Wednesday, April 4, 2018

Where This is Coming From, The Facts, and Simon and Garfunkel on the real problem...

As you readers should absolutely expect (and, at this point, be unrattled by) -- based on the headlines of the past 18 hours or so -- Dow futures are pointing to a 500 point decline at this morning's open. We'll put a video commentary together a little later this morning.

In the meantime, here's something to help you understand where this all is coming from:

Peter Navarro -- the UC Irvine Business Professor -- was a most curious pick for White House trade adviser from the get go. I mean, in your wildest dreams would the author of the book bearing this cover find himself consulting the leadership of the nation that the world's reserve currency calls home?

Years ago I would watch Larry Kudlow's (ironically, the recently appointed -- yet eerily silent since -- director of the President's Economic Counsel) evening show on CNBC. Every once in awhile Larry would bring in Peter Navarro as the antagonist to debate what he believed to be the merits of protectionism and xenophobia. Such a show needs to spice things up when it can, even when it means getting extreme  silly. And "silly" in my view aptly describes the arguments Peter would proffer. He was of course utterly outmatched by Larry, by other guests, and, most importantly, by any data that were presented. 

Folks like Navarro conveniently twist the evolution of (movement within) the labor market due to the advancement in technology into some utterly unsupported notion that the waning number of workers in the developed-world manufacturing industry has to do virtually entirely with offshoring. A mere glance at the actual data prove otherwise. 

Speaking of which, here's our chart of weekly jobless claims with a square enclosing the period since Navarro's book (subtitle reads "One Job Lost at a Time" ) was published:

And here's the U.S. Unemployment Rate:

Here's Navarro in an interview yesterday:
 "Everybody needs to relax," Navarro told CNBC. Trump's trade policy is "good for the market," he insisted, adding: "I teach that stuff. I mean, let's remember – if anybody knows what goes wrong with these models, it's the guy who knows how to teach them."

And here's Simon and Garfunkel on the root of the problem:
"A man hears what we wants to hear and disregards the rest..."

I thought about cutting and pasting a few excerpts from the CNBC article featured below, but there's so much truth offered by the featured economists (from both sides of the political aisle -- and many of them "teach that stuff" [assuming that's as important as Peter suggests it is (I'm doubtful)] -- by the way) that I figured I'd just copy the whole thing (be sure to read the last line):

Peter Navarro says Trump’s trade policies are ‘good for the market,’ but economists aren’t buying it
White House aide Peter Navarro insists that President Trump's trade policies will positively impact the market.

But some of his colleagues said some of Navarro's comments on the U.S. economy were simply wrong.
John Harwood | @johnjharwoodPublished 13 Hours Ago Updated 12 Hours

As markets plummeted Monday, White House aide Peter Navarro insisted fears of a trade war and President Donald Trump's attacks on Amazon were all wrong.

"Everybody needs to relax," Navarro told CNBC. Trump's trade policy is "good for the market," he insisted, adding: "I teach that stuff. I mean, let's remember – if anybody knows what goes wrong with these models, it's the guy who knows how to teach them."

Navarro taught at the University of California-Irvine before coming to the White House. But considering his comments, fellow economists question his grasp of the curriculum.

Navarro made many assertions to my CNBC colleague Kelly Evans. Some – like calling Trump and his trade representative Robert Lighthizer as "the two best negotiators in America" – represent simple flattery of his bosses.

More significant were economic assessments that his colleagues of both parties call simply wrong.

For example: "I don't see any inflation to speak of in this economy, and a lot of the reason is things like the president's tax cuts."

Fellow economists not only see inflation ticking up, they say Trump's tax cuts will increase it further.

"Inflation is low, but accelerating," explained Mark Zandi of Moody's.

The core Consumer Price Index has risen 2.5 percent on an annualized basis over the last six months and 3.1 percent over the last three months.

Moreover, "it's not current inflation that matters, it's expectations of higher future inflation, added Douglas Holtz-Eakin, a Republican economist who formerly headed the Congressional Budget Office. Economic analysts agree that fiscal stimulus from tax cuts and higher, deficit-financed government spending will increase inflationary pressures.

That's why the Fed has signaled the possibility of three more interest rate hikes this year. "I was a little puzzled," Navarro complained; he sees "moderating inflationary pressures due to productivity growth and supply-side factors."

Navarro described the economy as "hitting on all cylinders because of President Trump's economic policies." Specifically, he cited rising investment spurred by tax cuts.

"Where's the extra investment? Not in the data," wondered Jared Bernstein, an opponent of the tax cuts at the Center on Budget and Policy Priorities. Holtz-Eakin, a tax-cut backer, agreed "the evidence of success is just not in."

Former Obama economic adviser Jason Furman cited government statistics showing overall business investment has risen only in one sector: oil. That, he said, is mostly due to rising prices.

Navarro further argued that Trump's get-tough policies will reduce the trade deficit, attract foreign investment and create jobs. On this point, fellow economists are withering.

"It's ludicrous," said former Obama adviser Austan Goolsbee.

"We are near full employment — what jobs?" asked Holtz-Eakin.

"He seems to misunderstand basic national accounting," added Kyle Pomerleau of the conservative Tax Foundation. Like foreign financing of U.S. budget deficits, foreign investment is itself effectively an import; attracting more of both makes the trade deficit go up.

So does increasing the purchasing power of U.S. consumers who buy products made overseas. In the strong 2017 economy that Trump loves to boast about, the U.S. trade deficit reached its highest level since 2008.

Reiterating Trump's vow to scrap the North American Free Trade Agreement unless Canada and Mexico give better terms, Navarro mocked promises of growth and jobs before its enactment.

"What we got," he concluded, "was hell for American workers and hell for the American manufacturers."

That line works better among voters at political rallies than among economists.

"The evidence is that NAFTA clearly increased jobs and GDP," said Kent Smetters, a former economist for President George W. Bush who now teaches at the Wharton School. In the five years under NAFTA, noted Princeton economist and ex-Obama adviser Alan Krueger, the economy boomed and income inequality declined.

Calling the trade crackdown evidence that Trump "has the back of American businesses and workers," Navarro dismissed the risk of escalation. "I don't think this is going to be action/response, action/response," he said.

Yet China and the European Union have responded, as the Trump administration prepares to specify further tariffs. Corporate executives and investors have both made clear they don't want Trump to have their back this way.

"When Trump takes an economic punch at China and the rest of the world, he simply invites a punch back," Zandi said. A Wharton analysis, Smetters noted, showed that a trade war "would more than eliminate any potential benefits from the tax cut."

As it happens, financial markets on Tuesday took Navarro's recommendation to relax. The Dow Jones industrial average reversed most of Monday's decline.

But Navarro's economist colleagues don't see affirmation for his advice to Trump on, say, the interactions between tax cuts, tariffs, and trade deficits.

"99.999999% of economists agree," Furman said. "The rest are Peter Navarro."

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