NDN Blog

Greg Manciw, an economist at Harvard, runs an intriguing blog on matters economic. He holds his lofty position, at least in part, because of he quit / was pushed from his previous role as Chairman of the President's council of Economic Advisors. This happened after some some heretical thoughts on outsourcing; heretical in the sense that most sane economist's completely agreed with him. (NDN's Rob Shapiro has often notes that this administration doesn't have a serious economist anywhere near the leavers of power so Manciw might not regret his decision much.) Anyway, today Manciw is found musing about what New Lamont's jobs policy tells you about the direction the Democratic party has been taking on trade issues.

This rhetoric scares me. Wages, benefits, and labor and environmental standards are primarily a function of the level of economic development. Complaining about poor countries' low wages and benefits is essentially blaming the poor for being poor.....Demanding "strong standards" can easily become an excuse for imposing trade restrictions, which will only improvish the world's poor even further, as well as denying Americans the benefits of globalization.

Say what you want about Joe Lieberman, but he managed to combine two things that the Democratic party today finds difficult: a strong record on labor issues, with a recognition that open trade benefits the American people. This record makes the task for the mid-terms - and lets put Mr Lamont to one side for moment - clear, but very tough. Democrats must make an issue out of stagnant wages for working people, but not do so in such a way that portray global trade as a pantomime villain. Sadly, not even Tradesport seems able to give these odds.

And a big NDN hello! to our new readers, after yesterday's fun and excitement. I'll be leaving the state of the nation stuff to Simon, and go for the fripperires instead. Much discussion today of how yesterday's events in Connecticut will play out during the coming three months. Its a toss-up between Democrats heading for cut n'run rack and ruin if you believe the Vice President; Democrats energised and united if you believe the Democratic leadership; or the country hungry for the McCain-Lieberman Party, if you believe David Brooks. How can you tell who is right? Enter a nifty website a friend sent me this morning, Tradesport.com, which uses betting patterns to provide odds on all manner of good things. What do the punters say? Yesterday, it showed that the long term slide in odds of the GOP retaining the House in November continued. Not quite as rosy on the Senate, however. Joementum or not makes little difference in a fairly steady bet that the Dems are in an uphill struggle to take back the Senate. To think: all of that commentary ink spilled, and the betting men are unmoved. A lesson for us all?

Startling as it might seen, some news happened outside of Connecticut in America yesterday. Fed Chair Beranke's will-he won't-he dance came down on the side of won't, as rates were left unchanged. Good news for the mortgage, bad news for the economy? Seems like it. What last week looked like recession predictions from baby Bear have been joined this week by the Mama and Pappa Bear's of the economic firmament: Krugman, De Long , Feldstein to name but three. The balancing act is well put in a piece in the Times this morning:

The dilemma for policy makers is that if the Fed is forced into a serious crackdown on inflation, it risks throwing the economy into a recession. That would leave workers whose wages in recent years have barely kept up with price increases in worse shape, just as many are beginning to reap some modest gains from economic growth. And with energy prices up sharply, many workers, whose pay increases have also lagged far behind productivity gains, have less disposable income for other purposes.

There was further evidence that the White House is paying more attention to pocket book issues yesterday, when Press Sec Tony Snow led off his noon "gaggle" by pushing hopeful looking hourly compensation figures from the commerce department. Bill Emmott, former editor of the Economist, writes this morning that a slowdown in the US economy would be no bad thing, just as his ex-magazine wrote last week that slower american growth was exactly what the Fed should be in the business of promoting to combat inflation. And so they might. But a recession, following growth which failed to benefit most American workers, is a fix even the able Mr Snow might not be able talk himself out of.

I've been thinking some more about Hank Paulson's speech. I increasingly think it does show a shift in the administrations economic thinking. This was laid out in a perceptive Council on Foreign Relations Memo two weeks ago:

Bush essentially set five goals for the new Treasury secretary. Keep taxes low. Curb federal government spending to curb the budget deficit. Deal with international imbalances. Keep investment markets open. Support innovation and risk-taking in the private sector to boost USeconomic growth.

They were right on the money: this gives a pretty good summary of the speech. But three things strike me nonetheless. First, the repeated focus on entitelments. Paulson mentions it throughout, along with restarting stalled reforms. It is a very clear sign that we'll soon have Social Security, round 2. Second, the new deficit focus heralds budget cuts above the Deficit Reduction Act. Paulson is "working with my colleage and friend Rob Portman" at OMB. This implys new measures in the offing. Remember when most people thought Portman's move from trade signalled the death of Doha? Perhaps it instead meant a genuine new enthusiasm for budget cuts? I mailed a Wall St insider last night who concurred, saying "The major point of Paulson's remarks was the promise to cut entitlements next year to reduce the deficit." Finally, the sheer domesticity is striking. When Paulson was appointed, he was going to be Mr Global "No Retreat From The Global Economy." Now it seems he is Mr domestic "Getting Our House in Order." Yet, underneath, he could still be Mr "Using The Economy As An Excuse To Slash Spending." Lets watch and see: at some point, the real Henry Paulson will have to stand up.

