Making the Trump administration look less bad

I’m no fan of Donald Trump.  He is unworthy of the office he holds, and almost every week there is new data to reinforce that view.   And if his character is unworthy, there is no offset in the way in which he attempts to govern or in the clarity and excellence of his thought or vision.

And yet, when it comes to the People’s Republic of China, our Prime Minister –  probably with the full support of the Leader of the Opposition –  manages, somehow, to leave the US Administration looking as though –  for the moment at least – it is on the side of the angels.   And as if it is our governments that are simply all about “the deal” –  be it an “FTA” upgrade, party political donations. or just students flowing to our public universities that have made themselves so dependent on not upsetting the thugs in Beijing.

Then there is Scott Morrison.  I guess he probably won’t be Australia’s Prime Minister for long, but a couple of weeks ago he gave a pretty good speech under the heading “The Beliefs That Guide Us”.  Sadly, I didn’t see it reported here at all (from the Australian media there is a good commentary on it here) but it comes in stark contrast to the way in which our governments (present and past) behave and talk (or simply refuse to talk).  Rhetoric is, of course, easier than action, but at least the words were good (emphasis added).

Our foreign policy defines what we believe about the world and our place in it.

It must speak of our character, our values.  What we stand for. What we believe in and, if need be, what we’ll defend. This is what guides our national interest.

I fear foreign policy these days is too often being assessed through a narrow transactional lens.   Taking an overly transactional approach to foreign policy and how we define our national interests sells us short.

If we allow such an approach to compromise our beliefs, we let ourselves down, and we stop speaking with an Australian voice.

We are more than the sum of our deals. We are better than that.

And what does Morrison regard as the “beliefs that guide our interests”?

We believe that the path to peace and liberty demands the pursuit of prosperity through private capital, rights to own property, entrepreneurialism and free and open markets. That is what lifts people out of poverty.

We believe that acceptance should not be determined by race or religion. Rather, we accept people by their words and judge them by their actions.

We believe in freedom of speech, thought, association and religion.

We believe in peaceful liberal democracy; the rule of law; separation of powers; racial and gender equality where every citizen has choice and opportunity to follow their own paths and dreams.

A fair go for those who have a go – that is what fairness means in Australia.

We believe in the limits of government – because free peoples are the best foundation to show mutual respect to all.

We believe in standing by our mates, side by side with nations that believe the same things we do.

Few or none of those things would be embraced by the People’s Republic of China, or the Party that controls it.  As he goes on to point out, by omission in listing the sorts of nations which do.

From the United Kingdom and the democracies of Europe to the United States and Canada. From the state of Israel to the city state of Singapore. From Japan and South Korea in North Asia to New Zealand, across the ditch.

He goes on later to observe, of Australia’s participation in various conflicts

We have done this because we believe it is right. Being true to our values and principles [will] always be in our interest.

Whereas, so it seems, in our Prime Minister’s mind (and that of her Opposition counterpart) not only are the two in constant tension, but the values and principles of this nation are constantly sacrificed to some short-sighted, limited, and mercenary conception of “interest”.    It is shameful to watch.

What of the US Administration?  You might think, as I do, that the focus on the US-China bilateral trade deficit is wrongheaded and economically illiterate.  Which isn’t to say that there are no real economic issues that it is right for the US Administration to take the lead in addressing –  with, so it appears, pretty widespread endorsement across the political spectrum in the US.  Even if you think –  as I generally do –  that intellectual property protections generally reach too far, and even if you recall that most rising powers have attempted to gain an edge by purloining the technology or insights of firms/countries nearer the technological frontier, China’s approach is particularly systematic, aggressive, and unacceptable.  It needs to be called out.  China doesn’t offer anything like an open market in many areas (services and investment notably), and if  –  in the longer-run –  those choices will mostly harm the Chinese, I don’t have any problem with a big and powerful country attempting to encourage change.  They are the sort of changes most in the West probably looked towards when China was allowed into the WTO.  It was clearly a sick (if opportunistic) joke when New Zealand agreed to deem China a “market economy”, when it remains far from that –  and, in many respects, getting further from it.

But it isn’t just about trade and investment.  Last month, the Vice-President gave a pretty forceful speech on the Administration’s approach to the People’s Republic of China.    There was a trade dimension

Over the past 17 years, China’s GDP has grown 9-fold; it has become the second-largest economy in the world. Much of this success was driven by American investment in China. And the Chinese Communist Party has also used an arsenal of policies inconsistent with free and fair trade, including tariffs, quotas, currency manipulation, forced technology transfer, intellectual property theft, and industrial subsidies doled out like candy, to name a few.

