Millions Can Hardly Get By In Full Employment America

By Paolo von Schirach –

WASHINGTON – Especially if compared to barely alive, anemic Europe, America’s GDP and employment growth rates look absolutely sensational. As always, even if there is little or no justification, the incumbent president (Donald Trump in this case) takes all the credit, witness his recent Davos speech.

Millions US workers make very little

However, if we look under the hood, the picture is far, far less attractive. In a recent Letter to the Editor, The Wall Street Journal, (January 23, 2020), Martha Ross, an economist who works at the prestigious Brookings Institution, a major Washington, DC think tank, pointed out that “53 million Americans –44% of workers aged 18-64– earn low wages, with median earnings of $ 10.22”. Got that? 44% of US workers make a little more than $ 10 an hour. And, Martha Ross adds, these are not just kids starting out in life using low wage jobs as entry points into the labor force. These are ordinary adults, folks trying to make a living.

Insignificant wages growth

Sure enough, it is a good thing to note real, inflation adjusted, wage growth. However, as Martha Ross points out in her letter, this growth means that for non supervisory retail workers the bump amounts to an increase from an average of $ 16.28 an hour to $ 16.81. Not exactly a sensational jump.

Here is the thing. A single adult, with no children or other dependents, may be able to get by with such meagre earnings. But a family cannot. As Ross concludes: “Despite a recent uptick in wages and a low unemployment rate, tens of millions of Americans earn barely enough to live on”.

Indeed. And this is a national tragedy; even though not talked about much because the overall picture looks rosy. The US economy is growing at more than 2% a year, the stock market jumps from record to record, there is hardly any inflation, and the unemployment rate is at 3.5%, a historic low.

Low wages tied to bad education

So, why is it that in the midst of a booming economy millions of Americans are paid so little? One of the reason must be that millions of Americans can compete only for low paying jobs because they have no marketable skills since they received a truly bad or mediocre education. Sadly, our American public schools system is a disaster. This has been proven time and again through countless domestic and international academic tests.

Sure enough, America can be proud of being home to many excellent private schools and most of the top ranked private universities. However, these prestigious institutions are accessible only to the wealthy and the super gifted who may receive merit scholarships. For sure, these young people, once they graduate, will have access to good or excellent jobs that will launch them into great careers.

All the others, however, the millions who could enroll only in mediocre to bad high schools, combined with all those who did not manage to finish school and obtain a high school degree, get only the scraps. Hence the sharp socio-economic divide and the sad, in fact dramatic, statistics cited by Martha Ross in her letter to the WSJ.

Two tier America

So, here is the thing. For all practical purposes, we have two separate countries here in America. In the upper tier, young people receive a good or excellent education. Armed with that, they can aspire to highly rewarding careers.

In the lower tier we find instead the unlucky ones who were stuck in inner cities and did not have access to a good or even decent education. In fact, many of them, even those who received a high school diploma, received almost no real education. And the unlucky ones in this lower tier tend to be mostly minorities and poor.

Which is to say that in our America, the country that used to be admired across the world as an “open access to all society” and for its “upward mobility”, nowadays “birth is destiny”, just like in Europe in the Middle Ages.

Indeed in today’s America, if you were born poor, in a bad neighborhood, your chances of getting the education you need to climb the socio-economic ladder are close to zero. Therefore, even in a growing economy with full employment, millions can only get dead-end jobs that pay a bit more than $ 10 an hour.

This is a national disgrace.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.

Regulations Kill Enterprise

WASHINGTON – Jim Tankersley reports in The Washington Post, (May 23, 2016), that “The recovery from the Great Recession has seen a nationwide slowdown in the creation of new businesses, or start-ups. What growth has occurred has been largely confined to a handful of large and innovative areas, including Silicon Valley in California, New York City and parts of Texas, according to a new analysis of Census Bureau data by the Economic Innovation Group, a bipartisan research and advocacy organization.” 

Death of the U.S. small company

Holman W. Jenkins writes in The Wall Street Journal (Trump for Blow-Upper in Chief?, May 21-22, 2016) that the Kauffman Foundation noted that there is a marked “decline in small business entrepreneurship” in America. Jenkins also cites a Brookings Institution report pointing out that business closures now exceed business starts in the U.S.

Well, what could be the reasons behind this rather ominous trend in what used to be the land of private enterprise? May be the cause of all this is in another fact cited by Jenkins in his WSJ piece. According to the Competitive Enterprise Institute, last year Congress passed 114 laws. But it issued 3,410 new regulations. These amounted to 80,260 pages in the Federal Registry, close to a historic record.

