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Blue Collars Lose Ground – Don’t Blame Trade

By Shlomo Maital

 

     Led by the Trump Administration in the US, worldwide there is a counter-revolution against globalization. Right wing governments are being elected in Hungary, Italy, Austria, partly in Germany, and elsewhere, reacting against the ravages of globalization – particularly, the claim that blue collar workers are being scalped by it – by migrants (free flow of labor) and by trade (free flow of goods).

     America, which invented this amazing system that made many emerging economies wealthy (East Asia, primarily) now leads the charge against it.

     And this whole counter-revolution is based on a falsehood. Don’t blame trade. Blue collar woes have another primary cause, according to Harvard University Professor Elhanan Helpman, in his new book Globalization and Inequality. It was not primarily free trade (globalization) that caused the large gap between blue collar and white collar wages.

     Earlier, in 2016, Helpman published an NBER working paper * showing this (typically understated, as academic researchers are wont to do):

       Trade played an appreciable role in increasing wage inequality, but its cumulative effect has      

       been modest, …globalization does not explain the preponderance of the rise in wage inequality

            within countries.

   What, then, does explain it? Technology and productivity.

     Studies show that the premium for a college education (i.e. skilled workers) was 63%.   The blue collar/white collar wage gap results from basic supply and demand factors, “…the dominant cause was an increase in the relative demand for skilled workers”.

   OK – so who is to blame?   American political leadership, for failing to find ways to upgrade the skills of blue-collar workers, especially in America’s failing and failed educational system.   And, as New York Times op-ed columnist David Brooks has noted – the educated elite simply ignored the plight of the non-educated elite – and the price they pay is the election of Donald Trump.

* Elhanan Helpman. “Globalization and wage inequality”.   NBER working paper 22944, Dec. 2016.

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 Infrastructure:  Europe, China – and America
By Shlomo  Maital 
 
    In Economics, there are not many principles we can cite with absolute certainty.  Here are two of them:
   1.  The rate of return on investment in Research and Development is in many cases astronomical.  In 1958 Prof. Zvi Griliches found that investing in research in hybrid corn “paid a return of at least 700 per cent”.   Few other social investments can rival this. Yet countries continue to underinvest in R&D.
   2.  The rate of return on investment in infrastructure (roads, transportation, communication, education) is equally astronomical.  Yet in the West countries continue to undersave and underinvest in infrastructure.
   The contrast between Europe, China – and the US under Trump is stark.
    The EU, not noted for bold innovation, is undertaking a huge infrastructure project that will link Malmo, a Scandinavian port, with Palermo, a port in Italy.  This project will help reduce the large gap between the wealthy Northern EU and the relatively poor Southern EU.  It will do much to knit the fractured EU together, in the wake of Brexit. 
     China has a bold vastly expensive program to build a new Silk Road, linking China with Europe, the Mideast and Africa.   The One Belt One Road initiative, now changed to “Belt and Road Initiative”   is, according to Wikipedia “one of the largest infrastructure and investment mega-projects in history, covering more than 68 countries, equivalent to 65% of the world’s population and 40% of the global GDP as of 2017.”
     And the US?   Well,  on a recent visit there, I used Waze (an application developed originally in Israel, now owned by Google) to navigate.  In the US,  Waze informs the driver of potholes. And, trust me – I heard about a LOT of potholes from Waze while driving in the eastern United states.  Some of them were big enough to swallow Trump’s ego.
      President Trump speaks often about infrastructure.  He has plans to fix it, including thousands of crumbling bridges. But here’s the catch.  The latest Trump tax cut put a huge hole in the government budget and added $1.5 trillion to the deficit.   So there is no money left for infrastructure investment.  The solution?  Trump thinks he can get private industry to finance it, using tax credits.
       This is science fiction.  Basic economics shows, the return on infrastructure investment is largely “social”,  that is,  not captured by private investors, but accruing in a diffuse manner to all of us.  So why would private money invest in it? 
         China, EU – and the US.  Another instance of how the US has become a Third World nation, and China, in the Third World, is becoming First World. 

