Short Items of Interest—U.S. Economy
Small Business Loses Confidence
Small business confidence can be an illusive quarry. It is so diverse it can be hard to gauge an overall attitude to much of anything. The National Federation for Independent Business (NFIB) does a pretty fair job of polling and assessing the group. Their studies have been showing a decline in overall confidence for the last four months. According to their survey, the confidence level has not been this low since 2016. This seems in stark contrast to the other data that has been coming forward regarding the economy. The NFIB tends to be a conservative group and has been quite supportive of the Trump administration. They are noting that many small business owners are worried about the future of growth in 2019 and are uneasy about the political climate. The sense is that too much rancor in politics is inhibiting growth and creating issues where there shouldn't be any.
Fed Officials Do Not Seem to Be in a Hurry
The minutes of the last Fed meeting will be released this afternoon. There are already some conclusions to be drawn based on the comments that several of the voting members of the Federal Open Market Committee (FOMC) have made. The expectation is that the members will emphasize they have time to work out what the next steps should be. The growth of the economy is still solid and job gains are still impressive enough to keep the Fed on target for more interest rate hikes. At the same time, there has been much market volatility and there are hints of a slowdown later in the year, so there is an argument to be made for delaying any further hikes. The sense now is that the Fed will pause for a few months and see what direction the economy moves.
Will U.S. Lose Sway Over World Bank?
When Obama named Jim Yong Kim to head the International Bank for Reconstruction and Development (World Bank), he was criticized for putting someone in that position without a banking background. Kim was a public health advocate. The intent of this selection was to guide the World Bank towards these kinds of projects. His tenure has been rocky to say the least as he lacks the respect of his staff and there is no consensus support for this move to public health. Kim has elected to resign three years prior to the end of his term. Now, there will be a debate over who replaces him. Tradition holds that the U.S. picks the head of the World Bank and the Europeans pick the head of the International Monetary Fund (IMF), but there were challengers to Kim and many of the 189-member countries have indicated they would be more than willing to select a non-American if Trump makes a choice they do not like.
Short Items of Interest—Global Economy
Another Six Years of Maduro
The reality is that Venezuela will not survive another six years of rule by Nicolas Maduro. The inflation rate is over 10 million percent. That means that there is no money economy anymore. It is all barter or smuggled in foreign currency. Unemployment is over 60%. It is estimated that over 80% of the population is in poverty. Crime is rampant and Caracas has become the murder capital of Latin America. The only choices on the horizon are Maduro's resignation or a coup of some kind. Most expect the latter. Not that a new regime will be able to solve these problems quickly, but at least a change in leadership may lead to resumptions of aid and loan packages.
Europe has become increasingly worried about the rise of populism and nationalism as they have led to a fragmentation of the electorate—a process that has occurred in the U.S. as well. It is all but impossible to reach a consensus on much of anything as the extreme positions of the left and right leave no room for a center approach. The Germans are splintered along with the French and Italians and many others. The litmus test for these extremist parties is total fealty to the party line. That means any level of cooperation is seen as betrayal of those ideals. Even if some of these leaders wanted to, they would not be allowed to partner up with the leaders of these more radical parties.
Meanwhile, Back in Asia
The domestic clash over the border wall and the government shutdown has essentially dominated the news cycle for weeks now. It would be easy to assume that nothing else was happening of import with all this going on but, of course, that is not the case. There has been quite a lot of activity in terms of the U.S.-China trade conflict—at least there appears to be. The U.S. and Chinese negotiators were scheduled to wrap up their talks a day ago, but they agreed to keep meeting. It could signal that some kind of deal or agreement may be close to fruition. At this juncture, there has been no official word. Observers have been straining to get some inkling of what is to come and have only supposition with which to work. It appears that talks will now move to the U.S. in about a week; both sides are sounding optimistic.
Analysis: The core issues have not changed much. The U.S. wants China to buy more from the U.S. so that the trade deficit can be reduced substantially. The U.S. is also seeking assurances that China will not pressure U.S. companies to give up their technological advantages and secrets. There is also a desire to get the Chinese to curtail their espionage activities aimed at U.S. companies. The issue of intellectual property protection is the more important of the issues and has been tied to some other domestic behaviors in China such as heavily subsidizing export-centered industries and engaging in currency manipulation. The Chinese have started to buy more in the way of farm output and other U.S.-made goods, but this is unlikely to lower the deficit appreciably.