Regulations suffocate small enterprises

So, here is my simple theory. Whatever its intentions, the Obama administration in its effort to regulate and restrict almost every economic or commercial activity is slowly strangling U.S. enterprises, especially small and medium-sized companies that simply lack the resources to ensure compliance with this myriad of confusing federal rules. Please, do keep in mind that these companies are the true engines of the U.S. economy. These are the innovators and the jobs creators.

Killing capitalism 

So, here is the thing. You do not need a proletarian or a social-democratic (Bernie Sanders-style) revolution to kill capitalism. A death by a thousands cuts inflicted by federal regulators will do just fine. It seems that government bureaucrats are quite capable of destroying capitalism on their own.

And so the most successful economic system ever devised in human history will wither and die not because of a popular uprising staged by the angry masses, but because of the suffocation caused by an avalanche of regulations that make it almost impossible for small businesses to stay viable and grow.


Unhappy Americans Look for Culprits

WASHINGTON – The most visible impact of “The Great Stagnation” , (the title of Tyler Cowen’s book provides a good definition for this uninspiring economic era), is that many Western societies, including America, have lost whatever confidence they had in the ability of elected representatives to deliver steady economic growth, and therefore more prosperity. Hence a peculiar mix of revulsion and cynicism towards the “political establishment that failed”, and at the same time completely unrealistic confidence –almost blind faith– in would-be new, non traditional leaders who promise cost-free, total transformation –first and foremost the overnight rebirth of slow-moving economies.

Politicians do not deliver the prosperity they promised

Regarding popular sentiments in the U.S., just look at the stunning outcome of a recent NBC/Wall Street Journal poll. Only 24% of all American polled indicated that the country is moving in the right direction, while 70% believe that we are headed the wrong way.

The problem is that most people, looking for the causes of an anemic economy, now believe that their own personal economic misfortunes are almost entirely attributable to the errors and/or misbehavior of corrupt or incompetent political leaders.

Hence the delusional hope, in many cases absolute certainty, that if we finally “throw all the rascals out”, and replace them with genuine fresh talent, all will be well. Sadly, here we have a combination of bad diagnosis and delusional faith in an impossible cure.

Lack of innovation, constrained opportunities

As Tyler Cowen explains in his book referenced above, the developed world is going through a bad patch of slow growth due lack of innovation. This means that there are very few new economic opportunities created by new technologies.

In the meantime, most Western societies, the U.S. included, are suffering because of the negative consequences of globalization. With hundreds of millions of Asians willing to work for far less money, millions of steady manufacturing and services jobs held by so many Americans migrated to Asia. No chance that these jobs will be coming back. I mean not a chance. Which is to say that anybody who promises to “bring our jobs back” is dreaming, or worse.

Who is guilty of all this? 

Anyway, no matter what the real facts are, this is what millions of Americans believe. Number one: most U.S. voters have lost confidence in the political and policy-making process as we know it, mostly because “establishment politicians” are unable to deliver improved economic standards. Number two: large numbers of voters — large numbers; but not majorities– are willing to take a chance on untested would-be leaders (businessman Donald Trump on the right, and Senator Bernie Sanders on the left) because they are perceived to be “good outsiders”, not tainted by the corrupt Washington establishment; even though one should note that, just like the old establishment politicians, both Trump and Sanders also promise great things at almost no cost. In fact, these brand new would-be Chief Executives promise much bigger and better things.

So, here we have a really bad combination of disgust about what exists and childish fantasies about what the next happy chapter is going to be. It is clear that there would be no number two (escapist fantasies about great, flawless leaders), without number one (excessive pessimism about the current political establishment).

Loss of confidence 

Number one is serious business. Millions of Americans are now convinced that this country is run by an insiders’ game rigged by the special interests who pay for the election of candidates. Once in office, these puppets do exactly as they are told by their paymasters. The accepted story is that the innocent American people are fooled by nice stories told at election time; and then they get just a few crumbs that fell from the table, because all the goodies go to the crooks who paid for the elections of their corrupt representatives.

Disgusted voters 

While this is an exaggeration, there is unfortunately enough truth in this generalization, (think of the armies of Washington lobbyists, the “revolving door” always open for retired politicians who want to go into business, the PACs, the convenient tax exemptions), to generate and justify genuine disgust about the whole political process. And this is a real problem.

Let’s not forget that the peaceful self-perpetuation of the American Republic rests on the assumption that most people believe and will continue to believe that we have a legitimate, ethical system that operates in a transparent way, and that this system is run mostly by law-abiding office holders.

