Posts Tagged ‘U.S. economy’

Senators Support Rollback of Bank Oversight

November 14, 2017

Bipartisan deal raises threshold dictating which banks would face heightened oversight from the Federal Reserve

Dozens of banks received the biggest signal yet that they may soon be freed from some of the most onerous rules put in place after the financial crisis, as lawmakers from both parties agreed to a plan that would enact sweeping changes to current law.

The bipartisan Senate agreement released Monday would relieve small and regional lenders from a number of restrictions meant to limit the damage firms could cause to the economy in the event of another crisis.

In what would be the biggest step to ease the financial rule book since Republicans took control of Washington, the proposal could cut to 12 from 38 the number of banks subject to heightened Federal Reserve oversight by raising a key regulatory threshold to $250 billion in assets from $50 billion. The legislation also would ease red tape affecting credit unions and community banks, allowing them to lend more, supporters said.

The deal will “significantly improve our financial regulatory framework and foster economic growth by right-sizing regulation,” said Senate Banking Committee Chairman Michael Crapo (R., Idaho), who brokered the agreement between Republicans and a group of moderate Democrats.

Monday’s deal shows Republicans’ determination to ease regulations that they say constrain U.S. economic growth by limiting the capacity of banks and other businesses to serve customers and hire new workers. While it isn’t clear that any rule reduction will bolster the economy, efforts to scale back the 2010 Dodd Frank financial overhaul law and other policies amount to a bet that a freer environment will pave the way for increases in investment, spending and hiring.

Analysts said it isn’t clear that lending would actually increase, given that demand for commercial loans this year has been weak. But banks that had been avoiding mergers, such as those that didn’t want to go over the $50 billion line, could be more inclined to deal-making, said Brian Klock, an analyst at Keefe, Bruyette & Woods.

The deal could dramatically lighten the regulatory burden on a wide swath of banks from Utah’s Zions Bancorp oration to M&T Bank Corp. in Buffalo, N.Y. Those banks in recent years have had to submit to detailed financial and risk exams in order to pay dividends to shareholders.

Many banks bristled at this annual “stress test” review done by the Federal Reserve, and some including Zions, Citizens Financial Group Inc., BB&T Corp. and SunTrust Banks Inc., failed the Fed’s annual test previously. The bill would lighten their stress-test load.

For stress tests alone, building a system to meet the Fed’s expectations could cost firms tens of millions of dollars or more. Liquidity rules governing banks’ cash holdings are another expensive regulatory exercise that the legislation could allow the Fed to ease.

Regional banks have said their smaller size and lack of interconnected trading businesses makes it unlikely that their demise could create systemic risk that would threaten the economy as Lehman Brothers’ failure did in 2008. Their critics say regional banks can be risky, pointing to the 2008 failure of IndyMac Bank.

Read More

  • The $50 Billion Question: What Makes a Bank Big? (May 30)
  • See the Banks Affected at Different Thresholds

The deal marks a setback for regional banks with assets above $250 billion, including U.S. Bancorp and PNC Financial Services Group Inc., which have urged policy makers to do away with asset-size thresholds altogether. They favor allowing regulators to apply rules based on their own judgment of firms’ riskiness.

“$50 billion? $250 billion? Why is that number any better than another?” U.S. Bancorp’s chief financial officer Terry Dolan said in an October interview. His firm has about $459 billion in assets.

PNC said in a statement Monday it was disappointed in lawmakers’ proposal. “As a Main Street Bank, PNC’s business model and risk profile are very similar to that of other regional banks, and very different from the systemically important Wall Street banks,” it said.

Monday’s deal is co-sponsored by nine Republicans, including Tim Scott of South Carolina and Bob Corker of Tennessee, along with nine Democrats, including Joe Donnelly of Indiana and Heidi Heitkamp of North Dakota. That is enough to clear both the banking panel and the full Senate, assuming all Republicans in the chamber support the bill.

In brokering the deal, Mr. Crapo left off key Republican goals such as attacking the Volcker rule, a ban on proprietary trading.

“This is the first proposal that has a legitimate shot at making it to the president’s desk,” said Milan Dalal, an attorney at lobbying firm Brownstein Hyatt Farber Schreck in Washington and a former aide to Sen. Mark Warner (D., Va.), who backed Monday’s deal.

Republicans hold just 52 seats in the Senate and generally need support from at least eight Democrats for legislation to pass a needed 60-vote threshold. The House, also controlled by Republicans, would need to act for the plan to clear Congress.

Liberal Senate Democrats, including Ohio Sen. Sherrod Brown, the top Democrat on the banking panel, attacked the legislation, saying it would do little to help “working families.”

Negotiations between Messrs. Brown and Crapo on a similar regulatory rollback broke down last month, prompting Mr. Crapo to seek a deal with moderate Democrats.

Mr. Crapo released a summary of the legislation Monday, without unveiling its text. It appears to send a message that Congress wants regulators to lighten the burden, though regulators still have broad authority to apply tough rules to banks they view as risky.

Regulators could immediately exempt firms with assets between $50 billion and $100 billion from stress tests and other rules that were mandatory under Dodd Frank, according to the summary of the legislation. Banks with between $100 billion and $250 billion in assets could get that treatment after 18 months, though the Fed could exempt them earlier. Banks in the latter group would still have to take periodic stress tests.

Presumably, banks that are no longer subject to stress-testing and other rules would be able to slash their costs, but Evercore ISI analyst John Pancari said he wasn’t sure if looser regulation would actually materialize into cost savings. “A lot of the banks view much of the cost that they’ve spent on that as sunk costs,” Mr. Pancari said. “So, for example, if they spent money on the robust monitoring of their risks, they are probably going to keep up what they built.”

The effect on each bank would depend on how close it is to the $250 billion threshold, Mr. Pancari said.

The legislation also is expected to include dozens of other provisions, some of which have been previously floated or discussed by lawmakers.

One targets credit bureaus in the wake of the hack of Equifax Inc., according to the summary. It would require credit bureaus to freeze and unfreeze consumers’ credit for free once a year.


How to Break Out of Our Long U.S. National Tax Nightmare

November 10, 2017
What Cut Cut Cut won’t solve.


President Donald Trump wanted to call it the Cut Cut Cut Act. Congressional Republicans settled on the less catchy and no more descriptive Tax Cuts and Jobs Act. What the legislation that began making its way through the U.S. House of Representatives in early November actually would do is sharply reduce taxes for business while rearranging the personal income tax with a mix of cuts and increases. House Speaker Paul Ryan called the bill “a game changer for our country.” The president said it was “the rocket fuel our economy needs to soar higher than ever before.”

That’s a lot to expect from some changes in the tax code. But then, here in the U.S. we’ve come to expect big things of our income taxes. On the right, cutting them has been portrayed for decades as a near-magical growth elixir. On the left, raising or rearranging them is seen as essential to making society fairer. And across the political spectrum, economic and social policies have come to rely on carving credits, deductions, and other exceptions out of the tax code to favor this or that behavior.

It can sometimes feel, in fact, as if “we have lost sight of the fact that the fundamental purpose of our tax system is to raise revenues to fund government.” That was the lament of President George W. Bush’s Advisory Panel on Federal Tax Reform in November 2005. But this bipartisan group of worthies couldn’t agree on how to raise those revenues either, instead offering two plans with differing priorities. Both were mostly ignored by Congress at the time, though some of the recommendations—such as shrinking the tax deductions for mortgage interest and state and local taxes—have found their way into this year’s bill.

Overall, though, it appears that the legislation will only make it harder to raise revenue to fund government. The House and Senate have passed budget resolutions clearing the way for $1.5 trillion in revenue losses over the next decade from the tax changes. That’s $150 billion a year to add to a federal deficit that totaled a sinister-sounding $666 billion, 3.5 percent of gross domestic product, in the just-ended fiscal year. All of which is a longer way of saying that we’ll almost certainly be back at this once again in the all-too-foreseeable future, trying to figure out a better way to fund the government.