But there was so much more. The military position for example

And using that stolen technology, the Chinese Communist Party is turning plowshares into swords on a massive scale…

China now spends as much on its military as the rest of Asia combined, and Beijing has prioritized capabilities to erode America’s military advantages – on land, at sea, in the air, and in space. China wants nothing less than to push the United States of America from the Western Pacific and attempt to prevent us from coming to the aid of our allies.

Beijing is also using its power like never before. Chinese ships routinely patrol around the Senkaku Islands, which are administered by Japan. And while China’s leader stood in the Rose Garden of the White House in 2015 and said that his country had “no intention to militarize the South China Sea,” today, Beijing has deployed advanced anti-ship and anti-air missiles atop an archipelago of military bases constructed on artificial islands.

and systematic issues with a more individual impact

Nor, as we hoped, has Beijing moved toward greater freedom for its people. For a time, Beijing inched toward greater liberty and respect for human rights, but in recent years, it has taken a sharp U-turn toward control and oppression.

Today, China has built an unparalleled surveillance state, and it’s growing more expansive and intrusive – often with the help of U.S. technology. The “Great Firewall of China” likewise grows higher, drastically restricting the free flow of information to the Chinese people. And by 2020, China’s rulers aim to implement an Orwellian system premised on controlling virtually every facet of human life – the so-called “social credit score.” In the words of that program’s official blueprint, it will “allow the trustworthy to roam everywhere under heaven, while making it hard for the discredited to take a single step.”

And when it comes to religious freedom, a new wave of persecution is crashing down on Chinese Christians, Buddhists, and Muslims…

Last month, Beijing shut down one of China’s largest underground churches. Across the country, authorities are tearing down crosses, burning bibles, and imprisoning believers. And Beijing has now reached a deal with the Vatican that gives the avowedly atheist Communist Party a direct role in appointing Catholic bishops. For China’s Christians, these are desperate times.

Beijing is also cracking down on Buddhism. Over the past decade, more than 150 Tibetan Buddhist monks have lit themselves on fire to protest China’s repression of their beliefs and culture. And in Xinjiang, the Communist Party has imprisoned as many as one million Muslim Uyghurs in government camps where they endure around-the-clock brainwashing. Survivors of the camps have described their experiences as a deliberate attempt by Beijing to strangle Uyghur culture and stamp out the Muslim faith.

And the sort of influence activities that Anne-Marie Brady has written about here

I want to tell you today what we know about China’s actions – some of which we’ve gleaned from intelligence assessments, some of which are publicly available. But all of which is fact.

As I said before, Beijing is employing a whole-of-government approach to advance its influence and benefit its interests. It’s employing this power in more proactive and coercive ways to interfere in the domestic policies and politics of the United States.

The Chinese Communist Party is rewarding or coercing American businesses, movie studios, universities, think tanks, scholars, journalists, and local, state, and federal officials.

He explicitly championed Taiwan as an example of a better way –  a country, actively threatened by China, and which is not only free and democratic, but more prosperous than China.

As far as I can see a few people in the US quibbled at the margins, but there was no great dissent from the broad thrust of the speech. It characterises the regime, and its threat, in a way that many or most experts seem to regard as pretty descriptively accurate.  The PRC is a threat to its own people of course, but abroad –  to countries in the region who espouse the sorts of values Scott Morrison talked of, and in the internal political processes of countries like our own, Australia, or the US (and many others).

It wasn’t just a one-shot effort from Pence, who is representing the President at this week’s summit meetings.  In the Washington Post yesterday there was a report of new interview with Pence.  With political theatre in mind, the interview took place as Pence’s plane flew across the contested South China Sea.  The report included

The vice president said this is China’s best (if not last) chance to avoid a cold-war scenario with the United States.

In addition to trade, Pence said China must offer concessions on several issues, including but not limited to its rampant intellectual property theft, forced technology transfer, restricted access to Chinese markets, respect for international rules and norms, efforts to limit freedom of navigation in international waters and Chinese Communist Party interference in the politics of Western countries.

and ended thus

I asked him what would happen if Beijing doesn’t agree to act in Asia in a way that can avoid a cold war with the United States.

“Then so be it,” Pence said. “We are here to stay.”

Who knows whether his boss really means it – or will still mean it in six months time –  but at least it was being said.   And there is an interesting article in today’s Financial Times, highlighting the apparent bipartisan support (including among business leaders) for a more robust stance.  There was also an interesting Bloomberg column which observed

Trump usually gets the blame (or credit, depending on where you stand) for souring relations. He’s not the real culprit, though. The man truly responsible is China’s president. Xi has altered the course of Chinese policy in ways that made a showdown with the U.S. almost inevitable, whoever sat in the White House.

