Market Political Risks Rising: U.S. Immigration...
...Delphi labor contract, French employment law, China currency/trade, Iran
In my 3/24 "Economic/Financial Monitor: Potential Tipping Points Could Make Spring Very Interesting" link, I noted a number of economic and financial risks that could possibly increase this spring. Of these, the rise in long-term interest rates and Fed policy continue to get considerable attention.
The FT's lead editorial today says, "The bad news is that this cyclical adjustment [in long-term rates] may have further to run. Moreover, if the structural underpinnings of today's low interest rate environment ever came under pressure, the resulting sell-off would make recent price falls look like a picnic."
This post will focus on political risks. The U.S. immigration debate is an example of the American public yet once again being emotionally divided and pitted against each other, absent any viable political leadership from either major party nor intelligent debate in the mass media, over an issue in which the president greatly oversold the reasons for and beneficial impact of his policies.
In this case, I'm not referring to Bush II and the invasion of Iraq, but rather to Bush I, Clinton and NAFTA. Not mentioned in the mainstream media, the immigration issue is really about the unfulfilled promises of NAFTA "free trade" and the current market distorted, hyper speculative version of globalization.
Bush I and then Clinton sold the American public on NAFTA on the dual promises that it would help save high-paying American manufacturing jobs as the U.S. exported to a rapidly developing Mexico and other "developing" nations for which Mexico would be the model, leading to reduced immigration to the U.S.
Little noted by the pro-globalization mainstream media in the ongoing immigration debate is that these two promises, saving U.S. manufacturing employment and reduced immigration, about NAFTA have not been fulfilled since it went into effect on Jan 1, 1994.
Yet though the Mexican economy clearly remains mired in low growth, the Mexican stock market has tripled since the beginning of 2003, so Mexican "oligarchs" and U.S. hedge and private equity funds and mega-banks must certainly be very happy. Perhaps if they look carefully at the immigration issue, some Americans might finally begin to question whether isn't that really the goal of the hyper speculative version of globalization that currently prevails?
Mexican economic growth from 1993 to 2003 was a mere 2.7% per year, even after the massive devaluation of 1994, which helped drastically cut Mexican living standards at the time (in a bailout for U.S. speculator bondholders arranged by Clinton's Treasury Secretary and Goldman-Citigroup banker Rubin), and is currently stuck in the 3-4% range, and even that increase is mainly due to high prices for its oil exports. About half of Mexico's population of more than 100 million lives on less than $5 per day, with huge income and wealth inequality (I may expand on Mexico in a follow-up article).
Over that same ten-year period, the U.S., whose GDP per head is over six times that of Mexico (more than four times in purchasing power parity terms), grew 3.3% per year; China, with thirteen times the population of Mexico, 8.9%, 9-10% the past two years; India, with ten times the population, 6.2% per year, 1-2% higher that that most recently; and Vietnam, with 84 million people, at 7.4% annually.
These high growth rates are due mainly to each country's own efforts, along with the benefit of outsourcing by global corporations that have much preferred China over other "developing" nations for manufacturing, especially following its 2001 accession into the WTO.
At least some serious development economists have noted the limitations of NAFTA. Here is a view of its impact on Mexico, from an interview with Daniel Lederman, World Bank senior economist, co-author of "Lessons from NAFTA for Latin America and the Caribbean Countries: A Summary of Research Findings":
"The main lesson is that a free-trade agreement is not a substitute for a development strategy. It is but one of the ingredients in a much broader development framework. According to one of our estimates, without NAFTA, Mexico's GDP per capita would have been 4 to 5 percent less than it was at the end of 2002. This indicates that NAFTA had a net positive effect on the economy, but a rather small one after almost a decade of implementation. NAFTA alone hasn't been enough to propel Mexico onto a path of fast-paced and sustainable long-term economic growth. There are some structural factors, related to domestic policies that are impeding its development. Three key factors are constraining the country's ability to catch up to the levels of development in the United States and Canada. They center around the quality of institutions, a lack of innovation, and deficiencies in infrastructure."
