Current Account Imbalances – What do they mean?

Today I have been covering this topic at a Cambridge AS Level revision course. In 2008 the world economy went through what is known as the global financial crisis (GFC). A lot of commentators had forecasted the GFC but there was a common assumption that the crisis would be caused by persistent current account imbalances. However it was poor regulation of financial markets and excessive risk-taking that were the root cause of the crisis and not current account imbalances. This becomes apparent when you look at how deficit and surplus countries were impacted by the GFC:

Eurozone – current account deficit countries went through a major recession
Australia had a consistent current account deficit – averaging 4% of GDP – but went through the crisis years without experiencing a recession. Australia has to thank China’s insatiable demand for natural resources.
Switzerland had significant current account surpluses which has averaged 7.8% since 1981 – peaked 14.9% in 2010 – but the GFC had a major impact on its economy. This was mainly because it hit the country’s two biggest banks.

What do current account imbalances mean?

Current accounts are endogenous in nature, driven by numerous factors. However many commentators tend to take a very simplistic view of what causes a deficit. A good example of this is Donald Trump’s accusation of Germany’s current account surplus being funded by America’s deficit and the assumption that reducing German’s surplus will improve America’s deficit. This rationale would mean that the US deficit is exogenous and the German surplus is endogenous.

Furthermore some have challenged the view that Germany’s surplus reflects the country’s superior productivity and stagnant wage growth. Although German does have high earnings from overseas it is what Germany does with these surpluses that is the issue – rather than spend on imports, which would reduce the current account deficit, it saves a large part of these surpluses.

The definition of the current account balance found in most textbooks is the difference between export earnings and import payments of the 4 accounts – Goods, Services, Primary Income and Secondary Income. This tends us to focus on the comparative advantage that a country may have and it dependence on certain imports. According to Paul Krugman competitiveness encompasses not only prices of goods and services, but also their quality, production costs, and how they are delivered in the market place. Furthermore a firms’ business strategies and the labour market impact greatly on price competitiveness.

But if you just focus on prices it is difficult to comprehend why Switzerland retains a large current account surplus even though it has a strong Swiss Franc – a strong currency makes exports more expensive and imports cheaper. Additionally the US has had a current account deficit since 1984 even with the fluctuating US dollar – US deficit today = $116.8 bn but the currency is not seen as overvalued. Competitiveness is more a symptom than a cause of what is happening in the economy so should not be seen as what drive current account imbalances.

A better explanation

The definition that reflects more closely the primary concern of current account deficits is a country’s saving or borrowing from the rest of the world. Excessive borrowing from overseas will continue as long as deficits keep persist until the country is unable to repay its debts.

However if the make-up of the imports is generally capital goods then they add value to the economy as it will improve the competitiveness of the country’s products. Therefore if the rate of return on imports exceed the cost of borrowing to buy them it makes sense to borrow more in the long-run. Australia have experienced this situation and has little difficulty in servicing its debt. On the contrary if a country borrows to to support spending the implication is that consumers are borrowing from different trading banks. The risks are more prevalent if the trading banks borrow from overseas and have to default to foreign lenders if borrowers become less likely to pay back their debt.

Governments are much more likely to become highly indebted as unlike consumers / businesses countries cannot be closed down or forced to sell its assets. Furthermore they may political leverage to enable them to borrow more. Foreign lenders may stop lending to a country with large external debts making it impossible for that country to finance it’s ongoing deficit and consequently lead to a crisis like that in the eurozone. There are three important observations:

1. It usually takes too long for questions to arise about whether countries that borrow excessively are competitive.
2. Whether motivated by carelessness or expectation of a bailout if things go wrong, imprudent lending is always the root cause of persistent high deficits that finance private or public spending in excess of earnings.
3. Large and persistent deficits create vulnerability as borrowers start to become dependent on access to funds.

Are surpluses bad?

It is generally regarded that surpluses are harmless but if households, firm, or governments spend less than they earn the surpluses must be invested abroad. However investments abroad can be very risky especially in volatile countries so prudent investment is essential.

