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Mayhem at the US Capital -- a Silver Lining to a Tragedy

1/10/2021

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Anger is the easiest emotion and I think anyone must feel that, of course, but on reflection, I believe it did something that if Trump's army of  supporters had marched peacefully, rather than violently, then we would be in a far worse  place today than we are.  Trump as a force for bad could go on.  Republicans could ignore what he tried in Georgia, they would still be allowed to like the man or as some of your clients, the idea that the market is at an all time high and taxes an all time low, but the attack, the desecration of the  Capital on live television, the deaths, and then the regaining control and the votes to affirm what we all knew to be true, and followed by the President's faulty words, all made it impossible or the Republicans, the ones who were riding his coattails or worried about their own tails in future elections, not to hide behind -- its just Donald being Donald. 

When I wrote my novel, The Phoenix Year, over  sometime in the 1990's, long before it was published, I included a version of Donald Trump as a self promoting and failing real estate executive whose portfolio of prime sites was needed as part of the plot.  In some ways that self promoting vision of the man is benign compared to Donald the President.   Never in my wildest dreams could I have imagined him as President.  So if there is a silver living from this it is that he has done what I imagined might have been the real purpose of his life -- to show us as we really are, not as we imagine we are, to break the illusion of the Republican Party as a Party of conservative political thinkers, moral and upright, but rather that they have been, since Lyndon Johnson passed the civil rights act, and Richard Nixon opened the door for the Southern branch of the Democratic Party to migrate to the Republicans, for where there strength really lies, in a party that is White, older, and possibly  wanting to preserve the world of their fathers, not the world of today.  So the rioters did everyone a service, they allowed the Republicans who have some fibre of courage to break with Trump if they so desire, and they allowed other people who aligned with the Republican Party the freedom to become Independents or even Democrats and disengage from the Trump Party, as his sons so aptly coined it.   Unlike Hitler, I don't expect Donald to write his own version of Mein Kampf during his exile, but you never know.

A revised three book version of the Phoenix Year, updated to include Donald Trump as President of the United States in Volume 1 will be released next year under the title of The Phoenix Agenda trilogy -- Book 1 Ancient and Honorable Society of the Phoenix; Book 2 - The Phoenix Storm and Book 3 -- Phoenix Rising.  


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How I helped Alan Greenspan to Become Famous

12/31/2020

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How I helped Alan Greenspan, second longest serving Chairman of the Federal Reserve, the man who stopped the panic of 1987 singlehandedly, become famous is a long, drawn out story about hubris that likely we need reminding about today.  Prior to Ronald Reagan the idea of running huge and growing budget deficits was something that Republicans just didn't do.  Deficits are inflationary, but then Reagan came in and everything changed. 

Carter Out, Reagan In -- Star Wars, Tax Cuts, Supply Side Economics, and Growing Budget Deficits

In 1982 Ronald Reagan became 40th President of the United States.  I had been the Senior and for most my seven years in the Office of the Secretary of Defense, only economist since returning from Switzerland and the UN in 1978. During the Carter Administration I had been working on a plan to introduce Nato Bonds, debt issued by individual governments within the alliance to fund purchases of weapon systems in order to quickly and rapidly beef up the defense of our allies in face of the growing, on paper at least, Soviet threat.  Funding bonds in individual currencies under the NATO umbrella would have presented the Soviets with an economic challenge that might bring down the failing government in the East.  I had even hired a researcher to write a paper and the conclusions were the same -- challenge the Russians to a financial race and you will destroy the Soviet Union economically.  When Carter lost the election and Reagan won, promising a massive increase in defense spending and "supply-side" tax cuts, it was like the United States was going on a spree of unfunded debt on the US borrowers tab rather than jointly with the other countries of NATO.
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McNamara's Whiz Kids Out,  Program Analysts In

​As part of the reorganization of the Office of the Secretary of Defense and to meet the letter, if not the spirit of the Republican platform that Reagan had run on, the Office of the Assistant Secretary of Defense for Systems Analysis, the McNamara era whiz kids who had managed to get the United States embroiled in Vietnam, the "best and the brightest" as they were characterized (and people I had worked with when I was just a Summer intern during the halcyon days of the Johnson build-up, 1966-69) were to be disbanded.  Of course you couldn't run an organization spending 1/3rd of the US budget without smart people, so they did what governments do, our office was renamed and the Assistant Secretary position disbanded, turned into a Director, reporting directly to  the Secretary of Defense, and given a new name Program Analysis and Evaluation.  But within my little fiefdom, until the new office was established, there was fear.  We went so far to hire a company that had good political connections to do a special study in hopes remaining in our plum status jobs (everyone was either SES or GS-15).  My office was responsible for putting together the DoD budget that Carter had presented and was DOA as Reagan planned to spend more money than we had on Star Wars and other efforts to as they put it -- drive the Soviets into the tank.   
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Carter's Three Percent Defense Growth Out, Reagan's Magic 10% In

The DoD budget is a massive document, thousands of lines of requests, covering everything from paying the troops, operations and maintenance, and new equipment.  We gathered in my boss's office and we had a copy of the budget and everyone got a few pages of printed text and we started to cut them into strips, one strip for each appropriation category, and then we had to reassemble them to that the original Carter budget was now going to be the completely redesigned Reagan budget ready for the new requests -- huge increases.  When I had had in October my seminar, reported elsewhere, where I had had six major economic forecasting firms and their Chief Economists, including Larry Klein (who had just won the Nobel Prize, so it turned into a bigger deal than it originally was to be), Otto Eckstein, and Michael Evans, to name three of the six, the only economist who had turned down the request, was Alan Greenspan.  Greenspan was mad that I had not spent the $ 10K he charged to buy his services), I had proposed two budget levels -- the standard 3% growth that we had been doing under Carter, and what I had billed as a wartime budget of 10% increase  each year.  So when Reagan came in, he bumped the 3% Carter budget up to 10%.  So our exercise with the slicked printed budget and the new urgency to spend the Soviets into oblivion.

Who's Afraid of the Deficit --Reagan took the Deficit from $ 70 billion to $ 170 billion, Bush to $300 billion, Clinton to $0, Bush to $ 1.2 trillion, Obama to $600 billion, and Trump to a Trillion and Counting, So Who Says Republicans are anything but Keynesian's at heart

The only problem, aside from the fact that David Stockman and his supply side thinking, didn't fit with the earlier exercise that I had run showing a 10% increase in spending with taxes unchanged (not cut deeply) led to a growing budget deficit that Reagan had also promised, like Donald Trump, to eliminate through his magical manipulation of the economy, i.e. Voodoo economics,  In all, but one case, the higher defense spending, no changes in tax  rates, showed bigger deficits (only one of my six was able to get the 10% figure to balance, i.e. spend more on defense and you get a few more dollars in revenues enough to cover the higher spending, only Merrill-Lynch's model managed to get this result).  Aside from the Reagan increase in defense, there were the Reagan supply side deep cuts in taxes.  The net result was a growing budget deficit and a growing trade deficit.  Much of the new money flowing into American peoples paychecks went overseas as foreign goods flooded in and the US dollar appreciated in value.  Of course we were in a deep recession in 1982 and I as the Pentagon's economist was dispatched to talk to companies about what the Pentagon's growing budget would do for them to help out Congress men.  I had the right stuff to do this having build the Defense Economic Impact Modelling System (DEIMS, still being used today but with a new name) at the end of the Carter Administration.  But honestly I knew from all the work I had been doing on measuring how defense spending affected the industrial economy that spending more money in a collapsed (and it was collapsed in 1982) US industrial base was not inflationary, it didn't cause higher rates, it didn't crowd out, in fact it was rather benign, less than 6% of the US GDP in total.

Enter the Story -- Dr. Murray Weidenbaum of Washington University in St. Louis, distinguished Professor, and long time critique of defense spending.  How he became Reagan's first Chairman of the Council of Economic Advisors I will never know.  He had written extensively on how damaging to the economy spending on national defense was and how it caused inflation.  A nicer man you couldn't find, but not one easily convinced by anyone such as myself, so Reagan brought in someone who might just convince Dr. Weidenbaum that spending billions more on defense and cutting taxes n the rich and the poor didn't cause inflation or that government deficits just only matter when there is a Democrat in the White House.
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It was 1982, I was scheduled to speak before a group of  in New York City of Defense contractors and their wives, a kind of keynote speech on the great things coming their way from the newly enlarged and rapidly expanding DoD budget.   I could bring my wife,  we were to stay at the Hemsley Hotel, newly renovated, and they had tickets for everyone to a hit Broadway show with dinner after that at midnight.  Unlike spending hours on a plane to give a speech before people who just wanted to know how they could get their checks, and why was there so much paperwork with government procurement, this one perk was the best I had in seven years in the Pentagon.  I had flown up to New York with my wife, we were in the hotel, when I received an urgent call, it was Friday, the speech was on later that evening, and the conference on Saturday with the show later.  My boss, David Chu (President of IDA now and a great friend and colleague) called and asked if I could fly back to DC and then go to the Old Executive Office building to brief Dr. Weidenbaum as to why DoD's spending was super inflationary.  Alan Greenspan had suggested that I was the best one to do this.  And so I flew back to DC, and for the first and last time in my life, entered the august space that the Chairman in that grand old building on 17th Street, the East Wing of the White House complex.
Ushered into the office, I was alone with Alan Greenspan, who I had only spoken to on the phone and Murray.
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 th There was was seated between perhaps the best known critique of why defense spending was somehow more inflationary than any other spending, a now so well known, outside of New York financial circles economist, Alan Greenspan (better known for playing his clarinet and saxophone in the Woody Herman band in the 1940's) who had his own economic consulting firm offering advice for a subscription of $10 K), and myself, best known for absolutely nothing but a bit of self promotion when I managed to restart doing economic analysis on issues related to defense spending when I was desperate for a job after four years in Geneva at the UNCTAD.   But at thirty-five or so I was absolutely sure that I was right about one thing -- inflation didn't come because supply of defense equipment and demand for toilet paper didn't match. Spend a dollar on defense or give it a Social Security recipient, it was the same dollar going out into the economy.  Murray, bless his heart, had made his spurs on the idea that defense spending, because you didn't use the stuff, was more inflationary precisely because the product produced never saw the light of day supplying necessities.  I had been batting that argument down for years usually with reporters and commentators who seemed to thing that spending on their writing was more useful than on a new F-15.  

