World Trade Coming to a Standstill of its Own Accord

In spite of the constant exhortation by experts such as Christine Lagarde, IMF chief, to the contrary, world trade (globalization) is slowing down, coming to a halt, as this article from today’s New York Times clearly indicates. Perhaps, in this case, the people whom it affects most knows best.

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By BINYAMIN APPELBAUM, October 30, 2016

The constant flow of goods from Asia to the United States was briefly interrupted last month after Hanjin, the South Korean shipping line, filed for bankruptcy, stranding several dozen of its cargo ships on the high seas.

It was a moment that made literal the stagnation of globalization.

The growth of trade among nations is among the most consequential and controversial economic developments of recent decades. Yet despite the noisy debates, which have reached new heights during this presidential campaign, it is a little-noticed fact that trade is no longer rising. The volume of global trade was flat in the first quarter of 2016, then fell by 0.8 percent in the second quarter, according to statisticians in the Netherlands, which happens to keep the best data.

The United States is no exception to the broader trend. The total value of American imports and exports fell by more than $200 billion last year. Through the first nine months of 2016, trade fell by an additional $470 billion.

It is the first time since World War II that trade with other nations has declined during a period of economic growth.

Sluggish global economic growth is both a cause and a result of the slowdown. In better times, prosperity increased trade and trade increased prosperity. Now the wheel is turning in the opposite direction. Reduced consumption and investment are dragging on trade, which is slowing growth.

But there are also signs that the slowdown is becoming structural. Developed nations appear to be backing away from globalization.

The World Trade Organization’s most recent round of global trade talks ended in failure last year. The Trans-Pacific Partnership, an attempt to forge a regional agreement among Pacific Rim nations, also is foundering. It is opposed by both major-party American presidential candidates. Meanwhile, new barriers are rising. Britain is leaving the European Union. The World Trade Organization said in July that its members had put in place more than 2,100 new restrictions on trade since 2008.

“Curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades,” Christine Lagarde, managing director of the International Monetary Fund, wrote in a recent call for nations to renew their commitment to trade.

Against the tide, the European Union and Canada signed a new trade deal on Sunday.

It may be hard, however, to muster public enthusiasm in the United States and other developed nations. The benefits of globalization have accrued disproportionately to the wealthy, while the costs have fallen on displaced workers, and governments have failed to ease their pain.

The Walmart revolution is over. During the 1990s, global trade grew more than twice as fast as the global economy. Europe united. China became a factory town. Tariffs came down. Transportation costs plummeted. It was the Walmart Era. But those changes have played out. Europe is fraying around the edges; low tariffs and transportation costs cannot get much lower.  And China’s role in the global economy is changing. The country is making more of what it consumes,and consuming more of what it makes. In addition, China’s maturing industrial sector increasingly makes its own parts. The International Monetary Fund reported last year that the share of imported components in products “Made in China” has fallen to 35 percent from 60 percent in the 1990s. The result: The I.M.F.  study calculated that a 1 percent increase in global growth increased trade volumes by 2.5 percent in the 1990s, while in recent years, the same growth has increased trade by just 0.7 percent.

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Hanjin, like other big shipping companies, bet that global trade would continue to expand rapidly. In 2009, the world’s cargo lines had enough room to carry 12.1 million of the standardized shipping containers that have played a crucial, if quiet, role in the rise of global trade. By last year, they had room for 19.9 million — much of it unneeded.

India is not China redux. Most trade flows among developed nations. The McKinsey Global Institute calculates that 15 countries account for roughly 63 percent of the global traffic in goods and services, and for an even larger share of financial investment. China joined this club the old-fashioned way: It used factories to build a middle class. But the automation of factory work is making it harder for other nations to follow. Dani Rodrik, a Harvard economist, calculates that manufacturing employment in India and other developing nations has already peaked, a phenomenon he calls premature deindustrialization. The weakness of the global economy is exacerbating the trend. Infrastructure investment by multinational corporations declined for the third straight year in 2015, according to the United Nations. It predicts a further decline this year. But even if growth rebounds, automation reduces the incentives to invest in the low-labor-cost developing world, and it reduces the benefits of such investments for the residents of developing countries.

The political reaction is global, too. The economist Branko Milanovic published a chart in 2012 that is sometimes called the elephant chart, because there is a certain resemblance. It shows real incomes rose significantly for most of the world’s population between 1988 and 2008, but not for most residents of the United States and other developed countries. The chart is often presented as a depiction of the consequences of globalization. The reality is more complicated, but perception is undeniable. Voters in developed nations increasingly view themselves as the victims of trade with the developing world — and a backlash is brewing.

Donald J. Trump’s presidential campaign is an obvious manifestation, as is Hillary Clinton’s backing off from her support of the Trans-Pacific Partnership trade deal. A study published in April found that voters in congressional districts hit hardest by job losses are more likely to reject moderate candidates, turning instead to candidates who take more extreme positions.

Economic stagnation is turning European voters against trade, too.

Professor Rodrik said that proponents of free trade were guilty of overstating the benefits and understating the costs. “Because they failed to provide those distinctions and caveats, now trade gets tarred with all kinds of ills even when it’s not deserved,” he said. “If the demagogues and nativists making nonsensical claims about trade are getting a hearing, it is trade’s cheerleaders that deserve some of the blame.”

