WILL THE U.S. BECOME VENEZUELA? (the writing on the wall)

On February 4^th 1992, the president of Venezuela was nearly assassinated. For the previous two years the president had been struggling against his party, dinosaur politicians and entrenched economic interests, to bring Venezuela into a market economy; to transform the centralized command economy of the past 30 years that was driving the country into financial ruin.

To get rid of President Carlos Andrés Pérez (known popularly as CAP), a few generals and business leaders had put up a patsy to assassinate him in an attempted coup so they could then launch a counter coup to “rescue democracy” restore order and eliminate the patsy. This patsy was chosen because of his misguided ambition, open disdain for democracy, oratory skills and charm; not for his military prowess. It was by that lack of prowess that he failed miserably in the primary objective, assassination, throwing askew all the original plans. President Pérez ordered Lt. Colonel Hugo Chávez arrested and tried, as befits in a country ruled by laws, but the populist spark was lit and the “failure” of his government blamed for the conditions leading to the coup was used politically to lead the country down a path of increased populist fervor. CAP was finally dropped by his own party and impeached. Ensuing events led to the ascendancy of Hugo Chávez to the presidency, under the convenient banner of “socialism,” which would net him an estimated fortune of $1 Billion by the time of his death while he was, effectively, president for life (I document all of this in more detail in one of my books, “La Venezuela Imposible”).

Why should Americans care? What does this have to do with the electoral cycle of 2020? It is critical to understand that what led to the events described above was not a conflict between capitalism and communism or socialism. It was a conflict between leading a country as a market economy or leading it as a command economy. Transforming a country from the legacy systems of monarchies and autocracies to a country embracing a system from the Age of Enlightenment. The reaction against this attempted change led Venezuela to be among the world’s first elected populist autocracies, a new ruling model recognized now as a precursor to modern illiberalism.

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In 1948 the victors of the most devastating war the world has ever known had to reconstruct it, and two models of economic development were at the table, so to speak. As the least scarred nation, the U.S. supplied many of the goods needed and offered its economic development model, racking up a trade surplus which was reinvested around the world as U.S. based multinational corporations boomed.

The opposing economic model offered, communism, attracted many thinkers indulging in its promise of a just society, quicker and more effectively than the contrasting model promoted by the U.S., capitalism. The first model relies on central planning by an elite group of leaders that believe they know and have more information than anyone else and are able to manipulate the production levers of society to make it better. Call it a “Type-A” model, seeking more and more control in order to achieve its goals. The second model is not as satisfying to those who want to control outcomes, because it believes that individual initiatives and behavior will lead to an aggregate of better, spontaneous outcomes for society; and you can’t really predict individual behavior. Call it a “Type-B” model.

As the world sifted the ashes of war, an economist partial to the Type-A model became influential in one of the main organizations focused on Latin America: The U.N. Economic Commission for Latin America and the Caribbean, known in the region as CEPAL. Raúl Prebisch was a promoter of the idea of Import Substitution Industrialization (ISI): placing tariffs on imported goods to promote and protect local industry and create well-paying jobs. A need to choose industries (and companies) follows by the nature of this model, leading to an executive department, the “Promotion Ministry/Office,” most often a cabinet level position with control and influence over the economy; five year development plans with fantastic names ensue. The idea is that the executive knows better and can plan the economy from its vantage point as the leader of the country. Influence peddling, smuggling networks and rampant corruption sprout left and right– as well as a concentration of extremely rich oligarchies well connected to a government protecting the monopoly power of the chosen ones. The consequences are explosive growth of income inequality and economic stagnation, as opportunity is stifled and innovation withers.

The Type-B model, with its foundation on capitalism, has as its primary driver the force of renewal and innovation. Joseph Schumpeter called it “creative destruction” more popularly known as “out with the old, in with the new.” Friedrich Hayek compared a market capable of such creativity as a super computer more efficient than any single human mind, much less a collective of minds in a bubble. This penchant for renewal makes the Type-B model more conducive to democracy, which is also a mechanism of elite renewal at its ideal best. As I wrote in a new introduction to a Brazilian edition of “The Latin Americans: Their Love-Hate Relationship with the United States” (written by my father, Carlos Rangel), capitalism is the economic manifestation of democracy, while mercantilism (command economies led by autocrats) is the economic manifestation of totalitarianism.

But renewal goes against most people’s self-preservation instincts. No one wants to get “renewed.” That is why capitalism as well as democracy are constantly distorted, fragile and in peril. Entrenched political leaders and entrenched economic interests want to stay entrenched. If they are powerful enough they will do so. Power sees democracy as a threat and the more powerful, the more it will do anything to self-preserve by stifling innovation and opportunity to potential future rivals. Markets dominated by oligarchs and tycoons, ever more powerful as they reach worldwide, want to ensure that domination continues. No renewal or innovation needed here, we know what is best for you.

In Venezuela, CAP was an old style, chicken in every pot, populist. President for two terms, but with ten years in between, in his first term he nationalized industries, such as iron and oil, and promoted many civil construction and infrastructure projects. His charismatic leadership concentrated even more power in the presidency. His profligate deficit spending increased the per capita GDP substantially, creating a sense of bonanza; but his most significant lasting investment was in education, the foundation of opportunity and innovation, including sponsoring bright youths to study abroad. By the time he was reelected (a period known as “CAP II”), the populist/command policies he had fueled in his first term had led the country to the brink of economic disaster. He realized the errors of his populist past and tried to rectify. With the help of the new generation of foreign trained professionals that his education programs had fostered, he started to dismantle command economy structures, such as subsidies, tariffs, price and wage controls, centralized/big government, etc. And with such dismantling, the protections to powerful figures in politics and the economy. This would lead to his attempted assassination and political demise.