To make a long story shorter, I failed.  Murray was unconvinced.  Alan tried his best, i tried my best, but he was determined to tell Ronald Reagan he could not have his cake and eat it too -- no big bump in defense, no Star Wars, no driving the Soviets into the tank, no tax cuts, no extra desert, just deficits, Republican deficits, but dangerous waters all the same, and so I went back to  New York, saw Dream Girls on Broadway with my wife, had a nice meal, and a few months or days, not sure later, Alan Greenspan became famous -- first at Reagans next Chairman of the CEA, and later the second longest serving Chairman of the Federal Reserve. 

I've been working this problem for many, many years and the longer I think about things, the more I'm convinced that budget deficits really don't matter so long as there is excess supply.  The complexity of the economy and the tendency for most products to have more people welling than buying, makes the idea of inflation being caused by sudden demand for hoopla hoops or F-15 parts as causing inflation is nonsensical.  We are in a point where people are crying out for help, where helping people to spend money is more important than some number with lots of zeros on the page after it.   My best guess for 2030 in nominal dollars is that the world economy measured in gross output or production will be over 400 trillion dollars but in 1995 dollars just half  this amount. Its just numbers, less meaningful than if I said its food in Sudan and diamonds in New York.  So when Republicans talk about deficits and the dangers I think of my grand effort to convince Dr. Weidenbaum that spending on defense wasn't more inflationary than giving a tax cut to Warran Buffett or Jeff Bezos -- as I used to say all the time -- its just a bit of aggregate demand. So what, in the worlds of the immortal  Alfred E Neumann "What Me Worry!!!"

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Leaving Afghanistan -- Charlie Wilson's War  Revisited

12/21/2020

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In 1985 I was leaving my job as Senior Economist at the Pentagon where I had been for seven years.  During this time I had rebuilt the economic analysis capabilities of the Department that had been missing.  It was a good time to come and I had free reign to do interesting and important things.  During the Carter administration I had proposed and was in the process of starting a program of multi-national cooperation to issue NATO Bonds to rebuild defense capabilities and to allow multi-national sharing of the costs and benefits of procurement.  When Reagan came in he did what I was going to do with jointly financed spending through NATO bonds by deficit spending.  The goal was the same -- to drive the Soviet Union into the tank after their losses in Afghanistan had seriously damaged the government there.  I was planning to demonstrate massive financial stength of the alliance to the Soviets through the Nato bonds program and Reagan did it with deficit finance.  

Anyway in 1985 I was leaving to go to work for DRI/McGraw-Hill then part of S&P (see previous blog post), but just before I left I saw the Department try to change the way they calculated inflation on DoD outlays for equipment.  My office was the budget affairs shop for the DoD budget.  We set the inflation rate to apply to the projected costs of new and existing weapons systems in the yearly budget.  Since an aircraft carrier spent over 7 years, setting the right figure for future inflation was critical.  All weapons when budgeted for are based on a kind of hypothetical cost based on the point in the buy where the fixed development and tooling costs are relative to the fixed price, i.e. if we expected to buy 500 aircraft then the price at this point is some price well above the cost of the 500th aircraft after all the fixed costs were finished.  But the DoD comptroller, either out of ignorance or on purpose, had decided that inflation rates for DoD equipment must be different than for the general economy.  They had sent over money to the BLS to develop defense specific inflation rates for the categories of equipment that we purchased -- missiles, ships, fighters, tanks.  The BLS had used a kind of heuristic method where they captured the higher prices of the new equipment coming into the inventory after the end of the Vietnam war, more expensive ships and aircraft, and call all that early equpment with higher fixed costs inflation and then projected it would grow over time.  The result was a set of inflation indices that were higher than they should be since the higher costs were double counted -- once in the fixed costs by the point in the buy cycle and once in the BLS inflation indices.  When my boss was informed to use these alternatives, I protested, but the DoD Comptroller won the war.  Higher amounts were built into the 1984-85 budget -- about $ 50 billion.  Eventually I was able to secretly get the Congress to remove much of this excess.  

When I lost the battle for the soul of truth, I knew I had to exit, but before I did, I wrote a novel about what that slush fund might just finance.  Years later, many years, I  revised that plantive story into what is now available on Amazon in print and electronic formats called The Rings of Armageddon.  I made the first revisions after I saw the Towers falls and after we had entered the war in Afghanistan.  

Last night I revisited Charlie Wilson's War, the story of how the US increased the spending on the secret war after the Soviets.  In my story, revised as it is, it begins with when the US decided to get real about the Soviet-Afghan war. 

The following is an excerpt from the Rings of Armageddon available on Amazon in print or electronic form. 

Pakistani Northwest Territories, March, 1982   
             
The Arab gritted his teeth in the bone numbing cold.  It had been a long, slow ride up from Peshawar.  He was exhausted from the jostling as the truck bounced over the rock strewn road not much wider than a goat trail.  It was far removed from his native Qatar with its flat, dusty, desert or the towers of Doha.   Opposite him sat the American officer who seemed impervious to the biting cold or the rough ride.  His coming a month ago had shaken his world more than had the Imam who dared him to come to this God forsaken land in a mission of holy Jihad.   Before the American had come with his attitude and his airs, he and Omar had led a comfortable life in a heavily guarded villa in Peshawar.  Ibrahim had been content setting up religious schools for displaced Afghan boys in the refugee camps that dotted the Pakistani border with Afghanistan, and doling out money to the many different groups fighting the Soviets to free Afghanistan.  Ibrahim was the Saudi representative to the Afghan rebels, a sinecure offered by the Royal family to his own, very influential family, in part to get him out of Saudi Arabia where he was known as a troublemaker.  In Peshawar he coordinated with the Pakistani’s to arrange travel and visas for Moslems willing to die for the cause of freeing Afghanistan from the godless Russians.  Hassan had come to help out six months before, but had rarely left the villa until now. He was from a rich banking family in Qatar, but had become enamored with the cause of the Afghani freedom fighters.  He was hardly the most observant Muslim and during his wild, American college years, had dated and partied frequently.
 
The American officer had just recently arrived to coordinate supplies. The comfortable life in Peshawar wasn’t for him, and he had challenged both Omar and him to do more to fight the Russians pulling them both into the eternal struggle between the money worshiping Americans and the godless Russian Communists.  And now, cold and hungry, and angry, he was in a truck on his way to seeing firsthand the unequal fight between the Mujahidin and the Russian imperialists.  The Americans wanted to develop new supply routes into these difficult to reach mountains for new weapons and equipment to make the battle less one sided.  The Americans would take care of gathering these weapons and training the foreign jihadists and local Afghans in training bases just inside the border in Pakistan, while the Saudi’s and other Gulf oil nations, including his native Qatar, raised the funds to pay for this new equipment.
 
The truck stopped suddenly sending him pitching forward.  He listened while the driver spoke to the American in Pashtun, a language he barely understood.  The American stood up and reaching down helped him to stand.     
 
“Come,” he said in Arabic, “we’re here.” 
 
The driver helped them down from the truck and pointed to the mud brick building with a dirt-encrusted sign in English with the word Café barely visible in the moonlight. The American now took the two packs and rifles from the truck.  Without waiting, he lifted one on each shoulder and walked towards the light, leaving the Arab standing in the cold.  Reluctantly, the Qatari followed.  He was enough of a mystic, despite his Western education, to realize that from this point on their lives would be intertwined, like vines on a tree, so that even if they went in different directions, at some point their lives would intertwine again.                 
   
The driver pointed towards the back of the smoky room.  The table was set back, away from the others, and there was one man seated, the face hidden by a hood so that only the eyes could be seen in the shadows.  The building was old, the thick adobe brick walls holding in the heat from the open fire at one end providing what little there was.   The air was thick with tobacco smoke and the smoke form the three oil lamps that hung from chains anchored to the ceiling.  On one wall was a torn poster for an Indian movie complete with a half clothed young woman.
           
The face was hidden under the patu, the warm blanket that Afghan men used to keep warm in the mountains.  The voice that greeted them, however, was that of a woman.   The Arab startled.  The American pushed the hood back to see the face more clearly in the dim light of the kerosene lamps. Her eyes were gray-green, deeply set, and penetrating.    
 
“A girl?” the Arab said surprised.
 
“I’m mujahedeen!”  She corrected. 
 
 Before any more could be said, three grizzled men walked to where they were seated.  The girl rose motioning them to sit, but the men continued to stand speaking quickly in Pashto.      They left and then she sat down again watching as they withdrew to a table closer to the door.  
 
“They’re to take us into the Khost region tomorrow, just over the mountain from here.”
 
“How long to the first village?” the American asked in English.  
 
“Depending on the Russians, a few hours, or days, or never,” she said in English, her accent lilting, but her words clear.  She was thinking about the road ahead.  She stared at the American.  He was ruggedly built; there was the look of a man who could not be stopped by high arid mountains and cold winds.   Then she stared at the other man, the Qatari.  He looked too frail to survive the mountains and the Russians.  
           
 
“Will he make it?” she asked in Pashtun, looking directly at the American officer.  
 
The American looked at the Arab.   There was something in his eyes that told him the truth.  He translated the girl’s words into Arabic and the answer was quick in coming.
 
“He says if a girl can make it, then he can too.” 
 