Even that interview wasn’t all that can be set to the credit of Mike Pence in this sort of area: speaking out about manifest evil, actions that don’t align with the sorts of values countries like the US, Australia, and (once upon a time at least) New Zealand sought to espouse and –  rather imperfectly to be sure – operate by.  There was Pence’s meeting with Aung San Suu Kyi, where he talked plenty bluntly and openly.

“The violence and persecution by military and vigilantes that resulted in driving 700,000 Rohingya to Bangladesh is without excuse,” Pence said.

And then there is the Rt Hon Jacinda Ardern, our Prime Minister.

On the day the Chinese deputy foreign minister warned other countries not to “obstruct” China’s growing activity in the Pacific, it was as if our Prime Minister was just falling into line when, in an interview yesterday, she refused to even address the issue of China’s activities in the Pacific.

When she met Aung San Suu Kyi –  who, as far as I can see has no New Zealand economic “interests” to threaten –  her language seemed to be much more muted than Pence’s

“We, of course, share the concern of the international community around what has happened in Rakhine State, and the ongoing displacement of the Rohingya,” Ardern said following the meeting.

As the Newsroom report puts it

[Aung San Suu Kyi] has also been stripped of the US Holocaust Museum’s Elie Weisel award and Freedom of the City awards, which were revoked by Edinburgh, Oxford, Glasgow and Newcastle.

While in Singapore, Malaysia Prime Minister Mahathir Mohamad said Suu Kyi was “trying to defend the indefensible”.

But Ardern said she did not detect any defence from Suu Kyi during their meeting.

And US Vice President Mike Pence also had firm words for Suu Kyi during the pair’s meeting in Singapore.

“This is a tragedy that has touched the hearts of millions of Americans. The violence and persecution by military and vigilantes that resulted in driving 700,000 Rohingya to Bangladesh is without excuse.”

Suu Kyi was brief in her remarks, saying each country knew their own situation best. “So we are in a better position to explain to you what is happening and how we see things panning out.”

Sounds pretty defensive to me.   When the Trump Administration and Mahathir Mohamad are more willing to speak out on human rights abuses than a New Zealand Prime Minister, something is very wrong.    “Kindness” and “empathy” might be her watchwords, but I didn’t suppose she meant them for tyrants and those who abet gross and systematic abuses.

And what of the PRC regime.  Here was how the Herald reported her

Ardern said before her meeting with Premier Li that she would be raising human rights issues with him but they were kept to the closed door session.

In her opening remarks she said: “New Zealand’s relationship with China is incredibly important to us. We see that relationship being incredibly important not just from an economic perspective but from a regional perspective.”

Only sweetness and light in public –  this, after all, from someone who only a few months ago pledged stronger ties between Labour and the Chinese Communist Party –  and if she politely indicated in private the odd area of possible difference, who really cares?  I’m sure the Chinese won’t.  After all, her party president is on record –  not behind closed doors – lauding the regime and its leader.

Has she ever said tried to lead ther discussion and debate at home about the character of the regime?   Has she ever said anything openly critical about one of the most dreadful regimes on the planet –  about its activities at home (a couple of weeks ago she said she “might” raise Xinjiang privately) –  and –  more importantly –  about its activities abroad, let alone its activities in New Zealand?  Even “small” things like, for example, the presence in our Parliament of a former PLA intelligence official, close to the PRC Embassy, who acknowledges misrepresenting his past to get into the country, and who has never once said anything critical of the regime.  Decent people shake their heads in disbelief (as I do each I write this), but not the Prime Minister.   Or arranging –  with the National Party –  to award a Queen’s Birthday honour to a non-English speaking Chinese-born businessman, who associates closely with MPs (and mayors) from all sides of politics, seems to arrange party donations (partly with a view to getting additional MPs into Parliament) and who the record shows is very closely associated with the Chinese Communist Party and the regime –  back in China, and here.

