Category Archives: History

The Unwinnable Trade War

By Weijian Shan – There are at least two reasons why Chinese exports to the United States have not fallen as much as the Trump administration hoped they would. One is that there are no good substitutes for many of the products the United States imports from China, such as iPhones and consumer drones, so U.S. buyers are forced to absorb the tariffs in the form of higher prices.

The other reason is that despite recent headlines, much of the manufacturing of U.S.-bound goods isn’t leaving China anytime soon, since many companies depend on supply chains that exist only there. (In 2012, Apple attempted to move manufacturing of its high-end Mac Pro computer from China to Texas, but the difficulty of sourcing the tiny screws that hold it together prevented the relocation.)

Some export-oriented manufacturing is leaving China, but not for the United States. According to a May survey conducted by the American Chamber of Commerce in Shanghai, fewer than six percent of U.S. businesses in China plan to return home. Sixty percent of U.S. companies said they would stay in China.

The damage to the economy on the import side is even more pronounced for the United States than it is for China. Economists at the Federal Reserve Bank of New York and elsewhere found that in 2018, the tariffs did not compel Chinese exporters to reduce their prices; instead, the full cost of the tariffs hit American consumers. As tariffs raise the prices of goods imported from China, U.S. consumers will opt to buy substitutes (when available) from other countries, which may be more expensive than the original Chinese imports but are cheaper than those same goods after the tariffs. The price difference between the pre-tariff Chinese imports and these third-country substitutes constitutes what economists call a “dead-weight loss” to the economy.

Beijing’s nimble calculations are well illustrated by the example of lobsters. China imposed a 25 percent tariff on U.S. lobsters in July 2018, precipitating a 70 percent drop in U.S. lobster exports. At the same time, Beijing cut tariffs on Canadian lobsters by three percent, and as a result, Canadian lobster exports to China doubled. Chinese consumers now pay less for lobsters imported from essentially the same waters.

The uncomfortable truth for Trump is that U.S. trade deficits don’t spring from the practices of U.S. trading partners; they come from the United States’ own spending habits.

The United States has run a persistent trade deficit since 1975, both overall and with most of its trading partners. Over the past 20 years, U.S. domestic expenditures have always exceeded GDP, resulting in negative net exports, or a trade deficit.

The shortfall has shifted over time but has remained between three and six percent of GDP. Trump wants to boost U.S. exports to trim the deficit, but trade wars inevitably invite retaliation that leads to significant reductions in exports.

Even a total Chinese capitulation in the trade war wouldn’t make a dent in the overall U.S. trade deficit. more>

Obama’s Idealists

American Power in Theory and Practice
By Peter Beinart – In different ways, each book traces a narrative arc that begins with a vow, made in young adulthood, to use the United States’ might for good and ends with a sober realization about how hard fulfilling that vow actually is. For Rice, the arc begins with her failure, as a young NSC aide, to rouse the Clinton administration to halt the 1994 Rwandan genocide, after which she pledged “to go down fighting, if ever I saw another instance where I believed U.S. military intervention could . . . make a critical difference in saving large numbers of human lives.” For Power, it starts during her time as a war correspondent in Bosnia, where the besieged residents of Sarajevo asked her to “tell Clinton” about the horrors she had seen. For Rhodes, it begins with 9/11 and the Iraq war, which left him yearning to harness the idealism he felt the Bush administration had squandered.

In each book, three moments during the Obama administration play outsize roles in chastening this youthful idealism: the decision to bomb Libya in 2011, the decision not to bomb Syria in 2013, and the 2016 election.

The problem isn’t that Rice, Power, and Rhodes shade the truth to make themselves look good. To the contrary, all three are, at various points, admirably frank about their mistakes. The problem is that by refusing to reveal what happened behind closed doors, they fail to help readers understand what lessons to draw from the Libya debacle. Is the lesson that presidents who lack the stomach for nation building shouldn’t topple regimes? Is it that the United States needs greater diplomatic capacity? Is it that brutal dictatorships are better than failed states? By not explaining Libya’s lessons, liberal internationalists like Rice, Power, and Rhodes make it easier for nativist bigots like Trump to proffer a lesson of their own: that Washington should care less about people overseas, especially if they are not Christian or white.

In each, the saga of disillusionment reaches its nadir in 2016, with Russia’s electoral interference and Trump’s election. After witnessing the limits of the United States’ ability to defend democracy and human rights abroad, Rice, Power, and Rhodes realize to their horror the limits of its ability to defend those principles at home. When Obama asks Mitch McConnell, the Republican Senate majority leader, to issue a joint statement condemning Russian interference in the election, McConnell refuses, a move that Rhodes calls “staggeringly partisan and unpatriotic.”