A thick stew of lamb, with warm Afghan bread, and richly brewed black tea laced with cardamom, was brought to the table.    The woman ate sparingly; with wary eyes she watched the two men wondering which would crack under the strain.     It would be a long journey through a dangerous land from the Panjahir valley, where the Tajik’s fought the Soviets in the north to the plains of Kandahar in the south.       
 
They finished their meal and were about to follow their Pashtun guides out to into the night when an old Sufi hobbled over to their table.  He spoke in a whisper in a dialect neither man could understand.  The girl listened carefully, and then she smiled.  She translated into English.
 
“He’s Iranian, a Sufi holy man.  He reads fortunes. He asks if you would like to have your fortune told?”  
 
“Why not?” the American answered intrigued.  So far his life had been more than interesting, but what might come now was more of a gamble than when he had flown deep into Vietcong territory as a forward air controller during the last years of the Vietnam War. 
 
 “Only Allah knows the future,” the Arab answered looking towards the door. 
 
 
The old man sat down at the table as the girl laid a few coins in his cup.              
 
 
With his gnarled, arthritic hand, he took her palm first.  He studied it for a long time and then closed his eyes; his face turned dark, as he let go of her hand.  As the old man spoke, the girl’s smile disappeared
 
“What did he say?” the Saudi asked anxiously.
 
“Some futures are best not told,” was all she could say through tears. 
 
Next, he reached for the American’s hand, studying it.     When he finished, he motioned to the Arab.    The Qatari pulled away, but the American reached for his wrist and pulled it forward placing it in the old man’s hand.  The old man gripped it tightly and for a long time he stood very still mumbling words that only he understood.   Finally, he spoke, his voice almost a whisper.  The girl listened carefully, and then translated from Farsi.
 
 “Brothers in blood, owing a life, separate paths to the same end at the place where it all began.  Death will find both in a blinding flash of fire as bright as the noon-day sun.” 




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S&P Global buys IHSMarkit -- Full Circle in a Half a Century

12/9/2020

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Commercial economic forecasting started with two companies that were formed out of research that began in the United States just after the end of World War II.  Wharton Economic Forecasting founded by Larry Klein out of the University of Pennsylvania and DRI (Data Resources, Inc.) founded by Otto Eckstein out of Harvard.  Rumors have it that both Otto and Larry were investors in each others companies, but they were less rivals and more friends.  At about the same time as they were building models of the US economy using the brilliant help of their best students, Mike Evans claims to have built the Wharton model and Alan Sinai the detailed monetary relationships in the DRI model, others were studying the post-war World Economy including Hollis Chenery at the World Bank and of course the links between industries Wassily Leontief out of Harvard with his IO models. 

What made DRI special came from the integration of the release of government data in a form that could be modeled and the availability of the EPS software to link company activity to the broad based forecasts that DRI's model was making available.  An army of Harvard MBAs went forth to the business community to sell this new service and to teach economists in the large, Fortune 500 companies, to integrate their own company sales information with the detailed forecasts coming from the DRI model.  Otto's great innovation might have been to produce not none economic forecast but four each month -- Control, Optimistic, Pessimistic, and the one that I thought was most innovative, cyclical.  This insured that DRI's money making computer could earn more money as the Army of users had to run and print out alternative sales forecasts for their companies.  Otto also allowed users to interact with their model.

I first encountered DRI when I went to work one summer at the Treasury in 1971.  The United States was running a large deficit on its BOP.  Gold was flowing out and Nixon and his Secretary of the Treasury, Connolly, wanted to have an excuse to take the US off the gold standard (The Smithsonian Agreement).  So they broght in a few graduate students, loaded up data on US imports and exports (about 100 categories), added a teletype machine, and divided the products 20 to each of us, and said, here's data on the US and its partners and make equations on trade to show what the deficit will be next year and five years.  

Later, I was reintroduced to DRI in 1977-78 when I was trying to leave Switzerland and the UN.  I was recruited to interview for positions in the company when I was still in Switzerland.  Returning on home leave, I interviewed with a number of groups only to learn, years later, that I was too much a threat and didn't get a job.  But for the company, it is fortunate, I just didn't hold a grudge for when I did move back to America, to the Pentagon, to reestablish economic analysis after in the Office of the Secretry of Defense, I hired DRI and WEFA.    

So in 1978, just before DRI was being sold to its new master, McGraw Hill and later to be merged into the growing portfolio of companies under S&P, I ended up as the Pentagon's Senior and only Economist with a mandate to do whatever the hell I wanted.  Joe Kasputy's engineered McGraw-Hills purchase of DRI for $ 100 million dollars and moved from the Washington office to Lexington.  Before he left he had installed George Brown as my contact for the large, and growing contract I had with the company.  Brown moved into Kasputy's spot as head of the Washington office, and when Kasputy's moved up at McGraw-Hill/S&P, Brown moved to Lexington.

In 1985 I finally made it to DRI to build the World Sea Trade Service that led to the current set of models that I still control and build on.  By this time DRI was a large, money losing part o the S&P franchise  due to its own success.  As the company added more and more data and services, it needed more disc space and the computer system they had was unable to host more storage.  So just as the PC was entering the business community, the company was still invested in time share computing.  The steady decline in revenues coming from simple operations meant that ultimately the business model that had started so well was into the terminal phase of the decline.  DRI waited too long to move to the PC, to port the EPS software to the smaller machines.  At one time in order to do an update of the World Sea Trade Service bilateral trade models it took up 40% of the main frame capacity. 

Just as DRI was floundering as it tried to manage the transition, the other competitor WEFA was also having problems.  It had transitioned to the PC earlier, but the competitive space for DRI and WEFA was the same set of Fortune 500 companies.  George Brown left, taking with him the Trade Group, but the writing on the wall was that both WEFA and DRI needed to merge.  DRI's new leader had proposed to buy WEFA and close it down, to this end he had acquired the WEFA client list.  But as he was waiting for the answer to the McGraw-Hill offer, or at least this is the story I was told, the news came over the wire that Bain had sold WEFA to Primark, the company that Joe Kasputy's now ran.  And so, after all that it was Primark that combined DRI with WEFA to produce Global Insight.   This leads us directly to the sale of Global Insight to IHS, then IHS merges with Markit, and finally IHS Markit merges with S&P, so Otto's creation, the company that changed the way we use data (electronically) and how how we interact with economic data through models and multiple forecasts of the future is once again, safely, within the S&P family of companies.       

   

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Phoenix Agenda Trilogy -- capitalism under siege

12/3/2020

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 “Who is John Galt?”

The tag line from Ayn Rand’s master work about the disintegration of economies.  Her experience growing up in in Russia going through a revolution and its aftermath made her think carefully about how societies turn on themselves.  In a way my novel was formed from reading and rereading Atlas Shrugged when I was a teenager.  I think I missed the philosophy of selfishness that Rand espoused.  But it is a compelling narrative despite its obvious flaws.   Even when I loved the story, I think I hated the philosophy.  So few people are in the .1%.  I think it’s a bit of luck of the genetic lottery and a bit of family money to help out, and not growing up in the ghetto, or having the connections to get into the right college.  Rand mixes up the Roosevelt New Deal with Soviet Russia.        I probably never read the last 50 pages of the story when John Galt speaks to the nation about how useful greed and selfishness is to motivate capitalists and how socialism and idealism destroy self-interest.  Libertarianism with its limits on government activities can trace its intellectual roots to Rand’s philosophy, but libertarians may find that building their dream houses on the shores of the rising oceans will not save them when the waters rise.    

​The story I’m telling in three parts in the Phoenix Agenda Trilogy (will be available on Kindle in 2021 unless I find a real agent for the story and try to do this the right way)  is a different story with a different message about capitalism and free markets than the one that Rand told.  The world we live in is far more complex than the one that Rand described.  Liberal ideals are not always bad and while sometimes Bernie Sanders seems more like Leslie Mooch of the National Economic Planning Board in Rand’s story, he’s not a socialist nor is the world likely to be socialist in the future.  Which system of exchange and development is better at meeting goals of clean drinking water, health, food, shelter, and happiness depends upon your philosophy.  Each has its benefits and its costs.  Which is better -- American capitalism with its independence and self-interest, European social democracy which is somewhere mid-way between  laissez-faire capitalism and socialism, but is over regulated and far too rule based (a by-product of the rule based Napoleonic system of laws introduced during the 19th century in Europe). Unlikely to emerge is the Communist planned economy of Soviet Russia with its Commissars and secret stores, or the new Hybrid Capitalist-Socialism of China that can only exist so long as excess production is wholesaled to the world.  Equally unable to fulfil the needs of the world we are moving towards is the free wheeling, mostly underground economies that exist at the fringes of the established systems.   

​The multi-billionaires who are at the heart of this story are like the Bezos, Gates, and Buffets of the world, are so rich that they see their purpose in making things better or at least believe they can make it better by destroying American style, managerial capitalism with its short-term interests in next quarters profits and the stock price rather than long-term results based on innovation and growth.     While Larry Fink can, as the introduction suggests, argue that public and private companies must look to growth as much as profits in measuring success, in social obligation to communities and the world as to shareholders and pension funds,  his investment firm often as not rejects proposals that don’t return 40% returns in three years.  They have good intentions, but often the best laid plans for utopia (from various American utopias created in the 19th century to the present day notion of classless, moneyless societies) fail because of human greed to get more than a fair share or contribute less than you take, i.e. freeloaders or for companies, free riders who pollute leaving the clean-up to others).   By book three the protagonists have the hard task of reconciling their ownership positions to the needs of society without losing the power that markets and self-interest to drive progress. 

The Revisions from the Earlier Version – The Phoenix Year, published 2014

The Phoenix Year, an earlier version of this story, has been updated to include Trump’s Presidency in this version. It was published in 2014 both in print and electronic versions with good reviews and little real success.  The publisher was distracted and honestly unless you get a major publisher you don’t usually make much from it.  Under terms of the original contract I had to deliver the remaining two volumes to finish the story.  I wrote both within about 18 months, but they were never published.  In that version of the story, the engineered financial and stock market collapse started in 2016. 