For a lot of countries the purpose of exports is to generate revenue so that they can buy imports of goods which they may not produce – or could produce but relatively less efficient. In China a surplus does keep the export sector industries employed but suggests there is a strong presence for saving or weak domestic demand. More balanced trade would increase the level of imported goods into a country and increase real incomes as the value of its currency rises. This will allow for more inflows of foreign capital from abroad stimulating growth in the domestic economy. It would help a sluggish world economy if surplus countries, like China and Germany, were to spend more on imports.

Final thought

All current account imbalances are note created equal. In the 19th century the US had large persistent deficits in order to fund the growth and development of the country – inter state highways, national parks, hydro dams etc. Therefore these imbalances were creating value for the economy and highly productive. By contrast Greece ran large deficits to assist private consumption which doesn’t add any productive potential to the economy or value creation. Furthermore it left lenders exposed to bad debts who had to be bailed out.

Source: The Deficit Tango – Charles Wyplosz – Project Syndicate

For more on the Current Account view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

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China and the economic centre of gravity

Very good FT video with Martin Sandbu and James Kynge discussing the fact that although the Chinese economy has grown at an alarming rate over the last 40 years, will it become the global superpower? Some of the main points:

• Global economy is now becoming more regionalised
• From 1979 to 2018 China’s GDP growth rate averaged 9.5%
• 2,000 years ago everyone was poor – centre of gravity of global economy followed population size
• Key change in the mid ’90s, when China began to allow the sons and daughters of farmers to migrate from the village to these big factory towns.
• Liberalised global trade in 1980’s helped China access markets
• China still very much a developing nations – ranks 61st in terms average per-capita income but got an excellent infrastructure.
• China’s middle class approx 400m but that means approx 1bn of the population are poor
• Middle income trap – getting from poor to middle income is a very different process from getting to middle income to high income.
• Economy needs to change from a growth model based on accumulating labour and capital to a growth model led by technological development and technological progress.
• China is either a global leader or at least close to the cutting edge, wind and solar power, online payment systems, digital currencies, aspects of artificial intelligence, 5G telecoms, drones, ultra-high-voltage power transmission.
• Three major trading hubs – EU, US and China – with trade being more regionalised. China reluctant to lose export markets in EU and US as they are big drivers of exports
• Three trading blocs will lead to protectionism and decoupling of supply chains. unless the EU, the US, and China can sort out their differences.

Will China’s dominance be more regional than global?

Below is a very good video with FT’s global China editor James Kynge and FT economics commentator Martin Sandbu. They discuss whether China will dominate global commerce or whether the world economy could split along regional lines. They also give a good account of the growth of China since the 1970’s. The main points from the video follow.:

• China – major player in the global economy forever more but not the centre of a global economy, partly because other parts of the world will not be keen to let it and global economy starting to become more regionalised rather than globalised.
• China growth – 1979 to 2018, GDP growth averaged 9.5 per cent a year.
• Global centre of gravity – last 40 years has moved towards China
• How did China grow? – late ‘70s market reforms and attracting foreign direct investment. Significant reason was in mid ‘90s, when the sons and daughters of farmers were allowed to migrate from the village to big factory towns. Western countries were pursuing globalisation at the time so China’s cheap production costs were a popular option
• China still a poor country – ranks 61st and the world in terms of countries by their average per-capita incomes. China is still very much a developing nation. But it’s a very different type of economy, from the type of developed country that we can see elsewhere in the world. China’s middle class – 400m people. But there are a billion Chinese that are much less well-off.
• China and the middle income trap – getting from poor to middle income is a very different process from getting to middle income to high income.
• Chinese consumers last year spent about $7.3tn – greater than the entire GDP of the Japanese economy. But now I think we’re entering a very different phase. And that one is characterised by China’s emergence as a technological power.
• China leads the world in many technologies. – wind and solar power, online payment systems, digital currencies, aspects of artificial intelligence, 5G telecoms, ultra-high-voltage power transmission.
• Within the world trading system there are three hubs – Germany – China – USA. However trade relationships seem to be more regional within these hubs and it is suggested that China will become more dominant on a regional basis rather than global.

