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July 6, 2018

Confronting the Dragon

Of No Real Use

A young man might go to business school believing he is obtaining some sort of academic training that will enable him to make a comfortable living.  His degree may gain him entry into a large corporation, where he can work his way up to a good income.  This may even put him on the fast track to what he envisions as success.  
But his academic training likely won’t be of any real use.  He won’t be prepared to create new products or deliver new services or technologies.  He won’t possess any special knowledge that will improve the well-being or satisfaction of others.  He won’t have the skills to bring in new business or grow the bottom line.
Rather, his academic training will have prepared him to use spreadsheet entries to forecast quarterly revenue and margin targets.  What’s more, if the numbers show a disagreeable trajectory, he won’t have the skills or slightest inkling as to what to do about it.  He’ll merely ride the wave down until it crashes on the rocky reef.
But if he is in a position of leadership, he will likely panic.  Out of his element, he will chase one idiotic solution after another.  He will package up and sell off a segment of the business.  He will invest in a new company branding initiative or fancy computer based system tools.  He will postpone the effective date of annual merit increases until the second quarter.  He may even require that workers put $0.25 cents in a collection jar every time they fill up their coffee mug.
The results of these efforts will likely be the exact opposite of that intended.  Instead of stemming the hemorrhage of red ink, these efforts will accelerate it.  Before long the productive employees will jump like rats from a sinking ship.  After that, the company will take on water in earnest.
We have seen it happen first hand.  We know how quickly these things can go down.  Here is the point…

A Track Record of Perfection

Peter Navarro is the Director of the National Trade Council of the United States.  This, no doubt, sounds like an impressive and essential job title.  Yet, somehow, the first 241 years of the nation’s existence passed along fairly well without it.
So given that this is now an essential office of the executive branch of the U.S. government, we have some questions.  Namely, what is it, exactly, that the Director of the National Trade Council does?  Do you know the answer?  Well, neither do we.
We do know that Director Navarro, a PhD in economics from Harvard, spent over 40 years in academia.  His primary purpose has been researching and writing about how America gets a raw deal from its global trading partners.
On occasion, Navarro’s taken a break from his studies to run for political office in San Diego.  As a political candidate his track record is perfect.  He lost the mayor’s race in 1992, the 49th Congressional District in 1996, and the District 6 city council seat in 2001.  We even came across one report that he’d run for political off five times, losing each time; though we couldn’t confirm the details.
The exclusive attention of Navarro’s labors since roughly 2005 has been focused, in the words of one of his book titles, on Confronting the Dragon.  The dragon to be confronted, according to Navarro, is China.  His main premise is that war with China – both trade and military – is inevitable.
In economic circles, he is considered an embarrassment.  Dan Ikenson, director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, called Navarro a “charlatan”.  The Economist thinks his ideas on the trade deficit are “dodgy economics” and “fantasy”.

Confronting the Dragon with Peter Navarro

But in Navarro, President Trump found his perfect stooge.  Here is a man who provides Trump with the limited academic cover he desires to pursue his MAGA agenda.  Attainment of this ideal seems to hinge upon closing America off from foreign competitors so that American workers can get back to work making light bulbs and picture frames.
The difference between the President and the Director of the National Trade Council on any issue of the day comes down to one point: rule.  The President can order practical or impractical actions on all important and trivial matters.  The Director, on the other hand, is limited by his influence.
Navarro, a lunkhead, has presently garnered full influence over President Trump in the area of foreign trade.  Together, they are unleashing economic chaos on friends and foes alike through new tariffs and border taxes.  Yet, their assessment of the cause of America’s troubles is off the mark.

US real manufacturing output per worker is close to a record high (so is real manufacturing output overall, although it remains slightly below the peak it reached just before the GFC). As this chart illustrates, manufacturing output and employment have moved in opposite directions for a very long time. This is akin to what happened in the agricultural sector, which employed almost 80% of the workforce a century ago – and although it employs just 2% of the workforce today, its output has gown by orders of magnitude. Such far-reaching changes in the economy are a hallmark of progress, but they are always disruptive. This is why there is always resistance to such changes, despite their promise of boosting overall living standards (a famous example are the Luddites who tried to stop factory automation in its tracks at the time of the Industrial Revolution). The chart also hints at the fact that decades of incessant money printing and debt accumulation under the fiat money regime have led to capital consumption, as too much capital has been malinvested over a succession of boom-bust cycles – hence the sharp slowdown in productivity growth in recent years. One can hardly blame trade with China for this. [PT]   
After decades of government expansion and ever increasing government and consumer debts, the United States finds itself on a disagreeable trajectory.  These massive debts, remember, are responsible for the gaping trade deficit.  In China, Trump and Navarro have a convenient boogeyman – a dragon – for the imagined decline of America’s manufacturing sector.
Alas, the result of their trade policies will likely be the exact opposite of that intended. Confronting the dragon with Peter Navarro is a losing prospect.  Without question, these actions will lead us to bitter defeat.
Trump mainly seems to be fighting the Dragon by utterly confusing it. One should probably wait and see what will actually happen. Trump often makes astonishing U-turns which reveal that whatever he threatened to do was really just part of his negotiation strategy (US-North Korea relations are a prime example of this approach). It may well be that he is merely using the rabid one-track Navarro as a stick. It is of course true that current global trade arrangements do not represent free trade, but rather managed trade. They are still better than the heavily protectionist situation in place before. We should add, we have rarely heard Trump say anything about trade that didn’t sound economically ignorant;  however, to his credit, he appears to have proposed at the recent G7 pow-wow that everybody should simply remove all trade restrictions, which his counterparts apparently considered a complete non-starter (that would not surprise us, as their commitment to free trade is paper-thin) – if that is his goal it would certainly be worthy of support. We cannot really know if that is truly the case though (not yet, anyway). [PT]  

Courtesy of MN Gordon, Acting-Man (More from Acting-Man here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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