Although none of the authors puts it this way, it’s possible to read their books not only as tales of tempered idealism but also as chronicles of America’s declining exceptionalism. In retrospect, the belief in democracy promotion and humanitarian intervention that Rice, Power, and Rhodes embraced early in their careers rested on a faith that democracy was stable at home. With that faith now eroded—and the United States battling its own rising tribalism, authoritarianism, and brutality—it is hard to imagine a book like Power’sA Problem From Hell,” a critique of the country’s repeated failure to stop genocide, becoming the sensation it did in 2002.

As Americans have grown more preoccupied with, and more pessimistic about, their own country’s moral condition, they have turned inward. As a young woman, Power helped expose concentration camps in Bosnia. Today’s young activists are exposing them in Texas. As of September, foreign policy has barely figured in the Democratic presidential debates. more>

The EU’s rule-of-law test

By Tytti Tuppurainen – In his book The Origins of Political Order, the political scientist Francis Fukuyama argued that the rule of law is the most difficult pillar for a successful modern society to construct.

Organizing government administration and staging elections to a legislative body is relatively easy, and only a small number of failed states have no functioning public administration or legislature. But in far more countries, the absence of the rule of law is the primary source of instability and political decay.

For the EU, the rule of law is of central importance, because the EU is not simply a joint economic undertaking (although, as the economist Hernando de Soto has emphasized, the rule of law is also a prerequisite for a developed market economy). The EU’s raison d’être, like that of its predecessors, is to guarantee peace between European countries and to safeguard human rights within its member states. And the bloc is founded on common values enshrined in its treaties.

The EU’s commitment to the rule of law, set out in Article 2 of the Treaty on European Union, is straightforward. It stands for legality, legal certainty, the prohibition of arbitrary exercise of authority, the separation of powers, and an effective and independent judiciary. Respect for the rule of law affects different layers of society in very practical ways: at the level of the Union, the nation-state, companies, and citizens.

Within the EU, the rule of law is not a political statement or unattainable moral ideal, but a principle that public officials and courts are responsible for upholding. more>

The Unwanted Wars

Why the Middle East Is More Combustible Than Ever
By Robert Malley – The war that now looms largest is a war nobody apparently wants.

A conflict could break out in any one of a number of places for any one of a number of reasons. Consider the September 14 attack on Saudi oil facilities: it could theoretically have been perpetrated by the Houthis, a Yemeni rebel group, as part of their war with the kingdom; by Iran, as a response to debilitating U.S. sanctions; or by an Iranian-backed Shiite militia in Iraq.

If Washington decided to take military action against Tehran, this could in turn prompt Iranian retaliation against the United States’ Gulf allies, an attack by Hezbollah on Israel, or a Shiite militia operation against U.S. personnel in Iraq. Likewise, Israeli operations against Iranian allies anywhere in the Middle East could trigger a regionwide chain reaction. Because any development anywhere in the region can have ripple effects everywhere, narrowly containing a crisis is fast becoming an exercise in futility.

The Middle East has become the world’s most polarized region and, paradoxically, its most integrated. That combination—along with weak state structures, powerful nonstate actors, and multiple transitions occurring almost simultaneously—also makes the Middle East the world’s most volatile region. It further means that as long as its regional posture remains as it is, the United States will be just one poorly timed or dangerously aimed Houthi drone strike, or one particularly effective Israeli operation against a Shiite militia, away from its next costly regional entanglement.

Ultimately, the question is not chiefly whether the United States should disengage from the region. It is how it should choose to engage: diplomatically or militarily, by exacerbating divides or mitigating them, and by aligning itself fully with one side or seeking to achieve a sort of balance.

Economically, it ranks among the least integrated areas of the world; institutionally, the Arab League is less coherent than the European Union, less effective than the African Union, and more dysfunctional than the Organization of American States. Nor is there any regional entity to which Arab countries and the three most active non-Arab players (Iran, Israel, and Turkey) belong.

Yet in so many other ways, the Middle East functions as a unified space. Ideologies and movements spread across borders: in times past, Arabism and Nasserism; today, political Islam and jihadism. more>

The dirty secret of capitalism

By Nick Hanauer – I am a capitalist, and after a 30-year career in capitalism spanning three dozen companies, generating tens of billions of dollars in market value, I’m not just in the top one percent, I’m in the top .01 percent of all earners. Today, I have come to share the secrets of our success, because rich capitalists like me have never been richer. So the question is, how do we do it? How do we manage to grab an ever-increasing share of the economic pie every year? Is it that rich people are smarter than we were 30 years ago? Is it that we’re working harder than we once did? Are we taller, better looking?

Sadly, no. It all comes down to just one thing: economics. Because, here’s the dirty secret. There was a time in which the economics profession worked in the public interest, but in the neoliberal era, today, they work only for big corporations and billionaires, and that is creating a little bit of a problem.