US dollar under pressure as the reserve currency.

In doing most introductory courses in economics you will have come across the four functions of money which are:

• Medium of exchange
• Unit of Account
• Store of Value
• Means of deferred payment

Since the Bretton Woods Agreement in 1944 the US dollar was nominated as the world’s reserve currency and ranks highly compared to other currencies in the above functions. As a medium of exchange the US dollar is very prevalent:

• 60% of the world’s currency reserves are in US dollars
• 50% of cross-border interbank claims
• After the GFC, purchases of the US dollar increased significantly – store of value.
• Around 90% of forex trading involves the US dollar
• Approximately 40% of the world’s debt is issued in dollars
• n 2018 banks of Germany, France, and the UK held more liabilities in US dollars than in their own domestic currencies.

So why therefore is there pressure on the US dollar as the reserve currency?

The COVID-19 pandemic has closed borders and will inevitably lead to more regionalised trade, migration and money flows which suggests a greater use of local currencies. However China has made its intention clear that the Yuan should become a more universal currency. Some interesting facts:

• Deposits in yuan = 1trn yuan = US$144bn
• Yuan transactions have grown in Taiwan, Singapore, Hong Kong and London.
• Investment by Chinese firms into Belt and Road project = US$3.75bn which was in yuan
• China settles 15% of its foreign trade in yuan
• France settles 20% of its trade with China in yuan
• 2018 – Shanghai sock market launched yuan-denominated oil futures.
• The IMF suggest that the ‘yuan bloc’ accounts for 30% of Global GDP – the US$ = 40%

However if the past is anything to go by the US economy has gone through some very turbulent times but the US dollar has remained firm. This suggests that how we perceive the US economy doesn’t seem to relate to the value of its currency.

Source: The Economist – China wants to make the yuan a central-bank favourite
7th May 2020

US unemployment figures – Great Depression again?

The number of people applying for unemployment benefit in the US over the last four weeks is astonishing – 22 million which represents 13% of the labour force. Some economists are suggesting that it will go above 15% in the next couple of months as the lockdown continues to impact businesses.

“There’s nowhere to hide,” said Diane Swonk, chief economist at Grant Thornton in Chicago told the New York Times. “This is the deepest, fastest, most broad-based recession we’ve ever seen.”

Getting money quickly to people who need it is essential to limiting the economic damage and heading off a prolonged downturn, economists say. Relying on state unemployment offices, however — which had been set up and staffed to deal with record-low jobless rates — has resulted in mammoth delays. New York Times

The graph below represent these figures in a historical context. It would not be surprising if the rate went above that of the Great Depression – 25%. However these estimates would be dependent on a L U V or W recovery – see previous blog post. The graph below is from GZERO.

Janet Yellen on the economic crisis

With more that 6.6 million Americans filing for unemployment benefit this week this brings the total number of Americans who have lost their jobs in recent weeks to 17 million. Janet Yellen predicts that the unemployment rate will be greater than that during the Great Depression. However unlike the 1930’s the underlying economy is in much better shape and the current downturn is health driven.

Congress passed a $2.2 trillion economic stimulus bill at the end of March that extends unemployment benefits to more workers and provides loans for small businesses to keep their employees on payroll. Most Americans will receive a direct payment of $1,200 from the stimulus, as well. Lawmakers are pushing to pass another spending package to provide additional funding to small businesses, hospitals, and state and local governments, in particular. 

Below is the interview with Janet Yellen on today’s PBS News.

Covid-19 hits oil prices hard

With the demand for oil dropping over covid-19 and the over supply in the market, oil prices have collapsed. Brent crude fell by more than half in March to below $23 per barrel. For many years OPEC – Organisation of the Petroleum Exporting Countries – has manipulated supply to maintain higher prices. Since 2017 both Saudi Arabia and Russia have been working together to prop up oil prices but have had a falling out over Saudi Arabia’s insistence on cutting oil supplies by 1.5 million barrels per day.

