By Michael Every of Rabobank
"Is our presidents and economists learning?"
President George W. Bush once bewailed: “Rarely is the question asked: ‘Is our children learning?’” With radical ideas thrown around by Harris and Trump pre-election, economists are asking the same about presidents. However, presidents can rightly ask it about economists.
Trump just underlined his protectionist plans for "ultra-low taxes and regulations" zones, appointing a "manufacturing ambassador” to persuade firms to relocate to the US, and that “American workers will no longer be worried about losing your jobs to foreign nations. Instead, foreign nations will be worried about losing their jobs to America.” Economists are appalled. Yet they have no problems when an emerging market sets up low-tax and regulation zones and lobbies Western firms to close factories and move production there, with a loss of jobs. This is celebrated as “FDI”. Of course, economists say one case involves higher prices, and the other lower prices. In short, the morality of targeting other states’ industries and jobs revolves around price, not value (or values). That’s cold, hard realpolitik logic for the liberal humanist West, which never applies it to how one treats one’s own family: politically, the issue is then how one defines ‘family’.
Yet protectionism was staggeringly successful for the US in the past; and Germany; and Europe; Japan; South Korea; and China - all of them used it to climb the development ladder. To presume all you get from tariffs is inflation is to argue the US should today be solely the seller of commodities it was in the 18th century; Europe should be buying British goods and selling them food as the UK industrialised first; and Japan, South Korea, and China should be specialists in rice, not tech. You can see how ridiculous these arguments are, and we are all better off that they aren’t, even if via protectionism. Yes, tariffs can be a “tax on consumers” if you assume nothing changes but price. However, if they generate higher or better-paid employment, and increase production to attain economies of scale, tariffs can be moderately inflationary and a major stimulus to industrial growth.
Today we get a Harris speech to put flesh on the fish-like skeleton of her economic plan: the same Biden-era strategic US tariffs on China(?) - in which case, the ‘strategic materials fallacy’ says far more controls will follow, like the ban on Chinese EV software, a de facto ban on Chinese EVs; $25,000 for first-time homebuyers - when tried in Australia, this pushed up house prices by the same amount; a $50,000 tax benefit for SMEs; and actions against “price gouging”.
On prices, economists are again appalled. The same people who think lower prices are better than high, have no problems if concentrated corporate power ensures higher prices become embedded because they conveniently assume oligopolies can’t happen absent government. Of course, economic history, and radical leftwing thinkers like Adam Smith, are clear that private oligopolies do happen, and governments can break them up, and prices fall when they do. However, anti-trust is a slow, contested process in a democracy. The faster route is direct price controls, as also advocated by Trump on credit card rates no higher than 10%. Such Diocletian methods could mean goods shortages that many emerging markets are used to experiencing.
We are days away from the US east coast port strike call that could paralyze logistics. Economists’ Q4 consensus forecasts don’t show screwed-up goods availability and pricing, and markets think we solved our supply chain issues when we just got lower demand for goods.
One of the US Navy’s few oilers just ran aground. This means a key part of the hegemonic US fleet can’t refuel at sea: do the military math vs. rising geopolitical tensions, and as the US has already lost effective control of the Red Sea and Suez Canal. Worse, new oilers won’t be built for years due to low US capacity and high US debt and bureaucracy.
Middle East tensions will remain high. Israel has shifted strategy against Hezbollah and will continue to strike it until the militia retreats from southern Lebanon and declares it will stop firing missiles. While neither side wants war, the logic flows in only that direction. Israel will hit harder until Hezbollah buckles, which leads to war; Hezbollah and/or Iran may respond on a scale that triggers war – indeed at time of writing, warning alarms just went off in Tel Aviv; and if Hezbollah collapses, it opens the curtains on Israel vs. Iran.
The West has no leadership on this issue. Europe is divided, as usual, the UK PM just showed his geopolitical gravitas by declaring that Hamas must “release the sausages”, and the US is AWOL due to the looming election. The US also still has an inverse Vegetius stance: an unnamed senior official just stated, “I can’t recall, at least in recent memory, a period in which an escalation or intensification led to a fundamental de-escalation and led to profound stabilization of the situation.” Tell that to Putin, or those advising Ukraine, and how about Israel destroying Iraq’s nuclear program in 1981? Indeed, the US just accepting BRICS-member the UAE as a major defense partner might be a precursor for what happens with the Saudis. In which case, Israel hitting Hezbollah hard, rather than shaking its hand, has likely been a key motivator for a shift in some regional states’ geostrategy/economic decision-making.
Markets "isn’t learning" anything about China either. Bloomberg describes the PBOC as unleashing “one of the most daring policy campaigns in decades.” The 20bps, 0.5% RRR, and mortgage rate cuts that have all failed to help so far? The share buybacks and funds to brokers vs. collateral of unwanted stocks to help buy other unwanted stocks? Markets who don’t read Marx isn’t learning “fictitious” vs. “productive” capital, and that only the latter matters to Beijing. With the US banning its EVs and talking tariffs, the US Navy down an oiler, and the Middle East aflame, Chinese geostrategists would of course argue their priority now is a stock rally: sorry, I mean American. In reality, China just fired a dummy ICBM into the Pacific, making even financial market headlines for a moment. Yet if the Fed keeps thinking about fictitious things, not US Navy oilers, a Chinese strategy could, hypothetically, be real stimulus which pushes up commodity prices and US inflation again.
As all this all plays out, Bloomberg is seeing chatter of not just another Fed 50bps cut, meaning in weeks we’ve moved from 50/50 to 50-50, but of emergency intra-meeting cuts! Some people isn’t learning about politics, or economic statecraft, or logistics, or oilers, or geopolitics, or the 1970s, it seems.
Allow me to finish with another Bushism more logical than the above Bloombergism: "There's an old saying in Tennessee—I know it's in Texas, probably in Tennessee—that says, 'Fool me once, shame on...shame on you. Fool me—you can't get fooled again.'"
Yes, you can, it seems.