Since 1981, the year of President Ronald Reagan’s big tax cut, Congress has passed and presidents have signed 55 bills that the Urban-Brookings Tax Policy Center counts as “major” tax legislation. During the prior 36 years there had been just 18. In their essential text, Taxing Ourselves: A Citizen’s Guide to the Debate Over Taxes, economists Joel Slemrod and Jon Bakija dub the years since 1981 the “modern tax policy era.” Which leads this exhausted taxpayer to wonder: What will it take to make this era end?

Ominously, most previous U.S. tax eras ended with major wars that required big increases in government revenue. Let’s hope it doesn’t take that to break us out of the cut-reform-increase-repeat loop we’re currently trapped in. But a tour of U.S. tax history does at least offer the hopeful message that things can change.

Featured in Bloomberg Businessweek, Nov. 13, 2017. Subscribe now.

The no-taxes era: 1776-89. The first chapter of U.S. tax policy was defined by the Articles of Confederation, which left the national government to beg the states for money. Fixing this was a major priority of the Constitutional Convention of 1787. “What substitute can there be imagined,” Alexander Hamilton wrote in Federalist Paper No. 30, “but that of permitting the national government to raise its own revenues by the ordinary methods of taxation authorized in every well-ordered constitution of civil government?”

The tariffs era: 1789-1861. Some in the early republic had proposed that the federal government should be able only to levy external taxes, i.e., tariffs. While the Constitution put limits on “direct” taxes—at the time understood to mean taxes on property, which became a key means of funding state and local governments—it made clear that more than just tariffs were allowed. An early foray into taxing distilled spirits sparked a rebellion, though, leaving customs duties to provide almost 90 percent of federal revenue from 1789 to the Civil War. Tariffs had the added benefit, as Hamilton argued, of encouraging domestic industry. So from the beginning, U.S. officials looked to tax policy to achieve economic goals beyond just funding the government. But in the tariffs era they did this in moderation, prioritizing revenue over protectionism.

The tariffs-plus-sin-taxes era: 1861-1913. The War of 1812 put a damper on trade, and thus on tariff revenue, forcing Congress to turn temporarily to excise taxes (sales taxes on specific goods, in this case mainly liquor). But it was the huge costs of the Civil War that finally ended tariffs’ dominance. To finance the war, the Union used its imagination, taxing income, estates, liquor, tobacco, playing cards, and a variety of manufactured goods. (The Confederacy struggled to collect taxes—and in the end mainly just printed money.) Most of these taxes were repealed not long after the war, but some remained to help pay the bills. It wasn’t that government had gotten all that much bigger—federal spending settled back to about the same level after the war as before, around 2 percent of gross domestic product. But customs revenue sputtered as protectionist politicians from manufacturing states pushed tariffs so high that they depressed trade. By 1913, customs duties accounted for 45 percent of federal revenue, and liquor and tobacco taxes 43 percent.

The income tax era: 1913-41. The Civil War income tax was repealed in 1872, but the clamor for a legislative answer to the explosion of economic inequality unleashed by industrialization grew in the ensuing decades. Taxes became a national obsession: A “single tax” on land proposed by the economic crusader Henry George gained a fervent following; state after state enacted inheritance taxes. In 1894, a Democratic-majority Congress imposed a tax on high earners and corporations while reducing tariffs. A year later, in a bitterly contested 5–4 decision, the Supreme Court ruled this a violation of the Constitution’s limits on direct taxes, but the unpopularity of that ruling helped nudge the partisan struggle over taxes into a consensus.

By 1909 a Republican Congress and president, William Howard Taft, were approving a corporate income tax designed to get around the Supreme Court’s ruling and a constitutional amendment permitting a personal income tax. Four years after that, the Democrats took control of Congress and the White House and promptly imposed an income tax, a 2 percent levy on the top 2 percent of the income distribution. The military buildup for World War I brought an expansion of the tax to about 15 percent of households, with rates for higher incomes topping out at 77 percent. After the war, some Republicans wanted to supplant this progressive tax—“a modern legislative adaptation of the Communistic doctrine of Karl Marx,” one senator called it—with a national sales tax. But Treasury Secretary Andrew Mellon pushed instead to keep the income tax while lowering the top rate, eventually to 24 percent. With the growth of government spending, to about 4 percent of GDP in the 1920s, and the advent of Prohibition (so long, liquor tax revenues), corporate and personal income taxes had become indispensable, with the former providing about a third of federal revenue and the latter about a quarter.

The much-bigger income tax era: 1941-81. Income tax revenue, reliant as it was on corporate profits and a narrow base of high earners, collapsed in the Great Depression, sparking a fevered search for alternatives. In 1932 a bipartisan deal for a national retail sales tax was upended by a bipartisan back-bench rebellion, with Congress opting instead for income tax hikes and excise taxes on automobiles, furs, gasoline, radios, refrigerators, and much more. (The states, meanwhile, turned to general sales taxes in a big way.) The big new spending program that was Social Security necessitated a payroll tax, which started at 1 percent of earnings in 1937. But the really big changes came with World War II, which sent federal spending’s share of GDP flying past 40 percent. Washington met the challenge by, first, borrowing lots of money and, second, making the income tax a mass tax rather than one targeted at the affluent. The number of returns filed jumped from 7.6 million in 1939 to 49.9 million in 1945.

After the war, the taxes stayed. From today’s perspective it seems remarkable that voters didn’t rebel against such a gigantic increase. Federal revenue went from an average of 4.9 percent of GDP in the 1920s and 1930s to 17 percent in the 1950s and 1960s. Vestigial wartime patriotism was key, at first. So was the 1943 shift to an ingenious, even diabolical invention: the automatic payroll deduction, which made the tax both harder to evade and less painful to pay. “It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom,” lamented economist and conservative hero Milton Friedman, who worked on the withholding plan in the wartime Treasury Department.

It also helped that decades of strong, broadly distributed economic growth kept paychecks rising, despite the tax bite. Plus, the things government was spending money on—interstate highways, the space program, Social Security—were popular.

The cut-reform-increase-repeat feedback loop era: 1981-present. The revolt finally came three decades later. Economic growth was sputtering, conservative political ideas were resurgent, and inflation was pushing taxation beyond acceptable bounds, moving taxpayers into higher-rate brackets even when their real incomes didn’t rise. They reacted by, among other things, electing Ronald Reagan president in 1980.

While Reagan’s dislike of taxes seems to have been visceral, he had the backing of a group of “supply-side” political activists and thinkers who had coalesced in the 1970s around the notion that trimming certain taxes, mainly on high earners and businesses, would so stimulate economic growth and income that the tax cuts might pay for themselves. The Reagan cuts of 1981 in fact didn’t pay for themselves, though this was in part because Reagan insisted on cutting everybody’s taxes. Lawrence B. Lindsey, an economist who worked for Reagan’s Council of Economic Advisers and was later George W. Bush’s top economic adviser, has estimated that lowering the rate for the top bracket from 70 percent to 50 percent in 1981 did bring an increase in net revenue as top incomes grew and tax avoidance declined, and rate cuts for the next few brackets (there were 17 at the time) broke even. But most of the other 1981 provisions were revenue losers, with the indexing of all brackets to inflation likely the biggest. Overall, Lindsey concluded, economic growth and reduced tax avoidance recouped about one-third of the bill’s estimated direct cost.

Big deficits arrived in the tax bill’s wake, followed by tax hikes in 1982, 1983, and 1984. Then came the tax reform of 1986, which lowered rates and removed deductions in mostly revenue-neutral fashion—but didn’t put an end to tinkering with the tax system. Multiple rounds of income tax cuts and increases have come since. And whether or not Lindsey’s one-third estimate is exactly right, it’s nice shorthand for how Republican economists—as opposed to politicians and propagandists—have justified tax cuts to this day. They don’t claim cutting taxes increases revenue, instead arguing that bigger government distorts the economy more than smaller government, high tax rates distort more than low rates, taxes on capital (aka business) distort more than taxes on labor, and taxes on labor distort more than taxes on consumption.