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Venezuela is not the only country to be destroyed by populism and command economy principles. In the U.S. this is a present threat, which comes from the most unexpected source: Donald J. Trump. Trump uses as a model for governance his experience as the tycoon of a privately held company focused on win-lose propositions – a command structure. Trump’s economic policies embrace Import Substitution Industrialization as a way to “bring jobs back to America;” apply industrial policy to protect and subsidize industries such as fossil fuels and steel, as well as agriculture—in blatant populists ploys; and seek to concentrate unaccountable power in the federal executive so as to deepen the command structure. Trump rules with the A-Type model and uses the populist authoritarian playbook to do so.

A common trait of a populist is self-identification with “his people” leading to phrases such as “El pueblo soy yo” (“I am the people”) affirmed in different variations by AMLO, Chávez, and Fidel, to infer that opposition to the leader is antipatriotic opposition to the country, a common assertion we see in Trump and his supporters. Of course this comes directly from the sense of entitlement of powerful monarchs of mercantile economies, such as Louis the XIV, the Sun King: “L’Etát c’est moi.” And if the leader is the people, what benefits the leader benefits the people – the rationale for self-centered corruption.

By revolving around a command economy to preserve and protect entrenched political and economic power (whether of existing or new elites in power through “revolution”), populism uses the tools of government to do just that. This includes bending rules, violating civil liberties and cronyism, as well as discrediting or censoring any information that may shed a negative light on the administration and its allies. Control and distortion of information is a key way to consolidate power. Attacks on the press and journalists, either physical or reputational, become a frequent tool of command economies seeking to concentrate power. As far back as 1859, John Stuart Mills argued liberty of the press as a fundamental check against tyrants. Any leader in power that continuously rails against the media as its enemy is suspect of aspiring tyranny. Of course, particular members of the press can be relentless in their attacks against a leader they dislike, but blanket and consistent attacks by a government against the right to have an informed citizenry are signs of tyranny.

In Venezuela during CAP II the press ran rampant with attacks against the president, sowing the eventual coup and rise of Chávez. The lack of an ample relationship of mutual respect and trust was part of the problem, but CAP’s intention to change the command economy into a market economy fueled the animosity driving such attacks. Even so, his government did not attack members of the press in the manner of oppressive tyrannies. Certainly not in the way Chávez would later, choking it economically, accusing it of lying, inciting persecution of journalists, crowding out information airwaves, and outright closing of media outlets. Not to mention sponsoring propaganda and partisan outlets to spread the government’s view on its enemies: an opposition by “scrawnies” intent on nullifying the regime.

Populism relies on grievances, offering a redress to those grievances by scapegoating a perceived weak group which is blamed for the people’s woes. It is based on a sectarian mindset that feeds animosity. In an interview I gave to the Brazilian magazine Crusoé, I exemplify this common trait between populists in Venezuela, Cuba, México and Bolivia where the president’s opponents are branded to cleave society as escuálidos (scrawnies), gusanos (worms), fifís (fussies) and colonialistas internos (internal colonialists). Such labeling to dehumanize the opposition and separate it from the mainstream has its lexicon cousin in ethnic and anti-Semitic epithets, and feeds on the same base emotions. The Chávez regime was eventually successful in making "adeco," the name given to those affiliated to President Pérez's party (Accion Democrática), into a common slur.

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Two more alarming indicators of populist “democratic” tyrannies are attacks on civil liberties and on the right to vote. Democratic institutions strive on free speech, and free speech includes protest marches. It is inherently democratic to have marches protesting against policies or leaders. Freedom of the press, freedom of speech and freedom of assembly lead eventually to free opinions in a ballot box. Thus, because voting is in essence a form of free speech, the former is a consequence of the latter. It is the role of a democratic government to protect peaceful protests from opportunistic individuals who may take advantage of a difficult-to-control situation for personal gain. It is not the role of a democratic government to suppress peaceful protests; its role is to protect them. Protecting peaceful protests is as important as protecting the right to vote. Suppression is what the regime has been doing in Venezuela since 2002, and unfortunately seems to be occurring here now, in the U.S.

In addition to unlawfully suppressing protest, the threats, harassment and outright jailing of perceived enemies or “disloyals” is a chilling aspect of tyrannical power. The retaliatory jailing of Michael Cohen, because he is writing a “tell-all” book about his relationship with the president, is a clear example. By the same token, the treatment of Roger Stone and Michael Flynn by the president and the DOJ is a challenge from the rule of men to the rule of law.

Finally, the rise of private militia and mercenary groups is a telltale indicator of a burgeoning populist tyranny. To circumvent the established rule of law, populist governments will use the emotional force of sown grievance to raise and encourage armed and repressive groups to intimidate and attack the populist leader’s targets. In Venezuela these were called the “colectivos.” In the U.S. they are sometimes called “very fine people” exercising their gun rights inside State Houses, for example.

The reported use of mercenary forces in the escalating repression of protesters in cities around our country is disturbing if true. But just the blatant use of federal forces to suppress local problems is problematic in itself. Federalizing repression, taking away the local control by local police forces, was one of the first things Hugo Chávez did, with the assistance of mercenary forces from Cuba, after massive protests against him in 2002. Let us hope that “Operation Legend” is not such an attempt – and that it is not a dress rehearsal for potentially violent voter suppression or results dispute in November.