One of the lead articles in the pro-globalization "The Economist" this week with this sub-head, "Settling America's migration now requires a stronger NAFTA as well as wiser legislation," calls for more of the same "free market" medicine, with a twist, concluding:
"Nowadays, Mexico creates decent jobs for only around a quarter of the 800,000 who join its workforce each year. The main way to change that is for Mexico's next president, who will be elected in July, to push through long-delayed reforms of taxes, energy, labour, and competition laws ... A North American infrastructure fund--in which the United States matched Mexican investment--makes much more sense than spending money on a border wall."
Turning to the U.S. side of the immigration issue, manufacturing employment is down 3.4 million from its most recent peak (seasonally adjusted) in March 1998, most of that decline, 2.8 million, coming in the first three years since Bush II took office, with a slight decline since then for the past two years despite strong economic growth in the U.S. and worldwide.
The average weekly real (inflation-adjusted) earnings of U.S. workers are up a mere 1.3% total, 0.2% annually, since Bush II took office, and are actually down 1.6% the past two years, despite a so-called "tight" labor market with a low reported unemployment rate, most recently 4.8%, during that period. This follows a 9.6% increase in worker earnings from Jan 1996 to Jan 2000, the only sustained increase since 1972, having declined 17% over that entire period (see Table B-47, pg 338, 2006 "Economic Report of the President," link.)
(The ongoing debate over the tightness of the U.S. labor market is just one of many that make little sense to me. How could the labor market be tight if real wages are not increasing? There is a global "oversupply" of labor due to the failure to adequately invest savings in productive employment generating businesses rather than in m&a and hyper speculation. This is part of the endless inflation debate, where wages and tradable goods have been deflating while financial assets and commodities have been massively inflating. Cutting costs through labor arbitrage, i.e. shifting production from higher to lower wage regions, is not true productivity nor innovation. I am similarly baffled by all the debate re the strength of U.S. capex taking over from the American consumer if necessary in the second half. There has been a huge capex boom for the past five years, it just happens to be in China.)
Here are a few quotes from recent news articles in the mainstream media about the economic facts behind the U.S. immigration debate. My point in citing these is most definitely NOT that immigrants are hurting U.S. workers, the real issue is lack of a just global economic development, including in both the U.S. and Mexico, but rather to note the underlying economic source of the U.S. backlash.
"The Center for Immigration Studies, which is in favor of some restrictions on immigration, recently issued a report looking at jobs and undocumented workers. One of its conclusions was that between March 2000 and March 2005, only 9 percent of the net increase in jobs for adults went to people born in the US. "This is striking because natives accounted for 61 percent of the net increase in the overall size of the 18- to 64-year-old population," writes Steve Camarota, director of research. Howard Hayghe, an economist at the Department of Labor, confirms that this number is correct." "Immigration debate crux: jobs impact," "Christian Science Monitor," March 30, link.
"According to his [Camarota's] study, published in March, unemployment among the native born with less than a high school education was 14.3 percent in 2005; the figure for the immigrant population was 7.4 percent ... George J. Borjas, a professor of economics and social policy at the Kennedy School of Government at Harvard University, said he believed that the flow of migrants had significantly depressed wages for Americans in virtually all job categories and income levels. His study found that the average annual wage loss for all American male workers from 1980 to 2000 was $1,200, or 4 percent, and nearly twice that, in percentage terms, for those without a high school diploma. The impact was also disproportionately high on African-Americans and Hispanic-Americans, Professor Borjas found. "What this is, is a huge redistribution of wealth away from workers who compete with immigrants to those who employ them," he said." "Immigrants and the Economics of Hard Work," "The New York Times," April 2, link.
"Mexico touts annual job growth of 550,000. But that doesn't begin to soak up the million who are added to the work force. No wonder 400,000 illegal workers arrive in the U.S. every year. The biggest problem is education. Mexico spends just 5% of GDP on schooling"
"The [income] gap is now wider than it was when Mexico, the United States and Canada signed the North American Free Trade Agreement in 1992." "Immigration debate seen skirting root cause," Reuters, March 29, link.