People feel cheated 

This is not the case anymore. People feel cheated because politicians dis not keep their promises. And there is some truth to this. Indeed, in order to get elected, most candidates for public office routinely promise that they will magically create millions of new jobs. But the honest truth is that elected officials at best can help create a more pro-business environment. No elected officials can create millions of jobs. Looking at our current predicament caused by aggressive Asian competition and lack of innovation, it should be clear that nobody can reverse new historic trends and major global shifts through legislation.

Politicians cannot fix this problem 

No U.S. Senator, Governor or President can reverse the rise of Asia, with its hundreds of millions of low-cost workers who get millions of jobs outsourced from the U.S. simply because Asian workers are happy with much lower salaries, and therefore are more cost competitive. By the same token, no U.S. President can prevent automation from killing hundreds of thousands of factory and now services jobs.

Promising the impossible is immoral. And yet all candidate do it, all the time. Voters believed those who in either party made the biggest promises. But now they do not believe them anymore, not because they understand the truth about “The Great Stagnation”, an epochal change that cannot be controlled, let alone reversed by elected officials; but because they believe that these politicians are personally responsible for their plight.

The accepted narrative is that the masses suffer because most U.S. politicians are in the pockets of the greedy 1% who want to grab everything. Unfortunately, most Americans do not really understand the true dynamics of globalization.

Rigged game

Most voters no longer believe in the establishment because now they are convinced that America is a rigged insiders’ game. According to the simplistic and yet generally accepted narrative, America is still very rich. The problem is that most of the wealth is stolen. Millions of Americans believe that Wall Street and major corporations are making huge gains by willfully sending jobs abroad, while all the cash goes to them, a tiny minority. Meanwhile, corrupt politicians paid by the special interests twist the system so that the greedy few will keep receiving even more, thanks to customized laws and tax provisions that favor the already ultra rich elites.

Throw everybody out 

Contemplating this ghastly picture, the disgusted voters are not asking for reforms. No, they decided that the entire establishment needs to be junked. And so, in this most unusual presidential campaign, they turned their attention and hope to outsiders, with blind faith that, once elected, these new leaders will step forward and fix everything, quickly and painlessly.

The fact is that the outsiders, if anything, make even bigger and therefore far more preposterous promises. But millions of voters are willing to believe them, because they appear to be “sincere”. Since they are outsiders, they are not tainted by Wall Street money, PACs, Washington lobbyists, and the dirty business of buying and selling votes. So, they must be real saviors.

There are no saviors 

Well, they cannot be. And this is has nothing to do with their intentions. It has to do with the limited reach of any public policy. As indicated above, we are going through a bad patch that is only in some measure the result of poorly designed laws and regulations.

Washington cannot make productive innovation happen by legislative or regulatory fiat. Washington can and should promote and support a pro-growth, pro-innovation, pro-business environment. But even assuming that we did this tomorrow, this would be no guarantee of success. Eventual success is about the drive and the ingenuity of smart people who will come up with new technologies, new products and new services. This is a highly desirable outcome; but it cannot be mandated by law.

Aspiring “Political Saviors” cannot and will not deliver prosperity just because they say they will. Unfortunately, this simple common sense message will not be listened to by people yearning for a panacea.

The old guard is out 

At this point, the infatuation is on, and the focus is and will stay on those who promise miracle cures. Sadly the traditional political forces are too discredited. Whatever sensible message about establishing a healthy distinction between realistic and unrealistic expectations they may put forward, they will not be believed.

And why? Well, because for decades they have been in the business of making exaggerated promises they knew they could not keep. For a long time they got away with over promising, because the economy was still growing. But now it isn’t anymore, and so nobody believes them. Hence the rise of the Saviors.

Aldous Huxley: The Political Candidate Sold On TV As Deodorant

WASHINGTON – “Three years before Kennedy’s inauguration, Aldous Huxley argued in Brave New World Revisited that the modern methods “now being used to merchandise the political candidate as though he were a deodorant positively guarantee the electorate against ever hearing the truth about anything”. 


The above quote is taken from an interesting book review essay by David M. Shribman, editor of the Pittsburgh Post-Gazette, (The Power of Persuasion, The Wall Street Journal, January 22, 2016). The book reviewed is Republic of Spin by David Greenberg.

The theme of the book is that American politicians have been consciously manipulating information to further their interests for the longest time.

But it is with the advent of television that old “spin” acquired a true industrial dimension.