The U.S. has threatened to impose more tariffs in March if the agreement stalls. China has pledged to respond with tariffs and barriers of its own should that take place. The on-again, off-again conversation between the U.S. and China has been roiling the markets for months. Nobody is quite sure what to expect as the direction of the talks lurch from positive to negative almost daily. The markets have been a little reassured by the latest activity because it seems the real issues have come into focus.
China's economy has been stuttering of late. This has prompted the government to engage in a whole series of stimulus efforts, but these carry their own risks. The fear a year ago was that certain sectors of the economy were on the verge of overheating. The focus was on cooling things down with restrictions on lending and expansion. These have now been abandoned in favor of jump starting the economy back to solid growth, but the threat of inflation remains a big worry. The Trump team has tried to assert that the slowdown in China has been due to the U.S. tariff policy, but the decline started long before any of these tariffs and trade restrictions were implemented.
China has been in a transition for several years now and it has not been all that smooth. The stated intent of the Xi Jinping regime was to build a different kind of China—one that was not dependent on the export sector, but one that grew with its own domestic demand. To do this required China to develop a consumer class. That has meant fairly hefty pay hikes for some in China. This has affected productivity as there has been no real change in output. This is a very familiar challenge in the U.S. and in Europe as well as Japan, but the Chinese are somewhat new to it. They have largely lost their global position as a low-labor-cost nation although they are still far cheaper than the developed western nations.
The Economics of Border Security
The issue of border security has become fraught with emotional and ideological motivations. It's to the point that it has become nearly impossible to have a considered conversation about it. The fact is that every nation seeks to control its borders, and for a variety of reasons. The primary issue is economic and is based on the assumption that no nation has unlimited resources and therefore seeks to preserve what it has for its citizens. The reason that a nation forms in the first place is to create a sense of shared responsibility towards some community. As long as there are differences between nations in terms of economics, social norms or freedom, there will be a desire on the part of some to leave the nation they are in to seek a different life somewhere else. There are basically four reasons that people seek to migrate. Controlling a nation's border means addressing all four.
Analysis: By far the largest number of migrants (legal and illegal) leaves their homes to seek a better economic environment. They are looking for employment or a state that will allow them to start a business or a state that will provide them some sort of economic security. The estimates vary, but generally speaking, 75% of those who migrate are doing it for economic reasons. Most nations are perfectly happy to accommodate legal migration by people who are seeking jobs as they are often filling the needs of business in the country where they choose to migrate. There is still a desire to control the numbers of people that are coming legally so as not to disadvantage the domestic population. Control of this kind of migration is theoretically easy as it rests on whether there are job opportunities. Legal migration is regulated by the issuance of visas, but this system breaks down if the visa requirements are ignored. For all the talk of the southern border, the majority of illegal migration to the U.S. is from people who have overstayed their visa. Illegal migration is controlled by focusing on those that employ illegal migrants. The U.S. is very weak on this kind of enforcement as compared to nations that prosecute these employers as if they were engaged in human trafficking—severe fines and extensive jail time. If there are no jobs, there is very little illegal migration as the U.S. learned during the recession when the numbers of illegal migrants fell to the lowest levels in decades. As long as there are jobs available, there will be people who desperately want these jobs.
The second leading cause for migration is based on security. These migrants are better labeled as refugees as they are fleeing some situation at home that has made life untenable. Most of the time, this is war or crime, but it can also mean natural disasters, famine, disease and the like. This is an especially complex motivation as these are people who really do not want to leave their homes and most fully intend to return when it is safe to do so. Unfortunately, it may not be safe for years. They are not moving to something, they are fleeing something and do not care what waits for them at the destination as it is better than what they left behind. The vast majority of these refugees are illegal as the host countries are basically unwilling to cope with the onslaught of desperate people. Europe has been flooded with people fleeing wars in Syria, Iraq and Libya, while the U.S. has been trying to cope with the people fleeing the drug gangs and violence in Central America. Australia is now starting to cope with those who have been affected by the earthquakes and tsunamis in Indonesia, while millions in Africa are essentially wandering from country to country to get away from the incessant wars. Dealing with this motivation for migration is very hard as it means addressing the violence itself by trying to stop the wars or control the drug gangs.
The third major motivation for migration is related to the second motivation, but lacks the urgency of a war. Much of the early settlement of what was to become the United States was by groups that were fleeing persecution back home due to their religious beliefs or their customs or social norms. The colonies that formed in the New World were often religious communities. That still motivates migration. Today, there are groups like the Rohingya in Thailand or the Kurds in Syria and many others. The U.S. attracts people that would be shunned in their native lands. How is this controlled without making the U.S. complicit in their persecution? That is a very awkward question. The U.S. has been a haven many times before—the Jewish population fleeing the Soviet Union or the Cubans trying to escape Castro's rule.