The Economist – 26th March 2020

Cost of extraction v Price of a barrel

Like any business you need to consider costs relative to the price of your good or service. Some shale oil wells in the US may have a break-even point of $40 a barrel despite the high fracking costs. However some sources say that it is above $60 a barrel with the higher-cost wells coming in at over $90 a barrel. These industries cannot survive in this environment of such low oil prices. Also the Canadian tar sands are another costly method of extracting oil and this could lead to a shut down of production.

By contrast in Saudi Arabia the extraction cost is around $9/barrel with Russia coming slightly higher at $15/barrel. The Middle East and North Africa are also very efficient, producing oil as cheaply as $20 per barrel. Worldwide, conventional oil production typically costs between $30 to $40 a barrel.

Nevertheless countries like Venezuela and Nigeria depend hugely on oil revenue for their spending. Although Russia and Saudi Arabia have significant foreign reserves the more the virus persists and demand keeps falling the greater the damage. Useful video from Al Jazeera below.

Least educated workers a symbol of recovering US economy

During the GFC the American workers who suffered the most were those without a high school diploma – their unemployment rate was 15.6% in the summer of 2009 more than three times the peak unemployment rate for college graduates – refers to cyclical unemployment. Furthermore this particular group of unemployed were also those that found it hardest to get back into employment. However by July this year the Labour Department recorded that the unemployment rate for those without a high school diploma fell to 5.1 percent in July this year. This is surprising considering that low-skilled workers, who makeup 7.2% fo the labour force, were seen as the least likely to recover from a recession

Cyclical unemployment (or demand deficient) occurs when there is not enough demand to employ all those who want to work. It is a type that Keynesian economists focus on particularly, as they believe it happens when there is a disequilibrium in the economy. It is also often known as cyclical unemployment because it will vary with the trade cycle. When the economy is booming, there will be lots of demand and so firms will be employing large numbers of workers. Demand-deficient unemployment will at this stage of the cycle be fairly low. If the economy slows down, then demand will begin to fall. When this happens firms will begin to lay workers off as they do not need to produce so much. Demand-deficient unemployment rises. The behaviour of demand-deficient unemployment will exactly mirror the trade cycle.

The increasing trade war between the USA and China seems to have done little to put a damper on hiring. The manufacturing sector, which is particularly sensitive to exports, was robust, adding 37,000 jobs.

Source: New York Times – 2nd August 2018

US and China trade war and what it means.

Doing trade barriers with my NCEA Level 2 class and below is a good clip from Al Jazeera about the issues that are arising from it and who will lose the least from a trade war. The last ten years saw a marked improvement in trade between the United States and China. But Trump’s battle of the tariffs is threatening that. And there are fears of an all-out trade war. The U.S. is putting tariffs on 50 billion dollars worth of Chinese imports. The president says he wants a fairer trade with China. But Beijing’s fired back with a tit-for-tat response. It’s published a list of more than 600 American products it plans to hit with its own taxes. Is it a case of who blinks first in this economic brinkmanship? And what will it mean for global trade? The comments by Philippe LeGrain are particularly good.

USA China trade war – who would win?

After a third round of trade talks between China and the US ended in stalemate a US$100bn trade war is on the horizon. America has published a list of 1,300 Chinese products which it proposes to hit with a 25% tariff. China has it own list covering 106 categories. As the Chinese embassy in Washington DC said “As the Chinese saying goes, it is only polite to reciprocate.” See graph below from The Economist.

US list covers Chinese products worth – $US$46bn in 2017 – 9% of exports to USA.
Chinese list covers US products worth – US$50bn in 2017 – 38% of exports to China

Historians of trade have an advantage over those who study wars of the military kind. Each side is a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies. Trump’s blunt attack targeting of a particular industry – steel and aluminium – is to supposedly make the industry in the US stronger. China retaliated by placing tariffs on US$0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and US$1.2bn-worth of aluminium waste.