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Apostle Matthew says “a city set on a hill cannot be hidden” (5:14, Sermon of the Mount). In 1630, the pilgrim John Winthrop used the image from that verse in a speech on a boat’s deck to his fellow settlers as a foundational ideal for the New World they were sailing towards: “wee shall be as a Citty upon a Hill, the eies of all people are uppon us.” With all eyes upon that city, the new colony should be humble before those of God or risk His wrath and be doomed to oblivion. In 1961, J.F. Kennedy used Winthrop’s words as a call for self-aware responsibility in government: “Today the eyes of all people are truly upon us--and our governments, in every branch, at every level, national, state and local, must be as a city upon a hill--constructed and inhabited by men aware of their great trust and their great responsibilities,” a view of a public servant in a democracy (listen here). But it was Reagan who used those words to usher in the idea of American Exceptionalism by adding the word “shining” and frequently during his presidency alluding to that image of the Shining City, all the way up to his farewell address:

“I've spoken of the shining city [upon the hill] all my political life, but I don't know if I ever quite communicated what I saw when I said it. But in my mind, it was a tall proud city built on rocks stronger than oceans, windswept, God blessed, and teeming with people of all kinds living in harmony and peace - a city with free ports that hummed with commerce and creativity, and if there had to be city walls, the walls had doors, and the doors were open to anyone with the will and the heart to get here.”

I have lived and observed the transformation of Venezuela into a nation ravaged by gaping inequality, crushed opportunity, misery and lawlessness. In 1992 I saw the signs of the creeping acceptance of totalitarianism which would lead to that condition and tried to warn anyone who would listen about the instincts of Chávez and his supporters –but a frog cannot feel the rising temperature of the water until it is too late. I do not like what I have been seeing for the last few years in the United States. The core values of this country are fighting against the challenges of illiberalism and totalitarian forces, especially after the populist spark lit during the 2016 campaign. It is possible that on November 3^rd the electorate will deliver a temporary answer and reprieve, but the dark forces are relentless and capitalism and democracy are always under attack. After 1992 it took 10 years for Venezuela to realize it was late in the game in this fight. The following 18 years brought that country to its current condition. November 3^rd will not be the end of the fight to restore the Shining City. It will mark the beginning.

Image credit: budastock

The Immigrant.

I am an American born abroad: born from an American parent in a foreign land. I have dual citizenship and lived a large portion of my formative years outside the U.S. in a country close to my heart, Venezuela. I have relatives, friends, dear memories and continued interest and involvement with the country where I was born. Its current situation and of those I have left behind pains me greatly. This is a common affliction shared, with different details, stories and backgrounds, by many in the U.S. born in other countries and living here now; and while I am not technically an immigrant I understand, literally, where they are coming from and have an ear attuned to anti-immigrant rhetoric.

That anti-immigrant rhetoric ignores a basic question: why did 42 million people, a number greater than the whole population of Canada or half the population of Germany, decide to migrate to the U.S.? Contrary to the current Republican candidate’s messaging, no country actually “sends” people to the U.S.

Migrants make the individual hard choice of leaving their home country because they see no other way out of their situation, be it political, economic or personal. They believe that in the U.S. they will have a new opportunity to improve and/or protect themselves and their families. They believe such opportunity is lacking in their country of origin. Many make the trip thinking they will go back once they’ve made it (“if you can make it there, you can make it everywhere”) or conditions “back home” have changed. A great majority eventually remains in the U.S. once they have constructed a new life, under new rules and with a reliable social contract. They sometimes try to return and realize, as Thomas Wolfe wrote, “you can’t go home again” as the home they once knew exists no more.

A portion of U.S. born Americans always says before any election that if the candidate they oppose wins, they will move out of the country. Canada has often been the supposed destination, New Zealand seems to be a popular choice this season. No mass migration has in fact occurred after any U.S. elections, but immigrants in many cases have not only chosen but been forced to leave their own country of birth for political, war strife, hardship or safety reasons. The quipped motivation in the “if he/she wins I’ll move to Canada” retort, is augmented hundreds of times over for many incoming migrants. They have truly voted or been forced to vote with their feet. Most have probably not read or know but would empathize with the lines by Emma Lazarus:

“Give me your tired, your poor, 
Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tossed to me,
I lift my lamp beside the golden door!”

By definition immigrants believe in the promise of America. Their economic contribution is significant and their social contribution incalculable. Many have mixed marriages and there are 36 million U.S. born children of immigrants. Immigrants by the most part do not want to reject their origins and naturally seek fellow expatriates to socialize and live with, maintain their country of origin customs and enjoy the cuisine they miss. That is not a rejection of U.S. values and customs, it is an addition. When their origin values and customs are anathema to those in the U.S. in most cases they and their children adapt, particularly when they feel socially welcomed by their new country. Conversely, the U.S. adapts elements of immigrant culture and makes it our own. Salsa, pizza slices and Chop Suey come to mind as adaptations now natural to the U.S. culture.

The hard numbers of size, scale and factual contribution are clear:

• The Migration Policy Institute calculates, derived from Census Bureau statistics, that the immigrant population (defined as “people residing in the United States who were not citizens at birth”) totals 42.4 million people. That is a little over 13% of the country’s population. For perspective, the African American population is 12.2% of the population and the Hispanic American population is 16.3% (2010 Census). The estimated population of undocumented migrants is around 11.2 million which would make approximately 3.5% of people residing in the country “illegals,” a small minority bearing a disproportionate amount of vindictive political venom and upon which countless ills are laid on. The number of undocumented immigrants has decreased from a little above 12MM in 2008 to its present level and counting.

U.S. Foreign Born Population by Region of Origin. 

Europe Region: 4.8MM

Asia Region: 12MM (East Asia: 3.77MM / So. Central Asia, including India: 3.2MM / West Asia, including Israel: .96MM)

Africa Region: 1.75MM

America Region: 22.3MM (Central America, including Mexico: 14.8MM / Caribbean: 3.88MM / So. America: 2.8MM)

Migration Policy Institute, U.S. Immigrant Population by State and County (accessed Sept 1, 2016)

• The Pew Research Center calculates there are 36 million second generation Americans, of which 20MM are adults, i.e. can vote. Added to the approximately 19MM immigrants that are naturalized citizens it makes for a powerful voting bloc. Even with a 50% abstention rate it would mean almost 20 million votes, enough to swing many an election.  Politicians demonize immigrants at their own peril when driving wedges between long timers and newcomers.