The fourth major motivation is criminal activity. There is a market for illegal drugs in the U.S.—perhaps the largest market in the world. As long as there are those who will buy drugs, there will be those that make and sell them. They will find ways to get the product to market.
In the end, border security is complex and will never lend itself to simple solutions. The contest between President Trump and those opposing the wall ceased being about border security years ago. It is now simply a battle over who has power. Real border security will involve walls (we already have over 300 miles of one), fences, barriers, surveillance and patrols. It will also involve intervening in conflicts that pressure the U.S.—fighting those drug gangs in Mexico and Central America. It will involve ensuring that U.S. companies do not break the law with impunity as they seek to exploit illegal migrants. It means having a comprehensive policy to deal with refugees that may need short-term help to survive that disaster in their home country.
As with most other developed nations in the world, the U.S. is a draw for those seeking a better life. The U.S. has benefited spectacularly from immigration. The number of people in the U.S. that entered legally from other nations has reached 37 million, an all-time high. While most developed nations are struggling with a rapidly aging population and a serious lack of workers, the U.S. continues to solve part of that problem with immigration. The fear now is that the U.S. is not considered as desirable a destination as it once was due to the heat of anti-immigration fervor. The U.S. needs that influx of talent, but also needs to maintain control over who comes to the U.S.
What Do the Less Educated Do for Work?
The data from the Labor Department last week was unexpected and encouraging as it suggested that there was continued job growth in the U.S., but behind these glowing numbers there are reasons for concern. The worker with limited education or training is getting left behind and will struggle to build much in the way of financial security. Over the last 10 years, the gap between the uneducated and the educated/trained has widened. Not only are those with little education unlikely to find jobs, they will also be paid far less as the jobs they do find are low level and often temporary.
Analysis: One of the biggest changes as far as education and work are concerned is that much of the problem is now in the rural areas as opposed to the urban centers. There are still large populations in the cities that are not receiving the education they need, but there are far more opportunities to rectify the situation than in the rural communities. The level of education in rural areas becomes an even bigger issue as those who do get the training and education are very likely to leave the rural community altogether—that education was their ticket out. That leaves a very stressed and isolated population behind. The overall feeling in many rural communities has been one of desperation. That has fueled the rise of populism in these same areas.
I really do wonder sometimes. Every year we festoon the house with Christmas finery to an excessive degree. There are huge decorated trees on both levels of the house and every flat surface has something seasonal on it—everything from Santa figures to nativity scenes and things that barely qualify as holiday (an alligator with a Santa hat and coat). It takes days and days to set all this up and just as many days to take it all down. Once upon a time, I convinced myself that this was all for the delight of the children; however, my grandkids are now in their 30s. True, my granddaughter has two little ones (and a third on the way), but they live in Florida and have not made the trek back to KC in years. I have had to face the reality that I seem to be doing this for myself. I just like the way the place looks with all the twinkling lights and garlands and the other stuff. I also like the way it looks when I take all that décor down—everything looks clean and neat again.
I engage in this kind of obsession more than I should admit. I do the Halloween thing the day of Halloween and take it all down the next day. We put up Irish decorations for St. Patrick's Day, hearts and romantic stuff for Valentine's Day, little bunnies and chicks for Easter and all manner of patriotic stuff for Fourth of July. I really do not know why. I have always had an interest in the symbols and traditions of life though. They remind me of things and places and people, and somehow connect me to my own history. I remember when I received gifts and from whom and why. I remember when I acquired some object on my travels and it takes me back there. The decorations for the holidays remind me of past holidays; always good memories. For now, it is all back in the boxes and stored for next year, but it will come out again and remind me of all those past years.
Unemployment Rates and Earnings by Education Level
It certainly comes as no shock to note that education matches up with employability. The situation for the person with less than a high school degree has certainly improved since the depths of the recession when the unemployment rate was close to 10%, but it remains almost twice the rate of the person with some college. The good news on the labor front is that many of those with minimal education and training are finding jobs, but the bad news is that most of these jobs are poorly paid, come with no benefits and have no future as far as promotions and raises are concerned. To add yet another troubling note—these are the jobs that are at most risk of being replaced by technology and machines.