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Globalization Here and in China, Part Three

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  Traditional China

By ANDREW BROWN, October 22, 2016

In China, trade helped to lift hundreds of millions out of poverty. In the U.S., it is one factor that has contributed to widening wealth disparities and four decades of stagnant wages for the middle classes. Technology is another reason. While both are disruptive, argues Edward Alden, a senior fellow at the Council on Foreign Relations in his forthcoming book “Failure to Adjust,” there is a crucial difference: “Those who lose their jobs to computers are likely to find new ones, while those who lose their jobs to imports are much less likely to do so.”

The real problem is not globalization, argues Mr. Alden, but the “irresponsible” political response by the U.S. government to those whose lives it upends. “Washington has left most Americans to fend for themselves,” he writes.

Mr. Trump’s trade proposals, if enacted, would almost certainly spark a trade war, cutting deeply into the profits of U.S. companies that do well in China, such as Boeing, General Motors, Apple and General Electric. Trade with China supports high-paid jobs in the U.S. for software engineers, marketers, advertisers, retailers, shippers and insurers. If a trade war precipitated a pullout of Chinese capital from American bond markets, it could raise interest rates and throw the economy into recession.

Trade friction, too, would likely harden the Chinese.

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Beijing is more jealously guarding its domestic markets, and a sharp turn toward authoritarianism under Mr. Xi is reinforcing the trend. New national security laws are driving out U.S. tech companies. Anti-Americanism is on the rise. A video recently released by the Supreme People’s Procuratorate warned of the “dark shadow of the Stars and Stripes.”

Moreover, wealth disparities in China have grown even more pronounced than in the U.S. Mr. Xi faces an influential Maoist fringe convinced that Deng’s entire economic “reform and opening” experiment betrayed the workers in whose name the Communist Party rules.

For both countries, the painful costs of globalization are stubborn realities, and history suggests no easy escape. Even now, after decades of fighting decline, Lowell is still not fully back. Cambodian and other immigrant communities have brought new life, but the old Boott Mills, where New England farm girls once toiled, is now a cultural heritage site for drawing tourists, and another old industrial landmark serves as a business incubator.

mass-moca-10  richard-nonas-no-water-featuredMassachusetts Museum of Contemporary Arts today in a converted textile mill

Lowell’s city fathers, says Mr. Forrant, the history professor, like to tell an optimistic story of “rainbows and unicorns.” But there is another, darker narrative—of aging factory workers cast aside. They are out of place in a renovated downtown colonized by artists, movie producers and tech entrepreneurs.

Dongguan’s prospects are just as ambiguous. Gong Jiayong, vice president of the local branch of the China Center of Information Industry Development, ticks off a list of priorities to turn around Dongguan’s fortunes that would be familiar to city authorities anywhere in the U.S.: build brands, deploy robots, boost spending on industrial research and development. “We’re moving from copying to inventing,” he says.

In a way that neither city might acknowledge, each has a stake in the success of the other. Over the years, expanding trade and investment between the U.S. and China provided the ballast for the world’s most consequential relationship. We know where the alternatives can lead. In the 1930s, America turned inward and threw up barriers to trade. Global conflict rapidly followed.

This is the conclusion of a three-part article

Globalization Here and in China, Part Two

  img_4632_a         Detroit today

This is Part Two of an article from the New York Times on the comparative effects of globalization here in the US and in China.

By ANDREW BROWN, October 22, 2016

Deindustrialization in Dongguan looks very different from its historical counterpart in New England or in the smokestack cities of the American Midwest and South, which have emerged as Mr. Trump’s political base. There, communities disintegrate, skilled factory workers bag groceries at Wal-Mart, and many of the unemployed succumb to the opiates plague. In Dongguan, blue-collar armies simply melt back into the countryside, and many are able to pick up work in urban areas closer to home.

There are jobs available in China’s emerging services sector. Even in depressed Dongguan, employment agencies advertise positions at $1,000 a month for motorcycle couriers who deliver office lunches and packages. And, so far at least, the Chinese public’s faith in their government’s economic management remains solid. Almost 90% think that the economy is in good shape, according to a recent Pew survey, and 60% believe that their country’s involvement in the global economy is a good thing.

But Mr. Xi sees the clouds gathering. He speaks with a shrug of the “new normal” of slower growth, and his assertive nationalism—he popped up on television recently in combat fatigues and has used reefs in the South China Sea to create military-style fortifications—betrays deep insecurities.

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Mr. Xi has a daunting problem on his hands: The consumer economy isn’t expanding fast enough to make up for lost manufacturing. GDP growth has been slowing every year since 2011. E-commerce may be booming, but bricks-and-mortar shops are shedding staff. Mass layoffs loom in “zombie” state enterprises that crank out products in massive oversupply, like steel rods and cement, and survive only on government-directed handouts. . .

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Premier Li Keqiang is pumping money into high-tech manufacturing, like semiconductors, while promoting “mass entrepreneurship and innovation” to create jobs; 4.4 million startups got off the ground last year, with generous government help. Daniel Lin, a serial entrepreneur, runs a business incubator with a $7.5 million grant from the Dongguan government. Its first candidate: a team promoting a smart bra that monitors for cancer.