Much ink and bytes have been used to counter arguments laid out by the anti-immigrant rhetoric. In a fact-free reality immigrants (coded as “illegal” to slander a population much greater than the actual 3.5%) are accused of stealing jobs at best and being harbingers of terrorists and criminals at worst.

• Fact is, as has been pointed out, the low end jobs “stolen” usually do not involve language skills (typically crops, dishwashing, abattoirs, gardening, clean up, etc.) and higher end jobs are filled by companies skirting laws and ethics in pursuit of self-interest through legal corporate sponsorships. In 2012, there were nearly 420,000 “removals” by Immigration and Customs Enforcement (ICE), of which 228,000 were by border capture (they never made it in) and 190,000 where “interior apprehensions.” During 2012 there were 1.8 million jobs created by the private sector, that is, nearly the same number of jobs were created every month than all “interior apprehensions” for the whole year. Of the total removals, 55% were of convicted criminals--not everyday workers.

• Facts are, as has been repeatedly demonstrated, neighborhoods and cities with increasing immigrant populations have seen decreasing crime over the years. While absorbing a portion of immigrants, members of the Muslim community aid in uncovering terrorist plots, and members of Hispanic communities work with police to better control gangs. This does not mean that there are no bad apples, but the rhetoric paints broad strokes with a wide brush, smearing minorities to reinforce stereotypes.

• The Institute for Taxation and Economic Policy has calculated that undocumented alien residents (“illegals”) currently living in the United States collectively paid $11.64 billion in state, local taxes, sales taxes and government fees in 2015. These do not include their tax withholds which will not be returned.

• GDP is the sum of all transactions in products and services. The contribution of 78 million immigrants and children of immigrants to the market of transactions make for a sizable chunk of America’s GDP.

There comes a morning when the immigrant looks in the mirror and realizes that an American is staring back; an American accepting of differences, striving in the pursuit of happiness, created equal; and troubled by the whipping up of anti-immigrant sentiment. Many have seen and lived such persecution of minorities for electoral purposes in their country of origin and know what it has led to. Thus, when asked, “Is America headed in the wrong direction?” their answer is “yes” because of the celebration of obstructionism, racism, extremism and sheer stupidity in political discourse, its lackadaisical treatment by the so-called mainstream media and the rising influence of fringestream media feeding populist frenzy. The wrong direction. Something I have lived, outside of the American Democracy bubble. I personally know that democracy is not the end of history: we can regress.

There will always be a special place in the immigrant heart for his or her roots. This is human, understandable and not a reason to marginalize. I know of the pain they feel when there is pain in the country they grew up in. Immigrants will support in humanitarian ways and with patriotic fervor the causes they believe in and, in so doing, defend and spread true American values throughout the world. They are the newest Americans. Welcome.

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Links and References

Migration Policy Institute: Where do Immigrants Come From? (Interactive Chart)

Migration Police Institute: FAQ and Statistics

U.S. Population by Race and Hispanic/Latino Origin (Census 2001 and 2010)

World Population by Country

Foreign Born Population in the U.S. (U.S. Census Bureau Presentation)

U.S. Deports Families

Deported in 2013

Immigration and Customs Enforcement (ICE) Deportation Statistics 2015

Pew Research Center: Second Generation Americans (PDF)

The Great American Con

It must be conceded that some Trump supporters are not only sincerely convinced Trump's beliefs and positions are based on true American values but believe these positions, if enacted, will improve their lot and their countrymen’s to “Make America Great Again.” Otherwise a Trump supporter is either a self-serving cynic or a willfully ill-informed disaffected protestatarian with anarchic tendencies. While these two latter characterizations do indeed define important groups of Trump supporters, these segments cannot to be reasoned with; and all of the three major groups, the American value based, the self-serving cynics and the anarchists, attract their share of morally reprehensible racists, xenophobes and nativists which are also beyond reasoning with.

Yet, it is within the first group, the one embracing their interpretation of American values, that we must seek to understand the appeal of the economic case Trump claims to have. This is a group of Americans that should be listened to, understood, and be afforded empathy, to start a conversation of reason. Not to do so is not only politically unwise, it seeds the possibility of a “better Trump” in the future: someone with the same divisive discourse but better disguised and better scripted. So, how does Trump then embody the emotional needs of these followers?

American Values

American values are set forth in several origin documents of the nation. The Declaration of Independence, establishing the right to representation and the foundation of inalienable rights; the Constitution establishing the separate powers of government, a united federation in pursuit of a common goal and the Bill of Rights; and the Gettysburg Address establishing American democracy as an experiment in progress. The Federalist Papers could be added, as they illuminate the thoughts and interpretation of our founding fathers on the first two documents and the role and promise of the union.

A common thread in these documents is faith and optimism in the future and role this grand experiment will have in the world. This has become a core value of America: a belief that the best is yet to come, that this is the land of opportunity, that there exists an inalienable right to the pursuit of happiness. This is at the root of what is commonly called American Exceptionalism. Trump makes a primal call to that core belief. He vociferously denounces America as a land that has lost its way and promises to rectify and restore that faith in America and its people. 

But Trump distorts the essence of American Exceptionalism and has deceived a large portion of the values group. He has done so by making up some facts unabashedly and distorting others, starting by his vague claim but catchy slogan “Make America Great Again.” By the numbers, this claim is spurious. Just a few gross indicators tells us that:

• From 1947 to 2016 GDP per Capita (constant) steadily climbed from $13,407.01 to $51,276.06.
• Infant mortality rates for full term births decreased from 15.2 per 1000 in 1960 to 2.6 in 2006.
• High school graduation rates increased from 74% in 1990 to 82% in 2013.
• The economy is currently in its longest streak of monthly job creation on record.

Civil rights have unquestionably expanded over the last 100 years and such expansion has accelerated at an increasing pace in the last 50. More Americans than ever can fully participate in the civil, social, political and economic life of their own country. Social nets have spread, nearly eliminating destitute elderly, protecting children and assisting low or no income Americans in their plight.