Unfortunately noting such basic facts, as mainstream liberal economist Paul Krugman did in a recent NYT op-ed article, was twisted by neocon British bulldog Tony Blankley on the last "McLaughlin Group" to try to tag Krugman with supporting the economic views of the anti-immigration right, such as those of another regular on that show, Pat Buchanan.
I am not going to go through all the devious political calculations of both major parties on immigration that are fully covered in the mainstream media. Suffice it to say, I repeat, the immigration debate can NOT be fairly and successfully resolved if it is posed in that way, pitting illegal immigrants against low-paid American workers. In the final analysis, this is really all about creating good, high-paying, secure jobs, in the U.S., in Mexico, globally, not mainly about building fences, guest worker programs, amnesty, etc., etc.
Perhaps in a worse case scenario, the U.S. would run the risk of alienating a very large group of hard-working, underpaid workers within its borders whose aspirations were raised and then seemingly dashed. Long-standing grievances and rising expectations not being met erupted in several years of massive urban riots in the U.S. in the 1960s. That is not going to happen now, but the prospects of having huge numbers of angry people already here would not be a good one.
The Mexican immigration issue was high on Bush's agenda when he was first elected. Like a lot of other key issues, most especially N. Korean nuclear armament, it was pushed way down on the administration's priority list by the Bush/Cheney pre-occupation following 9/11 with invading Iraq for neocon rationales.
Imho, as I briefly noted in my 3/24 article, at the root of many of the stories currently in the general news, such as those listed in this post's title, is a growing reaction and backlash to the inexorable increase in global inequality and a widespread basic sense of unfair justice, both "distributive" and "procedural," as seemingly inherent features of the current hyper speculative version of "globalization."
I.e., the rich just keep getting richer, with the number of billionaires and corporate profit margins at record levels, while the poor and "common man" don't seem to matter very much, and there's nothing one can do about it, since "globalization" is considered by the mainstream media the economic equivalent of a "force of nature." (I strongly favor everyone getting as wealthy as possible through innovative and ecologically sustainable new products and services, but not through economically wasteful and immoral financial hyper speculation, with light taxes on the former real wealth creation and heavy ones on the latter "paper" one.)
Up until now, popular backlash to "globalization" has been virtually non-existent in the U.S. With the domestic population seemingly not a problem, the most likely source of tension that the elite seemed concerned about was geopolitical, between the U.S. and so-called "rogue states," especially Iran, and perhaps ultimately between the U.S. and the "peaceful rise" of China, currently manifested in threatening protectionist action over currency and trade, with the U.S. and Europe filing a WTO action against China.
Unlike the U.S., other areas have felt rising internal tensions, e.g. Europe, most recently in the massive demonstrations in France over its employment law and before that immigration issues, and China, with confrontations (at last count over 80,000 per year) over land seizures and local official corruption.
In these areas, memories of the social convulsions of the late 1960s, especially the worldwide wave in 1968, most well-known in Europe but which also engulfed China in the "cultural revolution," are starting to faintly echo once again. Even in the usually much more flexible labor markets of the U.S., according to one news story, a few young high school protestors against proposed changes in immigration law decided to sit down, because one of them vaguely remembered something about sit-down antiwar strikes in the 1960s. Perhaps there may even be a UAW strike this spring, with that union in a far weaker position than it was in the very bitter Lordstown, Ohio strike of 1972
(Btw, the main concern in the financial markets re the massive loss of auto industry jobs this time around has been its possible impact on GM credit derivatives, a far cry from the Chrysler bail out of 1980 in which jobs and U.S. industrial capability were the main concerns. The battle to save U.S. manufacturing employment was actually lost in the Reagan administration, partially because the Dems did nothing, one of the main reasons they became susceptible to losing the so-called "culture wars," and Silicon Valley entrepreneurs eventually were "seduced" by and allied with Wall Street, much later also Hollywood, rather than the industrial heartland.)