For a President, having one recession might be unfortunate. But to have two? That must be considered careless. Yet Sterling Newbury, a private equity analyst who writes over at TPM, thinks carelessness has been the order of the day. Since last week's slower than expected GDP figures there has been much discussion the extent of the upcoming slowdown. Newbury is more bearish than most:

"The reason, ultimately, that the "doom and gloom" caucus is predicting recession, is that the economy is tearing through the net of housing and federal stimulus that has held growth up, and there is very little but the cold, cold ground to break the fall. With inflation here, people are pulling out of short bonds, expecting more rate increases, this is forcing up short term rates."

The chances of slowdown are greatly hastened by any number of grim possibilities: the possibility that foreign central banks will stop buying American assets leading to a declining dollar, a further (unexpected) oil shock, a decline in the housing market or an economic shock caused by a security event. Even without these, Newbury says thinks that 2007 will see a signifcant GDP slowdown, with certain areas of the country in recession. If he's right, it will turn conventional wisdom on its head. Economists traditionally worry that Politicians will cynically engineer economic pre-election booms. The idea that they might be able to bring about a bust the year before an election..... well that would take a President of extraordinary economic vision, wouldn't it?

Treasury Secratery Paulson gave his first big speech yesterday. His bipartisan tone and policy priorities were, i thought, encouraging. He comes accross as engaged and thoughtful. And significantly he made stangant incomes one of his four top priorities, along with reform of social security, energy, and protecting open trade. This is a big switcheroo, and backs up what Rob and Simon said in their memo last week. Pressure from progressive organizations is helping to put the issue up the agenda. This change of emphasis was picked up by Ed Luce in the FT, and the Times.

But is it a change of heart? Not really. Last month Olympia Snowe asked Paulson about wages at his confirmation hearings. He said nothing was going on that further rises in productivity wouldn't fix. That sentiment did not change yesterday, as you'll see if you read the full remarks. Key quote:

"But we still have challenges, and amid this country's strong economic expansion, many Americans simply aren't feeling the benefits. Many aren't seeing significant increases in their take-home pay. Their increases in wages are being eaten up by high energy prices and rising health-care costs, among others."

The explanation in the rest of the passage - wage growth will follow economic growth, wages rises below productivity rises is a long-term trend, lots of factors are responsibile - doesn't show much of a change of thining. The only switch is a more New Dem style focus on helping people get access to training. Two bottom lines. First, while its nice to see the change of emphasis, there hasn't been a change of analysis. Second, on wages, free trade and the deficit, it isn't enough to say you are on the right side. You actually have to do something about it too.

There is something of the horrow movie villain about the doha round. You knows its going to die, but it keeps looking like it might come to life, just to be killed one last time. If you can't quite follow what is going on, don't worry. Neither, it appears, can EU Trade boss Peter Mandelson. UK Prime Minister Tony Blair made a speech in California the day before yesterday saying:

I have not at all given up on the WTO trade round. After a long discussion with President Bush after our press conference on Friday, we both agreed we needed to make one final effort to re-energise the negotiation and I hope we can do so within the next few weeks.

A sidenote in this morning's FT claims that Mandelson - formerly Blair's closest advisor - was "slightly baffled" as to what the Prime Minister was going on about. While Mandelson had previously blamed "US Greed" for talk's collapse, today Bruce Bartlett puts the blame squarley on President Bush. Bartlett, who worked for Jack Kemp, knows irresponsible economic policy when he sees it. And he sees it here:

Last week, the Doha Round of trade talks collapsed. Future historians may well conclude that of all the Bush administration's economic mistakes, this one was the biggest. That is because we may have just seen the end of the free-trade consensus that has been at the core of U.S. international economic policy for both parties since World War II. The result may be a new era of protectionism that could be extraordinarily costly and painful.

On that note, i was almost tempted to get a copy of Senator Dorgan's new book, to see how frayed the rope tethering the trade debate to the realities of planet earth has become. But Daily Kos publishes a review, so i don't have to. And yes, Ladies and Gentelman, from the tone of it's comments about "The Toxic Waste of World Trade" we are indeed now floating in space.

What is the chinese for crocodile? Nope, me neither. But Lacoste are working it out. Daniel Altman, an editorial writer at the Herald Tribune, points to a new move in the ongoing attempts of the French clothing manufacturer to stop Chinese manufacturers waddling into the marketplace sporting what they call "spurious crocodiles".(Lacoste launched new action yesterday; read what the People's Daily has to say here.)

As NDN has said before, protection of IP has not been front of mind for the current administration. It is worth remembering, though, that there was a time when IP was even less of a priortiy. Following the revolutionary war, the considered view of the sitting administration was that it should get hold of as much foreign (normally, British) patented and copyrighted material as possible. (This book tells the story, while this was the result.) Now the boot is on the other foot. But, being fair, there is at least one obvious difference between 2000 and 1800. Two hundred years ago there was no way dominant European powers were going to let their valuable technological know-how slip out of their mercantalist trading areas. While India might get the tools, America had little choice but to steal and borrow its way to industrial might.