There is no knowing whether such ventures will ever succeed. Meanwhile, Beijing is keeping the economy buoyant by inflating an already massive property bubble and adding to a mountain of national debt. . .

In this context, Mr. Trump’s anti-trade agenda is incendiary. It is also too late. The damage to the American workforce is done. Slapping a 45% tariff on Chinese exports to the U.S., as Mr. Trump has threatened to do, won’t return jobs to places like Lowell, which is the ostensible reasoning behind his plan. Rather, it will hasten the outflow of Chinese jobs to lower-cost destinations such as Cambodia and Myanmar. Mr. Trump’s promises to bring back jobs, says Robert Forrant, a former factory machinist who is now a history professor at the University of Massachusetts Lowell, are “beyond ludicrous.”

America largely wrote the rules for global trade after World War II. Successive U.S. administrations treated trade almost as a gift that they bestowed on the world; free movement of goods and capital would bind the U.S. more closely to its friends and allies in a liberal global order. This generosity, however, failed to take account of China’s game-changing potential.

Between 1991 and 2007—the 16-year period when Dongguan was on a roll—the value of U.S. goods imported from China increased by a staggering 1,156%, according to research by the economists David H. Autor, David Horn and Gordon H. Hanson. U.S. exports to China grew much less.

To be continued

Globalization Here and in China, Part One

This fascinating article, comparing the effects of globalization in the US and in China, which have close parallels and wide differences, appeared in last Saturday/Sunday’s Wall Street Journal.  This blog has been keeping close tabs on globalization in America but it has not occurred to us to look at its effects abroad until we came across this piece. We can reach a better understanding of our own situation by observing what occurs in other countries.

Because of the length of this article we are subdividing it into three parts, the first part of which we present here:

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 Textile mills of Lowell, Massachusetts in the 19th century

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By ANDREW BROWN, October 22, 2016

Just about a century ago, the Boston merchants who had helped to build the textile town of Lowell, Mass., into the cradle of the American industrial revolution started pulling out. First, the spindles and looms shifted to the low-wage South. A half-century later, they migrated to the “miracle” economies of East Asia.

The Youngor Textiles Factory.

The Youngor Textiles Factory, in Yinzhou District, Ningbo. Youngor is a major textiles and apparel brand in China.

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In the 1990s, much of the global textile industry relocated yet again, to cities like Dongguan in southern China, the world’s factory floor. Now, as Chinese wages soar, textiles and apparel along with other labor-intensive export industries are on the move once more, this time to inland China and, increasingly, to fast-growing regional rivals such as Vietnam and Bangladesh.

Globalization is shortening these cycles. Technology accelerates the churn. Like Lowell and a more recent procession of U.S. manufacturing cities, Dongguan is emptying out, and the economic and social shocks are triggering a political earthquake in China just as they are in the U.S.

The political dynamics in the two countries are very different, of course, but there are striking parallels. The most obvious are the wrenching dislocations created by a world of impatient capital, footloose labor and intricate cross-border supply chains. Vulnerable workers in both countries are feeling the pinch. . .

Dongguan’s rise and fall would be familiar to any student of New England economic history. Lowell’s heyday as an industrial center lasted from the 1820s to the 1920s. Situated at the confluence of the Merrimack and Concord Rivers, the city was the manufacturing wonder of its day. The poet John Greenleaf Whittier called it “a city, springing up, like the enchanted palaces of the Arabian Tales.” It was organized around boardinghouse mills, which provided decent-paying jobs initially for New England farm girls, along with a place to stay. They operated spinning machines based on a design stolen from Britain.

Dongguan has followed a similar trajectory, only on an unimaginably vaster scale. Once a rural backwater in the Pearl River delta, it grew into an industrial colossus by drawing on a national army of 130 million or so migrant rural workers, who bunked together in cramped factory dormitories. Industries that once flourished in New England eventually ended up here, along with their tools and technology. Dongguan was Lowell (“Spindle City”), Waterbury (“Brass City”), Leominster (“Plastics City”), Gardner (“Chair City”) and Holyoke (“Paper City”) all rolled into one.

Few in America foresaw this wholesale devouring of the country’s manufacturing heartland. The threat arose from empty rice paddies. Dongguan, writes the journalist (and former Wall Street Journal reporter) Leslie T. Chang in her book “Factory Girls,” was “a place without memory.” Today, it is mimicking Lowell in another way, as its prosperity fast fades away.

At its peak in 2007, says Lin Jiang, an economics professor at Sun Yat-sen University’s Lingnan College, Dongguan’s population reached 12 million. (The official census data is unreliable.) Then the global financial crisis struck, and China’s exports dried up. Dongguan has never recovered. Its population has shrunk to just seven million, Mr. Lin estimates, a loss equal to the combined populations of Chicago and Houston.