With the election of Donald Trump in 2016 a fait accompli and with time on my hands,  I decided to revise the first book now that I had all the rights back in hand, with the disaster moved to 2020 and to deal with President King’s (Trump) election consequences.  Much of the storyline with respect to placing tariffs on American imports by an American President, in this case President Toure (Obama) , to try to stop the loss of American manufacturing jobs, has actually taken place.  So in some ways, at least, part of the original storyline has come true.  How the Trump tariffs ultimately turn out for the US, China and the World economy remains to be seen. 

My goal is to get at least the three full volumes of the story published – The Society of the Phoenix, The Phoenix Storm, and Phoenix Rising and afterword.  In the last volume, the solution to how to reform modern managerially focused capitalism is suggested.   Managerial style, stock market fueled, capitalism may be harmful to the planet and to future life here.  To solve the problems of today and the known problems of tomorrow, then the time frame of cure must be in decades and centuries, not in weeks and months.  Cooperative capitalism with all stakeholders – workers, shareholders, managers, and governments – working towards the same goals may be a better approach to dealing with the issues we face -- from rising seas to virulent viruses.   If this means companies must cooperate with other companies, even competitors, then this is a better outcome than seeing one company drive the other out of business.  
 
The Ancient and Honourable Society of the Phoenix is the first book in a three book trilogy to be available on Amazon Kindle electronically and in print tracing the effort to reform capitalism into a new model reversing three hundred years of competitive capitalism to a new form of cooperative capitalism where companies work together for the great good.  In the second volume, The Phoenix Storm, the fall-out of the sudden collapse of the market and the loss of trillions of dollars in wealth on the global economy leads to a worldwide depression.  While Michael and Natalya fight for control of the Phoenix Trust assets in order to complete the Von Kleise vision of a cooperative capitalism organized to work together to solve global problems, other members of the Society try to force the dissolution of the Trust and the dilution of the assets.   As members of the Society are being killed one-by-one by Michele, one of Von Kleise’s former assistants angry at his decision to place the final execution of the plan  in Michael and Natalya’s hands, a meeting is arrange, high in the Swiss alps at a closed ski lodge to vote shares and decide the next moves of the Society.  Lacking enough votes to keep control without the share her father holds, Natalya flies into a war torn Russia to rescue her father from a Russian prison.  With the world economy nearly at a standstill, regaining control of the massive assets owned by the Trust and using these to restart the economy, the fate of the world comes down to if she can fight her way up the mountain, face down and kill Michele, and regain control of the Society and the Trust so that Von Kleise vision of a global business alliance organized around social principles of fairness and growth can restart the global economy damaged by the collapse of confidence and markets that the Society engineered last October.


In book three of the trilogy, Phoenix Rising, the Ross’s face a new enemy, The One Hundred Club, a secret group of executives of the largest companies who realize that control of their Boards could be lost once the shares sold during the panic are voted. While the Ross’s work to develop a plan for a rapid changeover in the make-up of the Boards of the companies they now are majority owners, they don’t control the current Boards of Directors.  Fearing poison pills and golden parachutes, the work of transfer shares and readying legal documents is going on in secret.    When Michael is kidnapped and held in a remote Caribbean Island estate, Natalya is forced to rescue him so that they can be in New York in time to execute their plan for the consolidation of ownership before the One Hundred Club’s members realize the peril their control of these world spanning companies is in jeopardy.   With a late October hurricane making its way, slowly, up the East coast and air travel limited, Natalya and Michael are forced to make the long sail from Turks and Caicos to New York in the one sailboat and with the one crazy skipper who just might make it in time to file the papers late on Friday with the courts.  Once in New York, the One Hundred Club and one member of the Society make a last ditch effort to assassinate the Ross’s before they can sign the legal documents needed to start the process of gaining control.   With the transfer of the ownership and the change-over in management and Boards completed,  they are  left with the huge task of rebuilding confidence in the future  and restarting the world economy using a new economic paradigm replacing self-interest, market driven capitalism of Adam Smith with a new model built on cooperative relationships, partnerships, designed to solve the pressing problems of the world facing the ravages of climate change and wealth inequality.   
 
 


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Everything You Wanted to Know About the QuERI Global Databases and Methodologies

11/26/2020

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When I left Merge Global in 2003, I brought the databases I had developed there with me and formed QuERI-International to keep these long time series, consistent, data sets alive.  Since then I've improved the models and expanded the coverage until today I want to pass them on to other organizations that can maintain and use these sets of data on industrial and trade for research into the future o the global economy.  Global Insight, IHS Markit, has maintained some earlier version of the original data developed at DRI and in a joint venture with WEFA as the World Industry Service without adding much to its structure.  After leaving Merge Global, the data was placed for a few years up on the Oxford Economic Forecasting system as a proprietary data set until they decided they wanted to do it all and kicked me off the system but given that the categories are similar if not identical to the original data on the system decided they might peak at the QuERI data.  I see they say that there system is the only fully integrated global model of industrial data. So I thought it might be nice to get a good idea of what the QuERI Global Model does cover and how it can provide useful insights into the changing structural patterns of demand in the world economy in the Post-Covid world.

​​Everything You Wanted to Know About the QuERI Global Databases and Methodologies—One of the Largest, fully integrated, Global Trade and Industry Data sets covering 72 countries for more than 400 commodities over the period 1990 - 2030
IN a few weeks, QuERI-International will make available to governments, research institutes, educational institutes, and private companies with the need and skills to use a global data base covering 72 countries at the ISIC3 level of detail for industrial activity, market demand, international trade, private consumption, investment, employment, prices, and main macroeconomic components in a complete form at a nominal price. Given the complexity of the data and the consistency developed over the nearly forty years of full development, this primer was prepared a few years ago to explain the methodology and approach.  For more information, contact me at querieconomics@gmail.com.
1. Where does the data come from?  
International data on industrial activity and trade comes from many different sources.  The problem is that it is often out of date, incomplete, and not detailed enough to allow companies to link operational and performance to market conditions in the countries they are operating in.  Solving this problem of getting baseline estimates that are both reasonable, i.e. tied to known information even if not exact, up to date, i.e. close to the current year and with forecasts into the next few years, and in sufficient detail to be linked easily to company products is hard.  QuERI solves the problem using an integrated set of global models linking industrial production within a country through an input-output model for the country so that demand for steel is related to growth in demand for automobiles, trucks, construction, etc.  Production of steel, for example, is closely tied to demand for steel from all sources of demand -- sales to other companies and final consumption demand (quite limited for steel, but significant for some steel products), it is also tied to foreign demand (exports), and usually is negatively impacted by imports of competing products. 
 
2. Achieving Consistency of Industrial Classifications – Actual & Estimated Data 
Accuracy is a more difficult question to answer since even government data is often inaccurate. Actual UNIDO data is generally available with missing data for most countries for manufactures at the ISIC3 detail.   We insure as much accuracy in the estimates as possible by using known data to scale more detailed  estimates derived from detailed (NAICS 6 level IO models) to available data from UN and country sources.  What international data we do have at the NAICS 6 level of product detail (covering more than 400 individual products) is international trade data.  At a somewhat lower level of detail we have international data on production of manufactures and some services, at the ISIC 3 level of detail (about 120 commodities) from UNIDO*.   Production data on services depends upon UN Standard National Account data.  To get down to the NAICS 6 level of service detail we use detailed country-specific IO models.  
 
 
3. How can you get to NAICS 6 level when the data for 72 countries at that level of detail barely exists for only a few countries and how can you insure consistency across countries?
There is no simple way to get to the detail needed for useful forward projections without using a framework for linking industries together through their relationships to one another and to the economy as a whole.  Input-Output models were first developed in the 1930's once sufficient data on the economy became available.  Developed by Professor Wasilly Leontieff these relationships were used strategically during the World War II to suggest targets for bombing that would slow or halt German war production.  As a result the Allies bombed the German ball bearing plants rather than the truck and tank plants as the Generals had first suggested.  Since then IO models have evolved and are available for many countries -- rich and poor.  Models, however, are developed over many years and with a frequency of around 5 years between releases.  There may, however, be 10 years between the date of the current model and today's date.  The 2002 US IO model is the only one now available at the NAICS 6 level of detail.  Annual models are estimated at a higher level of detail by the US BEA, but are simply based on limited information and estimates drawn from scaling rows and columns (balancing what is the known production of a commodity with the known demand for the commodity).  
QuERI has developed a  variant of this approach to estimate models for all countries based on a standardized US detailed IO model (430 rows).  Column totals are aggregated to the core model's 63 industry groupings (ISIC2 categories) and to vectors covering investment (63 industry groups), 16 private consumption spending categories, and 4 primary government consumption categories.  All of the columns are derived from the core, global econometric forecasting model.   Differences between countries in terms of consumption patterns (rows) are based on ratios between the known estimates of apparent consumption and the base model's estimate of apparent consumption. Using a balancing approach then individual differences between countries -- rich or poor, large or small-- are accounted for in the IO model's structure.  These adjusted models cover the periods 1998 through 2010 for all 72 countries.  This allows for a pure estimate of market demand and production by NAICS 6 categories (410).  
 
4.  What are the risks from this approach?
There are risks to assuming that the production and market demand estimates are precise. There's some precision at least in terms of total market demand and production at the ISIC 3 level of detail.  This level of industrial detail is only available for manufactures and with a lag that often stretches for several years.  Consistency across countries is assumed primarily because of the classification into a standard international definition, but it is likely that many of these sectors are approximations only.  Often, as not, for many countries no data is available despite the fact that exports do exist thus suggesting there is production.   Production data for the US is through 2011, but for most countries it is through 2009.  Forecasting models are then used to extend UNIDO or UN data through the current year.  To be absolutely clear we can't guarantee the accuracy of the raw government data which is, like GDP, based on a sample of sales data collected from industries.    No government provided data is precise as attested by the fact that Gross Domestic Product is itself just a sample estimate from limited information and is subject to full revisions sometimes years later.
What we can say about the estimates are that they are done in a consistent, and quite reasonable way.  They force estimates to line up to known information on production and trade where available.   QuERI country IO models are based on a detailed US IO model adjusted for differences in consumption patterns across countries.    For example, the changing share of computers in purchases of companies is reflected in the changing percentage of spending within intermediate demand, investment, government, and private consumption vectors.     As a result we are re-balancing the IO between rows and columns to insure consistency and it is this structured approach to measuring likely market demand that is the greatest strength of the QuERI model and data sets.
 