Extreme versions of this thinking have motivated political proposals such as the flat tax championed in the 1990s by magazine publisher and presidential candidate Steve Forbes, among others, and the “fair tax” that radio talker Neal Boortz turned into a cause in the 2000s. The Forbes flat tax was distinguished as much by its total exemption of investment income as its 17 percent rate; the fair tax aimed to replace the income tax with a 23 percent national sales tax.

Both were reminiscent of the late-19th century intellectual ferment that led to the income tax. Back then, the discussion was driven by progressives looking to tax the rich; in recent decades it’s been conservatives aiming to roll back taxes on the rich and on business. There have been other voices in the post-1981 tax debate, of course. Liberals and some conservatives have pushed to maintain the progressivity of the tax code, technocrats have wanted to broaden the tax base, and deficit hawks have campaigned for more revenue. But they’ve mostly been fighting rearguard actions, not setting the terms of the debate.

Those rearguard actions haven’t been fruitless, though. The top income tax rate is 39.6 percent, much lower than it was in 1981, and tax rates on capital gains and dividends are much lower than that. But by the reckoning of the Congressional Budget Office, these changes haven’t made the tax code less progressive. Average federal tax rates have gone down for all income groups since 1979, but the declines have been bigger for those with low incomes than those in the top 1 percent. Yes, there are exceptions to this increase in progressivity. State and local taxes cancel out much of the effect, and other research shows that the top 0.1 percent of earners have received a big tax cut since 1979. Also, Congress has shoehorned into the tax code what are effectively spending programs, such as the Earned Income Tax Credit. But it’s still noteworthy how progressive the federal income tax remains.

Also noteworthy is how little the overall federal tax burden has changed. From 1946 through 1980, federal revenue was 17 percent of GDP. Since then it’s been 17.3 percent, on average. The mix has shifted: Corporate income taxes and excise taxes bring in a smaller share than they used to, while Social Security and Medicare payroll taxes bring in more. The share owing to personal income tax, though, hasn’t budged much. All that tax cutting, raising, reforming, and complicating since 1981 has landed us … pretty much where we started.

Federal spending, on the other hand, hasn’t stayed put. From 1946 to 1980 it averaged 18.1 percent of GDP; since then, 20.6 percent. In the 1980s, defense and interest on the national debt drove spending higher, while over the past decade it’s been mainly Social Security, Medicare, and Medicaid. The persistent gap between spending and revenue may well be the most important feature of the modern tax era. And while there have been many political discussions about reining in entitlement spending, there seems to be very little public appetite for doing so.

This unwillingness to reduce federal spending is worrisome if you think the government is inordinately large. By U.S. historical standards, it is large indeed. Compared with other industrialized countries today, however, the U.S. spends and taxes rather modestly. Far from being the “world’s highest-taxed nation,” as President Trump has said again and again, the U.S. has the fifth-lowest total tax burden—federal, state, and local taxes as a share of GDP—among the 35 members of the Organization for Economic Cooperation and Development, the wealthy nations club.

The experience of other countries is too rarely invoked in U.S. tax debates. In a book published in AprilA Fine Mess, journalist T.R. Reid attempts to rectify this. His entertaining global tour shows that many of the impulses that have driven tax cutters and reformers in the U.S. since 1981 have also shaped tax policy elsewhere. Deductions have been eliminated, personal income tax rates have dropped, and corporate tax rates have fallen even more. The U.S. statutory corporate tax rate, in fact, is now almost the highest in world, which is possibly where Trump gets his “highest-taxed nation” sound bite.

Other countries, though, have been able to enact such reforms while imposing larger overall tax burdens thanks to an extremely powerful device: the value-added tax.

The VAT, invented by a French bureaucrat in the 1950s, is a broad-based consumption tax. Instead of being levied on the final sale of a product or service, like a common sales tax, it’s imposed at every step of production, with a refund for the tax paid at the previous step. Here’s a simplified example, borrowed from an OECD primer, of how a 10 percent VAT works: A tree grower sells timber to a furniture manufacturer for $100, plus $10 in tax, and sends the $10 to the government. Then the manufacturer sells the furniture to a retailer for $350, plus a $35 tax, and sends $25 ($35 minus the $10 already paid) to the government. Then the retailer sells it to the consumer for $500, plus $50 in tax, and sends $15 ($50 minus $35) to the government. This system sounds—and is—complex, but it has the advantage of being largely self-enforcing: Each business in the production chain must report the tax the previous business in the chain was supposed to have paid to get credit for it. Because of that, and because these payments often aren’t transparent to consumers, countries are able to impose VATs at rates far higher than would be conceivable with a sales tax. Hungary has the developed world’s highest VAT, at 27 percent—which allows it to get away with a flat-rate income tax of just 15 percent—while Canada has the lowest, at 5 percent. The U.S. is the only OECD member without any VAT at all.

Like any consumption tax, the VAT is inherently regressive, because poor people spend more of their income than rich people do. There are ways to offset some of that with rebates, and of course a progressive income tax can help make up for it, too. Most of the world’s other wealthy nations also rely more on government spending to combat inequality. Personal income taxes in the U.S. are actually both higher and more progressive than the OECD norm. But when you factor in government spending on health care and other safety net programs, most wealthy nations are much more generous to those with low incomes.

The notion that a national consumption tax in the U.S. could take pressure off the income tax while addressing the fiscal challenges posed by Social Security and Medicare—and maybe even allow for a bit more spending on this or that—has been batted around by would-be reformers for years. There’s even a bill currently in the Senate, sponsored by Maryland Democrat Ben Cardin, that proposes a 10 percent VAT coupled with rebates for the poor, much lower tax rates, and exempting couples who earn up to $100,000 from the income tax ($50,000 for individuals), and much lower corporate tax rates. Such initiatives have never garnered anything close to a critical mass of political support, though. That 2005 Bush tax reform panel, for example, studied both a VAT and a retail sales tax but endorsed neither.

With all this in mind, I headed out one recent afternoon to gauge the thinking of Glenn Hubbard, dean of the Columbia University Business School and seasoned veteran of Washington tax politics. Hubbard was an architect of the 2001 and 2003 Bush cuts and has warmly endorsed the new GOP tax plan. (He’s also a former Bloomberg BusinessWeek columnist.) Before I could even get the acronym VAT out my mouth, though, he launched into this mini-monologue:

“We don’t seem as a society to be willing to bring down spending as much as I would like to, and the corporate and personal income tax can’t be raised enough to cover the difference. If we’re going to have a higher level of government spending, you have to pay for it, and the most effective way to pay for it is through a tax on consumption, such as a value-added tax.”

And what about the current tax reform? Oh, it’s “still worth doing,” he said, but the U.S. can’t go on like this. “You can think of this as the last reform effort in this system.” The end of the cut-reform-increase-repeat era is coming.

Ah, but when will it come, and what will it take to bring it on, beyond a crisis? There was a time when federal deficits of 4 percent or 5 percent of GDP seemed like an emergency, but no longer. Politicians of both major parties have become increasingly comfortable with the chronic budget shortfalls of the post-1981 tax era, and it’s hard to blame them. The federal government has had no trouble financing its deficits (other than self-imposed trouble involving the statutory debt ceiling), and there’s a credible argument to be made that in a low-inflation, low-interest rate environment like today’s it ought to be borrowing even more to invest in wealth-creating public goods such as transportation infrastructure and basic research. Still, there’s much less of an economic argument for running up debts to pay for retirement and health care. Hubbard told me he thinks of the deficit in terms of “insurance, or fiscal space.” Without it, in case of war or economic crisis, “your capacity to intervene is reduced.” Then again, he acknowledged, “it’s not a table-banging argument to say, ‘we need fiscal space!’ ”

So no, I’m not going to bang on any tables. But someday the U.S. will need that fiscal space, and there’s a way to get it that would be in keeping with our history of tax experimentation and likely wouldn’t impose great economic pain. We probably should be talking about it a lot more, instead of just “Cut Cut Cut.”

Justin Fox is a columnist for Bloomberg View.