The greatest manufacturing boom in history is fizzling, dragging down national economic growth. Henry Cui, the vice president of operations at People Group, a Taiwanese-owned shoe maker in Dongguan, says that his industry is fragmenting: Sneaker production is shifting to Vietnam and Indonesia, high heels to Brazil, ankle booties to Spain and Portugal. Margins are already wafer thin, and his workers are demanding up to 15% annual pay increases. Meanwhile, Mr. Cui’s customers on High Streets across the U.K. have been clamoring for discounts since the Brexit vote bashed down sterling. “If you go cheaper and cheaper, eventually you die,” he says.

To be continued

Making Trade Work for Working Americans

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Here is a clear and powerful answer to the present-day dilemma of international trade pacts which, while being strongly promoted by the business world, have caused such havoc among American working men. William A. Galston, writing for October 26 Wall Street Journal Opinion Section, explores what he rightly considers the most serious challenge for the world economy today: making globalization compatible with social and political stability.

By WILLIAM A. GALSTON, Oct. 25, 2016

In 1997, Harvard economist Dani Rodrik published a prescient book titled “Has Globalization Gone Too Far?” At that time, recall, the “Washington consensus” about the path to prosperity—free trade, free flows of capital, deregulation, and so forth—was riding high. The U.S. economy was booming, jobs were plentiful, and wages were rising across the board. Hundreds of millions of workers in Asia and the European states no longer dominated by the former Soviet Union were on track to integration in the global market.

Despite all this good news, Mr. Rodrik detected a structural problem. Globalization, he wrote, “is exposing a deep fault line between groups who have the skills and mobility to flourish in global markets and those who either don’t have these advantages or perceive the expansion of unregulated markets as inimical to social stability and deeply held norms.” From this diagnosis, he drew a prescription for political leaders: “The most serious challenge for the world economy in the years ahead lies in making globalization compatible with domestic social and political stability” or, more bluntly, “in ensuring that international economic integration does not contribute to domestic social disintegration.”

Mr. Rodrik didn’t oppose globalization 20 years ago, and he doesn’t today. In an article published this month by Project Syndicate, he argued that “we need a better balance between national autonomy and globalization.” This implies, he continued, a better understanding of the relation between economics and politics: “we need to place the requirements of liberal democracy ahead of those of international trade and investment.”

This doesn’t mean surrendering to brain-dead populism, or to the nativism and illiberal authoritarianism that so often accompanies it. Rather, it means coming up with responsible alternatives to both hyperglobalization and the populism it spawns. It may mean adopting policies that corporations oppose in order to broaden public support for an international market economy.

If the established center-left and center-right parties cannot identify and implement these alternatives, they are doomed to irrelevance, and the outlook for market democracies will be dismal.

Hillary Clinton has said that she opposes the current Trans-Pacific Partnership (TPP) as a candidate and would do so as president. We should take her at her word; the American people certainly have. Reversing course on an issue of such importance would destroy her presidency, much as George H.W. Bush’s abandonment of his “Read my lips: no new taxes” pledge undermined his support within his own party. Unless the TPP is endorsed during the lame-duck congressional session, it is dead, at least in its current form.

This need not mean abandoning the good work that the trade representatives from a dozen nations have accomplished over years of painstaking negotiation. Nor need it mean accepting the huge blow to U.S. geopolitical influence in Asia that an outright collapse of this effort would entail.

Instead, it would mean going back to the negotiating table with a focused agenda of modifications that would make the TPP compatible with the interests of working Americans while strengthening the beleaguered pro-trade coalition. Modifying restrictions on national sovereignty such as special panels for settling disputes between governments and investors would be a good start; so would more robust protections against currency manipulation.

In addition, the next administration must be visibly on offense against violations of existing agreements. Foreign governments should not be allowed to subsidize structural overcapacity and force U.S. workers and firms to bear the consequences.

But before any new trade agreements can be approved, the next administration will have to persuade Congress to enact significant new protections for working Americans. Since 2000, millions have lost manufacturing jobs paying $25 per hour plus health and retirement benefits and can replace them only with service-sector jobs without benefits and paying half as much.

To cushion the shock, we need a contributory system of wage insurance that would replace a substantial portion of lost wages during a multiyear transition period. We should also make it possible for affected workers to remain on track for decent retirements, through mechanisms such as public contributions to personal accounts.

Many supporters of the postwar international order fear we are retreating to the economic nationalism that undermined prosperity, democracy and peace during the interwar period. To prevent this disaster, we need a new balance between workers and corporations, between national sovereignty and international institutions—and between market forces and the requisites of democratic stability.

“Like Lions Hunting Zebras”

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You may recall an earlier blog, posted 10/03/2016, entitled “Clawbacks Rarely Draw Blood,” about John Stumpf, former CEO of Wells Fargo Bank, whose bank board required him to forfeit the $41 million they had awarded him, plus his bonus, for having allowed his employees to cheat their customers. The forfeiture is known as a clawback.

As much as Wells Fargo would like to close the chapter on this scandal, those who are investigating it are saying “Not so fast!” as new and ugly evidence of the bank’s malfeasance emerges.

So the story, as told in today’s New York Times, continues : 

 By STACY COWLEY, October 22, 2016

Mexican immigrants who speak little English. Older adults with memory problems. College students opening their first bank accounts. Small-business owners with several lines of credit.

These were some of the customers whom bankers at Wells Fargo, trying to meet steep sales goals and avoid being fired, targeted for unauthorized or unnecessary accounts, according to legal filings and statements from former bank employees.