The local media seemed taken with the fact that Mike Pence was reported to have asked to be seated next to our Prime Minister at one of the summit dinners.  But strangely, while the local media talked up how the PM might raise such issues as steel and aluminium tariffs, or even speculated on the (manifold) political and personal differences between the two of them,  I didn’t notice anyone speculate on the possibility that China, and New Zealand’s rather shameful and supine attitude to the PRC, might have been among Pence’s list of talking points, amid the pleasantries and fine food.  I’m sure our allies welcomed the P8 purchases, and even the additional money New Zealand and Australia are (for how long?) throwing at the Pacific, but someone who won’t utter an open word of disapproval of such a regime, who won’t even speak out about the disgrace of Opposition MP, Jian Yang, who does nothing –  and refuses to openly take seriously –  the domestic interference issues is hardly someone showing any sign of living by those sorts of values that Scott Morrison enunciated in his speech.  And yet I suspect they represent rather well the values of most individual New Zealanders –  just not our political classes, who seem to act as if “values” are just some nice-to-have for other people, not something integral to how they live and act and speak.

It is pretty shameful when the Trump adminstration –  for now at least –  puts our country in such a poor light, on such a significant (and potentially a defining) issue. I remain sceptical about Trump’s willingness to follow through (on almost anything) or indeed about US administration’s willingness to pay much of a price to, say, defend Taiwan (and, if perchance, the trade strategy puts real pressure on, the temptation to action  – and distraction – there may only increase –  the Falklands weren’t invaded when Argentina was prospering).  The South China Sea is already, in effect, lost.  And no outsider can do much about China’s awful internal record.  But words still matter.  They express what we care about, what we value (more than just a deal).

And on these issues, the Trump administration at least has the words.  Jacinda Ardern –  and Simon Bridges –  sit cravenly silent.  It is as if, to upend Scott Morrison’s words, they think New Zealand is defined solely as the sum of our deals. It is shameful.

More thoughts on financial crises and economic performance

In my post yesterday, focused specifically on Geoff Bascand’s speech on financial stabilty, financial crises etc, I used this chart

crisis costs

to, again, raise questions about just how much of the poor economic performance over the last decade or so can really be ascribed specifically to the financial crisis (bank failures, large loan losses etc).  After all, the US was the epicentre of the crisis, and my other group of countries (long-established advanced countries, also with floating exchange rates –  Australia, Canada, New Zealand, Norway, Israel, and Japan)  didn’t have domestic financial crises.

I’d been playing around with that data with a view to writing a post about an article in the latest issue of Foreign Affairs, The Crisis Next Time: What We Should Have Learned from 2008″, by Carmen and Vincent Reinhart (she an academic researcher, and he a senior market economist and formerly a senior Fed official).    The Foreign Affairs website is having open access this month, so the link should work for anyone wanting to read the (accessible and not overly long) article itself.

I thought the article was a bit of a mixed bag (and this post ends up only partly being about the article).  Carmen Reinhart, in particular, has been at the forefront of efforts to remind that recessions associated with financial crises are often more severe than other recessions.  That is a useful reminder, but hardly surprising.  Mild recessions tend not to generate many loan losses, and even if the banking system wasn’t rock solid in the first place, nothing too serious is likely to follow.  But if resources have been severely misallocated in the first place, supported by ample new credit, then when the correction occurs –  and views about what is profitable have to be revised –  it isn’t surprising that the associated recession can be deep and the financial system can come under stress.  In New Zealand, for example, it wasn’t the financial system crisis (failure of DFC, repeated near-failures of the BNZ) that made the 1991 recession so serious; rather than pressures on the financial system were part of the same aftermath of excess –  over-inflated expectations – that the entire economy was caught up in, combined with some serious efforts to break the back of high trend rates of inflation.

As the Reinharts point out, the problems can then be particularly severe in a country that has few or no macro policy levers left open too it –  a fixed exchange rate or a common currency, tied to the fortunes of a group that may not share the particular problems you did (thus, for example, Ireland in a euro-area in which Germany is the largest economy).  Adjustment can be a lot slower without the ability to adjust the nominal interest and exchange rates.  Perhaps more than the authors, I’m a sceptic on the euro.

For my purposes, there is a convenient couple of sentences in the Reinhart article

Financial crises do so much economic damage for a simple reason: they destroy a lot of wealth very fast. Typically, crises start when the value of one kind of asset begins to fall and pulls others down with it. The original asset can be almost anything, as long as it plays a large role in the wider economy: tulips in seventeenth-century Holland, stocks in New York in 1929, land in Tokyo in 1989, houses in the United States in 2007. 

It usefully highlights a key difference between, say, the US (or Ireland or Iceland) late last decade, and the experiences of the group of non-crisis floating exchange rate countries whose experience is reflected in that first chart above.   Stock markets in those latter countries took a short-term hit, of course, but there was no sustained loss of (perceived) wealth akin to what happened in the crisis countries.

