The widening trade deficit

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The US Trade Deficit rose to $621 billion from $1027 to 2018 while the merchandise trade deficit with China increased to $419 billion. It’s interesting to see how this issue is mischaracterized by those on the left. In fact, many of the same media pundits who claimed that the President’s focus on lowering the trade deficit was misguided are now celebrating the increase as a “blow to Trump” (https://www.nytimes.com/2019/03/06/us/politics/us-trade-deficit.html). They were half-right then and are completely wrong now.

The US trade deficit has many drivers, including overall economic health, strength of the dollar, and “fair” trade policies. When President Trump laments the trade deficit, he is typically focusing on the latter. Specifically, trade policies in China and other countries that unfairly hamper US competition reduce exports and contribute to the trade deficit. The President’s emphasis on equal access to foreign markets is spot on, but his shorthand assertion that fixing these issues will eliminate the trade deficit is overly simplified.

In simple terms, the US economy is growing relative to the economies of our trade partners, and the dollar has strengthened as a currency. This means that US consumers have more to spend with dollars that buy more on the global market. Even with the tariffs, this economic strength drives consumer spending for foreign goods. In other words, the increasing trade deficit is primarily driven by a strong economy, not trade policy.

If you are not convinced of my argument, just think about the opposite scenario. If the US fell into a great recession and our trading partners did not, American consumers would have little to spend on imports. The trade deficit would fall because of the poor economy. The trade deficit reflects the ability to consume more than the ability to produce.

So how does a trade deficit affect other parts of the economy? The books always have to balance, so the difference must be made up somewhere. From a national perspective, countries like China balance the trade deficit by investing in US equities, bonds, government debt, or other assets. Put another way, countries with trade surpluses are financing the growth of those with trade deficits. A high level of foreign ownership of US assets can create problems, but a moderate level does not.

A trade deal with China that makes genuine progress on issues like intellectual property, company ownership, and currency manipulation will help curb the deficit in a meaningful way. But with a strong US economy, it will be difficult to erase the trade deficit, and doing so shouldn’t be our focus.

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Huawei’s dismal PR effort

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Huawei purchased a one-page “open letter to the US media” in yesterday’s Wall Street Journal: “Don’t believe everything you hear. Come and see us.” The Chinese company is attempting to repair its image and deflect pressure from the Trump administration.

https://twitter.com/AdamJanofsky/status/1101141848578506752

In an interview this morning with Fox Business anchor Maria Bartiromo, Huawei’s Chief Security Officer, Andy Purdy, tried to portray the company as a trustworthy, independent firm. He failed miserably.

If you’re unconvinced about the Huawei-China link or just a fan of exceptional journalistic inquiry, you’ll want to watch this video, which covers the first part of the interview.

https://www.foxbusiness.com/business-leaders/huawei-is-trustworthy-chief-security-officer-says

Excellent work, Maria.

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Why Amazon Doesn’t Love NY

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On Thursday, Amazon abandoned its plan to build a large campus in Queens and allegedly create 25,000 jobs for New Yorkers. The original deal involving $3 billion in government “incentives” was considered an economic victory by Mayor Bill de Blasio and Governor Andrew Cuomo but was derailed by a huge backlash from progressive activists and union leaders. So how did a Democrat-negotiated deal unravel at the hands of other Democrats? The answer is not difficult to understand.

First of all, I’m neither a Democrat nor a New Yorker, but I opposed this deal from the beginning. It’s entirely rational for governments to provide infrastructure when a large company comes to town, but the “extra” payouts to lure Amazon are a slap in the face to taxpayers and other businesses. The government was picking winners and losers. The “incentive package” New York offered would have given Amazon an unfair advantage over its rivals in New York and across the country. I’ll all for Amazon’s success, as long as it is attained through the marketplace.

But my views are at odds with many politicians on both sides of the traditional political spectrum. They overlook the cronyism involved when governments collude with some businesses (but not others) to locate in their cities or states. They refer to the payouts as “incentives” and “investments,” claiming that the jobs created will fuel economic development and that the tax revenues they create will more than compensate. They even use competitive lingo to justify the collusion, arguing that they must “fend off competition” from other locates to “win over” new businesses. But this logic overlooks an important principle: It’s okay and even desirable for governments to promote business activity with competitive tax policies and other inducements available to all firms, but governments should not use taxpayer funds to pick individual winners and losers.

This issue creates complications for those on the left. While defenders of liberty promote free markets and despise government intervention, socialists despise free markets and promote government intervention. Leftists don’t trust business in general and rely on heavy-handed regulation to keep it in line. But most socialists understand that the government is unable to replicate the private sector in terms of production efficiency, so they don’t want to destroy it altogether. They want some type of arrangement with quasi-free markets and big government.