The candidate as merchandise 

And I found Huxley’s notation made so long ago remarkably prescient. At that time Dwight Eisenhower was still President. And yet Huxley understood the perverse effect that TV (still in its infancy at that time) was going to have on the substance of political debates . He realized that politics had entered the mass media era. And he also realized that TV would become an incredibly effective tool –in fact by far the main tool– for both marketing politicians and for manipulating the voters.

Henceforth, the political candidate and the elected office holder would be treated mostly as a product to be sold. And therefore the handlers would present only the favorable sides. Therefore, no truth about anything anymore.

Of course, one could argue about how much truth was actually delivered to the public before the advent of television. The “Yellow Press” and slanderous accusations were not invented in the 1950s. Plenty of material going back to the very origins of the American Republic.

TV political commercials 

Still, here we are today, in this media saturated environment. During campaigns, the TV political commercial, ever slanted, ever tendentious, quite often openly false and slanderous, is not only the norm, it is in fact the primary instrument used by all campaigns to reach large audiences. This is where most of the money raised by candidates ends up. It is used to pay for air time. No money, no way to produce and let millions see the commercials. No commercials aired in large media markets, no chance to deliver the candidate’s message, and therefore slim or zero chances to win.

In these TV political ads records are routinely misrepresented; achievements are magnified or altogether invented. Enemies are vilified. Opponents’ character assassination is the norm. Complicated international political dynamics are reduced to stupid simplifications.

Nobody complains 

And nobody complains. This is the accepted and some times celebrated way in which candidates bring their case to distracted and uninformed people who in most cases do not have the time or the interest to beef up their knowledge on “the issues”. And so it is all about images, background music, and emotional language hopefully leading to persuasion. And if it takes tricks or outright lies to sway voters, so be it. “This is the way it is done”, all the pros will tell you.

What Huxley wrote almost 70 years ago is as true as ever. We have entered the era of lies routinely delivered by all candidates. But nobody seems to care. The one who can present his/her case in a few seconds in a persuasive way, however untruthful the whole thing may be, has a far better chance to win.

The truth does not matter anymore. And it seems that no one cares that much.

China Worries Fostered By Unreliable Government Data

WASHINGTON – What’s going on in the Chinese economy? Nobody knows, really. We get bits and pieces; but not the complete picture. There is a real estate glut in the secondary cities. There has been slow growth. We know that imports and exports are down. We know of massive over capacity in some basic industrial sectors, especially those that support construction and infrastructure (cement, steel and copper).

Ponzi Scheme? 

But we do not know the whole story. There is no open debate on the economy, or policy choices, let alone a clear depiction of the actual state of troubles sectors. In fact, independent reporting on the economy and financial markets is expressly prohibited.

And precisely because nobody knows, when something strange happens, like the recent Shanghai stock market mini crashes, (that now amount to a significant correction), at the very start of the new year, many analysts fear the worst.

The truly scary (still hypothetical) scenario is that China has now become a gigantic “Potemkin Village”, a Ponzi scheme, a make-believe place of fake growth based mostly on unsustainable levels of debt. Just like in other Ponzi schemes, for a while everything looks great, but then it all comes crashing down.

Pessimistic picture

Here is how The Wall Street Journal sees it:

“[It is] more likely that Beijing will continue to prop up growth, steering more capital to money-losing companies, unneeded infrastructure and debt servicing, depriving the economy of productive investment and leading to the sort of protracted malaise seen in Japan in recent decades. But China is less prosperous than Japan.”

“Some state firms remain in business despite massive debt, several years of loss-making operations and a weak business model—Chinese officials have dubbed them “zombie” companies. Earlier this month, during a visit to the northern industrial city of Taiyuan, Mr. Li railed at the drag of “zombie” companies, according to a government account. He said they should be denied loans to reduce excess supply in the steel and coal industries”.

Not a flattering picture. This WSJ piece talks about money-losing state owned companies, costly but unneeded infrastructure, zombie companies, increasing levels of debt, and a lot more. This is nasty stuff. But is this just a crazy exaggeration? Maybe.

Unreliable data 

However, the fact is that the dark scenarios and the extra worry about China are due in large part to an opaque system that produces dubious, and mostly self-serving information. We simply do not have all the facts. Therefore, it is much harder to understand what’s really going on.

And here is at least one key root problem about China. In large part we do not know what’s really going on because we cannot trust official Chinese economic statistics.

It is an almost universally acknowledged fact that Beijing releases only optimistic, doctored economic data. In other words, “they cook the books”. Their data on GDP growth, productivity, unemployment is fake.