So, what is a society to do? Well, it’s super clear to me what we need to do. We need a new economics. So, economics has been described as the dismal science, and for good reason, because as much as it is taught today, it isn’t a science at all, in spite of all of the dazzling mathematics. In fact, a growing number of academics and practitioners have concluded that neoliberal economic theory is dangerously wrong and that today’s growing crises of rising inequality and growing political instability are the direct result of decades of bad economic theory. What we now know is that the economics that made me so rich isn’t just wrong, it’s backwards, because it turns out it isn’t capital that creates economic growth, it’s people; and it isn’t self-interest that promotes the public good, it’s reciprocity; and it isn’t competition that produces our prosperity, it’s cooperation. What we can now see is that an economics that is neither just nor inclusive can never sustain the high levels of social cooperation necessary to enable a modern society to thrive.

So where did we go wrong? Well, it turns out that it’s become painfully obvious that the fundamental assumptions that undergird neoliberal economic theory are just objectively false, and so today first I want to take you through some of those mistaken assumptions and then after describe where the science suggests prosperity actually comes from. more>

Yes, contemporary capitalism can be compatible with liberal democracy

By William A. Galston – Ever since Aristotle examined the relationship between class structure and regimes of government, political scientists have understood that a strong middle class is the foundation of stable constitutional governance. The reason is straightforward: in societies divided into the rich few and the many poor, class warfare is inevitable.

The rich will use the state to defend what they have; the poor, to gain a bigger share. Sometimes this will be through majoritarian democracy, but is often led by a strongman claiming to act in the people’s name.

By contrast to either of these ambitions, the middle class tends more to prize the rule of law and to seek incremental rather than radical change.

Through much of human history, class structure was a product of chance and force, not policy. Because economic growth as we know it today existed neither in theory nor reality, economies were understood as zero-sum games. Political communities gained through plunder and conquest (or imperial tribute); economic classes gained through redistribution.

It is only during the past three centuries that long-term, secular economic growth, from which in principle all can gain, was conceptualized and realized as part of humankind’s lived experience.

There was nothing natural or automatic about this process. The vibrant markets on which growth depends are systems of rules backed by public power as well as social norms. Wise policies are needed to ensure that the fruits of growth are widely shared. When these conditions are satisfied, market economies tend to generate not only broad improvements in living standards but also growing middle classes that the poor can hope to enter.

Market-driven economic growth tends therefore to support constitutional governance in its modern form, combining elements of majoritarian democracy with protected individual rights and liberties. more>

National Security: Keeping Our Edge

By James Manyika, William H. McRaven and Adam Segal – The United States leads the world in innovation, research, and technology development. Since World War II, the new markets, industries, companies, and military capabilities that emerged from the country’s science and technology commitment have combined to make the United States the most secure and economically prosperous nation on earth.

This seventy-year strength arose from the expansion of economic opportunities at home through substantial investments in education and infrastructure, unmatched innovation and talent ecosystems, and the opportunities and competition created by the opening of new markets and the global expansion of trade.

This time there is no Sputnik satellite circling the earth to catalyze a response, but the United States faces a convergence of forces that equally threaten its economic and national security. First, the pace of innovation globally has accelerated, and it is more disruptive and transformative to industries, economies, and societies. Second, many advanced technologies necessary for national security are developed in the private sector by firms that design and build them via complex supply chains that span the globe; these technologies are then deployed in global markets.

The capacities and vulnerabilities of the manufacturing base are far more complex than in previous eras, and the ability of the U.S. Department of Defense (DOD) to control manufacturing-base activity using traditional policy means has been greatly reduced. Third, China, now the world’s second-largest economy, is both a U.S. economic partner and a strategic competitor, and it constitutes a different type of challenger.

Tightly interconnected with the United States, China is launching government-led investments, increasing its numbers of science and engineering graduates, and mobilizing large pools of data and global technology companies in pursuit of ambitious economic and strategic goals.

The United States has had a time-tested playbook for technological competition. It invests in basic research and development (R&D), making discoveries that radically change understanding of existing scientific concepts and serve as springs for later-stage development activities in private industry and government.

It trains and nurtures science, technology, engineering, and mathematics (STEM) talent at home, and it attracts and retains the world’s best students and practitioners. It wins new markets abroad and links emerging technology ecosystems to domestic innovations through trade relationships and alliances. And it converts new technological advances into military capabilities faster than its potential adversaries.

