Category Archives: political economy

“Bound to Add Upward Pressure”

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An American Enterprise Institute letter-writer wrote in Monday’s Letters section of The Wall Street Journal about his concerns regarding David Malpass’ view that the Federal Reserve needs to seriously set about reducing its balance sheet.

With the budget deficit projected at about $2 trillion a year and with foreign investors seeming to be losing their appetite for US Treasury bonds, any attempt by the Fed to reduce its balance sheet size today is bound to add upward pressure to long-term interest rates.

This, despite his stated position in his immediately prior paragraph that

David Malpass is certainly correct to argue that Fed balance sheet reduction is a worthy monetary policy objective[.]

If not now, though, then when? There’ll always be an excuse for today to put off the shrinkage until later, but there’ll always be some Next Big Thing coming up later that wants more delay. The letter-writer headlined his missive with the position that the Fed needs to take a long view in its determination of when to shrink its sheets.

It’s just barely possible, though, that the new Director has just that perspective. The longer the balance sheet reduction is delayed, the more expensive and disruptive to our economy that reduction will be when it is put into action. It’s the suboptimal short-term view to wait until later to begin for today’s convenience.

No, either way, short-term upward pressure will be added to interest rates. Better to grunt through that disruption now, before it gets really expensive.

Tradeoffs

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We, as a nation, have three questions that we must answer in order to proceed optimally into the future, according to Matthew Slaughter, of Dartmouth‘s Tuck School of Business, and David Wessel, of Brookings‘ Hutchins Center on Fiscal & Monetary Policy. They’re largely correct, but they miss one Critical Item without which our path into a prosperous and growing future would be severely constrained, if not blocked altogether.

In their question regarding “walls or bridges,” the two argue against walls—tariffs—and for trade globalization as the path to prosperity via competition and its heavily encouraged innovation rates that such free trade creates.

[R]esearch has long shown that globally engaged companies tend to create the good jobs at good wages for which so many Americans are yearning. In 2023, the US parent companies of US-based multinational companies paid their 29.9 million workers in America an average total compensation of $97,078—about 20% above the average in the rest of the private sector.

They didn’t address, though, the downside of their largely unfettered free trade regime. That downside was amply illustrated by the recent Wuhan Virus situation, during which our dependence on the People’s Republic of China’s medicines—and not just for Virus medical supplies, but also for over the counter pain killers and anti-inflammatories, even a variety of flu medicines—was exposed, along with the world’s dependence on the PRC even for simple things like face masks.

The downside was graphically demonstrated much more recently by the PRC’s control over rare earths, from ore through processed rare earths to finished products, and its use of that control to throttle their export and thereby threaten our economy and that of Japan’s.

The Critical Item is this tradeoff. Carry out free trade globalization; it is valuable, but do it within this framework. There are a few items that are critical to our national security and to our economy (there is a lot of overlap between them): those rare earths, the raw materials for medicines. For these, we need to have our own supply paths, wholly contained within our borders, that stretch from dirt in the ground through final product deliverable to the domestic end user. These nationally-contained supply lines need not be the only sources for these materials; it’d be sufficient for them to be in place, actively used, and able to be rapidly expanded during periods when overseas sources become constrained.

That tradeoff will be expensive, but that cost is simply—and necessarily—a cost of maintaining our national security, our ability to defend ourselves, whether militarily or economically. The cost of being unable to will be far greater, and not only fiscally.

Yet Another Reason

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The European Union is moving toward passing legislation that would allow it to curb imports of heavily subsidized foreign products. The legislation doesn’t single out any particular nation; although, the Peoples’s Republic of China is infamous for such subsidies.

Those subsidies allow PRC businesses to sell their products at less than their cost of production in order to sell at lower prices than European businesses can due to their own, unsubsidized, costs of production. That allows the PRC to put those businesses out of business and to seize nearly all of the market share. In the aggregate, this cascades into steadily increasing PRC influence over European economies.

Naturally, the PRC wants to continue this domination, so it’s threatening countermeasures if Europe continues with the impudence of defending itself.

Chinese authorities could initiate anti-discrimination and supply-chain security investigations into the EU’s “overcapacity instrument,” a social media account run by China’s state broadcaster said Friday, citing unnamed sources.
If the EU advances the tool, China will take immediate action and deploy comprehensive countermeasures, it added.

Of course, that retaliation wouldn’t matter if Europe’s nations were doing no business with the PRC or with businesses domiciled there.

The PRC keeps providing reasons for discontinuing business with or within it. It’s time for the EU and for Europe’s nations individually to act on at least some of those reasons, for their own economic survival.

Throw Money at it

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The letter-writer seems to be writing from the Left. Opening with Praise for Ohio’s Republican candidate for Governor Vivek Ramaswamy’s proposal for attacking Medicaid fraud, he quickly pivoted.

States need more funds to address fraud….

How typical.

No, States do not need more funds to combat and drastically reduce, much less “address,” fraud. Were States actually to get serious about combatting and reducing Medicaid, they’d uncover 10s of millions, if not billions, of dollars of fraud, and they’d recover significant percentages of those dollars. Those dollars then could feed back into the program to help keep Medicaid fraud down to an absolute minimum.

To address the problem for long-term of vastly reduced fraud and commensurate reduced fraud recovery funds, States need only to reallocate existing spending. They most assuredly do not need more money blindly and blithely tossed over the transom at the problem.

What Error did she Acknowledge?

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In James Freeman’s Best of the Web Wednesday piece, he wrote of Seattle’s newly elected socialist mayor Katie Wilson’s supposed acknowledgment of her problem vis-à-vis her disdain for big business in a competitive market. In her series of victory laps shortly after her election, she crowed while at a barista union rally,

I am not buying Starbucks, and you should not either.

With the ensuing backlash, which includes an exodus of big businesses like Starbucks from Seattle, she then said,

Those comments were not productive in the sense that they caused more harm than good….

Freeman then quoted, without questioning, Danny Westneat, writing for the Seattle Times:

Admitting errors in public is hard…. Conventional political wisdom says it means you’re weak. In this case, I’d argue it’s a positive sign for the future of both the mayor and Seattle.
It means the mayor is at least more grounded in the real world than some of her blinkered progressive fans….
Maybe this is a chance to reset relations with businesses—at least ones other than Starbucks, where it may be too late.

But what “error” is Westneat claiming Wilson has admitted? In fact, it’s quite clear from Wilson’s own words, and Westneat has chosen to ignore it. Wilson admitted the error of her words, not the error of their intent, which is and always has been, her disdain for and assaults on free markets and the larger businesses that operate in them.