Donald Trump’s year in numbers — Trump presidency an economic “game-changer” — And much better than expected

November 8, 2017

A year has passed since Donald Trump shocked the world by winning last year’s US presidential election. The news provoked a dramatic sell-off in Asian markets, and then a far more dramatic rebound. US stocks rallied, while emerging markets tumbled. The immediate belief was that a Trump presidency was a “game-changer” for the world economy and capital markets, and many feared it would be negative.

Image result for trump in make america great again hat, photos

The Nobel laureate economist Paul Krugman made an instant prediction that markets would “never recover”, for which he has since apologised. The results have been a little different.

First, after the initial reaction that the election meant “America First” and that other countries — especially emerging markets — would be harmed by the advent of Trump, the rest of the world, led by emerging markets, has gone on to outperform, even though the S&P 500 has set a series of all-time highs. Growth in the eurozone and China reassured doubters.

US stocks’ underperformance was largely driven by the dollar, which strengthened after the election but then began a significant weakening, driven in large part by surprisingly strong European growth which helped the euro

Perhaps ironically, the Russian rouble has gained the most of any major currency against the dollar since the election. Turkey’s lira has been by far the weakest.

Greater attention was turned to Mexico, which is uniquely exposed to the US economy and stood to be harmed by Mr Trump’s policies on migration trade. After an initial collapse, the peso put on a strong recovery, but it has wobbled again in recent weeks amid talk that the Nafta trade accord could be endangered after all.

Despite the anger and turbulence that surrounded Mr Trump all year, the US stock market has enjoyed what might be its calmest year ever. In terms of average daily moves of the S&P 500, 2017 may beat 1964 (another turbulent political year) as the calmest year ever for US stocks. As for the popular Vix index of market volatility, which was set up in 1990, it hit an all-time low in September. The practice of “selling volatility” — or short selling the Vix — became highly popular and highly profitable. Anyone who bought the main short Vix index on election day would by now have trebled their money.

If the markets stayed calm, then consumers seemed even happier. Gallup’s regular measure of economic confidence leapt to its highest level in more than a decade immediately after the election, and has since stayed at levels not previously seen since the crisis. Fury among liberal opponents of Mr Trump is still more than counter-balanced by the enthusiasm of his supporters.

The same goes for businesses. The regular ISM indices of purchasing managers, highly influential in markets, had signalled a possible recession early in 2016, before it grew clear that China was adopting an expansive economic policy again. During 2017, ISM numbers in both manufacturing and services sectors hit their highest levels in more than a decade, since well before the crisis; again the recovery of confidence is palpable.

On the core issues of the economy, however, the effects of Mr Trump are less apparent. The unemployment rate continued a steady fall that started during President Barack Obama’s first term. Meanwhile, inflation initially rose, suggesting that growth was about to resurge, before declining again during the summer. Inflation is picking up again now, but the mystery of how unemployment can stay so low without provoking higher inflation remains. The clear trend of the Obama years remains intact and uninterrupted.

Meanwhile, the greatest economic disappointment for the Trump administration is the continuing anaemic performance of wages. After stagnating post-crisis, they appeared to have at last hit a rising trend in the last year of the Obama presidency. But despite the tightening labour market, wage growth has slackened off again under Mr Trump so far. This remains the critical economic issue for his administration, and for the new leadership at the Federal Reserve.

On the president’s signature issues, the market is sending mixed signals. On tax, many banks now track the performance of the stocks which pay the highest effective tax rate, and should logically benefit the most from a tax cut. The chart uses Goldman Sachs data, and makes clear that such stocks are lagging; the market remains unconvinced that significant tax cuts are coming.

On the issue of Mexican immigration, however, there is evidence that Mr Trump’s rhetoric is already changing behaviour. Arrests at the border have fallen very sharply (although they have started to rise a little in recent months). This implies that far fewer people are attempting to enter the country. Meanwhile remittances to Mexico rose sharply. In the past this has been driven by Mexican migrant workers’ fear that they would lose their jobs, and implies that many may be planning to leave.

As for the highly controversial Trump positions on coal and climate change, coal stocks have risen since the election — although still not as much as the market. Meanwhile, the decision to withdraw from the Paris climate accord has not stopped clean energy stocks from rising much faster.

Global Economy / China vigilant about revival of Trans-Pacific Partnership (TPP)

November 5, 2017

By Satoshi Saeki
Yomiuri Shimbun Deputy Managing Editor

How will the administration of Chinese President Xi Jinping, now in its second term, proceed with its trade strategy? China is becoming increasingly wary about negotiations over the 11-nation Trans-Pacific Partnership free trade agreement, which includes Japan but not the United States following the latter’s withdrawal.

“Promote the establishment of the country as a trade power by expanding trade, with an emphasis on developing ‘One Belt, One Road’ (see below, chart 1). Work to facilitate trade and build a new platform for international cooperation.”

Xi emphasized this vision in his political report to the 19th National Congress of the Communist Party, which was held last month. It was a declaration that the realization of a huge economic bloc based on “One Belt, One Road,” which is led by Xi, would become the main pillar of China’s trade strategy.

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In a December 2015 government document, the Xi administration announced that it would “actively construct a free trade zone with countries along the Belt and Road, and create a huge market.” This signaled that development of free trade zones would accelerate, both domestically and with partner countries, in a bid to deregulate trade in services. He stated this basic policy in his political report to the party congress.

Focus on countries within area

Zhao Jinping, director general of the Research Department of Foreign Economic Relations at the Development Research Center of the State Council, indicated a desire to complete free trade agreements with countries along the Belt and Road, at an October 2016 symposium organized by the Japan External Trade Organization’s (JETRO) Institute of Developing Economies.

“Of the 15 countries and regions with which China has concluded FTAs, 11 are along the Belt and Road. But trade with FTA signatories makes up only 29 percent of China’s total trade. The rate of trade liberalization is low, and there is ample room for future expansion,” Zhao said.

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  • The Yomiuri Shimbun

According to the China Foreign Investment Development Report 2016, direct investment by China in countries in the area in 2015 totaled $18.93 billion, an increase of 38.6 percent over the previous year. This accounts for 13 percent of total external investment, a percentage that is increasing (see chart 2).

According to the “Belt and Road Initiative Big Data Report,” Chinese trade with Belt and Road countries in 2016 fell to $953.59 billion, down 4.9 percent from the previous year, and accounted for 25.7 percent of China’s total trade volume (see chart 3). The decrease from the previous year is attributed to a decline in commodity prices. The figure for the Belt and Road countries as a proportion of total trade rose 0.4 percent from the previous year.

Judging from factors such as Xi’s remarks on the Belt and Road at the International Cooperation Forum held in May, there can be no doubt that the Xi administration is preparing the Belt and Road initiative as an alternative framework to the U.S.-led international order.

Relief at U.S. withdrawal

So how did Xi’s government plan to react to the TPP, which was promoted by the administration of former U.S. President Barack Obama?

It is clear that they were deeply concerned not only about the security implications of a network encircling China, but also about its economic consequences.

The U.S.-China Economic and Security Review Commission, a U.S. Congressional advisory body, noted the following in their annual report published in November last year: If the TPP does not come into force and the Regional Comprehensive Economic Partnership (see chart 4) being discussed by 16 countries, including Japan, China, countries of the Association of Southeast Asian Nations (ASEAN), comes into effect, it will bring economic benefits of $88 billion to China, and if TPP is enacted and RCEP is not, China’s economic loss will amount to $22 billion.

For this reason, some Chinese experts at that time began suggesting that TPP participation should be considered. According to a source close to the Chinese Communist Party, three main reasons underpinned their thinking:

1. External pressure could be used for domestic economic structural reform, as was the case when China joined the World Trade Organization.

2. China would be disadvantaged if it was not actively involved in the formulation of trade and investment rules.

3 China would lose face if small countries like Vietnam participated in TPP while it remained on the sidelines.

So when then U.S. President-elect Donald Trump announced plans to withdraw from the TPP after his election in November last year, palpable relief spread within the Xi administration. “The TPP is finished,” said one Communist Party source.