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“The analogy I use was that it was like lions hunting zebras,” said Kevin Pham, a former Wells Fargo employee in San Jose, Calif., who saw it happening at the branch where he worked. “They would look for the weakest, the ones that would put up the least resistance.”

Wells Fargo would like to close the chapter on the sham account scandal, saying it has changed its policies, replaced its chief executive and refunded $2.6 million to customers. But lawmakers and regulators say they will not let it go that quickly, and emerging evidence that some victims were among the bank’s most vulnerable customers has given them fresh ammunition. . .

At a branch in Scottsdale, Ariz., members of a local Native American community would arrive like clockwork every three months with checks for their share of the community’s casino revenue. It was then, said Ricky M. Hansen Jr., a former branch manager there, that some bankers would try to dupe them into opening unnecessary accounts laden with fees.

In California, it was people with identification cards issued by Mexican consulates. The absence of a Social Security number made it simpler for Wells Fargo employees to open fraudulent accounts in those customers’ names. Wells Fargo is one of the few major banks to permit accounts to be opened without Social Security numbers.

And in Illinois, one former teller described watching in frustration as older customers fell prey.

“We had customers of all ages, but the elderly ones would at times be targeted, because they don’t ask many questions about fees and such,” Brandi Baker, who worked at a branch in Galesburg, Ill., said in an interview. . .

In the Los Angeles area, for instance, college campuses were considered prime spots for employees seeking to rack up new accounts because younger customers had a tendency to trust a banker’s advice.

Athena McDaniel-Watkins, a former teller who worked in and around Los Angeles, said a banker she worked with would take stacks of forms with him on campus visits and encourage busy students to sign the blank papers — he would fill them out later, he told the students.

“So the customer essentially handed the banker a blank check,” Ms. McDaniel-Watkins said. “The banker was then able to list as many accounts under that application as he wanted — or, in many cases, as many as he needed to hit sales goals for that day.”

Steven Curtis, who also worked at several Wells Fargo branches in the Los Angeles area, said that when college students showed up asking for overdraft fees to be waived, bankers would sometimes tell them they could do so only by closing their account and opening a batch of new ones.

 9569b51a44a9d189e7bede453e03f17c     Stage coach hold ups in the old days

The practices in California were also described in a lawsuit the Los Angeles city attorney filed against Wells Fargo in 2015. Among the complaints was that employees specifically sought out Mexican citizens because their identity documents were easier to misuse.

If customers complained, Wells Fargo employees advised them “to ignore the unauthorized fees and letters from collection agencies because the lack of a Social Security number means the debt will not affect them,” the lawsuit said. . .

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Current and former Wells Fargo employees say the problems continued well into this year.

Ashlie Storms, a former banker at a Wells Fargo branch in West Milford, N.J., said she quit her job in August, soon after learning that a banker at another branch had manipulated the accounts of one of Ms. Storms’s regular customers, an older woman with memory issues.

The woman had come to deposit a large check, only to have the banker use it to open new checking and savings accounts without her approval. The next day, the customer and her daughters arrived at Ms. Storms’s branch, confused about where her money had gone and why she could not gain access to it.

“What should have been a five-minute conversation turned into a three-hour complaint to corporate from the customer about the actions this banker decided to take without the customer’s consent,” Ms. Storms said. “The banker was a top producer for our region, always receiving recognition from management for her sales.”

The dynamics varied from branch to branch, former employees said in interviews. There was no systematic corporate policy or ethos of targeting specific groups of customers.

“Bankers wanted the quickest, easiest sale — the low-hanging fruit,” said Mr. Pham, the former Wells Fargo banker in San Jose. “The extreme pressure forced people into it.”

In some places, demographic patterns created distinct openings.

In the Phoenix area, managers gleefully looked forward to the days when the Salt River Pima-Maricopa Indian Community made its quarterly per capita distribution payments, said Mr. Hansen, the former branch manager in Scottsdale.

Members of the Native American community would head straight to the bank with their checks, and employees would encourage them to use the money to open new accounts. . .

Mr. Hansen learned that one enterprising branch manager had invented “per capita day packages,” jammed with five or more bank accounts. Customers would be told that they needed separate accounts for such purposes as traveling, grocery shopping and saving for an emergency.

“They would deposit their money and get hit with fees like crazy, because they got confused about what account they were using,” Mr. Hansen said. “They would use the wrong debit card and overdraw their travel account, and then when they came back three months later, they would lose hundreds of dollars from their next check paying off those fees. . .”

“Philanthropy in Democratic Societies”

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Edited by Rob Reich, Chiara Cordelli and Lucy Bernholz , Chicago 

Today’s Wall Street Journal reviewed an important book by Stanford political scientist Bob Reich and others about the role of private charity in modern democracy. It argues that philanthropy is essential to cover that public assistance which government either is unwilling or incapable of covering. The article also introduces a counter argument that private philanthropy, because of it lack of restriction, can undermine public policy. One of the authors makes the point that philanthropists should be directed as to where they place their money.