Big lies? 

What we do not know is how deep these lies go. Are they doing just a little “air brushing”, some minor embellishments? Or are we talking about massive data fraud? We simply do now know.

And precisely because we do not have a vetted, reliable baseline regarding GDP growth, inflation, unemployment, productivity, manufacturing growth and more, when something really strange and unusual occurs, like the sudden and deep Shanghai Stock Market losses, some are inclined to think the worst.

No transparency 

Well, is China’s government going to become transparent any time soon? Don’t count on it. Don’t count on a privileged Communist Party oligarchy that owes its unchallenged supremacy to its reputation of infallibility to show poor data revealing that the leadership is delivering below plan these days. They will never do this.

Given all this, we are left with a lot of questions. We know that China is slowing down, but we do not know how much. We know that there is a lot of bad debt, but we do not know at what point this becomes truly toxic. We know that most State Owned Enterprises, SOEs, do not perform well. However, we do not know whether this is a manageable problem or a crisis. We know about huge environmental problems caused by past unchecked growth, but we do not know at what point grass-roots protests about severe pollution may morph into organized political opposition.

Not a market economy 

One thing we do know. Despite all the incredible changes, and despite its ability to lift hundreds of millions out of poverty, China has not completed its transition to market economy status.

In a real market economy it is assumed that the government publishes accurate economic data in a timely fashion. It is also assumed that the private sector leads development, while all publicly traded companies publish balance sheets audited by third parties with reputable credentials. Finally, it is assumed that independent media freely report on economic issues.

None of this exists in China. I repeat: “none of this”. 

How Much Unemployment in China?

WASHINGTON – The WSJ just had a front page story on China, focusing on factory closings, jobs losses, strikes and workers protests. However, it is very difficult to place all this context. Unfortunately, there is no reliable official Chinese data on unemployment, bankruptcies and industrial actions.  

Official statistics 

Indeed, Chinese official statistics indicate that the unemployment rate in China is always the same: between 4.1% and 4.3%. Of course, this is impossible.

But why would it be important to know more? Well, because growing unemployment, if this is indeed the case, combined with workers’ protests after factories closings, is the social –and potentially political– consequence of China’s economic slow down.

New jobs in services? 

If the slow down is moderate and gradual –this is the official line coming from the Beijing political leadership– and if it is indeed true that China is successfully shifting from manufacturing to services, then its vast labor market will have time to adjust. Laid off factory workers may be able to find good or even better employment opportunities elsewhere.

But if the contraction in manufacturing is fast and severe, then the labor market cannot adjust, and this may create new problems. Citing various studies, the WSJ indicates that between 2014 and 2015 the number of labor related protests and strikes has doubled in China. If true, this is a remarkable development.

For the moment, the issue of labor protests seems to be contained. There are no politically explosive situations. But if this trend continues, if there are more and more public protests related to plant closings and jobs losses, then it becomes more complicated. In other words, what may begin as an  economic issue will become a political problem.

Unlucky migrant workers 

The WSJ goes into some detail on Chinese joblessness by telling the stories of unlucky Chinese migrant workers who left a life of poverty in rural areas and got factory jobs in cities. This change was definitely and improvement for them and literally tens of millions of others just like them.

But now many factories have shut down. These migrant workers are jobless. They cannot go back to villages where there is no opportunity. They are poor and frustrated. On occasion they stage public demonstrations.

Again, how many factories have closed nationwide? We do not know, because there are no official statistics on this. (We know however that at least 1/3 of all the factories owned by Hong Kong companies in the adjacent Guangdong region in main land China have shut down).

How many jobless workers? 

So, here is the politically relevant question. How many migrant workers are jobless and potentially desperate? Are the protests staged here and there just local events of no real consequence? Or do they represent a trend?

In other words, what if China’s economic slow down is worse than we are told by Beijing? Will unemployment levels grow to a point in which this will become a political issue?

Unemployment trending up? 

We really do not know. While unofficial statistics indicate that the real unemployment rate in China is probably closer to 10%, (as opposed to the official 4% to 4.3%), this does not tell us much. What would be really important to know is how it is trending. Is it going higher, at a fast clip, or is it stable or going down?

We have no idea. But it is hard to believe that China will be able to maintain its present level of employment while the overall economy slows down, construction is down, manufacturing is down, and exports are down.

More protests ahead?