“The TPP’s setbacks have extended China’s timeframe for strategic opportunities.” “It is definitely very positive news for China.” Such comments from experts were published in the Chinese newspaper The Beijing News on Nov. 25 last year.

In his political report at the party congress, Xi said, “We support a multilateral trading system and will promote the creation of free trade zones.” He likely made this remark with RCEP in mind. Xi’s second-term trade strategy involves promoting the early realization of RCEP and promoting FTAs with Belt and Road countries.

Irritation with Japan

Meanwhile, the Xi administration is irked by Japan’s attempts to push forward with the TPP in preparation the United States’ future return.

In July, an essay expressing the Xi administration’s true thoughts was published in the Global Times, a newspaper affiliated with Communist Party paper the People’s Daily: “Japan is the world’s third-largest economy, but its economy is less than 30 percent the size of the United States’. Its domestic market is also small. There is a very large gap between Japan’s subjective desires and its objective capabilities. It will be difficult for Japan to push ahead with TPP alone. They don’t seem to know their own limits.”

The essay was authored by Cai Liang, a senior fellow for the Center for Asia-Pacific Studies at the Shanghai Institutes for International Studies.

Analysis by an expert on Japan-China relations concluded, “The essay displayed a strong sense of caution about a future U.S. return to the TPP.”

Japan and Australia aim to reach a broad agreement on the implementation of an 11-nation TPP at the Asia-Pacific Economic Cooperation leaders meeting in Vietnam in November.

They will strive to achieve meaningful trade liberalization, and ensure that the flimsy “China standard” will not become the global standard. It is important that Japan makes steady progress with the “TPP 11.” (see chart 4)

■One Belt, One Road

An economic initiative proposed by Chinese President Xi Jinping in 2013 through which China supports infrastructure improvements in neighboring countries. It consists of the “Silk Road Economic Belt (One Belt)” that connects China to Europe, and the “21st Century Maritime Silk Road (One Road)” that connects the South China Sea, the Indian Ocean, and other bodies of water. The Asian Infrastructure Investment Bank (AIIB), whose founding was spearheaded by China, and others will finance the initiative. It focuses on coordination among five key spheres, which are described as 1. policy 2. infrastructure 3. trade and investment 4. finance 5. citizens.

China may grasp climate leadership at U.N. talks with Trump pulling out

November 5, 2017

The Dollar’s Enjoying a Renaissance

October 30, 2017


The greenback could keep pushing higher if U.S. tax cuts happen.
By Jason Schenker
Reversal of fortune in dollar-euro.

 Photographer: Owen Franken

After getting pummeled all year by the euro, the dollar is having a moment. In Wall Street parlance, it may be more than just a dead-cat bounce, as politics, economic fundamentals and technicals have converged to give the greenback a boost.

The U.S. currency surged in the immediate aftermath of Donald Trump’s election victory before suffering a long descent that lasted from December until last month. That’s when the political viability of U.S. fiscal policy reform in the shape of — as yet to be detailed — tax cuts (and maybe even tax reform) became increasingly likely. Although equity markets have reflected optimism all year that tax cuts would come, the dollar has conveyed doubt along with gold and bonds.

The Bloomberg Dollar Index is up more than 4 percent from its low for the year on Sept. 8, partially rebounding from the more than 10 percent drop since the end of December. There could be more to come in the short term if tax cuts happen, because the legislation is likely to contain a provision that would allow U.S. companies to repatriate significant foreign profits and further bolster the economy. That could spark more inflation and put U.S. monetary policy on a more aggressive path.

The Dollar Finds Support

Source: Mr. Robot

In terms of the euro, the political situation in Europe has been a distraction. After the election of the far-right Alternative for Germany party to the Bundestag on Sept. 24, the independence movement in the Spanish autonomous region of Catalonia has devolved into a political rat’s nest. Uncertainty, regionalism and the risk of escalating discord in Spain are adding to the political dissonance — a stark contrast to the apparent acceptance of U.S. Senate Republicans of higher national debt levels in exchange for tax cuts.

As the dollar-bullish and euro-bearish political dynamics played out, monetary policy expectations have provided a more direct leitmotiv to currency moves. Although expectations for Federal Reserve interest-rate hikes dimmed throughout the year, solid U.S. economic growth and a tight labor market will allow the central bank to continue to tighten policy, despite low rates of inflation. Note that the Fed announced the normalization of its balance-sheet policy at its September meeting — a time that roughly coincided with this year’s lows for the dollar against the euro, and the beginning of political concerns in Europe as well as political optimism in the U.S.

The ECB didn’t do the euro any favors last week by announcing an extension of its quantitative-easing program. Although monthly bond purchases were cut in half, there is no target end date. The ECB failed miserably at removing monetary accommodation between 2012 and 2014, when a one-third reduction in the size of its balance sheet pushed the euro zone to the edge of recession. But that lesson seems to have been learned, and the ECB is taking a page from the Fed’s playbook: Reduce the pace of accommodation gradually and test the waters, then remove it entirely and test the waters again before tightening monetary policy.

Although the prospect of endless QE could keep the euro under pressure for longer, it’s likely to pop once expectations for an eventual tightening rise. With euro zone CPI at only 1.5 percent, the inflation-sensitive ECB has some wiggle room, but not a lot. That makes the CPI the data point to watch. The euro is under pressure on all sides: The political story is bearish for the euro, as are U.S. economic conditions and monetary policy, and ECB monetary policy — for now.

Technicals have also shifted against the euro in the past month and could continue to weigh on the currency in the immediate term as it has fallen below both its 30- and 100-day moving averages. Stochastic, Relative Strength Index, and On Balance Volume indicators are all flashing bearish signals. But these are minor compared with the fact that the euro is near a critical level of 1.1607 that served as a ceiling from January 2015 to July 2017, when the euro rose above that level. If the euro closes back below that support, it could weaken further in the immediate term. After all, a level of resistance that held for two and a half years is not one markets are likely to ignore.

The U.S. Dollar Index has seen technical dynamics strengthen, having risen above its 30- and 100-day moving averages. Plus, the dollar is back above a floor that held from January 2015 until August 2017, when it fell below that floor for around a month. This bounce back above an important technical support means that either a sharp acceleration in euro zone inflation or the failure of U.S. tax cuts would likely be required to upend the recent trends in the euro-dollar exchange rate — at least in the near term.

Euro Technicals Have Weakened Since September

Photographer: Mr. Robot


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Book “All Out War: The Plot to Destroy Trump” — “Left-wing groups met with Al-Qaeda and ISIS to plot Trump’s destruction” — Radical Left are joining forces in an attempted coup d’tat to overturn the will of the people.”

October 30, 2017
 – The Washington Times – Sunday, October 29, 2017

Monday will be noisy as more details on the Russia collusion probe emerge. But wait. “All Out War: The Plot to Destroy Trump” by veteran investigative journalist Edward Kleinalso arrives Monday, making a detailed case that the notorious “deep state” is indeed up and running against President Trump and his administration.

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“In America, you are entitled to your own opinion. But you are not entitled to overthrow the democratically elected president of the United States and inflict irreparable damage on our country. That, however, is what Donald Trump’s enemies on the Left and Right are doing. Through a variety of underhanded tactics — lies, leaks, obstruction, and violence — they are working to delegitimize President Trump and drive him from office before he can drain the swamp and take away their power,” writes Mr. Klein, former editor-in-chief of The New York Times Magazine.

This is his 14th book, following “Guilty As Sin” and “Unlikable: The Problem with Hillary” — one centered on Hillary Clinton’s email woes, the other on her failed 2016 campaign. Now the author dwells upon Mr. Trump’s challenges, which appear to be unprecedented.

“With ferocity not seen since the Civil War, the Washington establishment and the radical Left are joining forces in an attempted coup d’tat to overturn the will of the people and return power to the political and media elites who have never been more unhinged,” says publisher Regnery Books, adding the new book reveals that “left-wing groups met with Al-Qaeda and ISIS to plot Trump’s destruction,” this according to an FBI investigation. Find the book here

Anti-Trump protesters "March for Truth"


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Klein says U.S. radicals traveled overseas to meet with representatives of the Islamic State in their effort to end Trump’s presidency….