It isn’t entirely clear from the article how much the authors want to focus mostly on the depth of the initial recession and how much on the disappointing economic outcomes in many countries over the last decade.  But both are mentioned, and there seems to be a tone that conflates the two in a way that I’m not surely is overly helpful (given the goal of learning lessons that can help better prepare us for future severe adverse events).  There also seems to be a very strong focus on the demand side, and none at all on the supply side (no mention at all of productivity growth).

And yet, if we look across the OECD as a whole, the unemployment rate was right back down to where it had been in 2007.  If (and there is) a disappointment about the last decade as a whole, it can’t be now about excess labour supply (unemployed workers) –  slow as the unemployment rate was to come down, it did eventually.  As it happens, the unemployment rate in the US (epicentre of the crisis) is now lower than in the median of my non-crisis floating exchange rate group –  which wasn’t the case in the years running up to 2008.

I have plenty of criticisms for the way many central banks (including our own) handled the years after the 2008/09 crisis and recession.  In some cases, actually tightening when it wasn’t necessary or appropriate, and often a hankering for some sort of return to “normal” interest rates (that may have prevailed in the previous couple of decades) when as has become increasingly apparent something about what is “normal” has changed.  Throw in the lack of any pro-activity in addressing the existence of the near-zero lower bound on nominal interest rates (itself arising from regulatory and legislative choices), and it is clear that more could –  and should –  have been done in many countries.

But even if such changes (in macro policy) had been made, the differences in economic outcomes would probably have been at the margin:  helpful (eg in a New Zealand context, getting core inflation back to 2 per cent, and getting unemployment down to the NAIRU perhaps two or three years earlier), but it is unlikely that it would have made much difference to productivity growth, or indeed to levels of real GDP per capita today.

In yesterday’s post, I showed a chart comparing labour productivity growth trends in the US (epicentre of the financial crisis) and in the group of non-crisis floating exchange rate advanced economies.  But what about multi-factor productivity?

The OECD only has MFP data for a subset of member countries.  Of my sample of non-crisis advanced countries, they don’t have data for Norway and Israel.  But here is the comparison for the US and the group of four non-crisis advanced countries, all normalised to 2007.

MFP crisis.png

In both cases –  although perhaps more starkly so for the non-crisis countries –  it is clear that the slowdown in productivity growth was underway well before the recession (and crisis).  The financial crisis (centred in the US) cannot be to blame for something that is (a) apparent across crisis and non-crisis countries (especially when the non-crisis countries are less productive than the US to start with), and (b) when the phenomenon got underway before the crisis or recession did.

(The Conference Board Total Economy database does have MFP estimates for my full group of non-crisis countries.   They use a different model to estimate MFP, but the same two key observations hold in their data: the slowdown was apparent in both lots of countries well before the crisis/recession, and (if anything) the US has done better than the non-crisis group both before and since its crisis.)

But what about some of the euro-area countries you ask?  And the Reinharts themselves rightly point out how poor the economic performance of Italy (and Greece) has been.  The OECD doesn’t have MFP estimates for Greece, but here are the estimates for three other embattled euro-area countries: Portugal, Spain, and Italy.

MFP crisis 2

All three countries have been in deep trouble for a long time now –  the estimated level of MFP peaking around 2000.   On this score, the trends don’t look materially different over the last decade than over the years leading up to 2007.    Whatever the cause of their problems with productivity, it can’t have been the financial crises these countries went through.

And perhaps nor would you expect it.  Readers might recall a wrenching financial crisis that Korea went through in 1998.   And here is the OECD estimate of multi-factor productivity for Korea.

mfp crisis 3

You can see the 1998 crisis/recession in the data, but as a short-term blip.  In the decade after the crisis, Korea productivity growth kept on at much the same rate experienced in the decade prior to that crisis –  before (presumably) joining in the global slowdown this decade.  (That had also been the experience of the United States in earlier crisis episodes –  estimates suggest that the 1930s, for all its problems (around demand shortfalls) was a period of strong MFP growth.)

There is lots to learn from the searing experience of crisis, recession, and slow growth in the advanced world over the last decade or more.   But I still reckon there needs to be a much more careful unpicking of the different strands of the story than central bankers –  who tend to see the world through money and finance lenses, and who are often keen to champion their future role –  are prone to.  To me, the cross-country evidence just doesn’t square with a hypothesis in which the financial crisis itself plays any large part in the sustained disappointing performance of so many countries over what is now such a long time.

Central bankers meanwhile might be better off rethinking the merits of arrangements like the euro, or of the continued passivity around the near-zero lower bound, both of which look as though they have the potential for causing very major problems the next time there is a serious economic downturn.