5. Why is this so special?  What's new about it?
There are many different levels of data availability.  The most detailed data that is easily available is foreign trade data.  Export and import data is available at the 6 digit Harmonized Code detail from the United States Commodity Trade Database.  It is generally up to date (current data is through 2011), but there are lapses.  Some countries simply don't report frequently enough, but if your company is looking for something that describes at least a part of the market in any market in the world you should be able to find it there.  
The problem, however, is that it misses what might be a very large market.  It doesn't provide any intelligence on which industries are buying the product or the potential of these "customers".  The only way to get at that is to do a survey of the market, but as any company doing the survey will tell you without knowing how large the market was at one time and it's relationship to the smaller survey sample, you can't get down to this level of detail with any more accuracy than simply making a guess.  
The QuERI data was developed to answer the larger question -- what is the "potential" size of the market.  Trade covers only a small portion of the market for most countries.  And while production and trade data together might be found, production data is usually out of data and difficult to interpret.  QuERI solves the problem by combining data from multiple sources and then processing it through a structured IO model to create pure estimate of likely or potential demand irrespective of the source of supply (domestic or international).  By using more detailed IO relationships then estimates can be developed that are more detailed than available from government sources, but which are based on a rational methodology that can be defended because the underlying relationships between buyers and sellers can be understood.  Further because it is a detailed build-up from the likely buyers, it splits estimates into four primary areas of demand -- intermediate, investment, government, and private consumption. 
 
6.  Is there an underlying model to explain differences across countries?
Countries move through stages of development.  This idea was proposed by W.W. Rostow that there are five stages of development:   
  • Traditional society -- with limited technology and poorly developed agriculture;
  • Pre-conditions to "take-off" - new technologies allow more production, agriculture becomes more efficient allowing shifts of more people to cities and villages, development of market system;
  • Take off -- manufacturing starts to allow a rising standard of income, exports and trade expands, new basic industries like textiles and apparel become concentrated in a few countries, but gradually technologies spread leading to new trade opportunities;
  • Drive to maturity -- new technologies are developed, new products, consumer spending and life styles improve, new transportation allows longer distance trade and distributed production;
  • Age of mass consumption -- rich, socially developed societies, mass consumption allows a higher standard of living for more people, detailed trade networks link countries, technologies are transferred, manufacturing is dispersed, labor costs equalize.
But Rostow's stages fail to take into account shifting patterns of trade and industrial development.  Rich countries may not remain always rich and patterns of production of finished goods will in time give way to a larger and more important service sector.  International trade may actually reduce living standards as poor countries substitute production and traded goods in rich markets reducing the flow of money and lowering wage rates.  Where Rostow's theory always assumed that the final stage is a steady, but slower period of growth or at least stable wealth, we have observed as globalization has spread that it may also reduce living standards and lead to stagnation or even recession.  
QuERI models are based on a pooled-cross-sectional econometric model.  This allows countries of different stages of development to be included in the model so that the coefficients measuring relative wealth (macro variables like per capita GDP) and market size (measured by urban population size) allow forecasts to reflect changing wealth and country size.  Models include other variables that are less generalized and more directly related to the dependent variable such as imports, exports, intermediate demand, final demand and prices.  Unlike time series models based on a single countries experience, pooled models take the generalized experiences of many countries -- from poor to rich -- into account when developing coefficients.  Additional elements allow for some variables to be more specific to one group of countries while others are allowed to reflect the broader differences across all countries irrespective of their wealth.  
Thus the dynamic, iterative, forecasting model is a true reflection of Rostow's theory.  It allows longer term projections to be made as well as short-term trends to be integrated.  Countries with limited production in more technologically advanced products can develop over time into manufacturing centers of these products as they develop.  The non-linear pooled models allow for this kind of transformation making the QuERI models uniquely suited for capturing the changing global dynamics of production, consumption, and international trade. 
 
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Global Trade in the Post - Covid World

11/24/2020

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Tariffs, Quotas and Jobs -- the Lordstown Conundrum
The workers of Lordstown voted for President Trump in record numbers because he is, as he says, "the tariff man". There are no guarantees in life, and less so when it comes to replacing known supply, often qualified to make the intermediate you need in your end product, and some generic product that may not be supplied on time, at the quality standards you need, or even for a good price. Call it what you like, open markets and free exchange is a far more effective trade policy than trying to pick winners and losers like President Trump has done. With tariffs, its the wack-a-mole on steroids as companies find new foreign suppliers, if need be, pay the higher tariffs on the assumption they will go away (as Trump promised in his deals with China), but rarely do they sign up for the four or five year, multi-billion dollar investment, in adding new domestic supply with the political system on a four year schedule of policy adaptations. To limit trade imbalances, you need across the board, non-discriminatory, tariffs on all imports that will allow private companies to make the hard decisions on cost and efficiency that trade policy demands.

Towards a New Approach to Global Trade Policy: Fair and Balanced Trade to Make Globalization Work
From
Dr. David L Blond, President, QuERI-International (301-704-8942, davidblond2000@gmail.com).
 
I have been studying American and global trade policies now for the past fifty years. I have written often and without much effect calling out the dangers to the erosion of the manufacturing base well before it became popular with politicians and economists beginning at my time at UNCTAD in Geneva in the 1970’s, later as the Pentagon’s Senior (and only) economist in the Office of the Secretary during the Carter and Reagan years, and for the next nearly forty years in the private sector. I worried about the imbalances even as I made my living forecasting and analyzing the global economy writing a series of essays in The Manufacturers magazine in 2001-2004 suggesting how to slowly and deliberately reverse the steady increase in the US trade deficit that began after the Reagan tax cuts and the back-to-back recessions of the 1980’s. The following ideas were first proposed in these essays appearing monthly, but they are as sound today and could easily fit into your own plans as they were then.  The QuERI Integrated Global Model is one of the largest and most complete models of the global economy covering industrial and service output, employment, prices, and international trade.  


Multilateral Solution to the Trade Imbalances
First general principle: Trade must be fair and also balanced if it is to be useful and equitable. 
Second general principle: Any tariff applied must be non-discriminatory and not tied to any single country or product flow. The world is far too complicated and interrelated to allow governments or even smart people to decide winners and losers.
Third general principle: The damage of from imbalances impact both the countries in surplus and the countries in deficit equally, thus the remedy must be applied to both sides of the equation.
Forth general principle: Any changes in trade policy must be made collectively, not unilaterally, thus the United States should propose and lobby strenuously for a revision in the WTO compact that requires the following from all countries party to the WTO agreements:
1.     At the end of the year, the degree to which a country is out of balance with its trade account needs to be fairly assessed allowing for some exclusions for emergency imports or other irregular imports. Countries with trade imbalances for more than two years in a row or three out of the last five years will be required if these imbalances as a share of their GDP are greater than an agreed maximum to apply to all:
a.     Imports for countries with a chronic deficit then governments are obliged to add an ad valorem tariff of 10% on all imports with the exception of primary products (manufactures alone).
b.     Exports for countries with a chronic surplus excluding primary products will be obliged to add an ad valorem excise tax of 10% on all outgoing manufactures.
2.     When countries regain some balance, then international trade and globalization, both necessary for the long-term health of countries and world economic prosperity, then tariffs will be less necessary, but form an automatic stabilizer.
Fifth General Principle: Don’t decide winners and losers, but allow natural processes determine who will change behavior with respect to imports. Thus applying the tariff across the board, on all imported products with a few exceptions, recognizes that companies understand their supply chains better and the costs they incur. A 10% increase in expenses on 30 or 50% of the inputs may place them at a disadvantage against competitors who have a far smaller bill for imported inputs, thus unlike a tariff on final products, companies will adjust sourcing to remain competitive and profitable. Applying the tariff on all imports eliminates the ability of companies to switch suppliers from one country to another with the only recourse to choose between foreign suppliers and domestic suppliers.  
Notes: The successive rounds of global tariff negotiations have significantly lowered barriers to entry until President Trump’s imposition of tariffs on a unilateral basis disturbed the global eco-system, but as the failure of the Doha Round, the last major unresolved global tariff negotiation showed, it is unlikely that there is much benefit from further efforts. Agricultural products are often the center of these talks and also pose the greatest danger to stability. Insistence on opening up the production of food to foreign competition has proven dangerous and destructive. Internalized growth in agriculture has proven to be a powerful force for growth in other sectors tied to agriculture. Self-sufficiency in food supply is insurance against the vagaries of international markets and prices. American efforts to “open markets” have been unhealthy given that long term global food security is critical to insuring adequate stocks in times of famine. 