 3 Decades in 364 Words:
A Guide for the Perplexed
By Shlomo  Maital   
  
     The world has become a chaotic, complex system, hard to understand, impossible to predict.  Here in 300 words is a vestpocket history since 1989 –hope it will help.
      On Nov. 9 1989 the Berlin Wall fell.  This led to the rapid unification of the two Germany’s (note: this can also happen to the 2 Korea’s, equally fast), which accelerated the European Union, and marks the onset of true globalization – free movement of ideas, capital, labor, goods, services and information across borders. 
       Globalization created massive wealth for a handful smart enough to take advantage.  It created unprecedented growth for China and other Asian nations; for Germany to some extent; for India, and some poor countries.  But most poor nations were left out, especially those in Africa. 
        Capitalism broke down.  Great wealth bought political influence, and corruption became rampant, in Russia,  and elsewhere.   The huge canyon between rich and poor led desperate people in corrupt nations (Mideast, Africa, some Central and Latin American countries) to migrate, at risk of life and limb, toward the wealth.  Meanwhile, in many countries democracy regressed.  The EU pushed union too far, seeking to unify politically, leading to widespread pushback and Britain’s exit.  The flood of migrants to Europe threatened the foundations of European unity. 
      In the ongoing historical cycle, the wave of democracy that swept the world after WWII,  and during globalization,  began to retreat, as corruption, influence of money and wealth disparities led democracy to break down in many places that tried it.  The Arab Spring became the Mideast winter.  Russia, China and other nations seemed to entrench leaders permanently.   Globalization receded.
       Even America, a bastion of democracy,  regressed under Trump, embracing the backlash of the white minority against migrants.  Trump’s “trade wars are good” reflects abysmal ignorance of the last Great Trade War, 1933, that brought a world depression.  Italy’s election tomorrow will focus not on key issues (economy, jobs) but on Italy’s 650,000 migrants.   In my country Israel, a right-wing government seeks to illegally expel African migrants, against their will.
      This cycle will play itself out.  We will eventually return to democracy and globalization will again grow and spread.  We will find ways to include poor nations left out of the global system.  Racist ignorant leaders will be deposed.  We are seeing signs everywhere of an uprising, of young people taking responsibility.  Take a long view of history and remain hopeful.

= = = = = =
A brief p.s.     In May, if sufficient numbers register,  I will offer a one-week course on How to Change the World With Ideas, at a beautiful spot in northern Greece.  If this interests you, check out:   http://unboundprometheus.com/program-one/

Ballooning Debt & Deficits: How the Republicans are Making America “Great (in Debt)” Again

By Shlomo Maital

You, dear reader, are as tired of reading about the Republicans’ iniquities as I am of writing about them. Hopefully – this is the last blog on the subject for a very long time.

   The Trump Administration has made hypocrisy an essential element of everything they do, with unqualified support of Republicans, both in the House of Representatives and the Senate.

     The latest 2-year budget?   It calls for massive spending increases in defense and non-defense items, without showing how to pay for them. Add this to the unfunded tax cut.  The result?

* The ratio of debt to GDP will rise to 109% by 2027, and

*   the spending bill will add $1.2 trillion to the deficit by 2019.

   Under Obama, the Republicans rioted over Obama’s free-spending budgets. But it is a fact – deficits have risen far more under Republican presidents (remember Reagan’s tax cuts, unfunded?) than under Clinton and Obama. Clinton in fact balanced the budget!   Obama ran a small deficit.

     Make America great again?   Here is how Trump is doing that.

     Here is the list of countries with triple digit (over 100%) debt to GDP ratios:   Portugal, Italy, Eritrea, Belgium, Mozambique, Japan.

       You’ve done it Trump! You have managed in just one year to help America gain entry, very soon, to this unique club of great nations, with GRRRREAT debt to GDP ratios. America will soon drown in debt, on the Republicans’ watch.   Does this bring new meaning to the word “political hypocrisy”?  