The US face a trade-off between protecting their own industries with import tariffs at the same time as increasing the cost of goods for its consumers. There is also the likelihood of causing disruptions to the US economy by increasing the cost of intermediate goods (aircraft parts, robots, semiconductors) which ultimately leads to higher prices.

Good long-run deal for China

It seems that China has the dominant position for the following reasons:

• China can stop purchasing US aircraft
• Impose an embargo on US soybean products
• Dump US Treasury Bills and other securities
• Chinese companies could reduce demand for US business services
• The government could persuade firms not to buy US products

China is indirectly one of America’s biggest employers. China could look to buy all it commercial aircraft from European consortium Airbus rather than Boeing. That move alone wold cost 179,000 US jobs. China controls key components in global supply and production networks

Initially a trade war would mean job losses for both countries but in the long-run with China looking to develop a more domestic led consumption model the export market becomes less significant – Project Syndicate. See video below:

Source:                                                                                                                                                        The Economist – Blow for Blow – April 7th 2018

Looming US China trade war – What can China do?

China’s share of global trade has surged since the 1990’s with both exports and imports increasing significantly – see graph below. Exports have been on a steep rise since 2001 with only a slight plateau with the GFC in 2008-9.

On Friday Donald Trump signed an order to impose tariffs on as much as $60 billion worth of Chinese imports. Trump wants to punish Beijing what he said is “the theft of American technology and Chinese pressure on U.S. companies to hand it over.” This deficit is significant – largest deficit of any country (see graph) – and Trump is blaming the US China trade imbalance for the loss of jobs in the US. This is an area that Trump focused his attention on in his campaign and now he is trying to fulfill the rhetoric.

Source: National Australia Bank

China has already warned that it will take “all necessary measures” to defend itself, raising the prospect of a trade war between the world’s two biggest economies. China has a few retaliatory measures it could use:

Soyabeans – US or Brazil?
The United States exported more than 30 million tons of soybeans — worth more than $10 billion — to China last year, over 57 percent of total U.S. exports of the popular legume. The soybean industry is heavily subsidised by the US government and this allows them to dump their produce on the Chinese market below the Chinese market price. China could look to Brazil for soy.

Boeing or Airbus?
Boeing make over 50% of commercial aircraft operating in China. Last November they signed an agreement to sell 300 planes to China worth $37 billion. This order supports approximately 150,000 jobs. In future China could look to the European plane manufacturer Airbus.

Sorghum
Earlier this year Trump imposed the following on Chinese products:

• 20% tariff on the first 1.2m imported large residential washers in the first year, and a 50% tariff on machines above that number.
• 30% tariff will be imposed on imported solar panels

In retaliation China has launched an anti-dumping and anti-subsidy investigation into imports of the grain from the US. China is the top buyer of US sorghum – US provided 4.76 million of CHina’s 5 million metric tonnes of sorghum imports – US1.1bn. China could retaliate after its investigation wraps up, expected next February.

Apple
China is a major market for the iPhone maker. Apple also depends on China’s workforce to make most of its products. As a result, China’s government has enormous leverage over the company and could, as it has in the past, target Apple for violating Chinese consumer rights.

General Motors
The Chinese market is imperative for GM – China has been the largest retailer for the last 6 years. 4 million cars were sold in China last year, up from 4.4% from the previous high a year earlier. Chinese automakers like Geely and BYD are competing for market share, though, and China could make it more difficult for both GM and Ford to operate on Chinese soil. In late 2016, China fined GM’s China joint venture $29 million for “price fixing,” or setting minimum prices for certain Cadillac, Chevy and Buick models.

Source: 5 Ways China May Try To Win A Trade War With The U.S.

Trump’s tax cuts likely to have limited impact on growth

Donald Trump has indicated that the US economy needs a big tax cut to stimulate some growth and aggregate demand –  C+I+G+(X-M). His rationale is that with consumers having greater income they will spend consume more (C) and businesses keeping more of their profits will invest more (I). He is even so confident that the tax cuts won’t put a dent in the overall tax revenue of the government. However economists are suggesting that the US economy is already growing as fast as it can and in order to improve its growth rate it needs to investment in productivity.