Those Jobs are Not Coming Back

Emotionally, however, the case to “Make America Great Again” rings true.  The flip side to the listed achievements attained is a sense of unfairness and abandonment from the technological and social displacement such progress has wrought. That is the raw nerve that Trump touches. Trump argues that American workers have lost their jobs to overseas cheaters, stoking xenophobia and false expectations simultaneously, promising (as do some Democratic politicians) to bring back “good manufacturing jobs” to America, typically meaning by that heavy industry and manufacturing jobs.

The reality is quite different, as technology is more to blame for such job losses. Silicon Valley technology thinkers are so aware of this issue that talk of “Universal Basic Income” is commonplace (along with speculation on the Singularity) among them. The UBI would be a way to ensure the welfare of everyone when all jobs are lost to automation and robots. But that is a whole other discussion and argument.

What is beyond argument is that technology disrupts the labor force, and that there is no turning back to a glorious past of a different (and “greater”) labor market structure. Productivity and output increases have been taking place in America and affecting the labor market structure. Suffice these examples:

Agro Industry:

• From 1900 to 2000 farm employment fell from 41% to 1.9% of the total workforce
• From 1948 to 1996 agricultural productivity increased 250%
• From 1955 to 2000 agricultural and farm exports increased approximately 800%

Automobile industry:

• 1980: 8,011,000 vehicles manufactured in the US by 725,000 workers – 11 veh/worker
• 2014: 11,661,000 vehicles manufactured in the US by 714,000 workers – 16.4 veh/worker
• The US accumulated Auto worker productivity increase from 1950 to 2013: 243%
• Estimated growth 2014-2018 - Employment: 2.1% / Productivity: 2.4%

Steel Industry:

• 1980: 101,455,000 Metric Tons shipped – employment: 398,829 – 254.38 MT per employee
• 2014: 95,400,000 Metric Tons shipped – employment: 149,800 – 636.85 MT per employee
• Overcapacity of the industry is estimated around 25 to 30% while steel imports estimated at 20 to 30% of the US market.

Electricity Generation:

• 2006 Generation: 4,060 TWh / By coal: 2,000 TWh (49.26%) / coal used: 1,030,556 K Tons
• 2014 Generation: 4,255 TWh / By coal: 1,600 TWh (37.60%) / coal used: 853,634 K Tons

Each of these industries has its own set of issues and problems, some of their own making, some related to unfair trade practices and some structural, but all indicate a substantial increase in output while reducing total employment or shifting resources. In fact, manufacturing jobs as a percentage of the total labor force has decreased from above 30% in 1960 to less than 8% in 2014 while manufacturing as a % of GDP has remained constant. No investor, businessman, entrepreneur or factory will give back the productivity gains attained to “Make America Great Again.”

Job Creation Blues

It is the reality and nature of a developing and growing economy that there will be labor force displacement, but no one expects or wants to return the economy to a country where 41% of the labor force worked in farms. The political promise of returning to an imagined better past is a pipe dream; in fact it is the original Marxist dream of Social Utopia. It also has striking visual imagery. The closed factories of old technologies create urban wastelands. Populists stand in a blighted area and decry such closings, making for a great image. It is not as striking to stand month after month in front of a hospital, a technology information park, or a construction site and say that in the last month more jobs were created than all existing jobs in the steel industry. If it bleeds it leads and that is red bleeding meat eaten up by voters of all persuasions.

According to labor economists it takes a little less than 150,000 jobs created monthly to keep the unemployment rate steady. Since 2010 this number has been exceeded repeatedly, decreasing unemployment from its peak of 10% in October 2009 to 4.9 % in August 2016. To compare, the highest unemployment rate since 1948 was 10.8% in Nov. 1982, and its lowest 2.5% in June 1953. Still, why does a steady stream of jobs created at a greater rate needed than by natural growth does not to quell the malaise that is touched upon by the slogan “Make America great Again”? When did this malaise begin?

Recessions strike employment as a lagging indicator, meaning unemployment peaks at the end of the recession once GDP starts growing again and impacts the labor market. The graph from the Federal Reserve clearly illustrates it well (shaded areas are recession periods). But this graph can also help us understand somewhat the underlying malaise tapped by Trump’s economic speech. The labor participation rate, i.e. the amount of people working and wanting to work, increased steadily at a rapid rate from around 1962, at 58% of the population, to 1990 at 67%. The participation growth curve slope starts to taper off in 1990 and peaks at 67.3 % in April 2000, climbing steadily down ever since to its July 2016 level of 62.8%.

Social changes have an impact, of course. The incorporation of women to the labor force likely explains part of the steep climb in labor participation rates between 1960 and 1990, while the growing peaks of recession-end unemployment rates in that period correlates to the desire of people to work during those years.  That growing participation curve can be interpreted as an optimistic outlook by the labor market. People expected the labor market to grow and have a good paying job waiting for them. Even in recessions, America was The Land of Opportunity. This may be, perhaps, the period to which Trump beckons when he says “Make America Great Again.”

The late 80’s and early 90’s changed the game. The biggest hoax perpetrated on the American people is the hoax of Supply Side economics. Begun with Reagan and synthesized in the phrases “trickle-down economics” and “a rising sea lifts all boats” but better described by Reagan’s own primary rival George H. Bush as "voodoo economics,” Supply Side economics transformed the economic landscape of the American worker.

The American labor market was under strain already. Technological disruptions (as described above) were driving down the manufacturing sector’s labor participation, and light industry, such as clothing and small goods, were feeling the beginning of globalization’s impact.  Starting in the mid 70’s the disconnect between productivity growth and wage growth became the norm. While many explanations for this disconnect have been put forward (including methodology problems measuring factors in the transit from a manufacturing to a service economy) undoubtedly the gap exists, resulting in owners of capital accumulating a greater share of the productivity gains than owners of labor.