     I predict this Trump Tweet:   GREAT world-leading debt ratio.  Historical. Fabulous.  Debt is great. I know — I did borrow and then bankrupt. Watch me bankrupt America too…piece of cake.  Make America broke.

World Economy: Best in Years

By Shlomo Maital

The recent one-day dramatic drop in the US stock markets, about 6%, has brought panic to investors – especially to every-day ones who manage their 401K accounts. It embarrassed President Trump, who speaks daily of the booming stock market and the “$8 trillion in new wealth” that it has created.   He has ignored the drop, and his spokespersons revert to speaking about the strong economy.

   So here is the basic truth.   The global economy, for the first time in over a decade, since the onset of the global financial crisis of 2007-8,   is expanding everywhere – United States,   Europe, Asia.   This synchronous expansion is of course amplifying economic growth and employment and job creation in each of the three key regions.

   The graph above, from Ifo Munich, shows “actual” on the x-axis and “expectations” on the y-axis, for the EU region, which is about the same size as the US economy.   It indicates that the EU economy is squarely in the upswing upper right quadrant, after a very long time being remote from it.   The economy is growing, and people expect it to continue.

     I hope small investors do not panic and bail out of their stocks, giving unwarranted profits to the sharks, and that they take into account this global synchronous acceleration, which I think will continue for a while. I hope also nobody will attribute this to what politicians, including Trump, are doing or have done.   This is simply a cyclical pattern, as people and businesses expand their spending after years of belt tightening.   It will end some day — but hopefully not too soon.      

Why do we disagree? And how can we reglue society? 

By Shlomo Maital

     It does seem as if the world is falling apart.   Whole nations are coming part (Spain, perhaps Italy, Iraq, Syria). Within nations, divisive bitter arguments pit one family member against another.  

   But why? Why now?

   I think moral psychologist Jonathan Haidt (U. of Virginia) has a persuasive answer. *

     He was recently interviewed on US Public Radio (WBUR). He explained that he believes there are five core values, or moral principles, that are strongly believed in, in society. They are: Harm/care (avoid harming others, care when they hurt or suffer, be empathic); Fairness/reciprocity (be fair, give as you receive); In-group loyalty (be loyal and true to your specific ethnic/social group); authority/respect (honor and respect whoever is in charge); purity/sanctity (follow religious practice, hold certain things sacred).

     Politically: Those who are very liberal give very high importance to “care” and to “fair”.   (See graph above).   Those who are very conservative attach high importance to loyalty, authority and sanctity.

     What seems to be happening in the US is that the middle is emptying. The middle class is declining, as people sink in their income, or, in a few cases, grow wealthy. The middle in politics is also emptying. And underneath all this, the ‘middle’ in moral values is also emptying.

     Either we are liberal, and hold above all else the crucial importance of empathy and fairness (equal opportunity, equal wealth holding). Or we hold above all else the vital importance of loyalty, respect, sanctity.  

     If you wonder why very conservative Trump supporters continue to support him strongly despite his statements, falsehoods and incompetence, this graph explains it. Loyalty!  

       Are there inherent tradeoffs or conflicts among these key values? Or can we, by listening and explaining, integrate all these values into a coherent single whole, one that we can all live by,   liberal, moderate and conservative?  

       Barack Obama recently said, that if you get elected by dividing people, you won’t be able to govern them. That is true. America is essentially ungovernable, post-Trump.

     Can we find someone who gets elected by uniting people, around those five core values woven together?    

* Jonathan Haidt. “The new synthesis in moral psychology”. Science, May 18 2007, pp. 998-1000.

Who Best Predicts the Future?   Historians – Here’s Proof

By Shlomo Maital

Which discipline best equips people for predicting the future?

Economics? That’s a joke. Sociology? Psychology?

History! Precisely those who study, record and analyze our past history, are, I think, best equipped to predict our near-term future. And here is proof.