Nevertheless, US tax cuts in the 1980’s under Ronald Reagan proved to be very effective in stimulating aggregate demand but the economic environment then was different to that of today. The 1980’s was an era of stagflation with the US experiencing 10% unemployment and inflation reaching 15%. Since the GFC in 2007 growth has been positive and unlike the 1980’s unemployment has been falling  – from 10% in Oct 2009 to 4.4% in April 20178. Tax cuts are all very well when you have high unemployment but with the rate falling to under 5% companies may find it difficult to respond to the greater demand for goods and services by taking on workers to increase supply. Tax cuts would then lead to an increase in inflationary pressure (see graph) which is turn would prompt the US Fed to increase interest rates.

Trump’s plan would also increase the Federal deficit and borrowing from the government. This would put upward pressure on interest rates for the private sector which reduces the potential for further growth. As noted earlier the area that needs to be addressed is productivity, with a shift of the LRAS curve to the right – see graph.

NAFTA – Positives and Criticisms

NAFTA took effect in 1994 during the Clinton administration although he had to rely on support from the Republicans in the House – 60% of congressional Democrats voted against NAFTA. NAFTA got rid of tariffs on more than half of its members’ industrial products and by 2009 the deal eliminated tariffs on all industrial and agricultural goods.

Positives of NAFTA

• American corporates believed the deal would cut labour costs and therefore increase efficiency and international competitiveness.
• American consumer would also benefit from lower prices.
• It would raise Mexico’s living standards especially in the north.
• Trade between the USA and Mexico has risen 1.3% in 1994 to 2.5% in 2015
• Mexico’s real income has risen – $10,000 in 1994 to $19000 in 2015
• Less Mexicans are migrating to the USA – 500,000 a year to virtually nothing.

Criticisms
Mexican incomes are no better, as a share of those in the US, than they were in 1994.  Americans are slightly better off. NAFTA has caused significant job losses in the manufacturing industry.

However there are some unseen circumstances which have affected the deal.

1. The crisis of the Mexican Peso in 1994-95  – Zapatista rebels launched an uprising in Southern Mexico and the leading presidential candidate was assassinated. Worried about stability, foreign investment began to flee the country. It was eventually brought under control by a loan from the US government.

2. September 11th – this terrorist attack increased the cost of moving goods and people

3. The rapid growth on the Chinese economy which accounted for more than 13% of global exports and 25% of global manufacturing value-added. This puts a lot of pressure on global supply chains.

Have job losses been a result of NAFTA?

Brad DeLong (University of California) estimated that NAFTA could be blamed for only 0.1% of job losses in the US economy. This equates to fewer jobs than the US economy adds in a typical month. But to be realistic job losses would have increased without NAFTA for the following reasons:

1. the advances in technology would see labour being substituted
2. the strong US dollar would make US exports less competitive and thereby making overseas production attractive
3. Transport and communications improvements have made overseas production also attractive

Source: The Economist – 4th February 2017
Below is Paul Krugman on Bloomberg news. He talks of the poor performance of NAFTA for Mexico in that the country hasn’t developed as a whole. Some of the northern states have done well but southern Mexico is still very poor.

 

USA and China Trade – will the USA create more jobs?

Donald Trump appointed Peter Navarro as the head of the newly created National Trade Council – it has been his anti-China stance outlined in his book ‘Death by China’ that has led to his surprise hiring by Trump. The book talks of the economic and military rise of China and the demise of the US manufacturing industry unable to compete with the Chinese sweatshops.

However a lot of the criticisms that Navarro has pointed at China have been quite valid.

1. Currency – the intervention on the foreign exchange market to keep their currency weak so improving the competitiveness of exports.
2. Intellectual property – forcing American firms to hand over intellectual property as a condition of access to the Chinese market.
3. Pollution – Chinese firms pollute the environment and have weak environmental controls on industry.
4. Working conditions – these are far worse than what is the law in most industrialized countries.
5. Export subsidies – government assistance help reduce the cost and ultimately the price of exports from China.