• Murmurs and asides to


US left wing groups travelled to Germany for the G20 Summit last July to meet with Al qaeda and ISIS leaders and plot the destruction of President Trump, secret FBI investigation reveals

  • Bestselling author Edward Klein is set to release his latest book All Out War: The Plot to Destroy Trump
  • Klein makes the shocking revelation that an FBI investigation discovered collusion between American anarchists and ISIS and Al-Qaeda 
  • ‘This is the greatest challenge to law enforcement since the Weather Underground and the Black Panther Party,’ the FBI report declared
  • It reveals the FBI sent a task force to Germany to report on radical groups that planned to protest President Trump’s attendance at this year’s G20 Summit
  • The investigation determined that U.S.-backed anarchist/radical groups had traveled to Germany and took part in the violence 
  • There was also evidence that three key leaders of an Oakland group met in Hamburg with a leader of the Al-Qaeda 
  • The foreign terrorists were helping them acquire the weapons they are seeking, primarily bomb-making equipment and toxic chemicals and gasses

Edward Klein is the former editor in chief of the New York Times Magazine and the author of numerous bestsellers including his fourth book on the Clintons, Guilty as Sin, in 2016. His latest book is All Out War: The Plot to Destroy Trump will be released October 30, 2017

A secret FBI investigation of the violent ‘resistance’ movement on college campuses against President Trump has led to an alarming discovery—the collusion between American anarchists and foreign terrorists in the Islamic State and Al qaeda, according to a confidential ‘Informational Report’ by FBI field offices.

‘There is clearly overwhelming evidence that there are growing ties between All Out War: The Plot to Destroy Trumpand the Islamic State, as well as several [ISIS] offshoots and splinter groups,’ stated the FBI field report, which was delivered to Acting Director Andrew McCabe on July 11, 2017, and which is being published for the first time in my new book All Out War: The Plot to Destroy Trump.

The FBI report on efforts by Islamic terrorists to recruit followers among violent U.S. groups like Antifa corroborates President Trump’s controversial claim, following last summer’s deadly protests in Charlottesville, Virginia, that left-wing anarchist groups are just as dangerous as right-wing white supremacists.

A secret FBI investigation of the violent 'resistance' movement on college campuses against President Trump has led to an alarming discovery—the collusion between American anarchists and foreign terrorists in the Islamic State and Al Qaeda (Pictured above are the protests in Charlottesville, VA) 

A secret FBI investigation of the violent ‘resistance’ movement on college campuses against President Trump has led to an alarming discovery—the collusion between American anarchists and foreign terrorists in the Islamic State and Al Qaeda (Pictured above are the protests in Charlottesville, VA)

‘This is the greatest challenge to law enforcement since the Weather Underground and the Black Panther Party,’ the FBI report declared.

Last summer, the FBI dispatched a task force to Europe to report on massive demonstrations planned by radical groups, such as the German contingent Antifaschistische Aktion, to protest President Trump’s attendance at a meeting of leaders and central bank governors of the G20 group of major industrialized countries

‘Task force covered G20 meeting in Hamburg, studied intel from local authorities, Interpol, and other assets, determined that as assumed U.S.-backed anarchist/radical groups had traveled to Germany and took place in the violence,’ the FBI’s summary stated.

‘There is also evidence of meetings between these individuals and associates of ISIS. There is an urgent need to closely surveil the identified individuals.’

The agents sent by the FBI paid particular attention to a group of anarchists from Oakland, a major port city that lies adjacent to the campus of the University of California at Berkeley, the scene of several violent protests.

It reveals the FBI sent a task force to Germany to report on radical groups that planned to protest President Trump's attendance at this year's G20 Summit (pictured) and found U.S.-backed anarchist/radical groups had traveled to Germany and met with terrorists

It reveals the FBI sent a task force to Germany to report on radical groups that planned to protest President Trump’s attendance at this year’s G20 Summit (pictured) and found U.S.-backed anarchist/radical groups had traveled to Germany and met with terrorists

‘While there has been military progress in Iraq against the Islamic State, their influence in Europe and throughout the world is clearly growing,’ the report said.

‘Now that the bureau has determined they have followers in the radical U.S. resistance movement in the United States, it is clear there will be additional violence in the attacks on law enforcement and U.S. institutions, including banks.

‘Ties between three key leaders of the Oakland group [names redacted] met in Hamburg with a leader of the AQAP [Al Qaeda in the Arabian Peninsula] and the AQIM [Al Qaeda in the Islamic Maghreb],’ the report continued. ‘The leader from AQAP is an Egyptian-born male [name redacted] who is known to be in charge of finances and recruiting for the group.

The FBI field report was delivered to Acting Director Andrew McCabe in July

The FBI field report was delivered to Acting Director Andrew McCabe in July

‘There is evidence from informants that he is helping the Oakland group acquire the weapons they are seeking, primarily bomb making equipment and toxic chemicals and gasses.

‘One of the men from Oakland traveled to Syria to meet with ISIS; the purpose was for training in tactics, but was thought to be primarily a bonding visit to discuss possible massive disruptive attacks in the U.S.

‘While in Hamburg, several of the Oakland-based criminals were photographed throwing Molotov cocktails and wielding iron bars, which have been their weapons of choice, though they are almost certainly on the verge of upping the caliber of their weaponry for use in the U.S.

‘Despite having their faces covered by masks, they were positively identified.

‘This group and their connections with the radical Islamic groups must be disrupted and destroyed.

The FBI dispatched a task force to Europe to report on massive demonstrations planned by radical groups, such as the German contingent Antifaschistische Aktion

The FBI dispatched a task force to Europe to report on massive demonstrations planned by radical groups, such as the German contingent Antifaschistische Aktion

Mounted policemen ride through a group of protesters sitting on the ground, in Hamburg, Germany, during the G20 Summit in July 

Mounted policemen ride through a group of protesters sitting on the ground, in Hamburg, Germany, during the G20 Summit in July

‘Action has been taken with the appropriate agencies to see that these named individuals will be identified when they return to the United States. It has not been determined if they will be detained or surveilled.…

‘Making some sort of common cause with Americans who are determined to commit violence against the U.S. makes them potentially very useful to radical Islam.’

Ed Klein's latest book is All Out War: The Plot to Destroy Trump will be released October 30, 2017

Ed Klein’s latest book is All Out War: The Plot to Destroy Trump will be released October 30, 2017

Before he was fired as director of the FBI, James Comey collected intelligence on the connections between Middle Eastern jihadis, European radicals, and the American anarchists who are part of the anti-Trump ‘resistance’ movement.

‘The Americans communicate with the Islamic State and other terrorist organizations on websites, and they use those websites to download instructions on making weapons,’ said an FBI source who had access to Comey’s intelligence reports.

‘As the Trump administration has demonstrated it’s serious about destroying the Islamic State, and depriving ISIS of territory in Iraq and Syria, the alliance between the American radicals and ISIS has grown even closer. The Internet chatter between the Americans and the Islamists is astronomical.

‘The FBI is really playing catchup ball, because the Obama administration refused to give the bureau the resources it needed to effectively infiltrate and surveil the radical groups on college campuses,’ the source continued.

‘Any talk of a connection between radical Islam—a phrase the Obama people wouldn’t even use—and American extremists was pretty much laughed off. [Former Attorney General] Loretta Lynch would have blown a gasket if she heard that the FBI was surveilling so-called college political organizations.

‘All that has changed under the Trump administration. Everyone’s aware that the resistance movement, with its effort to get rid of Trump by any means necessary, has created fertile soil for ISIS and al Qaeda to establish a beachhead in America.’

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Businesses Push Workers to Mobilize Before Tax Revamp

October 29, 2017

Companies and trade groups turn their tax wish-lists into talking points as federal tax overhaul looms

OMAHA, Neb.—In the parking lot outside Elliott Equipment Co.’s manufacturing plant here last month, more than a hundred employees gathered in front of a banner-bedecked truck, its raised boom flying an American flag 30 feet overhead, to hear from the company’s chief executive and the local congressman.