Balancing Private Sector Obligations to National Economic Wellbeing
Objective: Incentivize companies large and small to see their responsibilities to countries where they operate to create conditions for economic growth and expansion both in surplus and deficit countries. Subsidizing companies through tax credits whose net contribution to economic welfare is positive and penalizing companies whose net contribution to growth is negative. 
First Principle: Company revenues in a single country and company expenditures should be in relative balance in order to maximize the benefits to consumers, workers, and communities.
Second Principle: National economies must serve the entire community of interests, not just company optimization of profits, demand for goods and services reflects the national economic outlook, so selling into a rich market while rewarding, must be balanced against benefits offered to that market through purchases of materials and labor, sufficient supplies, or benefits to consumers through low prices. 
 Third Principle: Let companies determine the mix of domestic and foreign inputs while adding in costs and benefits associated with differential corporate taxes on profits are factored in. 
·       Measuring net contribution by calculating the share of total revenues from domestic sales relative to total sales worldwide against total purchases (materials, wages, and services) from domestic sources against total purchases worldwide.
·       Calculate marginal corporate tax rates based on relative share of domestic sales to domestic purchases with tax rates as a multiple of these ratios:
o  Ratios less than .8 (domestic sales/domestic purchases) are taxed at ½ standard corporate tax rate on profits, thus rewarding companies selling more overseas relative to domestic supply.
o  Ratios between .8 and 1.2 are taxed at the standard corporate tax rate on profits.
o  Ratios more than 1.2, where domestic sales are greater than domestic costs are taxed at 1.5 times standard rate.
·       Implicitly this approach would penalize wholesale channels that buy exclusively from overseas sources of supply. It is likely these sellers would have to raise their margins and potentially diversify. Higher prices for imports would reduce profits of companies relying on foreign sources exclusively. 
·       Applying the corrective only to profits, not costs alone, as tariffs do, will allow the private sector to determine sources of supply, not government regulators. It will also slowly resolve the problems of retailers in finding domestic alternatives. International trade will remain important, but trade imbalances will be forced through market forces back into closer balance by decisions made at the company, not government level. 
·       Additional taxes collected as a result of trade imbalances will flow to governments allowing them to fund programs to enhance domestic supply and competitiveness.  




It is my hope that this short and clear description of the optimal approach to solving the problem of rebalancing the global economy will get to policy makers and leaders, including Vice President Biden. We live in an interconnected world and President Trump's efforts have made it harder to find a good and honest solution to the dual problem of monopoly power of a few countries, as reflected in economies of scale in key regions as well as technology infrastructure, with the benefits of uplifting billions from poverty to a new future. These ideas were first suggested by me around 20 years ago in The Manufacturer Magazine articles, but they are truer today than they were then. Please pass this on. hashtag#Biden hashtag#Trump hashtag#internationaltrade hashtag#congress hashtag#trade hashtag#policy

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Our Interconnected American Economy...tread carefully Mr. Trump

2/4/2017

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  Every negative word about trade openness that has been uttered by Donald Trump on American trade policy I think I have uttered at one time or another.  People who know me, know that I've been consistent in saying that we need fair and balanced trade, not one sided trade as it now exists with just three countries with large, positive trade balances -- Japan, Germany and China (depending on whose statistics you use, Chinese export statistics or import statistics of its main trading partners) -- benefiting the most from free exchange.  Too often my wife and I have traveled through rural America and seen the destruction of the way of life in small towns when the major industry decamps for greener, more profitable, venues for manufacturing.  I worried about this imbalance when I was Senior Economist at the Pentagon and saw how dependent we were on imports of basic products -- from diodes to machine tools -- used in defense equipment.  I worried about the $ 18 billion dollar imbalance on our trade back in the late 1970's with Japan which seems paltry compared to today's imbalance of Japan with the world.  I once was called an "evil force" by no less than the American Ambassador to Japan for suggesting that Japan buy F-15's rather than make them there for twice the cost.  When I sent to DRI/McGraw-Hill in the mid-1980's and developed a global forecasting service for trade by commodity I watched as the US trade imbalance grew year by year.  As the yen revalued from 300 to 100, the import of Japanese products were immune to changes in entry prices as the price elasticity's calculated for Japan's imports to the US were close to zero.  I think I've studied the problem from every angle and written long essays suggesting some solutions and why steady and large imbalances are dangerous.  For more than three years I wrote monthly essays many on this subject alone for the Manufacturer Magazine with barely a response positive or negative from the CEO's and senior managers of the global companies getting the issues.  The reason  was clear -- economists said it was okay to run these imbalances, but as one drove through the  emptied towns and watched as companies moved jobs offshore, it became clear that eventually this would lead to a populist revolt. 

​In my essay published February 6, 2003 in The Manufacturer magazine, titled "Whose Economy Is It?" I asked the same question that President Trump asked when he chose the populist message: 

​"
An economy is like a democracy in that it involves a social compact between its citizens, who agree to work together to meet the needs of the community.  The American compact should not protect the livelihoods of Chinese or European workers.   International trade is only beneficial to an economy if it is balanced.  If it is unbalanced, as it has been for almost thirty years in the US, it can destroy more economic value more than it creates.  When the imbalance is negligible, there are clearly efficiency gains that accrue to the economy that outweigh any negatives.   When the trade gap continuously gets larger, we need to question how beneficial this condition is to the economic and social well being of the nation."

Economist argue that a good number of the jobs lost were lost to automation, not outsourcing, but that's not readily apparent to the communities where the plant is shuttered, but the products they used to make are imported from more modern plants in emerging markets.  The truth is more complicated.  My own estimate is that at least 5 million jobs can be attributed to the net of imports and exports.  This measure allows for technological changes as these are accounted for in the choice labor to output ratios used to measure job loss. Most of the jobs lost have been on the factory floor thus accentuating the negative impact on communities, while at the same time management level jobs have increased and the measure of "job loss" may thus undercount the true effect of the hollowing out of the companies. This trend is greater in the US than in Western Europe where strict labor laws make it harder to lay off workers without significant costs.  Moreover unions are stronger in Europe than in the United States. 

​In my recently published economic thriller, The Phoenix Year,  set in the present period, the main character is an economist recruited by the administration who had written a best seller  
The Economist’s Error: Why Globalization hasn’t worked for Rich or Poor  and when recruited to advise the President to try to slow the pace of globalization and defend American manufacturing with the net result of setting in motion the damaging realignment of the global economy that is the setting for the novel's elaborate plot to rebuild capitalism.  In Michael Ross, the protagonist in the book, there is much of Peter Navarro, President Trump's trade mentor. 

So I think I can say that I understand the frustration and the anger, but I must also say -- IT IS JUST TOO DAMN LATE TO CHANGE, THE TRAIN HAS LEFT THE STATION.  In the next section I  explain why any disruption in the flow of goods and services that is not well thought out and applied in ways that allow companies to make the choices will lead to economic disaster!!!

​How Dependent Are We on the World

A full scale trade war would be devastating for a country like the United States and a disaster for Mexico. China would be best positioned to come out the winner.  One thing I learned when I was the Senior Economist (and for a long, long while, the only economist working in the Secretary of Defense's office), technologically advanced manufacturing demands precision and uniquely manufactured inputs.  In the case of the military, MilSpecs tends to slow the progress possible from open source inputs, but in the private sector as the products became more advanced, the metallurgy and designs became more advanced of the factor inputs.    In the case of manufacturing the linked supply chain will have a combination of off the shelf products with multiple suppliers, and a number of very specialized manufacturers providing uniquely designed inputs.  Foreign inputs are often of the type that are only available from foreign suppliers or even subsidiaries of the parent company.  As micro economic theory suggests the gains from trade come from specialization as much as economies of scale.

Examine the table below and we can see the degree to which traded factor inputs are important to new and old-line manufacturers in the United States, China, and Mexico.  Looking down the list we can see that once beyond the specialized foods and beverages or tobacco, the US share of traded goods is significantly less than in China and Mexico.  This makes sense given that these two countries have become manufacturing centers for the world.  While Mexico has always been a natural source of low cost labor.  The original border trade zone set up as part of the Maquiladora trade integrated the Mexican manufacturing sector in a supporting role to the US companies needs.  Free trade in materials flowing both directions made Mexico a part of the US industrial base.  NAFTA confirmed this and extended it.  In the case of Mexico the dependence on imports to and exports is higher than normal.  

A similar pattern is apprent in the split between traded and non-traded goods in the input-output model calculated for China.  The hollowing out of US manufacturing has meant that less of the value-added is a result of factor inputs that are physical goods, while more of the company's normal activities involve less tangible products. To run and manage a large, multi-national company managements must buy services that are used not just to make the products domestically, but to support the worldwide operation of the company.

This smaller share of traded goods is not an advantage if more of the product is to be produced in the United States than today.  This restructuring of the supply chains would require companies to expand the direct labor contribution to output which must lead to a larger share of the value added coming from direct labor, the bending of metal, and less from the more intellectual management, sales, and design.  But assuming the goal is simply to replace the 25% of the current share that is sourced from outside, the transformation can't happen overnight.  Slowing the pipeline of inputs by raising the price or limiting the choices will reduce, not expand manufacturing in the short-run. 

It reminds me of a war game undertaken by the government during the Reagan administration that included along with the natural "going to nuclear after two weeks to end it" an unusual government-wide exercise to examine the potential for mobilization and control of the economy during the emergency. Aside from the Reagan zealots in Treasury demanding that the market system would adjust to a full mobilization, there was the FEMA old school plan to control a few key materials and to order entire sectors to reduce output and turn to making military equipment, like World War II.  I pointed out that if we followed that plan it would be the only war where unemployment soared as civilian supply collapsed while military production barely increased.  The reason was that the automobile industry could not produce modern fighter jets.  With that same logic the unique automobile production facilities in Mexico can't be turned off and Detroit suddenly turn on replacements.  

Finding American companies with the same capabilities and capacity available to fill requirements for foreign inputs for the products that we still manufacture here is one thing, but also seeing to the development of new plants to replace the often low cost manufactured finished goods is another.  

Finished Goods Shares

QuERI models split final demand into three parts -- investment goods purchased by industry groups, private consumption items by private consumption categories of expenditures (food, fuel, housing, housewares, etc.), and government.  In the two tables following we show for investment the foreign import share of traded goods and the same for each vector of personal consumption spending.   On average over 30% of the capital needed to expand US manufacturing turning green fields into new plants would need to be imported.  Tariffs or other impediments will slow or stop any expansion of manufacturing no matter how favorable the tax treatment is for new US manufacturing.  

