likes of Rep. Eric Cantor and, of course, the Tea Party movement.

The “two different worldviews” that divide Washington are too far apart for anything more than an armistice, Cantor suggested in a Wall Street Journal piece today. The Virginia Republican argued that expanding the welfare state and redistributing income are the central plays in the Democratic playbook. “The assumption … is that there is some kind of perpetual engine of economic prosperity in America that is going to just continue,” Cantor said. “And therefore they are able to take from those who create and give to those who don’t. We just have a fundamentally different view.”

Beyond that is the Keynesian-supply-sider divide. Keynesians such as New York Times columnist and Princeton economist Paul Krugman say Obama and Washington aren’t doing enough to use government money to stimulate the lackluster economy. By contrast, the GOP leaders invoke economist Arthur Laffer’s dictum – the Laffer Curve – to argue that tax cuts would be far more effective than government spending, especially when so much of the government money is borrowed. Variations of this debate are as old as the Great Depression and economists still are split on whether the government pulled us out that 1930s slump or prolonged it with government programs.

These are serious disputes, and unresolved economic questions. It comes to a matter of faith, of whether you worship at the Church of Laffer or the Congregation of Krugman. And, lately, it comes to a matter of who has the power to either turn on the government spigot or choke it off and, in theory, let the economy heal itself. Problem is, with a 9.1% unemployment rate, an outrageous amount of debt and the never-ending political campaign that Washington has become, the power centers and the course are anything but clear.

That’s partly why we should tip our hat to S&P. The outfit, the economic engine of my former longtime employer, McGraw-Hill Cos., didn’t bow to what had to have been enormous pressure from Washington in coming to its judgment. We can only imagine the debates that raged at company headquarters: Will this downgrade lead to higher interest costs for all Americans? What are the consequences when the economy is so weak? And what of the unlikely possibility that vengeful government regulators could make life tougher for S&P and McGraw-Hill, especially at a time when McGraw-Hill is facing pressure to reorganize or sell itself?

In fact, it’s a remarkable thing about our system that Washington can’t dictate terms to S&P. One can’t imagine that kind of independence in some other major global economies. Wall Street and Washington intersect at crucial points but neither can dictate to the other. That’s a priceless strength of our system and it would have been a sorry statement if S&P had caved to Treasury.

It is fascinating, of course, to see these warring economic visions collide. But this is no classroom exercise, no parlor game. The entertainment value is far outweighed by the size of the stakes. What Washington does will affect the livelihoods of millions, the legacy our kids inherit, and the role of the U.S. in the world. It doesn’t get much more serious than that. It will take smart and independent people to help the pols to chart the way.

Luddites revisited — attacking high-frequency traders, speculators and assorted other market “vipers”

Posted on November 17, 2010 by Joe Weber

Andrew Jackson, the country’s seventh president, was famous for railing against the financiers of the early 1800s. They speculated on “the breadstuffs of the country,” he warned. “Should I let you go on, you will ruin 50,000 families and that will be my sin! You are a den of vipers and thieves. I intend to rout you out and by the eternal God, I will rout you out.”

The quote, a favorite of bloggers who fret about plots to establish a new world order and such, would be at home today in the superheated arguments over high-frequency trading. The latest diatribe, I’m sad to say, comes from a dear friend and former colleague at Bloomberg Businessweek. Peter Coy writes, “The bigger the financial sector, the more dangerous it becomes.” He bemoans the flood of smart people going into the business, noting that a quarter of Harvard’s brainiacs in the early 2000s were drawn into investment banking and like fields. And he complains about banks “cranking up their trading operations in a way that imperils the financial system once again.”

His indictment, based on the May 6 flash crash, is headlined “What’s the Rush?” And his subhed warns “The American financial system is erratic and voracious, and keeps score in milliseconds. Here’s how to rein in the beast.” Among his prescriptions: a transactions tax of a few cents per $100 to “throw sand into the gears of high-frequency trading,” higher margin and collateral requirements, and steps such as new taxes to reduce corporate debt (on the idea that we’re being assailed by waves of “debt-fueled speculation.”)

Oh, come now, Peter. Let’s dial it down a bit. First, while the Great Recession was in part the fault of Wall Street, it was not a high-frequency phenomenon. Rather, we can blame bad securitization practices, flawed housing policies in Washington, poor market oversight and a raft of other well-documented problems. Superfast trading may have helped stocks crater, but it was not the force that drove them down.

Yes, one must admit that May 6 was not a good day for the high-frequency set. No matter how short-lived, the $800 billion plunge in the value of U.S. stocks that day was worrisome. Stocks such as Accenture slipped to a penny from $40 (before bouncing back) in trading patches as short as eight seconds. Clearly, something was amiss in the superfast computers at the likes of Getco.

But let’s keep a few things in perspective. First, after going haywire the market did correct itself. Prices came back, in most cases rapidly. The Dow lost 1,138.69 points from its high in crazed intraday trading on May 6, but closed just 341.9 points down, and regained all that and then some by May 10. Erratic? No doubt. Voracious. Okay, but when have traders been anything but?