The graph illustrating the disconnect between productivity and compensation (Lawrence Mishel, 2012) also indicates a sharp uptick in the slope of productivity gains in the advent of voodoo economics, while not as much in the hourly compensation curve, albeit it stopped declining.

In addition to these structural shift trends, income inequality has steadily increased in the US since 1969. Mercantilist policies, pushed by political “protectors” of business, created subsidies, tax loopholes and protective regulations resulting in increasingly non-competitive markets for goods and services benefitting the owners of capital. The GINI coefficient (indicator for income inequality) tells us that between 1969 and 2009 such inequality has increased an astounding 122%. This means that the increase in GDP per capita noted before has been distributed disproportionally at an increasing rate.

Increased income inequality has been directly correlated with increased divorce rates, increased personal bankruptcies and increased commute times, all associated with a lower quality of life. The increased income inequality pattern in America is a fundamental cause of the anger of the electorate with the political establishment as it fails to deliver the promised opportunity for a better life.

Hope and Greatness: Is There an Economic Case for Trump?

Reexamining the Unemployment/Participation chart from the Federal Reserve, 1990 onwards can now be understood as a period in which factors affecting the labor market structure and the remuneration of labor have come to a head. It is from that time that a trend of disillusionment begins for the American worker: a feeling that the American Dream is out of reach. It is no wonder that by 2008 the message of “Hope” resonated in the electorate enough to choose as president its purveyor, Barack Obama.  

Because the built-in structures (tax code) driving income inequality remain mostly unchanged, the faithful of voodoo economics hang on to the levers of economic policy and discourse, and the labor market structure is still buffeted by globalization and technology with no clear answer, it is no wonder that Hope gave way to Revolution in the 2016 election cycle. The “Rage Against the Machine” is understandable. And Trump preaches rage.

Yet, the answers Trump offers to quench this anti-establishment mood created by the disenfranchisement from the American Dream do not address the nature, origins or bases of this condition. His “recipe” includes more of the supply side economics that have been demonstrated time and time again to stifle growth and drive up inequality (supply-side faithful devotees are as blind to the failures of their economic ideology from the right as Marxist socialists are to theirs from the left). He promotes trade barriers potentially increasing by thousands of dollars per household prices for consumer goods from cars to TVs to toasters. Other agenda points in his recently announced master plan: weaken the social net and generally make the tax code more regressive for individuals and more generous for corporations, accelerating income inequality.

Trump’s answers are not the ones that will solve America’s woes. His answers do not even address the problems he highlights in his economic speech: job creation, fair trade and America’s “greatness.” It may be probable that by the way he posits the problems—with his knack for finding the raw nerve—and the way he parrots solutions from his supply side economic advisors, it may be just probable that he truly does not know how to link problems with solutions; and it is possible that at least some of those supporters that believed Trump could embody their aspiration of restoring America as the Great Land of Opportunity will soon see in Trump what Michael Bloomberg saw in him: A loud mouthed New York City conman.

Trump’s answers are not new, they have been tested before. Supply side economics has been tried throughout the world and failed—and brought us the Great Recession. His stance on trade has been tried before—and brought us the deepening of the Great Depression. And, beyond economics, his tribal stance of Country First has been done before—and brought us at its best ethnic cleansing and at its worst World War II. Trump is not the answer to America or is what America stands for. The grand experiment must go on, but different results should not be expected from trying the same solutions over and over again, no matter how loudly those solutions are pitched. His sales pitch is the Great American Con.

 Auto Industry in the 1980’s: A Decade in Transition; Christopher Singleton, Monthly Labor Review Feb 1992 (Accessed 8/7/2016)

Decline and Resurgence of the US Auto Industry (EPI) (Accessed 8/7/2016)

Economic Policy Institute, Surging Steel Imports Put Up To Half a Million U.S. Jobs at Risk, Briefing Paper #376 (Accessed 8/7/2016)

The US Steel Industry, Where we Have Been, Where we are Going, Keith Buse Feb 2005, Citing statistics from the American Institute of Iron and Steel (accessed 8/7/2016)

The 20th Century Transformation of U.S. Agriculture and Farm Policy, Carolyn Dimitri, Anne Effland, and Neilson Conklin, USDA Economic Research Service, June 2005 (Accessed 8/7/2016)

Coal Usage for Electricity Generation (Accessed 8/7/2016)

Manufacturing and the GDP (Accessed 8/7/2016)

Total Electricity Generation (Accessed 8/7/2016)

Manufacturing Labor Participation Federal Reserve Blog (Accessed 8/7/2016)

Labor participation rate/employment Federal Reserve Blog (Accessed 8/7/2016)

US GDP per Capita (Accessed 8/7/2016)

Infant mortality (Accessed 8/7/2016)

GINI in the US: Income Inequality and its Costs (Accessed 8/7/2016)

The wedges between productivity and median compensation growth, Lawrence Mishel,  April 26, 2012, EPI Issue Brief #330 (Accessed 8/7/2016)

Trump's Trade Deals

We have seen a glimpse. Trump, the business man benefiting from Trump the politician. He relished in the thought of more vacationers in Turnberry, Scotland staying in the magnificent lighthouse suites of his Golf Resort, taking advantage of a devalued British Pound. But, if you look closely, other political issues that he so heartily embraces are very good for his pocket. His relentless attack on the Trans Pacific Partnership is not only a populist stance, it is good for the business of his branded products. 

China is the big loser if TPP goes through, as the rest of Asia would be aligned with the US in a commercial alliance, and Trump has repeatedly said in the past that he has made great deals and lots of money with China. Perhaps that is why polls in China are more favorable for Trump that in any other country. But even if he moves from China to licensing his brand to manufacturers in other countries such as Bangladesh, Malaysia, Chile or Peru, his vested business interest is for the Trans Pacific Partnership agreement to unravel. A frequent point Trump does not make or conveniently does not mention is that there is no special trade deal with China to “rip up” unless the US withdraws from GATT altogether.
 