Erosion in the country’s leadership in any of these steps that drive and diffuse technological advances would warrant a powerful reply. However, the United States faces a critical inflection point in all of them. more>

Economics Can’t Explain Why Inequality Decreases

A problem with Piketty’s explanation
By Peter Turchin – In September I went to an international conference in Vienna, Austria, The Haves and the Have Nots: Exploring the Global History of Wealth and Income Inequality. One thing I learned at the conference is that, apparently, economists don’t really know why inequality increases and decreases. Especially, why it decreases.

Let’s start with Thomas Piketty, since Capital in the Twenty First Century is currently the “bible” (or should I say “Das Kapital”?) of inequality scholars.

Piketty provides a good explanation of why inequality increases. It’s good not in the sense that everybody agrees with it, but in the sense of being good science: a general mechanism that is supported by mathematics and by data.

So far so good. But how does Piketty explain the decline of inequality during the middle of the twentieth century? It was a result of unique circumstances—two destructive world wars and the Great Depression. In other words, and forgive me for crudeness, shit happens.

This is not a particularly satisfactory conclusion. Of course, it’s possible that the general trend of inequality is always up, except for random exogenous events that knock it down once in a while. So devastating wars destroy property, and by making the wealthy poorer reduce inequality. This is one of the inequality-reducing forces that Piketty mentions several times in his book.

To me such exogenous explanations are not satisfactory. My intuition (which I understand may not be shared by all) is that when inequality gets too high, there are forces that bring it down. In other words, to some degree it’s a regulatory process, and that’s why we don’t see truly extreme forms of inequality (when one person owns everything).

In Piketty’s view, the only reason we don’t see such extremes is because some kind of random event always intervenes before we get to it. more>

Are wages rising, falling, or stagnating?

By Richard V. Reeves, Christopher Pulliam, and Ashley Schobert – What is really happening to wages in America?

Over the past 12 months, average hourly wages rose 3.2 percent, according to the latest jobs report from the Bureau of Labor Statistics. But the longer-term story is contested.

Many analysts and commentators lament the situation of stagnating wages, while others celebrate wage growth.

To take just two of hundreds of examples, our colleagues in the Hamilton Project here at Brookings report “long-run wage stagnation for lower-wage workers”, while Michael Strain over at AEI writes that “the wages of a typical worker have increased by 32% over the past three decades. That’s a significant increase in purchasing power”. Though we would be remiss if we did not point out that this corresponds to less than a one percent increase per year.

The honest but boring answer to the question of what is happening to wages is: It depends. Specifically, it depends on how you measure it.

As so often, methodology really, really, really matters.

In the case of wage growth, four analytical decisions bear heavily on the results: which time period, which deflator, which workers (by gender), and which workers (in terms of position). more>

What’s Elizabeth Warren’s wealth tax worth?

By Isabel V. Sawhill and Christopher Pulliam – On both sides of the Atlantic, economic inequality has rocketed up the political agenda and inspired a new wave of populism. Wealth inequality is high and rising in the UK and staggeringly so in the US. The top 1% of American households now have more wealth than the bottom 90%. In the UK, the top 10% holds over half the wealth. The richest 400 individuals in the US average a net worth of $7.2 billion.

How did we get to this point? As Thomas Piketty, in his book Capital, famously argued, a capitalist economy left to its own devices will tend to produce not just inequality but ever-rising inequality of wealth – and the income derived from wealth. The main reason is because the returns earned on assets such as stocks and bonds normally exceed the growth of wages.

Imagine an economy with one capitalist and one wage earner. If the annual rate of return to financial assets is, say, 3%, but wages are only growing by 2%, more and more income ends up in the hands of the capitalist. Wealth then begets more wealth as the capitalist, not needing to spend all of his added income, adds to his existing wealth and reaps ever-growing income from that wealth. Unless a war or other shock destroys his wealth (think depression or the devastation in Europe after the Second World War), or government decides to tax it away, we end up with the rise in wealth inequality that we are now seeing in many rich countries – the US in particular.

There is something deeply disturbing about Piketty’s work. If one takes his thesis seriously, it means that the inequality of wealth and its corollary, income inequality, along with their continued growth, is the new normal. They are baked into a capitalist economy.

Of course, some financial capital gets invested in productive assets that help the economy grow. But productive investment and growth have slowed in recent decades, making it hard to argue that the rise in wealth at the top has benefited everyone. In the meantime, the accumulation of wealth in high-income households is one reason that income inequality is rising so sharply at the very top. While the richest 20% of US households, which benefit from a lot of human capital but not a lot of wealth, saw their market incomes rise by 96% between 1979 and 2016, the top 1% – which receives far more of their income from wealth – saw their incomes rise by a staggering 219%.

In short, growing wealth inequality spawns growing income inequality, so if we care about the latter, we cannot focus only on redistributing income. We need to tackle the accumulation of wealth as well.

What to do? Senator Elizabeth Warren, a serious contender for the US presidency, has proposed a wealth tax. more>