Let’s concede that there’s something bizarre about high-frequency trading. Its relationship to real value in stocks is remote at best. So, too, is its connection to fundamentals such as corporate strategy, earnings power, savvy management. All that good stuff that financial journalists, MBAs and CEOs – and maybe even the odd stockbroker — prize is a few solar systems away from the zippy stock-swapping at Hard Eight Futures, Quantlab Financial and such. Those guys, snapping to the beat of their own algorithms, don’t give a hoot about such things. It’s all numbers, bro.

Let’s concede, too, that the liquidity the HFT pack supposedly brings is an illusion. It is most likely gone when most needed. The simile Peter uses – “like a swimming pool that dries up just as you jump off the high dive” – is apt (hat’s off to his wordsmithing). It’s hard to see just what value the high-freqs bring to anyone but themselves.

But, so what? Speculators, those oft-reviled folks who put the zing in stock markets, have always been in the game for the gamble. They see Wall Street as a massive roulette wheel and believe that any way they can tilt the spin to their favor – legally – is fair play. In an odd way, they are cousins to technical analysts who have long played markets free of the burden of fundamentals. Are we to ban the technical folk because their charts are more like astrology than investment? They, too, are an odd subculture of market players whose powers over stock movements one could decry.

Surely, there needs to be policing to make sure high-freqs don’t misuse the power they have to move markets. They do swap millions of shares in ridiculously short periods of times, all but blind to fundamental values. At times, they account for disturbingly high amounts of volume. If they intentionally – or through glitches – knock stocks down to absurd levels to profiteer in some market-cornering way, they need to be rapped hard for that. Fines, perhaps, or suspensions of trading privileges could be used to rein them in.

But imposing transactions taxes or worse seems like overkill. Such steps would penalize all players for the perfidy of a few. Let’s use the scalpel instead of the meat-axe and target the bad boys, not just the folks looking for an edge of a few milliseconds on the next guy.

By the way, it’s passably ironic that Peter’s employer, Bloomberg, as well as Dow Jones and other data-providers are tripping over themselves to serve up market data ever more quickly to the high-freq bunch. Some go so far as to rent space to traders — at premium prices — so they can house their computers cheek-by-jowl with providers’ machines and save milliseconds of transmission time. What these providers know, just as traders do, is that timely information is still everything in this game.

Every technological advance that changes the playing field makes folks nervous. Luddism is a natural reaction. Moreover, the markets have long been the playground of innovators and, as a consequence, the targets of critics. In 1887 the head of the Chicago Board of Trade forcibly removed telegraph gear from the floor of the CBOT because he couldn’t abide the electronic links to notorious Chicago bucket shops, as recounted by Rutgers historian David Hochfelder. One NYSE broker in 1889 complained that the “indiscriminate distribution of stock quotations to every liquor-saloon and other places has done much to interfere with business.”

We may not like the high-speed folks. We may deride them as little more than turbocharged gamblers, as Rain Man-like idiot savants unfairly using their powers to enrich themselves while adding nothing to the game. But they will be players so long as there’s money to be made. We can take the profit out if they don’t play by the rules (and, by the way, maybe some of those smart Harvard types in finance can cook up better rules to keep market ripples from becoming tsunamis). Let’s not, however, make life onerous for everyone in the process.

Economic Slowdown: Ideology at Work

Posted on August 10, 2010 by Joe Weber

To the Obama-haters at the Wall Street Journal, the stubborn economic slowdown reflects business’ fear of looming tax hikes. The Administration-friendly folks at the New York Times, by contrast, blame the lackluster economy on political stalemate in Washington. Meantime, over at Bloomberg Businessweek, they tell us it’s all a matter of us having our cake and eating it, too — loving both the Bush-era low taxes and Obama-era high spending and failing to choose between the two.

The inability of our economy to surge back consistently from the Great Recession has become a Rorschach test for pundits. They look at the ugly blot and discern a pattern, one that – not surprisingly – reflects their biases. Love small government and Bush-era tax cuts? Obama’s overreaching is to blame for our woes. Never met a problem that more money from Washington couldn’t solve? It’s the shortfall in such largesse that is making that blot so skinny. And if they can’t make up their minds, they blame both Bush-era “wisdom and folly” – whatever that fence-straddling phrase means.

For my money, the reality is more a matter of the Depression-era notion of pushing on a string. Our policymakers can’t find the levers that will kickstart the economy, that will ignite the animal spirits of our business leaders, and that will drive down the pathologically high unemployment rate. Nothing seems to work, though the folks at the Fed aim to keep pushing whatever buttons they can. Their newest tack, revealed on Aug. 10: buying up more Treasury debt to keep interest rates low.

In the end, the problem may be that the hole we put ourselves into in the Great Recession is just depressingly deep. It took years to dig. And it could take years, sadly, for us to find our way out. To take just one measure, U.S. employment plunged by more than six percent in the recession that began in 2007, the steepest fall of any of the 11 recessions we’ve suffered through since World War II. To take another measure, these downturns lasted from six to 16 months, and our latest slide – believed to have ended in 2009, though the National Bureau of Economic Research has yet to date it – will almost certainly prove to be longer than any of them. (For policy wonks, the Minneapolis Fed puts all these comparisons into perspective here.)