The Amazon deal gave government a “seat at the business table” and some sense of control over the online behemoth, but it required a multi-billion-dollar payout to a giant corporation. Modern leftists want to control business activity in order to extract taxes and other concessions, but they don’t want to support large corporations in any way. In the end, the Democrat Mayor and Governor were willing to hand over taxpayer dollars to Amazon to “create jobs.” In the end, socialists like AOC won the battle because they don’t see why Amazon is needed in the first place.

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Takeaways from Venezuela

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If you have been following my blog, the ongoing chaos in Venezuela was entirely predictable. It remains the most underreported story on legacy media.

Here’s an abbreviated storyline: Nicolás Maduro recently won reelection in a sham vote. Two weeks after he was sworn in for a second term, Juan Guiadó assumed the interim presidency, citing constitutional authority that permits the head of the National Assembly to create an interim government and plan for new elections. The Trump administration immediately recognized Guiadó’s authority and instituted economic sanctions targeting Maduro. Guiadó has received support from most other nations as well, but Maduro has the backing of the military and hasn’t budged. Guiadó’s politics are largely moderate to left-of-center by American standards, but he supports free speech, private property, and other basic constitutional rights. His claim to the presidency is legitimate.

Venezuela was prosperous prior to Hugo Chávez’s election in 1998. The Chávez and Maduro regimes have looted and destroyed the nation in just two decades. The current situation is chaotic and heart-wrenching. Poverty is rampant. Stores are empty while many citizens scour garbage for food. Inflation is well above 100,000%. Hospitals lack basic medicine. All of this is occurring in a nation with the world’s greatest oil reserves.

Going forward, there are 3 takeaways from the situation in Venezuela:

  1. Where leaders are elected, Marxism begins with class warfare and an attack on private property. It ends with control, corruption, widespread poverty and despotism. Venezuela is a textbook case of this reality.
  2. Some Americans actively supported Chávez until he “ran out of other people’s money” and things began to unravel. Whenever socialism fails, the left blames corrupt leaders, not corrupt ideas. The problem in Venezuela—like Cuba, North Korea and the former USSR—is bad ideas, not just bad people.
  3. If applied, the bad ideas applied in Venezuela would reap havoc in the US. I wouldn’t expect the same degree of destitution, but the impact on our society could be severe. Don’t be deceived into thinking a “middle ground” is a solution and what has happened elsewhere couldn’t happen here. Whatever you think of President Trump, keep this in mind as you evaluate the rhetoric from Democrats who seek to unseat him in 2020.

It’s unclear how the current standoff in Venezuela will end, but a civil war is not out of the question. Let’s hope and pray that Maduro exits without mass bloodshed.

The Acton Institute posted a compelling interview with an economist in Caracas earlier this week if you want to see what’s going on there firsthand (https://livestream.com/ActonInstitute/VenezuelaInterview/videos/186483002).

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Politics vs. Policy

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Our founders created a system of limited government to minimize our dependence on Washington. They were pragmatic, but they never intended that policy be dictated by politics. Things have changed. With a national debt of $22 trillion, unfunded liabilities exceeding $200 trillion, and U.S. troops stationed all around the world, separating politics from policy is all but impossible. We hear lots of calls for “the other side to rise above politics and do what’s right for the country,” but this rarely happens. President Trump’s address to the nation on illegal immigration (and the Democrat response) illustrate this point.

The Democrats claim that Trump is manufacturing a crisis. I don’t agree. To be fair, one could argue that problems at the southern border are not as dire as he claims, but it’s difficult to find anyone on the left actually making the case. I see the same politicians who supported physical barriers to boost border security in the past now claim that such structures are immoral, ineffective, and a waste of resources. Their position changed once Trump adopted “the wall” as a central part of his campaign in 2016. Rather than engaging in a serious debate about borders and policy, they seem focused on the 2020 election.

Past Presidents and Congresses have refused to tackle illegal immigration for years, lest they battle corporate interests, offend activists, or be tagged as racists. I give the President credit for attempting to resolve it. Trump makes a similar argument about intellectual property, state-owned enterprises (SOEs), and other trade concerns with China. Agree or disagree with his approach, he’s being proactive.

Illegal immigration is a complex issue, but unlike many issues debated in Washington, our government has a Constitutional responsibility to address it. There is no perfect solution, but it’s inexcusable that our leaders can’t seem to make any progress.

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Facebook’s dubious commitment to privacy

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Facebook founder and CEO Mark Zuckerberg has received constant criticism for his condescending view of consumer privacy. As reported in the Wall Street Journal, the U.K. Parliament last week released a trove of internal Facebook emails that suggested the tech giant provided special access to user data to certain third-party developers. Several years prior, the company even considered charging developers for such access. Such a policy would probably be legal—as long as users accept the terms—but considering one suggests a lack of genuine commitment to Facebook’s longstanding “policy” of not selling users’ personal information.