WSJ To Pope Francis: Our Prosperity Stems From Freedom

WASHINGTON –  Here is how The Wall Street Journal, the unofficial protector of American capitalism, greets Pope Francis on the eve of his visit to Washington, (The Politics of Pope Francis, September 22, 2015):

“Like many Argentines of the left, Pope Francis seems given to suspicion about American wealth. But liberty and not coercion is the source of our [American] strength and of the wealth that has lifted millions out of poverty.[…].The U.S has prospered by respecting property rights and relying on the voluntary decisions of individuals. The rule of law here means that unlike countries such as Argentina, an American can build a large, successful business even if no one in government likes him. And unlike in Argentina, capitalist success creates millions of jobs that allow men and women without political connections to support their families and live in dignity.”

Freedom includes economic freedom 

So, here is the thing. In America we have built a society whose corner stone is the constitutional protection of individual freedoms. Among these freedoms there is economic freedom. People are free to start a business.

As long as they play by the rules, respecting all the laws and the rights of others, all Americans are free to work and prosper. In so doing, they bring along many others employed by them. Wider prosperity means less poverty.

And it all starts with freedom. In Cuba, the first stop in Pope Francis’ trip, there is no freedom, including no real economic freedom, (despite minor reforms). And so, while the political elites are taken care of, the people suffer. They are poor in large part because they are not free.

God-given rights 

In America we created widespread prosperity as a result of the enterprise and hard work of free people, and not political favors and kickbacks. This is the good outcome of the exercise of “natural rights” that our Founding Fathers believed to be given to each human being by God.

Yes, in America we do believe that the Almighty blesses hard work and its fruits. And, yes, we also believe that the best tool to fight poverty is not redistribution policies or chastising the rich, but broad-based growth.

A Very Weak American Economy

WASHINGTON – The slow but steady decline of the US economy should be the main theme of this unfolding and contentious presidential election campaign. But it is not. The recent steep Wall Street drop may change all this, (the Dow Jones lost another 530 points on August 21, making it the worst day of a very bad week), but I would not bet on it. In fact, optimistic analysts are on TV telling investors that this huge Wall Street loss is in fact just another temporary glitch, and thus a wonderful opportunity to buy really cheap stocks.

“Anchor babies” 

Regarding the presidential campaign, forget about the economy. The most recent headline is about Donald Trump’s proposal to repeal or modify the 14th Amendment to the US Constitutions that grants citizenship to all those who were born in the US. His point is that the Constitution has been abused by armies of pregnant foreign women who slip into the US in order to deliver what are now called “anchor babies” on US soil. As they are now mothers of US citizens, they can try to make a case to stay in America, despite their foreign status.

Millions of babies? 

So, there you go. “Anchor babies”. This is the burning issue. And how many “anchor babies” do we have? Millions? Hundreds of thousands? No, we are talking about a few thousand, at most.

Look, there is plenty of evidence of criminal enterprises that provide logistical and medical support to pregnant foreign women, so that they can come here, and give birth in the US. All this needs to be stopped. But, while real, this is hardly a crisis of catastrophic proportions.

Under performing US economy

The real issue that should be discussed by all those who aspire to be President is a consistently under performing US economy. (For a cogent, detailed and rather scary depiction of US economic decline, read the WSJ op-ed by Mortimer Zuckerman, Who Will Get the Dreary Economy Going? August 21, 2015).

Unfortunately, it is very difficult to fight against economic mediocrity, especially since more than half the country, including respected analysts, have gotten used it. In fact many tell us that this mediocrity is after all quite good.

Mediocrity looks OK

In truth, the US economy is not facing imminent disaster. On the contrary, it has been chugging along for a number of years at a slow, but semi-respectable 2% a year rate of growth. Not great, but a lot better than Europe. Unemployment has gone down, and it is now back to about 5%.

Most analysts who speak on Bloomberg TV, CNBC or Fox Business say that things are more or less OK. Not great, perhaps. But alright. You see, more Americans are employed. And this means more disposable income. And this will translate into more sales, and therefore more demand for good and services that will lead to better economic performance. As for the steep Wall Street decline, we are told not to worry. We always have corrections every now and then. The important thing is that the economy is on solid foundations.


Fragile foundations 

Look, the fact is that the US economy if fundamentally fragile, notwithstanding the ZIRP, (zero per cent interest policy) decreed by the US Federal Reserve many years ago. Which is to say that, despite this extraordinarily long period of monetary easing, economic activities have not picked up.

2% growth is well below our 3% historic average. On top of that, we have the lowest level of labor force participation in decades. This means that far fewer adult Americans are employed, compared to our historic averages. Millions of those who now are lucky enough to have a part-time job would rather have full-time employment. And most new jobs are in low pay service industries. Very little new employment is created by wealth-generating manufacturing.