If any portion of Trump’s income comes from Trump branded products he would be affected adversely when TPP countries manufacturing such products are forced to ensure and enforce the following (as Thomas Friedman has pointed out):

 

• Freedom for workers to form independent trade unions, elect their own labor leaders, collectively bargain and eliminate all child and forced labor practices.
• Adopt laws on minimum wages, hours of work and occupational safety and health.
• Halt human trafficking from countries such as Thailand, Myanmar and Bangladesh and require each signatory to improve access for human rights groups to assist victims of trafficking.

Those are real provisions included in the TPP that would impact Trump branded products by raising their manufacturing cost. Provisions with teeth, because if signatories fail to meet them, they would be slapped with tariffs.

Other TPP provisions include, lowering or eliminating 18,000 tariffs and restrictions placed on products manufactured in the US, such as cars, machinery and digital products, to improve US’ access to a billion person market; establish criminal penalties for stealing industrial secrets; recognizing and balancing unfair competition from state-owned and subsidized enterprises; and combat endangered animal part trafficking and penalize overfishing.

There are, however, provisions anathema to some legitimate critics. Pharmaceutical patent protections have been denounced by Sen. Bernie Sanders, for example, as too generous. These provisions restrict the production of unlicensed generics, potentially raising the cost of medicines to the region’s poor. But time limits originally sought by Big Pharma were substantially reduced and quality control increased by discouraging unlicensed and knock-off products.

Opponents also argue that multinational companies can sue governments in venues of their choosing to maximize legal advantages, and cite for example the case of Philip Morris vs Australia using ISDS (Investor-State Dispute Settlement) provisions. Philip Morris incorporated operations in Hong Kong to use tribunal arbiters from that country (China) and sue Australia for damaging the brand when it passed a law forcing plain warning packaging for cigarettes; the suit was eventually tossed out. TransCanada, the corporation behind the Keystone XL pipeline, has threatened to sue the US government, using ISDS provisions in NAFTA, for blocking its project on account of environmental concerns.

Clarification of ISDS rules is important but is not a deal breaker for TPP. Licensing, patents and intellectual property issues have been addressed and Big Pharma did not get all it wanted, just as generic manufacturers did not either. These are true concerns that a global economy needs to deal with. Ignoring the reality of global commerce is not going to diminish its transformational impact on labor markets all around the world. This reality is ignored by any country at its own peril. It is in establishing common rules and practices that global commerce can benefit a maximum of countries while regulating the negative externalities created by transactions carried out under different conditions and resources for each country involved. I addressed this issue before in my book Campaign Journal 2008. The term “Free Trade Deals” in itself is somewhat misleading, as these treaties in fact regulate the unfettered commerce practices creating those negative externalities as opposed to making such commerce more “Free.”

Steel Mfg. Processes as a Percentage of Total Produced

The economics of global trade are relentless, disruptive and heartless. But not more so than those of technological innovation. Old technology jobs give way to new ones and blame can be easily transferred by populists onto other factors, such as “free trade.” At least trade can be regulated, markets opened and facilitated. Technology not so much: as much or more steel is being produced and exported in the US now as ten years ago, but with technologies that need much less labor. More energy needs are being met by cleaner fuels and methods, not by coal. Food is being produced at astronomical rates with many less farmers. These are not jobs that are coming back from China, Mexico or any other place. Secretary Clinton, in an often misquoted statement, addressed the need to recognize this impact of technological disruption on the labor force in a Town Hall in West Virginia: 

“I'm the only candidate which has a policy about how to bring economic opportunity using clean renewable energy as the key into coal country. Because we're going to put a lot of coal miners and coal companies out of business, right, Tim? And we're going to make it clear that we don't want to forget those people. Those people labored in those mines for generations, losing their health, often losing their lives to turn on our lights and power our factories. Now we've got to move away from coal and all the other fossil fuels, but I don't want to move away from the people who did the best they could to produce the energy that we relied on.”

It is emblematic of populist cluelessness (or cynicism) that Donald Trump gave his anti-trade tirade in a scrap aluminum plant—a recycling plant. Recycling metal was one of the original disruptors, diminishing the need for mining and processing raw ore. It “killed” jobs, and as those workers that took over the jobs of other workers from a technological past cheered Trump on, you can be sure they have enjoyed the estimated thousands of dollars a year saved by each US consumer as a benefit of lowered trade barriers. The US International Trade Commission 2016 report on the Economic Impact of Trade estimates that U.S. consumers have saved as much as $13.4 billion in 2014 from tariff reductions associated with trade agreements. Furthermore it states that U.S. consumers who are either middle income (income between $40,000 and $69,000) or lower income (income less than $40,000) benefit disproportionately from the savings associated with the tariff reductions. Yes, they get cheaper TVs and toasters.
 

The benefits of trade are diluted and invisible, while job losses created by globalization and technological disruption are as visible as a shuttered factory down the street. Early in the Obama administration a lesson was learned. The president in 2009, and at the urging of workers’ unions imposed a tariff beginning at 35% and expiring after three years on tires from China. In his State of the Union Address of 2012 he said “over one thousand Americans are working today because we stopped a surge of Chinese tires.” However Americans, according to analysts from the Peterson Institute of Economics, paid $1.1 Billion more in tires over that period than otherwise would have been the case (about $800,000 per job “saved”), moneys that could have been used in other sectors of the economy producing jobs. China in turn, slapped retaliatory tariffs on US chicken parts, which cost American poultry exporters an estimated $1B in lost sales. Overall that line in the State of the Union address cost the US economy more than $2B. But a closed tire factory is visible and its unemployed workers are real. And they are voters. And they have unions. 
 

