Short Items of Interest—U.S. Economy
Tariffs and Exemptions
From the very beginning, there has been a certain amount of confusion accompanying the steel and aluminum tariffs. The fact is U.S. steel and aluminum makers have been facing severe competitive pressures over the years from nations like China and Russia that openly subsidize and support their industries. At the same time, the U.S. is a manufacturing nation that uses a lot of steel—far more than can be produced domestically. The goal has been to give the steel and aluminum sectors a leg up, but not hurt the manufacturers too much. A provision was put in place that allowed companies to ask for an exemption so they could import certain types and grades of steel. Thus far, 75% of the requests have been granted—covering about 16% of steel imports. At the same time, certain countries have been exempted from the tariffs—most notably South Korea and Brazil. Both are in the top four of nations that export steel to the U.S.
Challenge of Retraining
The U.S. has faced a shortage of workers in a variety of industries for several years now. The shortage has become acute in manufacturing, construction and transportation, but has also affected everything from health care to food service. The solution that always surfaces is training, but it is not as simple as it sounds. Three issues develop right away. The first is that too many people end up getting the same training and overwhelm demand. People either fail to get new jobs or the pay falls, or both. The second issue is that the training is obsolete before people even finish. The pace of change in industry is blindingly fast. It is hard for schools and programs to keep up. The third issue is that people in their 40s, 50s and 60s are much harder to train to a new skill than people in their 20s and 30s.
Infrastructure as Theme for Cooperation
It is safe to say that there will be few opportunities for members of this Congress to cooperate with one another. The mood for bipartisanship is nonexistent. There is one possible exception and that is infrastructure. No party opposes the repair and rebuilding of roads, bridges, airports and seaports. No party opposes making internet access in rural areas a priority. The only argument is around money and how to prioritize. The Democrats in the House will push a new infrastructure initiative on the assumption it will get the same bipartisan support the last effort got. Again, it will come down to money.
Short Items of Interest—Global Economy
Trade Imbalance with Europe Worsens
A few months ago, Trump included Europe in his tirade against the evils of trade. He threatened the EU nations with tariffs on everything from steel and aluminum to cars and industrial machines and consumer goods. That assault was headed off by the Europeans agreeing to limit that imbalance, but it has gotten worse as the dollar has gained strength. It has made European goods cheaper and U.S. goods more expensive. This has also been the case with the U.K., but with the additional impetus of the Brexit mess, that has forced the Brits to seek new markets.
China Warns Taiwan Again
The latest remarks by Xi Jinping have brought the issue of Chinese unification to the fore again. No direct threat was made, but it clearly stated that the unification of China was still a goal and one that would be undertaken by force if required. The stated preference is a Hong Kong-style approach, but that seems to depend on Taiwan and whether the U.S. would back the independence of the contested state.
Elections End in DRC but Not Really
The New Year's Day vote was more peaceful and orderly than expected in the Democratic Republic of the Congo (DRC), but that is unlikely to last. The three candidates that were leading in the polls are all claiming victory and refusing to concede to the others.
Will China Dominate or Is the Run Coming to an End?
There is never a shortage of pundits with a theory as to the balance of power in the world. Right now, there are still many that extol the virtues of China and continue to assert they have the modern model of success—one that will replace the model used by the U.S. The assertion is that autocracy is far more compatible with capitalism than democracy ever was. The problem with this assertion is it tends to overlook some of the issues that have compromised many other nations in the past. It was in the 1950s and 60s that many assumed the Soviet Union would come to dominate the world as it appeared they had the ability to accomplish anything they set their mind to (such as the space race). In the 1970s and 80s it was Japan that was going to take over the world with its close integration of the business community with politics through "Japan Inc." Today, the nation expected to dominate the future is China.
Analysis: There are three mistakes often made when assessing the future of national economies. The first is assuming that the recent past will serve as a guide to the future. China has grown dramatically over the last four decades, but the most dramatic period of growth was at the start of that process and the economy has been slowing down ever since. Growth from a very low base allows for some dramatic progress, but with every successive year, the growth is harder as there was progress the year before. Four decades ago, China was an impoverished developing economy. Today it is a modern and developed state with all the issues that come with that status. The very fact that China has grown complicates its ability to keep growing. This is something the U.S. has faced for years. It is possible for a developing economy to grow at 10% to 12% as China did a decade or so ago, but an economy the size of the U.S. is doing well to reach 3% consistently.