But there’s more. In an October 2012 email, Zuckerberg questioned, “I think we can leak info to developers, but I just can’t think of any instance where that data has leaked from developer to developer and caused a real issue for us. Do you have examples of this?” Stop and read this quote again. Zuckerberg is downplaying the potential adverse effects that data leaks can have on the company. Where is his concern for the effects data leaks can have on consumers?

An internal memo from 2014 also suggested that Zuckerberg maintained “a small list of strategic competitors” that could not access some services available to other developers. During a 2013 online chat, Facebook’s Justin Osofsky referenced Vine, a Twitter feature that lets users make six-second videos. Facebook allowed Vine’s users to find their friends via Facebook, but Osofsky objected, stating, “Unless anyone raises objections, we will shut down their friends’ API [application programming interface] access today…We’ve prepared PR [public relations].” Zuckerberg responded, “Yup, go for it.”

I’m not criticizing Facebook for the hard-nosed competitive tactics Osofsky suggested, but it’s just not consistent with Zuckerberg’s public statements. I’m getting tired of Zuckerberg’s posturing about Facebook’s commitment to privacy, access, and openness to others on the Web. The U.K. documents provide strong evidence that contrary to company statements, Facebook’s commitment to privacy has always been negotiable. Zuckerberg’s “don’t worry about your data” assurance to consumers has attracted them in great numbers over the years. The truth may be out now, but unfortunately, it’s too late for the globe’s 2+ billion users who trusted Facebook from the start and cannot simply retrieve their data and sign off.

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Amazon’s Headquarter Decision

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I addressed Amazon’s new $15 minimum wage in my last 2 posts. After attributing the wage hike to the firm’s commitment to social responsibility, CEO Jeff Bezos announced plans to lobby Washington to require his competitors to pay $15 as well.

Last week, Amazon announced its plans to build two new headquarters in Long Island and Crystal City (Virginia) after extracting multi-billion-dollar packages from each in direct payments, tax incentives, and other support. Both cities will be “investing” taxpayer funds in exchange for Amazon’s promise of economic development. Unlike Amazon’s new minimum wage, Bezos is not insisting that his rivals receive the same government handouts. It would be equally difficult to claim that the location decision had anything to do with “social responsibility.” Apparently, Amazon passed on Detroit and El Paso.

To be fair, this type of corporate collusion with state and local governments is not illegal. Amazon is not the first company to secure handouts, which come from both Democrats and Republicans. Taiwanese electronics manufacturer Foxconn recently received $4 billion from Wisconsin to build a new plant there. Outgoing Republican Governor Scott Walker spearheaded the deal.

But make no mistake, this is pure cronyism. When politicians make these deals, they curry favor with some voters at the expense of all taxpayers. In the instance of Amazon, local and state governments transferred tax revenues actually levied on some of Amazon’s competitors to lure the company to the region. Politicians claim that the benefits from economic development spurred by companies like Amazon will justify the “investments.” This could be true in some instances, but governments at all levels have a dismal record in the investment arena and shouldn’t be involved in such activity anyway. Politicians are famous for underestimating costs and overstating benefits of government outlays; just look at the national debt if this isn’t obvious.

Amazon’s toadies cheered when the company raised its wages for competitive reasons, while the company claimed virtue points and insisted that others follow suit. Perhaps they can justify the billions Amazon will get from taxpayers to locate facilities in two of the wealthiest cities in the US.

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Amazon’s New Minimum Wage- Part II

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Amazon’s minimum wage is now $15 per hour. CEO Jeff Bezos says the change is all about “doing the right thing,” but he also wants government to mandate the company’s new minimum wage to his competitors. I questioned his motives in my last post, but a colleague vehemently disagreed. She insisted that “companies need to be responsive to social change and their stated intentions should be taken at face value.” I don’t think she is seeing the big picture.

Earlier this year, the Seattle city council unanimously passed a measure requiring companies with revenues in excess of $20 million to pay an annual $275 tax per employee to fund “affordable housing” efforts. Amazon (and other large companies) vigorously opposed the tax and the council rescinded it the following month. Supporters assumed that companies like Amazon would simply comply, lest they be scorned for condoning homelessness. They were wrong, and Amazon was justified in its response. Bezos later tweeted a $2 billion pledge to fight homelessness by supporting efforts by nonprofits, not the city’s tax scheme.