Among the topics: the future tax rate for S corporations.

Who Has the World’s No. 1 Economy? Not the U.S.

October 18, 2017


By the most measures, China has passed the U.S. and is pulling away.

By Noah Smith

The wear and tear doesn’t help. Photographer: kurt Wittman/UIG via Getty Images

What’s the most powerful country in the world? There’s a good case to be made that it’s China.

There are many kinds of power — diplomatic, cultural, military and economic. So an easier question to ask is: What’s the world’s largest economy? That’s almost certainly China.

Many might protest when hearing this. After all, the U.S. still produces the most when measured at market exchange rates:

 All graphs are at:

Looks Might Be Deceiving

Gross domestic product at market exchange rates, 2016

Source: World Bank

But this comparison is misleading, because things cost different amounts in different countries. Gross domestic product is supposed to measure the amount of real stuff — cars, phones, financial services, back massages, etc. — that a country produces. If the same phone costs $400 in the U.S. but only $200 in China, China’s GDP is getting undercounted by 50 percent when we measure at market exchange rates. In general, less developed countries have lower prices, which means their GDP gets systematically undercounted.

Economists try to correct for this with an adjustment called purchasing power parity (PPP), which controls for relative prices. It’s not perfect, since it has to account for things like product quality, which can be hard to measure. But it probably gives a more accurate picture of how much a country really produces. And here, China has already surpassed the U.S.:

A Better Way to Size Things Up

Gross domestic product at purchasing power parity, 2016

Source: World Bank

If you don’t trust the murky PPP adjustments, a simple alternative is just to look at the price of a Big Mac. The same burger costs 1.8 times more in the U.S. than in China. Adjusting the market-exchange-rate GDP numbers by that ratio would put China even farther ahead.

In some dimensions, China’s lead is even larger. The country’s manufacturing output overtook that of the U.S. almost a decade ago. Its exports are more than a third larger as well.

American commentators may be slow to recognize China’s economic supremacy, but the rest of the world is starting to wake up to the fact:

Appearances Matter

Survey of perception of economic power in developed nations

Source: Pew Research Center

This doesn’t mean China’s population is the world’s richest — far from it. The countries with the highest income per person, in order, are Qatar, Luxembourg, Singapore, Brunei and the United Arab Emirates. But few would argue that Qatar or Luxembourg is the world’s leading economy — while per-capita numbers are important for the well-being of a nation’s people, they don’t translate into comprehensive national power unless a country also has a large population.

China’s modest per-person income simply means that the country has plenty of room to grow. Whereas developed countries can only get richer by inventing new things or making their economies more efficient, poor countries can cheaply copy foreign technology or imitate foreign organizational practices. That doesn’t always happen, of course — many poor countries find themselves trapped by dysfunctional institutions, lack of human capital or other barriers to development.

But there’s good reason to think that China will overcome at least some of these obstacles. Economists Randall Morck and Bernard Yeung have a new paper comparing the histories of Japan and South Korea — both of which climbed out of poverty to achieve rich-country status — with the recent rise of China. They find that China’s institutions are, broadly speaking, developing along the same path followed by its successful neighbors.

In other words, not only is China already the world’s largest economy, the gap between it and the U.S. can be expected to grow even wider. This continues to be borne out in the growth statistics — though China has slowed in recent years, its economy continues to expand at a rate of more than 6 percent, while the U.S. is at just over 2 percent. If that disparity persists, China’s economy will be double that of the U.S. in less than two decades.

So economically, China has surpassed the U.S., and is on track to zoom far ahead in the near future. But what about military power? Here, it still looks like the U.S. reigns supreme. It spends more money on its military than China, has a larger nuclear arsenal, and — thanks to its recent wars in Afghanistan and Iraq — has a more seasoned fighting force as well.

But that doesn’t mean that the U.S. would win a war, if the two countries fought. A full nuclear exchange, of course, would have no winners. But in a protracted conventional struggle, there’s a good chance that China’s weight of numbers and manufacturing prowess would win out. As an analogy, consider the U.S. and Japan in World War II. At the beginning of the war, Japan’s aircraft carrier force outnumbered that of the U.S., and its navy was far more seasoned (due to Japan’s war in China). But when the war began, the U.S. greatly outproduced its opponent:

Economic Size Made all the Difference

Aircraft-carrier production


The U.S. also had a 2-to-1 manpower advantage. When two countries of similar technology levels fight, numbers tend to tell. China has a larger GDP, more manufacturing output and four times the population. And as its recent advances in stealth technologydirected energy weapons, hypersonic missiles and other areas demonstrate, its military technology isn’t that far behind the U.S. In a drawn-out war, once the mighty Chinese steamroller got moving, it would be unstoppable.

In other words, China is now in a position similar to that of the U.S. at about the turn of the 20th century — a formidable superpower that just hasn’t yet felt any reason to exercise its dominance. Once the U.S. woke up to the need to throw its weight around, no one doubted its primacy.

China may never make the same decision. It may choose to remain restrained on the international stage, with a modest nuclear arsenal and a light footprint in global institutions. If so, its dominance will remain a lurking, looming potentiality instead of a real and present fact of life.

But I wouldn’t count on that happening.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.


Forbes Magazine Interview With President Donald Trump

October 12, 2017

I edit Forbes Magazine, and post on business, philanthropy–and food!

This story appears in the November 14, 2017 issue of Forbes. Subscribe

President Donald Trump sat down for an interview with Forbes Magazine Editor Randall Lane and Chief Product Officer Lewis D’Vorkin in the Oval Office on Friday, October 6th. White House Communications Director Hope Hicks also sat in. This is the unedited transcript from the interview, which lasted 50 minutes.

Randall Lane: You’ve always talked about having fun as a key to business. Are you having fun?

Donald Trump: I am having fun. I’m enjoying it. We’re accomplishing a lot. Your stock market is at an all-time high. Your jobs, your unemployment is at the lowest point in almost 17 years. We have fantastic numbers coming out. And I think we’ll have, over the course of the next, fairly short period of time, and more importantly over a long period of time, we’re going to have great numbers coming out of our country.

Lewis D’Vorkin: What’s your personal thought?

Trump: I enjoy success. And we’re having tremendous success, as a country. We have some difficulties with respect to North Korea, the Middle East. I inherited– and I’ve said it often–I inherited a mess. The country was having many different problems. Among them, the Middle East, ISIS, which we’ve done more with respect to ISIS in nine months than we’ve done in nine years. But we have really done, we have done, I would say eight months in eight years, to be specific. But we have done a really, really good job with the military. We’re building up our military. We just had an over $700 billion budget, which will be approved. We’re, you know, there’s been few times where the military was more important than what it is right now. And, in addition to that, which is by far the overriding element, it’s lots of jobs in the United States. So, what the country is doing, we’re doing very well. And on an economic front, we’re doing very well.

Photo credit: Jamel Toppin for Forbes

Lane: Now that we’re almost a year from the big upset and the big win, do you think your business background prepared you for this job? And were you ready, now that you have a year in?

Trump: Well, I think it helped. It’s certainly a different kind of job than, really there is anywhere. Because you have so many skills necessary. But certainly the campaign was successful. What people don’t realize is that I spent much less money than Hillary Clinton. So right there, perhaps that’s business. You know, if you look at the numbers it’s astronomically different.

Lane: Yeah.

Trump: I don’t think anybody’s ever written that. You know, in the old days, if you spent less money and won, that was supposed to be a good thing. Today nobody talks about it. But I spent much less money and won. I think that’s–so we start off there–I think that was good. I also think that, yes, being in–just last night I had dinner with all of our generals and admirals, at the highest level. You probably saw that.

Lane: Yeah, I saw the picture right here. Yeah.

Trump: It was lovely. It was fantastic. But I talked about business. I said, “Your equipment is coming in too slowly and at too great a cost.” And I actually got involved in negotiating, as an example, the F-35 fighter with Lockheed. You may call Marillyn [Hewson], the head of Lockheed, who you know, I think.