Today these ideas are widely available to any regime which shows a willingness to protect them. This is even more so in China. Companies are, at least to some extent, willing to trade-off the security of their assets for a foot-hold in a growing market. Its a complicated issue for sure, with some clever people on both sides. (I was surprised, for instance, to see a long passage in Jagdish Bhagwatti's excellent In Defence of Globalization in which he argued in favour of less stringent IP protection for medicines and software.) Yet, as our own Rob Shapiro noted earlier in the year, without these technological injections, there isn't much made in China that anyone would want to buy:

Most of the value of everything produced in China – from computers to automobiles -- comes not from the inexpensive labor and materials that China contributes, but from those who developed the products and the ideas that animate them, here in the United States or in other advanced countries. Yet, our government will nearly go to war with Europe over bananas and beef, while barely protesting which companies in India, China or Brazil rip off the ideas behind our pharmaceuticals, software and entertainment.

Lacoste might be french. But in filing suit to protect their famous crocodile they are acting in way that the Bush administration would do well to copy.

Not that I read the news solely to seek out examples that support other stuff NDN has lately been saying, but if its out there, why not use it? Three choice examples harvested from this weekend's news forest. First up, the Times ran a big front page on Sunday highlighting growing numbers of economically innactive American men in the labor force, and in particular the trend to support innactivity by drawing down income from rising home values. As Rob Shapiro has said in the past, this (admittedly long-term) trend of dropping out of job seeking helps explain how the economy seems to hover close to the c5% full employment rate without seeing full-employment style rises in wages.

Second, CAP's Matt Miller has an intriguing collumn about Starbuck's CEO Howard Schultz's campaign to get CEOs and politicians to admit that rising healthcare costs are damaging American competitiveness. Says Schultz: "It's the cloud Hillary created when she tried to change the system .... People burned her so badly, and everyone remembers that. It's a subject people don't want to touch." A fair point. But people used to call Welfare Reform the 3rd rail of politics, and ten years on from the 1996 Welfare Bill, that now looks silly. Surely someone can make this issue a winner in '08?

Finally, an intriguing piece of bi-partisan research on that increasingly rare species; fiscal responsibility. The Times business sections reports on an experiment in which various wonkish institutions, including Heritage on the right and Brookings on the left, ran public deliberations on what to do about the budget deficit. Without wanting to be overly trite about the report's "ordinary americans are smarter than dumb politicians" slant, the reporters take seems hopeful. Given the facts about balooning deficits and the upcoming crisis in entitlement spending, participants in the workshops could be persuaded to support tax rises, and wanted the Bush tax cuts repealed:

“I was surprised that so many people were in favor of higher taxes, but I think it’s a good thing,” said Anthony Condo, a construction contractor in his 50’s and a strong Bush supporter. “If taxes went up to lower the deficit, and I knew they were being used for that, I would be in favor of it.”

Probably not much use in partisan elections, but it goes to back up a too little remarked fact: the more people learn about progressive ideas, the more they are likely to support them. Heartening stuff. Back to work............

Its friday afternoon here at NDN, which must means its the perfect time to sneak out some bad economic news. And whats this? Indeed, its glum news on wages tip-toeing out of the back door of the Commerce Department. Marketwatch gives a good overview, reporting that these revised figures show that "the growth of employee compensation, already thought to be the slowest in any post-World War II recovery, has been even weaker than previously assumed." And today's figures, while rising, are doing so slower than inflation. As Jared Bernstein writes over at Brad De Long's place, "real compensation (wages plus benefits) has declined, on a yearly basis, for the past four quarters."

Normal economic theory suggests that a mix of rising economic growth and productivity will lead to higher wages and incomes. There has been a debate as to why this isn't happening. Some say, as we said earlier this week, that this is because of underlying changes in the nature of the global economy. Others claim there is simply a lag between growth and wage increases. But one precondition for the lag theory to be right is that the economy must keep growing long enough for the lag to kick. Bad news, then, that this isn't what seems to be happening. Today's GDP figures show that growth more than halved in the second quarter, down to 2.5%. The slowdown was expected, and the growth level is historically respectable. But it has certainly commentators cleverer than I furrowing their brows, and talking darkly of slow downs and recessions. The Economist highlights fears of an economic slowdown combined with inflationary pressures, and as usual hits the nail on the head:

The unexpectedly slow rate of growth comes just as there are reasons to worry about the underlying economy. Consumer spending has remained astonishingly high recently but only because Americans are increasingly willing to borrow, largely on their now-more-valuable homes. Personal-savings rates have been negative since the second quarter of last year. The share of household incomes devoted to servicing debt is at an all-time high.

Whats going to happen? As usual, nobody know. Some seem optimistic. The IMF thinks we're heading for a "soft landing" with lower growth. Others, like the hawkish folks over at the Hamilton Project earlier this week, worry that continuing global imbalances could combine with reckless fiscal management here at home to deliver a hard landing, complete with a slide in the dollar, higher interest rates and lower growth. The only thing that can be said with certain is that whether the economy slows soft or hard, a slowing economy is very unlikey to produce rises in incomes. Could this be the first complete economic cycle since the second world war to see no increase in real incomes at all? Watch this space.