At first glance, it appears contradictory that Bezos did not trust Seattle’s local government’s ability to use tax funds properly to address the homeless problem, but does trust government to fight poverty by mandating a higher minimum wage. Indeed, Bezos is correct not to oppose Seattle’s money grab to subsidize housing. Private sector efforts are much more effective at combatting the problem. If you need evidence, consider the longstanding rent control debacle in New York.

I’m not convinced Bezos really thinks that really thinks a higher (government-mandated) minimum wage will improve conditions for those in poverty. Most minimum wage workers aren’t the primary breadwinners in their families anyway, and requiring employers to pay above-market wages encourages them to hire fewer workers. But Bezos has two reasons to campaign for a higher (government) minimum wage. It’s a virtue signal that Amazon “really cares” about the poor, and it would also create a burden to current and potential competitors by requiring them to match Amazon’s pay level.

The same media pundits who criticize “big oil” for “deceiving” the public about climate change seem willing to accept Amazon’s support for an increase in the federal minimum wage without questioning the motives. They should apply a simple standard. Amazon and other firms should be permitted to set wages and make other strategic decisions without government interference, but they should be criticized when they lobby for government intervention that restricts competitors from doing the same.

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Amazon’s New Minimum Wage

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Effective November 1, Amazon will pay all of its employees a minimum of $15 per hour. According to CEO Jeff Bezos, “We listened to our critics, thought hard about what we wanted to do, and decided we want to lead. We’re excited about this change and encourage our competitors and other large employers to join us.” Bezos also said he will campaign for a higher federal minimum wage as well.

Many in the establishment media applauded Bezos’ “leadership” on the issue. Of course, higher wages are always welcome when they are not mandated by government. But I’m much more critical of Amazon.

Bezos claims that the decision emanated from serious contemplation about “doing the right thing.” But the U.S. economy is strong, unemployment is down, the number of unfilled jobs has increased substantially, and the Christmas shopping season is around the corner. Amazon had to address the wage issue for competitive reasons. This was an economic decision. All the talk about “wanting to lead” is dribble.

If you think I’m too hard on Amazon, consider that he is now campaigning for a higher mandated minimum wage. Lest you think this is out of a sense of “social responsibility,” recall that this political effort comes after Amazon announced its own plans to raise wages. Bezos is simply mandating that his competitors be required to do what he has now determined is best for Amazon. Why can’t other retailers make their own decisions about wages? If Walmart decides to start its workers at $18, should politicians mandate that Amazon do the same?

Amazon has grown exponentially because Bezos had the opportunity to chart a different course for the company without undue interference from Washington. But now that Amazon is better able to absorb the costs of a higher minimum wage and other political mandates, his tune has changed. It’s time to cut through executive doubletalk like this. Bezos should have the freedom to run Amazon the way he sees fit, but he should respect the rights of his competitors to do the same.

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Trade: The View from China

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I just returned from an 11-day visit in Beijing. This time I expected to hear a lot about the ongoing trade dispute between China and the US, as business between the two countries is always a hot topic. I had several interesting discussions, but heard a lot less than I expected. The graduate business students I taught knew surprisingly little about it and were largely unconcerned. It was clear that the ongoing dispute is being downplayed in the Chinese media.

There was some coverage, however. Reports on government-controlled CCTV (in English) featured select US economists chastising the Trump administration for instituting tariffs with no mention of closed markets, currency manipulation, or intellectual property. CNN’s international network was the only other English option in my hotel. Not surprisingly, most of its US coverage was negative or neutral, portraying President Trump as an uninformed, protectionist leader largely opposed by most Americans. The CCTV/CNN narrative is clear: China wants free trade while the US seeks protectionism.

It is possible to learn more about the official US position on trade, but not easy. Various US news sources (including Fox News) are available online, but many such as the Wall Street Journal are blocked in China. Media outlets are controlled by the state and commonly air comments from US politicians and business leaders who agree with the official Chinese position on an issue.

Of course, the contrast in China between our current and most recent presidents is stark. Barack Obama is widely revered in China; “Maobama” t-shirts with a picture of Obama wearing a Chinese star cap were widely seen throughout Beijing during his presidency. I didn’t see any t-shirts featuring President Trump. He is not popular, but most of the Chinese I talked with criticized his “attitude,” not policy. In fact, I raised some issues related to trade fairness with one manager and was not rebuked. The manager said he wasn’t familiar with Chinese exchange rate policy or disparate restrictions on foreign companies.

The ongoing argument is really about leveling the playing field, not the merits of free trade per se. In fact, most US economists across the political spectrum acknowledge the economic importance of global trade. Ironically, the Chinese and US media are portraying President Trump—not the Chinese—as the anti-market villain while few Americans and even fewer Chinese appear to know much about the underpinnings of China-US trade. It’s time to have a real debate on the topic.

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