Lane: Mhmm.

Trump: And she’s a terrific person. But I developed a bidding system between Boeing and Lockheed. And I was able to reduce the price of the Lockheed by billions of dollars. By billions of dollars. And this took me, actually, a very small amount of time. And I read a story, and this when I was president-elect, had not come here yet. And I called the military. I said, “What’s the problem?” We met with the generals. I then met with Lockheed. I then–the generals were unable to get anything off the price. And in fact, they wanted to raise the price and claim extras. And I met with Marillyn [Hewson], from Lockheed. I then went and had a very frank discussion with her. I then met with Boeing, and I said, “Well, we’re going to come out with a competing plane.” And then went back to her. And I went back and forth. And the end result is billions and billions of dollars have been taken off the cost of the plane.

Lane: Well, again, you’re negotiating with them. You have obviously a lot of negotiation skills that you bring.

Trump: And that’s one thing. There are many, many things that I was too late into the game for the President Gerald Ford aircraft carrier. But it took too long to build, and it was way over budget. And you know, those things, we’re being much more conscious as a country about things such as that.

D’Vorkin: So you’ve had pain points in business, obviously.

Trump: Well, I don’t know.

D’Vorkin: If you–

Trump: Pain points?

D’Vorkin: In other words, obstacles that you have to overcome.

Trump: Oh, sure. You always have obstacles.

D’Vorkin: So, if you take away the politics of being president, and what you’re trying to do with the economy, what are the obstacles that you are finding that you necessarily didn’t find in your business life?

Trump: Well, you have Congress. That’s a big obstacle in many cases. You have, in some cases, well-meaning people in Congress that truly feel strongly about something. And I understand that and actually don’t mind that. And then of course you have grandstanders and others that want to try and make a point or want to do something that really isn’t necessarily in the best interests of the country. And those people I fight. And what people don’t know is that I’ve had just about the most legislation passed of any president, in a nine-month period, that’s ever served. We had over 50 bills passed. I’m not talking about executive orders only, which are very important. I’m talking about bills. We’ve had a tremendous amount of legislation passed. Like VA accountability, which nobody could get passed. Meaning people are accountable now, because before you couldn’t do anything if you caught people who worked there doing very bad things. But many, many bills have been passed. And now we’re going for taxes. I will get health care. I’m one vote short of health care. I’ll get health care. And I think block-granting it back to the states is going to be a great thing to do. I think it’ll be great for the people. Smaller government, great for the people. They’ll be able to handle it better. But we’re one–

Lane: Are you talking about the Graham-Cassidy bill?

Trump: Yeah, I like it very much. I do. I like it. It’s block-granting. It’s granting the money back to the states.

Lane: Right, right.

Trump: And you have a smaller form of government that’s going to be able to do–if they do a proper job–that will be able to do. There are certain states where they are very well run. And I could name them. I could name certain states where they really–they will do miracles with that money, in terms of health care. It’ll be far better than it is. Because Obamacare has failed, badly. So I’m working on that now. But we actually, I would say, I either have the votes or I’m one vote short. And I believe we’ll get health care done sometime prior to the election.

Lane: With Obamacare, until you come up with something different, don’t you feel there’s a lot of things going on with Obamacare right now, where, don’t you feel you need, as CEO of America, an obligation to make it run as good as it can while it’s still the law of the land?

Trump: Well, that’s an interesting, that’s a very interesting question. It’s a failed concept. It’s thousands and thousands of pages. It’s been amended by additional thousands of pages. It’s a total mess. The premiums are going up, you know.

Lane: But while it’s still the law, don’t you think, you know, we’re cutting back on advertising, we’re shrinking the window of signing up, so–

Trump: Well, we’re actually, what we’re doing is trying to keep it afloat, because it’s failing. I mean the insurance companies are fleeing and have fled. They fled before I got here. But with that being said, no, Obamacare is Obama’s fault. It’s nobody else’s fault. In fact, if you go back to–

Lane: Yes, but now it’s your administration’s responsibility.

Trump: Yes. But I’ve always said Obamacare is Obama’s fault. It’s never going to be our fault. With that being said, I think the Democrats want to make a deal. At the same time, I think I have a deal with the Republicans. So I have the best of both worlds. That’s business to a certain extent–

Lane: Right.

Trump: –when you asked the business question. And as you have noticed, I’m very able to make deals with Democrats if I have to.

Lane: Who have you found so far are better deal-making partners, the Ryan-McConnell set or the Pelosi-Schumer set?

Trump: Well, the Republicans have something called the filibuster rule. Which is a disaster. And if they don’t get rid of that, it’s always going to be very tough for them. You know what that is.

Lane: Yes, well, of course.

Trump: The filibuster rule is–

Lane: It’s a disaster when you’re in the majority. It’s a friend when you’re in the minority.

Trump: Well, you need eight Democrat votes every time. I mean, they literally need eight Democratic votes. And, they keep it for the sake of history. But history is that, in 1789, when it all began, what it actually, when they started voting, it was 1789, the first votes, that was a simple majority. And we should go back to a simple majority. If we had the filibuster rule, if we had the 60 votes for Justice Gorsuch, he would not be sitting on the bench right now because for the judges that has been taken off. And part of my plan is that the Democrats would take it off in two minutes. And the Republicans–

Lane: Well, they didn’t when they had a majority.

Trump: Well, they were going to. Well, they did it for the judge. Don’t forget, 95 percent of that work was done before we got there. So I think the filibuster rule is very bad. At the same time, I think if we pass taxes, I think we’ll have health care and taxes before. I believe we’ll have a great infrastructure bill before, which is easiest of all of them. In fact, I think I’ll have more Democrat votes for infrastructure than I will Republican votes. And I also have another bill that I think will be very–an economic development bill, which I think will be fantastic. Which nobody knows about. Which you are hearing about for the first time. But I’m going to do that. But before–

Lane: What is that? What does that mean?

Trump: Economic development incentives for companies. Incentives for companies to be here. Incentives for companies to do things.

D’Vorkin: What kind of incentives?

Trump: And it’ll be a great bill. It’s something I’ve had. I just don’t want to do it before I do health care–

Lane: So business, like Carrier? Business incentives to create jobs, keep jobs?

Trump: So that when companies leave our country, they get penalized severely. So that when companies stay in our country, they’re incentivized. But there won’t be any more companies, and it’s really stuck. I hope you have seen–again, this is an interview where I am doing the talking, I guess–but I hope you’ve seen that companies are moving back into our country. You saw Toyota, five plants. Other companies, car companies are moving back into our country. They are expanding their plants.

Lane: So is it a carrot–

Trump: We have a lot of–

Lane: So is it a carrot to get companies to stay and/or grow? Or is it a stick that you penalize?

Trump: It’s both. It’s both. It’s both a carrot and a stick. It is an incentive to stay. But it is perhaps even more so–if you leave, it’s going to be very tough for you to think that you’re going to be able to sell your product back into our country.

Lane: How comfortable are you, as a businessperson, having the government involved in a business decision about where a company wants to locate? And where a company wants to put jobs.

Trump: Very comfortable, because there’s no tax if you stay. There’s no tax. We have to protect our companies. And if you looked at what’s happened, they’ve been ravaged by the stupidity of politics and, frankly, the stupidity of politicians. They’ve been ravaged. And we have to protect our companies. We have to protect our workers. And the only way you’re going to do that is you have to create rules. I mean, when you talk about, Randall, when you talk about fairness, do you think it’s fair that some countries charge us 100% tariff, or tax, to sell a product in their country? And yet the same product coming out of that country coming into our country comes into our country for no tax. See, that makes it unfair for our companies. And what I want to do is reciprocal. See, I think the concept of reciprocal is a very nice concept. If somebody is charging us 50 percent, we should charge them 50 percent. Right now they charge us 50 percent, and we charge them nothing. That doesn’t work with me.

Lane: You are also taking steps with the corporate tax rate. Which I think there’s a lot of consensus on that.

Trump: Yes.

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