   Arthur Schlesinger Jr. was a primary speechwriter and adviser to the Democratic presidential nominee both times, Adlai Stevenson in the 1952 and 1956 presidential campaigns. Schlesinger served as special assistant and “court historian” to President Kennedy from 1961 to 1963. He was a Harvard history professor and wrote many wonderful books, following in the footsteps of his father, Arthur Schlesinger Sr., a decorated historian. He died in Feb. 2007, at 89.  

   In 1992 he published a short little book, The Disuniting of America: Reflections on a Multicultural Society. In it Schlesinger said this:

   “Instead of a transforming nation with an identity all its own, America increasingly sees itself in this new light as preservative of diverse alien identities. Instead of a nation composed of individuals making their own unhampered choices, America increasingly sees itself as composed of groups more or less ineradicable in their ethnic characteristics.

     Will the center hold? Or will the melting pot give way to the Tower of Babel? …the historical idea of a unifying American identity is now in peril in many arenas…”

The US Presidential election of Nov. 2016 provided the answer. It’s Tower of Babel, or as Senator Corker from Tennessee described it, the White House is a “day care center”.

   We are in the era of identity politics. My identity is determined not by the nation in which I live and sometimes serve, but by the specific ethnic, racial, social, economic, educational, and religious group to which I belong. The “we” of “me” has become very very narrow.   This is true not only in the US but all over the world – former Yugoslavia, Kurdistan, Catalonia….  

   With identity politics, nations split apart.  When the supreme value becomes the celebration of diversity, rather than the cohesive force of national pride and identity, nations fall apart. Electing a leader who leverages this split, like Trump, for political gain is inevitable. And it’s happening all over the world.

   Schlesinger called it. The unifying American identity is gone. He saw this coming  25 years ago, in 1992. But nobody listened.

“The genius of America,” Schlesinger concluded, “lies in its capacity to forge a single nation from peoples of remarkably diverse racial, religious and ethnic origins.”

That genius seems to be gone, mortally wounded by a learning-disabled attention-deficit President who is unable to read a half-page briefing document. The glue that once bonded a redneck gun-toting blue collar worker from Chattanooga to a Harvard-educated Wall St. bond dealer with a summer cottage in the Hamptons is gone.

Only when that glue disappeared do we realize how vital it was to America and to the world.

 

What Happened? Why Hillary Lost..My Take

 By Shlomo Maital

Hillary Clinton has now published her account of why she lost the presidential election: What Happened?   She admits to blame, but also blames many others, including the Russians and Comey.

     She also notes how she was unnerved at a crucial debate, when Trump lurked behind her, scowling. And a headline even praises her for ignoring Trump (see above).

   I disagree. Her is my take on an alternative scenario.

       Hillary:   turning and pointing at Trump.   “Is that the person the American people want to lead them?   Come out here, Mr. Trump, come out into the light where we can see you for what you are – a bully. You bully everyone, you bully women in particular – but Mr. Trump, you can’t bully me. I’m not afraid of you. A man who bullies, who hides in the shadows as you do in your shady business dealings, in your shady bankruptcies, in your hiding your income tax returns…   you are not worthy of the trust of the American people. We don’t like bullies. We don’t like liars. And we don’t like men who threaten women.   We are going to thump Trump on November 8! Thump Trump!”

     Hillary was the first female U.S. Presidential candidate. I recall that Israel had a woman Prime Minister, Golda Meir, who was widely believed to be a lot tougher than her male counterparts. Many criticized Hillary for her emails, her lack of human warmth, etc.   I think she would have won Ohio (and hence the election) if she had shown another quality – toughness. The irony is, Hillary is indeed tough. But the toughness was shown only in private, and rather hidden in public.   Alas!  