Anyone who has visited a Walmarts or Target is struck by the share of the low cost consumer items that are sourced from Asia,  but more importantly from China.  So any effort to return more of these products to local sources of supply is sure to face the problem of finding any manufacturer who is willing to make these cheap products that are essential to furnishing and refurnishing our way of life.   When I began modeling and measuring the changing pattern of global trade as part of the World Sea Trade Service I used to note that it was highly unlikely that children's play boots would ever be made in the United States.  The profit margin would be low and the price charged well above what parents would willingly pay.   Multiply this by millions of items now sold routinely at prices that people already complain about and you will see that any Trumpian plan to remake American manufacturing by taxing imports from Asia or Mexico will lead to higher prices, fewer products in the stores, and more retail jobs lost as small and medium sized stores go out of business.  In the case of clothing and footwear nearly 70% comes from foreign sources and for furniture and other household products the share is over 30%.  Moreover economic theory should suggest that only consumer items that are efficiently made in the United States are still made here.  Thus food products have a relatively low foreign share in the US and China, but  higher share in the case of Mexico. 
 

 
 

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Summary and Conclusion

The issue of unraveling the web of connection that thirty years of growing deficits on our trade account has produced can't be solved with bombast.  It can't be solved by better negotiation.  You can't change the economics that makes manufacturing in China profitable for American companies. You can't reverse the decline in labor intensive American manufacturing to the point that there is very little produced of a low value here overnight.  And the key issue is why bother. Why make things worse without making them better.  The net result of Trump's ideas on trade and taxes will be massive deficits that make the Reagan deficits pale in comparison and likely higher prices and a lower standard of living for the poorest of our citizens as less cheap products are available in the Walmart and Target superstores.  

I urge anyone reading this blog to look at the shares foreign content in domestic supply chains (the cookbook for making what we still make here that comes from outside the country) and wonder who in business is going to pony up another 30% capital investment to make something that may not find a market by the time the company is in business and finally sets the price it wants to charge.  

The truth is that we all have benefited from the willingness of the rest of the world to subsidize American consumption.  Lower corporate tax rates could bring a few more jobs back, added costs of imports and risks induced by political chatter might add a few more, but for the most part the global system reflects the Ricardian assumption that specialization pays dividends and that open markets allow optimum allocation of labor to the highest value uses.  Any attempt to change this system without considering fully the consequences will be a disaster.  It is strange to see the stock market reach new highs even as Donald Trump blusters on with his America First Policies.  I must assume, as we all likely are, that his words are just that and that there are real adults actually running his government who will not do anything that "stupid."

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Making Free Trade Work for Everyone -- Rich and Poor, Surplus and Deficit Countries-- New Rules for World Trade

11/30/2016

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A Rational Trade Policy – Alter the WTO Rules Requiring Countries in Chronic Deficit to Impose Non-discriminatory Tariffs and Countries in Chronic  Surplus to Impose Export Taxes
By
David L. Blond, President, QuERI-International[1]
 
There is much of President-elect Trump’s agenda that I will never agree with, but on one point I do agree – we need a more American-centric trade policy.  I’ve  written about this for much of my life including years and more than twenty essays published during the 2002-2004 period in the business magazine The Manufacturer.  From my time as Senior Economist in the Office of the Secretary of Defense to my years forecasting global trade flows for commercial customers and governments, I’ve taken public positions on why growing imbalances in global trade are bad for the countries running surpluses and those in deficits.  In the case of the US, this has meant a loss in the capacity to bend metal and provide gainful employment to millions of hard working men and women without the means or interests to go to College.  For someone who makes a living from advising and forecasting the global economy with a special emphasis on forecasting international trade this emphasis on rebalancing the heavily one sided or unbalanced global trade accounts makes little sense. 
In my debut novel, an economic thriller, The Phoenix Year, one of the characters on the eve of the greatest financial melt down since the Great Depression that this character, a Swiss mult-billionaire, has engineered in part by collapsing a real estate empire of a Trump-like character, explains the problem to the more conventional economic advisor to the current President, as follows:
 “I’m not that radical. There is a role for government, but also a role for well-meaning capitalists with the skills and finances to make things happen. Government alone can’t keep an economy growing, or ensure that everyone who wants to work can work.”
“Describe this new man; this well-meaning capitalist,” Michael demanded, showing his own cynicism about businessmen in general. Too often he’d seen them act in the interests of themselves, rather than society, company employees or even the shareholders. Cutting jobs often profited them more than growth, and those profits relied on government assistance and subsidies. These captains of industry would then yell and scream that the government had to bring its accounts into balance.
“Only men who own companies outright are true capitalists. I own my companies, which means that I can take chances and forgo short-term profits, in order to get growth and stability for the workers who make my firms successful. The same can’t be said for someone hired by a team of outsiders, who may be only there for a year or two before they are gone, but who, in that period, may do damage to the company’s reputation and its workforce.  Its simple arithmetic: the circular flow of money has to be maintained; and productivity gains have to be shared with the ultimate consumers. Henry Ford saw that. He paid workers enough so they could buy Ford automobiles. I would say that your current version of capitalism is broken, Michael. For the past thirty years, ever since economists got into their head that globalization was the answer to all problems, rich and advanced countries’ workers have been in a race to the bottom. Wages have barely increased, and in many cases, have fallen. Don’t you see? It is time for something different; something noble and good; for both the owners and the workers.”    
Ten years ago I wrote this essay for the now defunct magazine The Manufacturer that I think summarizes the trade question.  In my essay titled “How I Learned to Love Chinese Workers and Not Worry About the Red Ink”  I wrote the following:
Two and a half years ago, I started writing about the trade deficit in this magazine.  I have spent a good ten-thousand words trying to get Executives of manufacturing companies excited about the risk to their businesses and the  economy from the growing, persistent, structural, trade deficit.   Given the poor response to these essays (I can count on one hand the number of e-mails I’ve received), I have come to the conclusion that I was wrong -- I would like to recant, like an old Communist.  It is smart business, not dumb policy, to let the Chinese and other, underpaid workers, do our work.    Giving-up high paying, secure manufacturing jobs, and the ability to make anything of importance here,  is an act of charity that should be lauded, not decried.  American workers who have lost their livelihoods, and the companies that have shipped their jobs overseas, should be praised for their courage in accepting the inevitable.   Executives of these companies should be rewarded with six figure salaries and bonuses for their intelligence and financial savvy in junking the messy, metal bending, for the highly profitable import-resale trade. 
 
American policy makers should be applauded for their sagacity in making the US dollar the key currency for international trade and finance, as well as American capital markets the largest and most efficient in the world.  Our current account deficit has grown each year – in good years and bad – for over 25 years.  The amount of outstanding Treasury Bills issued by the US government to foreigners is so large that it is no longer an issue.  Foreign governments can’t change it into any other currency without causing inflation.    Kudos should go to  American economic brilliance in hooking the world on holding onto dollars and not spending them. 
 
We have reached economic nirvana in which work no longer is of any importance.  We can have others do that work for us.  All we need do is have the government print money and give it to us in the form of tax rebates or,  when we are all unemployed, simply handouts.  Our job is to consume and by our consumption, the whole world benefits.
 
So my record on why trade deficits are dangerous is long.  It  began even in graduate school when I argued with my Professor and thesis advisor, Fritz Machlup, who saw losses of jobs as a form of society gratification that trade was working,  freeing up labor for other more profitable pursuits (the standard Ricardian argument for efficiency gains).   I almost wrote my graduate thesis not on how exchange rates impact trade between countries, but on the idea that there is a real labor production function that maximizes employment across all educational brackets as its measure of success.  There is need for brains and brawn.  I built some early models for the CIA to measure Japanese and Chinese trade protectionism using an objective cross-country model.  And when the US Japanese trade deficit was just $ 18  billion dollars, I was called an “evil force” in a back channel communications by the Ambassador when I questioned the decision to sell plans, not planes for the F-15 that could have helped rebalance the deficit.  
 
I have been forecasting global trade at a detailed commodity and industry level since the early 1980’s and I have watched the size of global trade imbalances grow larger each year making the benefits of free trade less obvious to me and to billions of people damaged by industries ability to take jobs from one location to another in search of the lowest wages or the least environmental rules.  So I will agree with President-elect Trump, something has to give.  It is time for a more balanced, rational approach, but given the web of relationships, it has been done carefully.
 
The Train Has Left the Station…the Genie can’t be put back in the bottle
 
We live in an interconnected world where companies depend upon long distance supply chains.  To slow global trade in one part of the world can have adverse impacts on the ability to make goods for sale in other parts of the world.  The table below illustrates this for the United States showing how in many critical manufacturing sectors the degree to which the factors of production, the inputs to make the finished products, are themselves largely sourced from foreign suppliers.  To slow this trade is bi production, factors of production – a mix of domestic and foreign content goods – are positive.  The likely impact then of disruptive tariffs will be to reduce production in the short-run, but the possibility of once disrupted for these companies unable to manufacture the products to survive is minimal.  Moreover much of what is sold in the retail sector now comes from abroad.  To understand the global interdependence look at the four table that follow.  Table 1 shows the share of foreign content in factor inputs for the United States needed in the production of both goods and services in the United States.  The foreign content share of factor inputs reflects the purchases by retailers, like Walmart, of necessary inputs to keep stores open, not the foreign content share of products sold.  The four columns to the right show the share of domestic consumption supplied by foreign manufacturers.  Tables 2,3, and 4 provide similar information for China, Germany, and the World. 
 
 What is clear from this is that any efforts to suddenly change trade patterns will have unintended consequences at least in the short-run, not just in the US but worldwide.  As I’ve warned now for more than 30 years (since my last year’s at the Pentagon in 1985) the growing deficit of the United States on our foreign accounts is dangerous and damaging to the ability of countries to grow and benefit from global integration.  After many years of thinking about this problem, I think there is a simple, easy to see, solution that if carried out with tact and skill can change the dynamics not just in the United States, but worldwide, allowing the benefits offered by globalized commerce to be shared.
 