The last time that we discussed of the role of philanthropy in democratic capitalism in this blog was in an article by Derek Walker, president of the Ford Foundation, which he titled “Why giving back is not enough.” posted on April 10 of this year. The point he makes is that simply giving millions of dollars to alleviate social ills while either being unable to recognize or unwilling to alter the serious injustices that have caused it, in his words, “Is not enough.” 

    Book review by JOHN FABIAN WITT, Oct. 16, 2016   

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. . . Last December, Facebook founder Mark Zuckerberg and his wife, Priscilla Chan, announced that they intend to donate roughly $40 billion to charity in the coming decades. As of this writing, 154 billionaires have joined the couple in signing Warren Buffett and Bill Gate’s “Giving Pledge”: a promise to give away at least half of their wealth before they die. One estimate put the projected combined total of giving through the Buffett-Gates pledge at a staggering $600 billion.

Most observers applaud such efforts. But a growing band of critics has begun to pose tough questions about such “philanthrocapitalism.”

These skeptics ask: Does philanthropy crowd out public provision? And is this culture of wealth replacing a society of citizens with a new social order of patrons and supplicants?

A new book from Silicon Valley is an important contribution to this emerging debate. . . “Philanthropy in Democratic Societies,” edited by Stanford political scientist Rob Reich, along with Chiara Cordelli and Lucy Bernholz, present[s] a balanced picture of the history, theory and role of philanthropy.

Since the 19th century, when courts immunized charities from lawsuits and authorized new public purposes to which the wealthy could leave their money after death, the United States has had exceptionally generous policies toward philanthropy. The modern tax system embraced philanthropic enterprise, too. In 1913 the federal income tax exempted certain charitable and educational enterprises. Congress soon authorized taxpayers to deduct charitable contributions as well. The exemption and the deduction have been with us ever since.

john_d_rockefeller_by_oscar_white_c1900                  andrew_carnegie_at_skibo_1914_-_project_gutenberg_etext_17976          John D. Rockerfeller and Andrew Carnegie                                                                                                                                                                                       . . . Consider Chicago financier Julius Rosenwald, a clothing merchant who made an early investment in Sears, Roebuck that by the 1920s was worth $150 million. Rosenwald helped build more than 5,000 schools for African-American children in the South. By the time of his death in 1932, 40% of black schoolchildren got their education in a Rosenwald building. Andrew Carnegie built nearly 2,000 public libraries. John D. Rockefeller financed black colleges like Spelman in Atlanta and made key gifts to the University of Chicago and the Rockefeller Institute, now Rockefeller University in New York. In the middle of the 20th century, philanthropists made major contributions to civil-rights organizations, such as the Congress of Racial Equality.

Today philanthropy finances exciting developments in the natural sciences, such as the $500 million brain research center in Seattle financed by Microsoft’s Paul Allen, or the $650 million gift from Ted Stanley of MBI to the Broad Institute in Cambridge, Mass., for research into the genetics of mental illness.

Why have so many breakthrough ideas come through philanthropic interventions? Mr. Reich and his fellow authors offer two interrelated reasons. First, tax-advantaged philanthropy empowers actors who are not governed by the orthodoxies of today’s political majorities. Second, when the tax code allocates public money to private decision makers, they can find new solutions for social problems. . . Philanthropy permits experiments that the public will not underwrite directly. Philanthropic funds, Mr. Reich writes, function as “a democratic society’s risk capital.”

These are powerful arguments—and some would say it is churlish to object. But the volume’s optimistic tone is shadowed by worrisome observations. As Mr. Reich says, quoting Judge Richard Posner, the charitable foundation seems to be a “completely irresponsible institution,” accountable to neither voters nor the market. Chapters by sociologists Aaron Horvath and Walter W. Powell and by the political theorist Eric Beerbohm contend that philanthropy disrupts the public institutions on which our democracy depends. Mr. Beerbohm cites education policy, where even though state funding dwarfs private giving, philanthropists have set the agenda in policy circles.

The boldest idea in the volume comes in the final chapter, where Ms. Cordelli contends that philanthropists should not be allowed personal discretion in selecting the objects of their largess. Because governments fail to live up to their obligations, she argues, philanthropists are obliged to fill the gap, not to pursue their idiosyncratic tastes in giving. . . But Ms. Cordelli’s argument is not so much a critique as a recognition of the need for philanthropy in a world in which basic needs are not being met by political institutions.

Politics is at the heart of the problem. Observers worry that foundations might use their tax-advantaged power to capture the very process by which democracies attempt to regulate them. Congress and the Treasury Department have aimed since the beginning of the modern tax system to deny exemptions and deductions to organizations engaged in partisan politics and propaganda. . .

              reichrobimage      Bob Reich

The vital contribution that Mr. Reich and his fellow authors make is to formulate the key question: Is our democracy strong enough to take advantage of philanthropy’s virtues without succumbing to its vices?

 

The Lion’s Roar III

This is Part III of an article from the Wall Street Journal about how the extraordinary economic growth that occurred during the three decades following the Second World War led people, including economists, to expect it to continue for ever. It hasn’t and it won’t. The present day growth of 1.5%, according to the author (and Thomas Piketty, too, we might add), is normal and should be expected. 