In 2006 he estimated that 41% of China’s competitive advantage over the USA in manufacturing came from unfair practices like those above and when China joined the WTO in 2001 the trade deficit with the USA ballooned at the same time millions of manufacturing jobs disappeared. The deficit though was funded by the Chinese and it was a consequence of the Chinese buying US Treasury bills – to put it simply the Chinese funded US consumers to buy Chinese products. Niall Ferguson refers to the relationship as Chimerica – the two are interdependent in that the USA borrows off the Chinese and then uses that money to buy Chinese products.

Navarro believes that with China adhering to global trade rules the deficit in manufacturing will decrease and manufacturing jobs will return to the US. However when jobs return they are not the same as they were in previous years as it is highly likely that productivity/technology has refined the production process. Research has also suggested that when the trade deficit with China increased (1998-2010) the loss of manufacturing jobs only rose slightly 2.5m to 2.7m. One wonders what Navarro will do in the coming months?

Sources: The Economist, The Ascent of Money by Niall Ferguson.

The 3 heads of Donald Trump

Below is a great cartoon clip from the FT with Gillian Tett talking about the 3 heads of Donald Trump. With some excellent cartoon graphics she goes through each of the following:

1. The sensible serious Trump
2. The love to shock Trump
3. Sleezy, freewheeling, write my own rules, anti elitist Trump

One wonders which Trump will be more prevalent in his presidency? A lot of references to economics – animal spirits, NAFTA, tax cuts, corporate tax etc. As Gillian Tett points out ‘nobody really knows who he is’

Options for taking on Trump – the Japanese Model.

A colleague alerted me to a Terrie Lloyd a New Zealand businessman in Japan who writes a weekly newsletter. With the election of Donald Trump his recent writing looked at bullies and ways in which you deal with them. Shinzo Abe, the Japanese prime minister, has been proactive in getting to know Trump and his team and how the two countries can work together.

Research on bullies

Lloyd suggests that there are generally three ways to deal with a bully.

Run – UK seem to be taking this option
Fight – Chinese will do this
Suffer and appease – Japan, having a bullying culture already, will go for appeasement

Abe will be meeting with Trump on 10th February for a second time in as many months and will want to convince him that Japan is one of the good guys and if he has to pick on someone in the area he should pick on China. For this to work Abe also needs to feed Trump’s ego publicly

Lloyd looks at the work of Dacher Keltner who has written about appeasement and related
human emotion and social practice. He looks at two general classes of appeasement.

1) reactive – the person provides appropriate responses after incidents and these responses are usually public displays of embarrassment and shame.
2) anticipatory appeasement where a person is proactive and engages in certain strategies to avoid conflict. Polite modesty and shyness are also considered anticipatory appeasement.

Japanese Model for dealing with bullies

With Japan taking the latter option, Keltner is suggesting that Abe must appease Trump with gifts of value and that they are seen publicly to assist Trumps power and reputation. Last month the Japanese gave access to US car manufacturers but will that be enough to keep Trump happy? At the meeting on 10th February Abe will propose a package that could generate 700,000 U.S. jobs and help create a $450-billion market. It includes the building of infrastructure projects such as high-speed trains in the northeastern United States, and the states of Texas and California, and renovating subway and train cars. It also includes cooperation in global infrastructure investment, joint development of robots and artificial intelligence, and cooperation in cybersecurity and space exploration, among others.

Toyota the car manufacturer has also been taking the appeasement option after the Trump administration criticised their building of a second car assembly plant in Mexico and also threatened to impose a 20% tariff on Japanese automobile and auto parts makers with plants in Mexico. Toyota quickly announced it would invest $10 billion in its U.S. operations over the next five years.

Abe has definitely been massaging the ego of Trump not only being the first international leader to visit Washington after his election but also telling Trump that he “hopes the United States will become a greater country through (your) leadership,” adding Japan wants to “fulfill our role as your ally.” It will be interesting to see what happens after their meeting on Friday 10th February.