Approach to Global Trade Rebalancing
The chart below illustrates the problem which is on a global basis less about China and more about Germany’s unwillingness to  balance its trade.  In the case of China the slowing of world trade growth to around 4% real growth and the continued growth in the Chinese middle class will lead to a deficit in the Chinese trade in constant dollars and a slight deficit before expanding towards the end of the period as world market prices increase for raw materials and the Chinese economy slows to only around 4% real growth in the later period. For the US, however, the problem remains that we are continuing to buy more than $ 700 billion dollars more than we sell to the world. Over the long period when this structural deficit has existed, millions of good jobs have disappeared.  But we can’t blame that problem entirely on China, rather the problem should be blamed on US manufacturers who have taken advantage of the growth in Chinese manufacturing capacity to source from China.  Chinese trade has tended to remain relatively in balance as much of what is exported is made up of imports of intermediate goods and raw materials. 
Figure 1: US, China and German Trade Balance
 
Three Approaches to Controlling the US Trade Deficit
Over the years I’ve suggested three possible approaches to controlling our trade deficit.  One approach uses the corporate tax code to penalize companies that sell more products in the US than they buy here while lowering the tax bill of companies that sell more outside the country and buy more here.  The second approach is based on an import warrant that must be purchased on the open market from either exporters (who earn a dollar’s warrant for every dollar exported) or from government.  By managing the total number of warrants outstanding in a period the government can gradually reduce the deficit while  offering incentives to exporters.  This would likely be seen as a subsidy for exports so the alternative is for the government to sell these using the money to invest in US industry and infrastructure.  These approaches are complicated and require changes in US legislation.
 
Change WTO Rules
Each of the other techniques for slowing or reversing the impact of the US trade will be outside of the WTO rules.    If we are to rebalance trade then we need an approach that meets the needs of more than a single country. The best approach is to change the underlying WTO Charter to require countries in chronic deficit to impose across the board tariffs on a non-discriminatory basis starting with 10% until the deficit falls below 1% or 2% of GDP.  Countries in chronic surplus would be required to impose a 10% export tax until the surplus falls below 1% or 2% of GDP.  If a country in chronic surplus as determined by the WTO fails to impose the tax, then chronic deficit countries will be allowed to add a 5% tariff additionally on imports from the surplus country failing to impose an export tax.

 
 
Our Integrated Global Economy
The QuERI Integrated Global Model unlike those of other companies includes the relationship between countries impacts the domestic production with exports generally positive to production and imports negative.  Thus reducing imports should logically make domestic output grow.  But there is a countervailing effect that comes from the share of factor inputs – iron for building buildings, chemicals for making plastics, etc. – that are sourced outside the country.  Tables 1 through 4 below show the degree to which dependencies gave been built that make undoing the web of global trade complex and likely fraught with danger.  The shares we used were at a broad level of industry detail, but the actual business to business trade is detailed and based on unique requirements.  Thus shifting to generic local supplier may be impossible.  For many key inputs the existing share of imports to apparent consumption is well over 20% and for clothing and apparel nearly 70%.  Replacing these with domestic supplies will be difficult even if absolute prohibitions are imposed.  As much of these type producs from computers to clothing come from China, draconian tariffs on Chinese imports will simply lead to less being sold to American consumers.  Companies will not bother to import something that has to be priced at 45% higher because of tariffs.
The bottom line is that when foreign inputs are included in industry production functions the positive effect on demand is negated by the decidedly stronger negative impact on production of finished or semi-finished  goods. If we try to reduce the deficit too quickly or using methods that make imports too expensive to companies and consumers we will set in motion a disaster with unemployment increasing rapidly as substitutes for many imported products sold hard to come by or non-existent.
Why Changing WTO Rules Creating Friction in the Free Flow of Goods is the Right Approach
The 10% solution applied across the board, without differentiation on individual trade flows – be they from China or Mexico – offers a single source internationally agreed solution to the problem that was created initially when the WTO (and its predecessor organization, The GATT) put the emphasis only on reducing or eliminating trade barriers.  President-elect Trump is correct in pointing out that the United States has historically allowed weaker foreign countries to get somewhat better deals than the US on the assumption that the US is the leader and needs to set the correct example. There are examples, however, when the US has asserted that it needs to protect some key industries.  President Reagan initiated a number of these in automobiles, electronics and steel that slowed the demise of US industry.  In the case of automobiles it led to the development of a large scale foreign owned automobile industrial complex (parts and finished assembly) in the US.  The 10% tariffs imposed across the board would force US companies importing foreign products to assess the risks especially if higher tariffs might be applied if the problem (the size of the deficit on the trade account) is not resolved. This is a gradual rebalancing of the world not just in the US but worldwide.  The size of the deficit is a problem not just here, but in many other countries.  If the deficit become a critical element in determining trade restrictions as a result international agreement then this will not spark a trade war.  Changing the WTO rules should be the approach taken by the Trump administration using the leverage of unilateral action and enlisting the help of other countries running serious trade imbalances. 
 

 




For a spread sheet with the tables showing the degree of trade dependency by country and ISIC categories manu please contact me at davidblond2000@gmail.com.  Say trade dependency tables.

 



[1] QuERI-International is a private consulting firm that carries out quantitative research into global economics using a series of dynamic models of the world economy pulling together data from international sources with synthetic data developed internally using Input-Output model.  For more information see www.queriinternational.com, davidblond2000@gmaill.com, 301-704-8942.

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Fixing the Trade Deficit Will Be Easier Said than Done

11/29/2016

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​​I wrote this essay around the time of the 2004 election.  I attended a NABE meeting in Washington and sat in the back of the room.  The keynote address was by Greg Mankiw and I asked a question about the US deficit on our trade account that had reached $500 billion dollars. I'd been writing about why this was dangerous for several years without much influence. His response didn't surprise me.  At the time John Edwards was the only "populist" in the race to replace George Bush.  Donald Trump's complaint is a familiar one, but since that ill fated year the trade deficit increased reaching an apex of over $800 billion.  It should remain in the $ 700 billion range for the foreseeable fucture, but without some dramatic and very dangerous interventions, we will have to remain the global engine of growth.




Corporate Free Riders – Why John Edwards May Win in November
 
Chairman of the Council of Economic Advisors, Greg Mankiw, is the President’s key advisor on the economy.  A clueless academic and victim of Washington speak, Mankiw  will be vilified in the coming months as a “poster child” for sending high paying American jobs overseas.   If employment growth sputters, as more companies rush to send more jobs outside the country before this practice is outlawed or too costly, then Greg Mankiew will be on his way back to Boston.  Of course, Larry Summers, President of Harvard, may find it more advantageous to shift Professor Mankiew’s own job to Bangalore in order to save money and take advantage of the low cost of telecommunications.
 
Six months ago, I asked Professor Mankiw if he was at all worried about the $ 500 billion in IOUs we hand out each year.     He wasn’t worried.  In fact, he told me that the problem would take care of itself.  I think he believes in the tooth fairy, along with other well-known economists including Robert Reich and Jagdish Bhagwati.  Barring divine intervention the trade deficit will likely increase for years to come.  
 
Many economists are sticking with the conventional wisdom that free trade and outsourcing is beneficial even though they are unable to make this theory work when it comes down to dollars and cents or jobs.     There is a disconnect between outsourcing jobs, the high rate of growth in American productivity, and the fact that despite this, American companies continue to buy more than they sell to foreign buyers.   If efficiency is the goal, then how much more efficient will we have to be to re-balance world trade and create more jobs at home.    To close the gap on our foreign trade account, American exports must capture 40% of the total growth in non-US trade within ten years.      
 
Economists believe markets magically make the best choices.    This same thinking led to the Great Depression, as the “classically trained economists” waited for the self-correction to come.  It was Keynes who showed that markets do not always fully use their resources.   An efficient economy – where many of the jobs are outsourced – can be in equilibrium well below the point where all resources are fully used.    
 
Supporters of outsourcing usually cite studies, such as the one carried out by the McKinsey Institute, that suggest that gains from lower costs allow faster economic growth.  Faster growth has equated to profits and not to jobs or higher wages. According to Business Week the benefits are spread to a new “investor class”.   While this is helpful in the short-run, it will not support a rising standard of living for all Americans.   Another study by Catherine Mann suggests that outsourcing software to India leads to greater use of lower priced software and to more employment here.  Have they heard the joke about the economist stranded on a desert island with a can of beans?   He assumes he has a can-opener to open that can of beans.  Both studies assume that all the freed up labor resources find other jobs that are higher paying.
 
Let me state the obvious – if we did not have a $ 500 billion trade deficit with the world – then outsourcing and sending offshore low value production would yield a higher American standard of living.  Citing Ricardo’s theory of comparative advantage as a rational for a $ 500 billion deficit is flat wrong.   In Ricardo’s theory, labor is traded at a rate of exchange that allows both parties to benefit.      Reich and Bhagwati are tenured Professors who have recently weighed in support of the Greg Mankiw.  If they believe that Ricardo meant that we can  hand out IOUs to the world rather than trade American employment for foreign employment,  then perhaps they should take a refresher course in International Trade theory.  
 
Most  supporters of outsourcing believe we have a comparative advantage in the production of high technology products.  If this is the case,  then why did we have a surplus of $ 19 billion in this trade in 1999 and a deficit of $ 27 billion in 2003?      If we can not run a surplus in high technology products, then what is the benefit offered by free trade?  It does not matter how much  more efficient  we get, if we hollow out shell of the American economy. 
 
 

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    Dr. David L Blond is a well known economists with experience in government and the private sector. Published in 2014, The Phoenix Year, an economic thriller about the events leading up to the global market collapse  New novel available on Kindle --The Rings of Armageddon based on insights learned during his 7 years as the Senior and only economist in the Office of the Secretary of Defense at the Pentagon. 

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