By MARC LEVINSON, Oct. 16, 2016

Government leaders in the 1970s knew, or thought they knew, how to use traditional methods of economic management—adjusting interest rates, taxes and government spending—to restore an economy to health. But when it came to finding a fix for declining productivity growth, their toolbox was embarrassingly empty.

With economic planners and central bankers unable to steady their economies, voters turned sharply to the right. After elections in 1976, Sweden’s Social Democrats found themselves out of office for the first time since the Great Depression. Conservative politicians such as Margaret Thatcher in the U.K., Ronald Reagan in the U.S. and Helmut Kohl in Germany swept into power, promising that freer markets and smaller government would reverse the decline, spur productivity and restore rapid growth.

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But these leaders’ policies—deregulation, privatization, lower tax rates, balanced budgets and rigid rules for monetary policy—proved no more successful at boosting productivity than the statist policies that had preceded them. Some insist that the conservative revolution stimulated an economic renaissance, but the facts say otherwise: Great Britain’s productivity grew far more slowly under Thatcher’s rule than during the miserable 1970s, and Reagan’s supply-side tax cuts brought no productivity improvement at all. Even the few countries that seemed to buck the trend of sluggish productivity growth in the 1970s and 1980s, notably Japan, did so only temporarily. A few years later, they found themselves mired in the same productivity slump as everyone else.

What explains the global downshift in productivity growth? Some of the factors are obvious. Once tens of millions of workers had moved from the farm to the city, they could not do so again. After the drive for universal education in the 1950s and ’60s made it possible for almost everyone in wealthy countries to attend high school and for many to go to university, further improvements in education levels were marginal. Projects to widen and extend expressways didn’t deliver nearly the productivity pop of the initial construction of those roads.

But there is more to the story. Productivity, in historical context, grows in fits and starts. Innovation surely has something to do with it, but we have precious little idea how to stimulate innovation—and no way at all to predict which innovations will lead to higher productivity.

It is tempting to think that we know how to do better, that there is some secret sauce that governments can ladle out to make economies grow faster than the norm. But despite glib talk about “pro-growth” economic policies, productivity growth is something over which governments have very little control. Rapid productivity growth has occurred in countries with low tax rates but also in nations where tax rates were sky-high. Slashing government regulations has unleashed productivity growth at some times and places but undermined it at others. The claim that freer markets and smaller governments are always better for productivity than a larger, more powerful state is not one that can be verified by the data.

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Here is the lesson: What some economists now call “secular stagnation” might better be termed “ordinary performance.” Most of the time, in most economies, incomes increase slowly, and living standards rise bit by bit. The extraordinary experience of the Golden Age left us with the unfortunate legacy of unrealistic expectations about our governments’ ability to deliver jobs, pay raises and steady growth.

Ever since the Golden Age vanished amid the gasoline lines of 1973, political leaders in every wealthy country have insisted that the right policies will bring back those heady days. Voters who have been trained to expect that their leaders can deliver something more than ordinary are likely to find reality disappointing.

Conclusion of article

Mr. Levinson is a former finance and economics editor of the Economist. This essay is adapted from his new book, “An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy,” which will be published on Nov. 8 by Basic Books

The Lion’s Roar II

Part I of this article from the Wall Street Journal explained that the three decades after World War II saw a phenomenal economic growth that was the direct product of two world wars and an intervening horrendous economic collapse. It has been labeled the Golden Age. 

The article continues:

By MARC LEVINSON, Oct. 16, 2016

The Golden Age was the first sustained period of economic growth in most countries since the 1920s. But it was built on far more than just pent-up demand and the stimulus of the postwar baby boom. Unprecedented productivity growth around the world made the Golden Age possible. In the 25 years that ended in 1973, the amount produced in an hour of work roughly doubled in the U.S. and Canada, tripled in Europe and quintupled in Japan.

Many factors played a role in this achievement. The workforce everywhere became vastly more educated. As millions of laborers shifted from tending sheep and hoeing potatoes to working in factories and construction sites, they could create far more economic value. New motorways boosted productivity in the transportation sector by letting truck drivers cover longer distances with larger vehicles. Faster ground transportation made it practical, in turn, for farms and factories to expand to sell not just locally but regionally or nationally, abandoning craft methods in favor of machinery that could produce more goods at lower cost. Six rounds of tariff reductions brought a massive increase in cross-border trade, putting even stronger competitive pressure on manufacturers to become more efficient.

Above all, technological innovation helped to create new products and offered better ways for workers to do their jobs. To take but one example: In the late 1940s, telephones were still rare and costly in Europe and Japan, but by the early 1970s, they were ubiquitous.

imgres-4 images-21Economic performances that at first seemed miraculous were soon seen as normal. The boom went on year after year. Australia, Austria, Denmark, Finland, Germany, Italy, Japan, Norway, Sweden—all enjoyed a quarter-century with only the briefest of economic doldrums.Unemployment, for all practical purposes, was nonexistent. Economic volatility seemed to have been consigned to the dustbin of history. And with experts such as Walter Heller, the head of the Council of Economic Advisers under Presidents Kennedy and Johnson, and Karl Schiller, the West German economy minister from 1966 to 1972, telling the public that wise government management had made recession a thing of the past there was every reason to expect the good times to continue. . .

images-20        Gas lines in 1973

The 1973 oil crisis meant more than just gasoline lines and lowered thermostats. It shocked the world economy. Politicians everywhere responded by putting energy high on their agendas. In the U.S., the crusade for “energy independence” led to energy efficiency standards, the creation of the Strategic Petroleum Reserve, large government investments in solar power and nuclear fusion, and price deregulation. But it wasn’t the price of gasoline that brought the long run of global prosperity to an end. It just diverted attention from a more fundamental problem: Productivity growth had slowed sharply.