The end of the energy boom 

All this indicates an anemic economy. But wait. It gets worse. Much of the (modest) growth that America experienced in the last few years was due to the extraordinary shale oil boom. But now the world is awash in oil. And there is no sign that this glut will go away. This means a real recession in the oil sector that is driving down energy companies and all their suppliers. Translation: depressed energy and energy related stocks, with dramatic loss of what used to be good jobs for all the oil companies and for the vast universe of suppliers and vendors connected to them. Add to this the negative ripple effects on communities that started thriving because of the extra money brought in by the energy business, and you get a rather dark picture.

Diminished China

Last but not least, we have China on the verge of a crisis. The US may not have much direct exposure to the Chinese economy. But the rest of the world does. Japan is affected, and so are Germany, Taiwan, Thailand, and South Korea. And we do business with all of them.

Beyond that, China’s slow down has already had a dramatic impact on the economic performance of all its raw  materials suppliers. Brazil, Australia, South Africa and Indonesia are in big trouble. Major mining companies are looking at disastrous numbers, because China does not buy much from them anymore.

Can anybody seriously believe that, while the world is headed towards an economic freeze, America will be miraculously unaffected?

Now, if China’s woes were just a glitch, well, this problem would go away. But we have many indications that China has entered a new slow growth economic era, while it is trying to deal with monumental debt, and massive industrial over capacity. Here is one sobering statistic. The Caixin China Manufacturing Managers’ Index just fell to a 77 month low. As I said, this looks like a new trend.

Therefore, forget about China growing at 7%. Forget about its ability to absorb massive amounts of iron ore, copper or whatever else.

Shaky America 

So, here is the picture. The American economy has recovered since 2008, but very slowly, notwithstanding the historically unprecedented monetary stimulus. Consumption is not buoyant because most Americans are still recovering from the over spending of 10 years ago. The US oil industry, a rare bright spot, is now clearly in serious crisis, while world trade is depressed because of China’s slow down.

Are we headed for a recession? Probably. (If nothing else, as we get a recession every 7 or 8 years, we are due for one anyway). Certainly there is nothing out there that inspires great confidence.

Wanted: An economic growth agenda

So, how do we get out of this? It is not difficult to identify the issues that need urgent attention in order to strengthen our foundations. We would need a skilled combination of tax reform, public education reform, targeted training programs, regulatory reform, and a lot more. The problem is that putting all this together in an eye-catching, compelling campaign platform is really difficult.

Sadly, it is a lot easier to listen to Donald Trump and others talking about “anchor babies”. As for Trump’s recipe for fixing the economy, he has one, and it is very simple. “You should elect me president, because I am the only one who has the proven experience to get things done. I know these things. The professional politicians are all talk and no action. I’ll take care of things”. Well, this is the level of detail we are getting, so far.

I hope that someone else can do better than this.

Ukraine On The Verge Of Collapse

WASHINGTON – Ukrainian President Petro Poroshenko recently authored an upbeat op-ed piece for the WSJ in which he painted a very positive picture of his country. Notwithstanding Putin’s aggression, the loss of Crimea and the costly conflict in the East, we learn that Poroshenko’s new, fully democratic government is filled with smart young reformers.

Are things getting better?

They are winning a serious fight against corruption and inefficiency. Lots of good people are lending a hand in this nation wide effort aimed at modernizing Ukraine. Soon enough investors from all over the world will see all this and Ukraine will offer them wonderful opportunities and more.

This positive depiction of Ukraine is both farcical and sad, because it is patently one sided. I am not questioning Poroshenko’s desire to modernize his sorry country. I assume his  sincerity. I also assume that there are indeed many western educated and highly qualified Ukrainians who are doing their very best to turn this former Soviet Republic around.

Leaving the bad stuff out

That said, if you tell a story about a country in serious turmoil, you cannot just omit the bad stuff. Indeed, as Poroshenko tells us what great progress Ukraine has made, all international economic and business publications write that the country is totally broke and on the verge of financial collapse.

The ongoing quasi-war with Russia is costing a lot, while Ukraine is at a stand still. According to the FT: “The economy is in a state of collapse, having contracted by nearly 18%, year on year, in the first quarter of 2015”. We also learn from various media reports that financial assistance provided by the IMF and other bilateral aid packages is too modest, and therefore it does not even begin to help. To start with, there are US $ 40 billion dollars to be paid back to foreign bond holders. And there is no money.