Global commerce will force changes and all stakeholders and grievances need to be recognized and addressed. Ignoring the problem and putting up a tariff wall will not solve the problem nor rescue lost labor. The best way to manage these relentless forces of change is by recognizing them and planning for them, just like you do for hurricanes. Social nets need to be secured, transitional paths designed and equal opportunity ensured to foster innovation and entrepreneurship in the new business environment. As Neil Irwin in the NYT pointed out recently, in Pittsburgh (home to the Pittsburgh Steelers) 5,100 steel mill jobs have been lost since 1990 but 66,000 new jobs in health care have come to the area. Yet, Irwin does not say... those iron workers, were they left twisting in the wind? Many if not most of them are unlikely to have transitioned to the health care sector. Until a satisfactory answer is given to those displaced workers, populist speech such as that of Trump will be music to their ears. To Trump’s own personal economic advantage.

Perhaps David Brooks is right when he says that the political issues of the day can be pictured as having shifted from arguments about size of government to arguments about size of walls. Walls for commerce and walls for immigration. The economic and identity anxieties of a globalized economy are being tapped into both by sincere and by cynical populist politicians appealing to the gut and the heart rather than the mind. Appeals that may be so misleading as to make a small but sufficient percentage of ill-informed voters vote for the word “Leave” in the belief that it means foreigners and other undesirables will be forced to leave and go back to where they came from, not that “Leave” will structurally change their own nation’s geopolitical standing. The term "swing voter" has decidedly now been irrevocably stained. As a wise man once said, you only have to fool some of the people all of the time in order to maintain political life and viability.
 

United States International Trade Commission: Economic Impact of Trade Agreements Implemented Under Trade Authorities Procedures, 2016 Report

The Economics of Inequality - A Healthy Economy is Healthy for Everyone.

The climbing stock market of the last few years as well as the anemic GDP growth are correlated to growing income inequality. Income inequality is a poorly understood economic issue that feeds speculative behavior and undermines economic growth. On the face of it, income inequality means there are people that earn a hell of a lot more than other people. It is about income not wealth, easily confused terms, although often one begets the other.

Growth is negatively impacted when financial assets and rents are accumulated by a small minority of higher level executives and majority owners who have a limited amount of capacity to spend it all. Said a different way: there is only so much stuff you can buy. So most of the money accumulated through inequality does not go into growth-generating consumer spending.

Typically that excess money ends up in financial markets of some sort: stock market and other financial games that do not contribute to economic growth, per se, when transformed into speculative bubbles. Of course, not all the climb of the market of financial instruments is speculative, as corporate assets, expected profitability and dividends are (or should be) the real drivers of the underlying value of a stock.

A major purpose of issuing stock is raising capital to invest in assets and company growth. If the human resources of a company are not considered assets but rather, easily tradable commodities, then maximization of profits (the fiduciary duty of business executives) logically dictates a policy of wage suppression. When wages can be maintained low, profitability increases and higher dividends are paid out. Increasing and steady dividends make for higher stock prices. And with a higher stock price, executive compensation climbs, and so on and so forth in a self perpetuating cycle. This falls under the classic category of market failure, i.e. a condition in which an imperfect structural allocation of resources creates inefficiencies and negative social outcomes—such as stagnant national economic growth. A structural situation like this typically requires third party intervention and direction, hence minimum wage laws.

But avoiding speculative financial market bubbles and decreased consumer spending are not the only reasons to intervene in the natural tendency for wage suppression by free enterprise. As Nick Hanauer has said, by maintaining the price of labor below the threshold of “living wages” many individuals and families, even when working much more than 40 hours a week, are forced to rely on public assistance for various basic needs, including housing, food and health. In other words, wage suppression shifts the true price of labor to the taxpayers. This is an egregious example of corporate welfare.

There is no substitute for money as a social program, as Daniel Patrick Moynihan famously argued. All instances of public assistance such as Medicaid, food stamps and public housing tend to erode the value of wages. In a counterintuitive and contradictory way, large businesses suppressing wages at a level under “livable income” are taking advantage of welfare and “socialist” programs, while groups and personalities pushing for a higher minimum wage are in fact advocating capitalist economics by defending the basic mechanism for distributing rents under such economic model: the salary.

The slowing pace of productivity has been blamed by many as the culprit of anemic GDP growth over the last few years. But income inequality is as culpable if not more, and the good news is that policy can change that, both materially and in expectations. This is not a case where the boss threatens the employee to fire him when said employee asks for a raise. This is leveling the floor and giving a raise to America, in order to give the economy a boost.

Metrics and indicators can be confusing and are open to interpretation. Mark Twain was famously eloquent about that: Lies, damned lies and statistics—the three ways to obfuscate the truth. Yet some probable consequences of raising the minimum wage can be inferred. Inflation will increase and stock market indices will be impacted adversely and naysayers will read these metrics as negative. Thinking it through, though, gives us a more mixed analysis. Negative interest rates and deflationary pressures are creating havoc in Europe and Japan. Experiments in cities around the country have not found that a rise in the minimum wage leads to sustained unemployment. Increased inflation will be more prevalent in the service sector, as manufacturing in the US is a relatively small portion of the economy. Interest rates on treasuries will increase, benefitting retirees and boosting the value of the dollar even more. This in turn will put downward pressure on the cost of imported goods, counterbalancing service sector inflation, but affecting exports. And finally, as disposable income in the less affluent sectors of society and the middle class increases, GDP growth will expand and pressure on social welfare programs will decrease. 

Depending on which noisy or quiet metric is focused upon at any given moment, the “economy” will be viewed, written about or politicized as prosperous or in the tank. But the growing level of income inequality is unequivocally unsustainable and certainly needs to be addressed. Not to do so most definitely will eventually bite the economy in its xxx even harder. America is not a household, and its budget accounts are different. America is not a business, and its operations work differently. America is a nation with a national economy; and America needs a raise.