If history proves anything, however, it’s that economies do claw their way back. Sometimes, they do so with the help of Washington. Sometimes, they move on despite government meddling, however well-intentioned. Even today, economists don’t agree on whether D.C. pulled us out of the Depression or prolonged it – making that bout of global misery our first and biggest political and economic Rorschach test.

It’s no comfort to people who have been out of work for months or even years at this point. It’s also small comfort to investors or people considering whether to deploy capital, especially since they are still sussing out Washington’s new regulatory reach. And, if this downturn proves at all similar to earlier ones, whole industries will emerge reshaped as a result of it (think Detroit), not to mention companies (think GM). We will come out of this as a far different economy with areas like Internet-related industries taking a dominant place over the manufacturing icons of the past. (How is it that people still have enough money for iPads?)

Following every twist and turn in this uneven recovery is enough to generate serious palpitations. For players in the capital markets – or anyone, for that matter — it’s healthier to set aside the dire headlines of the moment and keep your eyes on the horizon, however distant it seems. Bet on a long slow ride up, with lots of dips. Keynes famously said that in the long run, we are all dead. But at the moment, the promise of the long run is the only thing we have to hang onto.

Double-dipping?

Posted on June 29, 2010 by Joe Weber

Gentle reader,

Here is an excerpted take on the question of a double-dip recession, from the people at CalculatedRisk, a blog I dip into now and again. Echoes a post here a couple days ago, but with some more detail. Call us a pair of Pollyannas, but maybe we’re onto something.

Personally, I get nervous when conventional wisdom all moves in one direction — as the sliding markets lately seem to suggest. I’ll stick with the contrarians.

Tuesday, June 29, 2010
2nd Half: Slowdown or Double-Dip?

by CalculatedRisk on 6/29/2010 04:00:00 PM

No one has a crystal ball, but it appears the U.S. economy will slow in the 2nd half of 2010.

For the unemployed and marginally employed, and for many other Americans suffering with too much debt or stagnant real incomes, there is little difference between slower growth and a double-dip recession. What matters to them is jobs and income growth.

In both cases (slowdown or double-dip), the unemployment rate will probably increase and wages will be under pressure. It is just a matter of degrees.

The arguments for a slowdown and double-dip recession are basically the same: less stimulus spending, state and local government cutbacks, more household saving impacting consumption, another downturn in housing, and a slowdown and financial issues in Europe and a slowdown in China. It is only a question of magnitude of the impact.

My general view has been that the recovery would be sluggish and choppy and I think this slowdown is part of the expected “choppiness”. I still think the U.S. will avoid a technical “double-dip” recession.

Usually the deeper the recession, the more robust the recovery. That didn’t happen this time (no “V-shaped” recovery), and it is probably worth reviewing why this period is different than an ordinary recession-recovery cycle.

# First, this recession was preceded by the bursting of the credit bubble (especially housing) leading to a financial crisis. And there is research showing recoveries following financial crisis are typically more sluggish than following other recessions. See Carmen Reinhart and Kenneth Rogoff: “The Aftermath of Financial Crises”

An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. … Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.

# Second, most recessions have followed interest rate increases from the Fed to fight inflation, and after the recession starts, the Fed lowers interest rates. There is research suggesting the Fed would have to push the Fed funds rate negative to achieve the same monetary stimulus as following previous recessions. See San Francisco Fed Letter by Glenn Rudebusch The Fed’s Exit Strategy for Monetary Policy.

The graph from Rudebusch’s shows a modified Taylor rule. According to Rudebusch’s estimate, the Fed Funds rate should be around minus 5% right now if we ignore unconventional policy (obviously there is a lower bound) and probably close to minus 3% if we include unconventional policy. Obviously the Fed can’t lower rates using conventional policy, although it is possible for more unconventional policy.

# Third, usually the engines of recovery are investment in housing (not existing home sales) and consumer spending. Both are still under severe pressure with the large overhang of housing inventory, and the need for households to repair their balance sheet (the saving rate will probably rise – slowing consumption growth).

On this third point, I put together a table of housing supply metrics last weekend to help track the housing market. It is hard to have a robust economic recovery without a recovery in residential investment – and there will be no strong recovery in residential investment until the excess housing supply is reduced substantially.

During previous recoveries, housing played a critical role in job creation and consumer spending. But not this time. Residential investment is mostly moving sideways.

It isn’t the size of the sector (currently only about 2.5% of GDP), but the contribution during the recovery that matters – and housing is usually the largest contributor to economic growth and employment early in a recovery.

Two somewhat positive points: 1) builders will deliver a record low number of housing units in 2010, and that will help reduce the excess supply (see: Housing Stock and Flow), and 2) usually a recession (or double-dip) is preceded by a sharp decline in Residential Investment (housing is the best leading indicator for the business cycle), and it hard for RI to fall much further!

So I’m sticking with a slowdown in growth.

The Big Picture

Category Archives: Economy