Sources: Terrie Lloyd,  The Japan Times

Contributions to world GDP 2013-16

The Economist produced a graph showing world GDP data and made the following points:

• India and China account for 65% of world growth
• Emerging markets contributions in 2016 were down to its lowest figure since 2008 – falling commodity prices would have been a factor
• Norway contributed less to global GDP with lower oil prices being prevalent.
• USA with increased government spending and greater export volumes improved its position
• Brazil has been in negative territory since mid 2014 – interesting point with significant government spending on hosting the Football World Cup and the Olympics.

Maybe a good starter for your classes asking the question who contributes most to world GDP?

 

The economic legacy of Obama

Here is a good overview of President Obama’s economic legacy from PBS’s Paul Solman. Did his efforts to turn the country around after the 2008 financial crisis constitute a robust recovery, or too little, too late? Economics correspondent Paul Solman assembled a panel of economic experts to discuss employment across racial groups, the types of jobs created and the obstacles the president faced in enacting his economic agenda. Some of the comments are as follows:

• He saved us from a great depression.
• Over 15 million jobs have been added; 22 million more people have health insurance coverage than they did before.
• If we characterise an economy as being in a catastrophe at unemployment rates greater than 8 percent, the black unemployment rate is still above 8 percent. So, frankly, black Americans are still in a great depression, or great recession at the very least.
• The failure by the Obama administration to focus on economic growth.
• A long-term infrastructure program would have made a great deal of sense, and frankly still does today. But that’s not what the Obama administration proposed. I think we need to have a more holistic structural agenda for lower-income Americans, rather than just treating it as a problem of recession and recovery.
• We needed bolder, stronger, more fundamental, not tinkering, ideas to really structurally change the U.S. economy.

Real Housewives, US Election and Economics

You may remember a previous post I did on  ‘WetheEconomy’ now there is ‘WetheVoters’ The site has 20 short films designed to inform, inspire and ultimately activate voters nationwide with fresh perspectives on the subjects of democracy, elections and U.S. governance.

Below is a parody of the television programme “Real Housewives” with a political and economics twist. It shows a good example example of the current political climate and some possible avenues for change. On the one side you have Jessica who is concerned with the government balancing its budget and Lara who believes that the government needs to spend more on infrastructure etc to stimulate the economy and creates jobs. She also uses the austerity measures in the EU as an example to support her opinion. Jessica does make the point as to who is going to pay for all this spending – our kids. Then there is Vanessa who is neutral although does get into trouble by informing Lara that Jessica thinks the government should increase defence spending. From this point it gets quite heated but they do make up. Enjoy!

Fox News Graphic vs US Labour Department Graphic

A hat tip to David Parr for this piece from the Visual Communication Guy on how umemployment data was presented by the media. The graph below shows US unemployment as presented by Fox News. Although it may seem quite genuine at first glance if you look closely you will see that the spacing of the dates on the horizontal axis are not consistent but manipulated in such a way to give the impression of accelerating unemployment. Furthermore as it is presented on TV you are unlikely to have the chance to pick the axis as your eyes are fixated with the rising line.

 

 

 

 

 

 

 

 

 

 

 

 
While there certainly was an increase in unemployment from the end of 2007 to June 2009, the chart from the Bureau of Labor Statistics tells a very different story than Fox News’ graphic. Although there is a steep increase in unemployment during the first 6 months of President Obama’s presidency, there was a plateauing and reason to suggest that the stimulus packages were starting to work.

Whether or not you like Fox News or whether you agreed with President Obama’s stimulus packages is beyond the scope of this article. What matters is that we recognize how information is being presented to us and how easy it is for media gurus to tweak information to tell completely different stories with the same data.

We might ask ourselves: in a country where we strongly believe in freedom of speech, where do we draw the boundaries, if any, on the visual representation of data in the mass media? Where does the communication start to become unethical, and, at what point should unethical turn into illegal?