The consequences of the productivity bust were severe. Full employment vanished. It would be 24 years before the U.S. unemployment rate would again reach the low levels of late 1973, and the infinitesimal unemployment rates in France, Germany and Japan would never be reached again. Through the rest of the 20th century, the jobless rate in 28 wealthy economies would average nearly 7%.

According to the late British economist Angus Maddison, the world’s overall economic growth rate dropped from 4.9% a year from 1951 through 1973 to an average of just 3.1% for the balance of the century. Economic growth slowed even more swiftly in the wealthy economies. Incomes merely crept ahead, and families’ sense of stability vanished as weak economic growth undermined the financial underpinnings of the welfare state.

End of Part II – To be concluded in a subsequent blog.

Mr. Levinson is a former finance and economics editor of the Economist. This essay is adapted from his new book, “An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy,” which will be published on Nov. 8 by Basic Books.

The Lion’s Roar I

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Entitled “Why the Economy Doesn’t Roar Anymore,” this article from the Wall Street Journal is as good an explanation, in spite of the unrealistic expectations of so many people, of how our economy should normally be operating today as we have found. Thomas Piketty in his book “Capital,” that we rely on as our text on the economy, sets the normal economic growth that we should expect today  at between 1% to 1.5%. It is the distribution of wealth, not its growth, that is the problem that needs fixing.

Because of it length, this article will  be presented in three parts. Here is Part I:

By MARC LEVINSON, Oct. 16, 2016

Whoever sits in the Oval Office next year will swiftly find that faster productivity growth—the key to faster economic growth—isn’t something a president can decree. It might be wiser to accept the truth: The U.S. economy isn’t behaving badly. It is just being ordinary.

Historically, boom times are the exception, not the norm. That isn’t true just in America. Over the past two centuries, per capita incomes in all advanced economies, from Sweden to Japan, have grown at compound rates of around 1.5% to 2% a year. Some memorable years were much better, of course, and many forgettable years were much worse. But these distinctly non-euphoric averages mean that most of the time, over the long sweep of history, people’s incomes typically take about 40 years to double.

That is still significant progress. Looking back over an 80-year lifespan, a typical person in a wealthy country would have seen his or her annual income quadruple. But looking from one year to the next, the improvements in living standards that come from higher incomes are glacial. The data may show that life is getting better, but average families feel no reason to break out the champagne.

Today, that is no longer good enough. Americans expect the economy to be buoyant, not boring. Yet this expectation is shaped not by prosaic economic realities but by a most unusual period in history: the quarter-century that began in the ashes of World War II, when the world economy performed better than at any time before or since.

The victory of the Allies in 1945 was followed by economic chaos. In 1946, France’s farms could produce only 60% as much as they did before the war; many of Germany’s remaining factories were carted off to the Soviet Union as wartime reparations; and anger over price and wage controls—imposed during the war to stanch inflation and channel resources into critical industries—brought strikes across Europe, North America and Japan. Japan and most European countries couldn’t import coal for power plants and grain to feed their people. The future looked bleak.

And then, in the first half of 1948, the fever broke. In January, U.S. officials administering occupied Japan announced a new policy, the “reverse course,” which emphasized rebuilding the economy rather than exacting reparations. In April, President Harry Truman signed the Marshall Plan. In June, U.S., British and French military authorities in occupied Germany proclaimed a new currency, the deutsche mark, ending the Soviet Union’s efforts to cripple the German economy. . .

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[The economy of Western Europe and the US] did more than just grow. It leapt. The quarter-century from 1948 to 1973 was the most striking stretch of economic advance in human history. In the span of a single generation, hundreds of millions of people were lifted from penury to unimagined riches.

bn-qg579_ordina_m_20161014120846American factory workers work on rotary engines for aircraft, circa 1950.

At the start of this extraordinary time, 2 million mules still plowed furrows on U.S. farms, Spanish homemakers needed ration books to buy olive oil, and in Tokyo, an average of three people had to cook, eat, relax and sleep in an area the size of a parking space. Within a few years, tens of millions of families had bought their own homes, high-school education had become universal, and a raft of government social programs had created an unprecedented sense of financial security.

People who had thought themselves condemned to be sharecroppers in the Alabama Cotton Belt or day laborers in the boot heel of Italy found opportunities they could never have imagined. The French called this period les trente glorieuses, the 30 glorious years. Germans spoke of the Wirtschaftswunder, the economic miracle, while the Japanese, more modestly, referred to “the era of high economic growth.” In the English-speaking countries, it has more commonly been called the Golden Age.

To be continued

Mr. Levinson is a former finance and economics editor of the Economist. This essay is adapted from his new book, “An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy,” which will be published on Nov. 8 by Basic Books.