The second issue is related to the first as it is assumed by many that growth can be sustained more or less inevitably. That has never been the case. Each gain is much harder than the last. If one is only making a dollar an hour it is not that hard to double one's income, but if one is making $100 an hour that doubling is far harder. Economies slow after periods of rapid growth and for very logical reasons. The infrastructure becomes insufficient to sustain that growth and must be upgraded, people have to be educated and trained and investment has to increase. Opportunities in a mature market are fewer and further between and require more in the way of resources.
Perhaps the most important criticism of the Chinese model is that of the authoritarian path. It has been asserted by many that capitalism is far more compatible with autocracy because one doesn't need to bother with all those restrictions imposed on business due to concerns by the public for things like clean air, water and safe products. While it is true that autocracies can ignore the public and favor the business sector if it wants to, there is a key element of what makes capitalism work that is missing. The process of "creative destruction" is missing. In truth, many in the U.S., Europe and elsewhere in the capitalist world are less than comfortable with this process and they throw up barriers as well. The idea is that good ideas and new ideas supplant the old. This creates maximum efficiency for an economy, but there are those that lose. The rise of the ride-share option has revolutionized transportation, but it killed the livelihood of those that owned and drove cabs. Online shopping made FedEx and UPS behemoths and made shopping ridiculously easy, but at the cost of the big department stores. In the end, progress means gains and losses and autocracies have a harder time letting go of the old to embrace the new.
Brazil Swings Far Right
It has been over 30 years since the right wing has dominated in Brazil, but after years and years of corruption and ineptitude on the part of the government, the population has turned to a man who has been dubbed the "tropical Trump." Jair Bolsonaro is an unabashed nationalist and militarist and has declared his intent to upset every norm in the country. Analysts have not been all that shocked at his success given the issues that have dominated Brazil, but they also suggest he will be on a very short leash. The vast majority of those who voted for him have confessed they really don't much like him and are uncomfortable with his style and some of his ideas. They voted for him out of frustration.
Analysis: Last year alone, there were over 63,000 people murdered in Brazil. Some of the most dangerous cities in the world are in there. It is just now coming out of a grinding recession which was never supposed to have happened. Inflation has been eating away people's incomes and it has seemed that every politician has been corrupt. The public is fed up and demands a change.
It's a New Year—What's Changed?
This is, of course, a silly question. The fact that a calendar has changed has nothing to do with anything other than providing a way to keep track of the passage of time. That said, the majority of the global population reacts as if this arrival of a New Year is significant. In some respects, this is true as it is common for governments to begin at this point—new leaders take office and new legislatures convene. That is certainly the case in the U.S. as the new Congress starts its term tomorrow. Given that the 2018 elections put Democrats in control of the House of Representatives while the Republicans retained control of the Senate, there will be a new dynamic at work in Washington. Around the world, there are over a dozen new governments coming into power. Many of them are of special significance to the U.S. Mexico is now led by Andrés Manuel López Obrador, Brazil by Jair Bolsonaro and key elections will be held in Ukraine, Spain, Argentina, Turkey and many others. The 2018 state elections in the U.S. changed the makeup of the states a little as there were 31 state legislatures controlled by the GOP and 14 controlled by Democrats. Now there are 30 Republican controlled and 18 under Democratic leadership. The political changes are not exactly monumental, but they will be influential in terms of the issues that have affected the economy of the U.S. and the world for that matter.
Analysis: The big news in the U.S. is the change at the Congressional level. In the simplest of terms, it means that nothing of substance can take place in the legislature without some measure of cooperation between Democrats and Republicans as most of the important legislation requires the approval of both houses. There are actions that can be taken by the executive without the approval of Congress, but there are limits to what can be done. The next executive can undo anything that was done under this executive. The question on the minds of the business community is a pretty simple one. What does the government look like now? There are essentially three options for the president and Congress.
Option one is cooperation and conciliation. In past years, this has been the most common result. The majority of those in elected office are expected to be bargainers bent on getting the best deal they can get for the constituents that put them in office. That description of a modern politician has faded quite a lot in recent years. Most of those in office now are far more ideological than would have been the case in the past. They are generally uninterested in those voters that did not vote for them. There were many ways legislators bargained with one another in the past, but many of those tools are no longer allowed (earmarks were the old method of choice). It is not expected to be a cooperative Congress as there are very few people who could be described as moderates within either party.