Help Ukraine?

The FT makes the case for helping Ukraine, via debt forgiveness (the bond holders would have to take a major hair cut) and other forms of aid –for political reasons. Indeed, Ukraine is a large, strategic country, right at the eastern edge of Europe. It is in the interest of the West to save it. May be so.

However, in order to have a serious conversation about any rescue packages or bail out strategies, (whatever the chances of success), it would be good for President Poroshenko to tell the world how things really are. The fact that Ukraine is on the verge of collapse is not just a detail.

Sugar coating an economic and financial disaster does not help Poroshenko’s credibility.

And it certainly does not help Ukraine.



China Dumping Excess Steel

WASHINGTON – In a “normal” capitalistic country, when supply expansion strategies in any given industry exceed market demand, the companies operating in that sector pay the price. In order to realign demand and supply, they have to cut production, fire workers, sometimes close down entire production facilities. And, of course, the weakest players go bankrupt. Invested capital goes up in smoke, share holders are wiped out. This is painful. But it has to be done, simply because nobody can afford the luxury to keep making stuff that cannot be sold at a profit. And you cannot have any functioning capitalism without profits.

In China market rules do not apply

Well, move over to China and you see that these elementary rules do not apply –at least not now. Here is the story. In the go-go reckless years in which all local Chinese governments went into heavy debt in order to finance more and more construction projects, (construction was the easiest way to jack up GDP numbers), China built up gigantic steel, copper, cement, and glass capacity. All this was necessary, or so it seemed at the time, in order to supply the extraordinary construction boom.

Yes, except that the boom is over. China now is fantastically overbuilt. Brand new developments sit empty. There is too much of everything: luxury condos, shopping malls, office buildings.

Factories will not be closed

Needless to say, this is having and will have an impact on the supercharged sectors that were beefed up in order to support construction, steel first and foremost.

Well, according to the old-fashioned “demand and supply” capitalistic logic, China would have to cut down steel production. And we are not talking about trimming. We are talking about shutting down dozens of steel mills, since shrinking demand generated by a cooling economy will not even remotely match the existing, gigantic over-supply in the years to come. This would be most unpleasant. At a time of diminishing economic expectations, when projected growth rates are constantly adjusted down by the Beijing authorities, closing state-owned steel plants, while creating unemployment by firing thousands of workers would be politically complicated.

Political jobs

But, no worries. China operates in its own world –a world in which normal laws of the business cycle do not apply, for now. You see, in China most large steel mills are state-owned corporations. They will not go bankrupt on account of this over capacity and over production crisis because the state will give them easy credit, no matter what. It is politically important (forget about economics) that the mills stay open, and that they keep all their workers employed.

Dumping is the answer

And what about the excess steel they keep making for which there is no domestic market? Very simple! They will dump it abroad. In fact, they are already doing this.(Dumping means selling a product below cost, an illicit trade practice). As the WSJ reports, Chinese steel exports to the US have already jumped 40% in January 2015 from a year before, while US domestic prices have collapsed, creating a huge problem for US steel producers already hit by lower demand from the energy sector.

It is illegal

But wait. Isn’t dumping against the WTO rules? Isn’t Chinese behavior prohibited? Of course it is. But you have to make a case: provide the evidence, bring the whole thing to the WTO in Geneva, wait for a ruling, plan countermeasures, etc. All this takes time. Meanwhile, the Chinese keep dumping gigantic amounts of excess steel all over the world: Europe, the USA, India, and South Korea, bringing about economic ruin to hundreds of companies and thousands of workers.

How much excess capacity?

And how big is this excess capacity? Extremely big. As David Stockman put it in his Contra Corner: “China’s steel exports are now running at a 110 million ton annual rate compared to just 50 million in 2013. What’s worse, China has in excess of 1.1 billion tons of capacity and after nearly tripling production to satisfy its construction binge, its current 750 million tons of domestic demand has nowhere to go except down.” Got that? That’s 350 million tons of steel produced annually beyond what the Chinese market can absorb. All this will be dumped all over the world.

If private sector capitalism is bad, state-run corporations are worse

Capitalism is a crisis prone, wasteful and lousy system. We know that. But if you think that a country running huge state monopolies that are (at least for a while) immune from market forces is any better, just look at China.

I am confident that the oversold Chinese economic miracle will be soon deflated, along with its bubble economy. But, in the meantime, this anomaly that passes for “superior economic system” will be a source of disruption for the rest of a world economy that is trying to create and live by some rules of good conduct.