 

The Future Is Definitely Not What It Used to Be:

How Distraction Becomes Destruction

By Shlomo Maital

 

Productivity Growth in the US has Been Abysmal Since 2008

   “Americans aren’t saving money the way they used to. U.S. households scaled back their pace of savings to the lowest level in nine years at the end of 2016. At the same time, wage growth slowed, according to updated government figures. The personal savings rate was 3.6 percent in the fourth quarter of 2016, the lowest reading since a 2.8 percent rate in the final three months of 2007, just as the U.S. was entering a recession.”

             – Bloomberg Business Week

       What a week. TrumpCare goes down to defeat. Trump’s new communications director nicknamed “Mooch” spews profanity. The White House Chief of Staff is fired.   LGBT’s are banned from the US armed forces.

         These are all distractions. None have any real relation to core issues troubling America’s society and economy.   When distractions take center stage, distraction becomes destruction.   Replace just two letters in ‘distraction’, and you get destruction!

         So what ARE the core issues?   Americans’ consumer confidence is at a 16-year high! So Americans are spending and borrowing. Saving has fallen. That leaves fewer resources for capital formation. But America needs more saving, not more spending and more personal debt.

       According to Neil Irwin, writing in the New York Times, productivity growth has fallen from a long-term average of 3% to less than 1%. (see graph). That is because wages haven’t risen, so it no longer pays to invest in labor-saving technology, which raises productivity.

       America’s infrastructure is crumbling, it has been for years, but there is no money to pay for rebuilding it. Trump’s plan is to have the private sector rebuild it. How likely is that?    

         No Administration has been this dystopic, dysfunctional, perhaps in history. And it’s a doom loop. The more dysfunctional it is, the less good capable people are willing to join it. Who wants to board a sinking ship?

         Suppose America was a company whose shares were listed on the stock exchange. Would you sell them short?   Many people would.   The major worry is not the economy. It is this — in the coming year, it is highly likely that there will be a major, unanticipated Black Swan crisis. Could be North Korea, Iran….Mideast… who knows?  

     What are the chances that the Trump Administration will handle it coolly, professionally, with good judgment and wisdom, in a way that benefits not only America but the whole world?

       Read Barbara Tuchman’s March of Folly (1985). Here is the definition of folly: “Government decisions that are against its own interests”.   Can you see folly in the distractions of the Trump administration?   Can you see destruction?   And can we interpret the boom in consumer spending as a no-confidence vote in the future?

How to Explain Global Warming to Donald Trump

By Shlomo Maital

                              Ocean Temperature 1880-2017

Dear President Donald Trump,

       Donald, sir, I have a problem. How do I explain global warming and climate change to someone like yourself, with the attention span just a bit less than a goldfish ?   Who does not read anything, and gets information from Fox News? To someone with untreated attention deficit disorder from childhood ?

     Hmmm.

     Here is my best shot.

     Suppose this next sentence is a Tweet, Donald. Read it as such. I mean no disrespect.

         93 per cent of the added heat generated by global warming is absorbed by the oceans; only 7 per cent, by the air.

         That’s only 23 words.   Well within 140 characters.

         Don’t believe it? Please, look at the graph. OK?

         Why is warmer ocean temperature a problem?   Why do we care that up to 30% of the Great Barrier Reef has already disappeared, because the coral can’t stand the warmer temperatures?

         Well, Donald, let’s take your own body. Uh, rephrase that. YOU take your own body. Suppose you are running a temperature. Say, two degrees. Instead of 98.6 F., 100.6 F.?   Would you go to a doctor? Feel ill? Take medicine?

         Well, the ocean is like our human bodies. It is feeling unwell. And it has been running a fever for quite a while. And it is getting worse. Your decision to leave the Paris Agreement made the oceans feel sicker.

         So while we think global warming is about, say, heat waves, it is really about destroying the ecology of our oceans and melting the ice caps.   The oceans are huge heat sinks. And they just don’t like it all, nor do the creatures who live there.

     Oops.     286 words. Too long. I’ve lost your interest.

     Can anyone help? Maybe – the Russian spooks you seem to love?

 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2018
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