Option two is gridlock. This is considered the most likely outcome as there is not much that can be gained through cooperation as far the majority of legislators are concerned. The gerrymandering that has developed over the years has created a great many monocultures—districts that have been carefully created to favor one party over another. The primary system then creates an environment that rewards the candidate who sticks closest to their base given that fewer than 30% of voters turn out to cast ballots in a primary. The upshot is that somebody with the support of as little as 15% to 20% of a district can win. There is no incentive to be anything but loyal to that 15% to 20%. That sets up permanent stalemate.
Option three is outright war. This is also considered likely and the more so as the 2020 election gets closer. The contest for the White House will intensify within the year—candidates are already declaring. It appears there will be Republicans that will contest Trump as well as many Democrats. They will be seeking to make it very clear what they stand for in opposition to both Trump and the others that are running. That does not lend itself to cooperation in any way. The likely breakdown as far as the primary season is concerned will be Trump supporters vs. traditional Republicans in the GOP and at least three groups within the ranks of the Democrats. There will be liberal progressives like Elizabeth Warren (D-MA), centrist Democrats in the mold of former Vice President Joe Biden and pragmatists that can bleed votes from disillusioned Republicans like Beto O'Rourke (D-TX).
The bottom line is that there will be little help coming from the legislature in the coming year. That may prove to be a major problem if the economy starts to falter as many economists have been suggesting.
If there is one major issue that will continue to dominate the conversation this year, it will be border security. The impasse that led to the government shutdown has not ended although there were rumors of some agreement emerging today. If the shutdown does end, the issue of the border is still far from solved. A big part of the issue is that theatrics has overwhelmed any attempt at practical problem solving.
Analysis: The No. 1 source of illegal immigration is not illegal border crossing. The majority of those that are illegally in the U.S. have elected to overstay their visa. The number of people crossing the southern border is as low today as it has been in years. That has more to do with economic growth in Mexico than stepped-up border control efforts. Analysts have been near universal in their suggestion the U.S. do two things to stem illegal immigration. The first is to add more manpower to keeping track of people in the U.S. on a visa and ensuring they leave when they are supposed to. The second step is to severely punish employers who hire illegal migrants. This punishment should include very steep fines and imprisonment.
This is the time of year when I am torn between my pragmatic and my aspirational side. On the one hand, I look at the coming year as a new slate—an opportunity to better the year before. On the other hand, the change in the year is just an arbitrary construct. To be honest, I am not sad to see 2018 in the rearview mirror given that at this time a year ago I was wrapping my head around the fact I had throat cancer. Before the year was out, I also had a torn retina to contend with. My uncle died and now I am the very last of the Kuehl line. Only a few weeks ago, my eldest stepson died far too young (59). I am hopeful that 2019 will be an Improvement, but the reality is that good and bad things happen every year.
My resolutions this year are more on the attitudinal side as I have been reminded how little control we have over the events that shape our lives. I am not a person noted for patience and I want to improve. I get far too frustrated with the mundane—everything from traffic jams to airplane delays and the malfunctions inherent in technology. This was a year that sapped my usual strength and stamina. As I put more distance between me and the cancer, I want to get that back—which translates into working out regularly (always a catch!). I also became aware of life's fragility this year and vowed to spend more time with friends and family.
Most importantly, I want to be aware of what is good about my life and there is a great deal to be appreciative of. My wife and I have been together for nearly four decades and are as much in love as ever. Armada is 20 years old in 2019 and my business partner is as close a friend as ever. Our assistant, Karen, has been with us almost the entire time and she continues to take care of her disorganized employers with patience and humor. I have my feline four (soon to be five again). My stepson, grandson and granddaughter are my friends as well as family and I love their families dearly. I have dozens of really good friends all over the country. In short, I have far more than most and that makes 2019 a year to look forward to.
Slowdown of Economic Growth in China
This chart makes it clear enough that China's best growth years are well behind it. Nobody is talking about double-digit expansion any longer. The growth economy for 2019 is likely to be India as well as some of the other Asian economies that may be in a position to take advantage of the trade war between the Chinese and the U.S. The outlook for China in 2019 is not all that positive despite the concentrated effort on the part of the country's leadership to stimulate economic activity both directly and indirectly.