Clinton expended much of his political capital after his 1992 election following the advice of Greenspan and Rubin, the Goldman Sachs and Citigroup banker, to balance the budget to placate the bond market and to pass NAFTA, with its sham labor and environmental side agreements to placate the liberal wing of his party. NAFTA passed the House 234 to 200, with 132 Republican votes and 102 Democrats.
Afterwards, Clinton was unable to gain any traction with what he had considered the key item on his agenda, massive health care reform. Now, old-line manufacturing companies such as Delphi are buried in red ink, in part due to highly costly healthcare and benefits packages, and are trying to rip up their legally binding labor contracts via bankruptcy (which is now denied individuals due to the new draconian bankruptcy laws). See my 3/16 "FHPN Krugman's NYRB long essay, "The Health Care Crisis and What to do About It," brief excerpt," link.
Btw, the Delphi "turnaround specialist" president initially proposed wage cuts of about 50-60% percent. Wouldn't it be a little more fair if all American CEO's instituting massive layoffs and cutbacks also fired themselves, forfeiting their stock options and golden parachutes, for so blatantly failing at expanding their market share and profits with innovative new products and services? After all, they take credit in their stock options for all the "value creation" when their stock goes up, why not when they fail, how about CEO givebacks, as they ask of their employees? To just ask such questions shows how unfair things have become.
I will try to have more to say on global development issues in a follow-up article, time permitting. For now, let me close by putting these recent stirrings of popular backlash against the current hyper speculative version of globalization in an historical context. As I alluded to earlier, the first signs of stirrings of popular unrest against globalization are starting to evoke faint memories of the late 1960s and 1970s.
Ever since the "Asian" financial crisis of 1997-98 (sometimes known in Asia as the "IMF" crisis for the harsh conditions imposed by Rubin-Summers to help bail out hyper speculators at the expense of Asian living conditions, standard operating procedure for the "Washington Consensus" of Republicans and Democrats), I have experienced a growing feeling of "deja vu all over again" with the late 1960s and 1970s.
This might be explained by both Kondratieff-Elliott Wave stock market pro-capitalist types, the most well-known being Robert Prechter, and at the opposite end of the spectrum the few remaining marxists, as indicative of some sort of regular crisis in the capitalist global economy and financial markets that seem to occur at roughly thirty year intervals. There was a secular bear stock market from 1968 to 1982, whether a new one started in 2000 is still open to question. I will not discuss those views here, but simply note the uncannily eerie parallels between the two periods.
Among the many parallels between these two eras, first and most fundamental are very deep global economic imbalances, which in the earlier period led to a massive dollar crisis and the breakdown of the Bretton Woods gold-linked fixed currency rate monetary system in 1971. In the current period, it is claimed a "balance of financial terror" has resulted in what some economists have very misleadingly dubbed a "Bretton Woods II" arrangement between the world largest debtor, the U.S., and its creditors, in this case East Asia and Mideast oil producers.
Among the other similarities, both periods also experienced the following: huge equity bear markets, 1973-74 and 2000-02; rapidly rising prices of oil, gold, and other commodities; large real estate inflation; political crisis, such as Watergate and the near impeachment of Nixon, the actual impeachment of Clinton, and the 2000 presidential election decided by the Supreme Court; an increase in terrorism in both periods; major shifts in geopolitical alignments, in the earlier era in detente with the Soviet Union and the thawing of relations with China, e.g. the recent India nuke deal; major shifts in the global economy, with Japan and Germany coming into prominence in the earlier era as challengers to U.S. industrial supremacy; populism in Latin America, with Venezuela's Chavez now targeted as Chile's Allende was then; Mideast wars, the 1967 Six-Day War and the 1973 Yom Kippur War, which brought the U.S. and the Soviet Union to the brink of nuclear showdown. I've probably left a few more out.
The last parallel is probably currently the most troublesome, with continuing statements from the Bush administration similar to those just once again exposed last week in talks between Bush and Blair a few months prior to invasion of Iraq. The major difference this time being that the U.S. now has a doctrine of using "tactical" nuclear weapons if deemed necessary, and the Clinton centrist Dems continue to try to out-Cheney Bush on Iraq and Iran. I will try to deal with the very real dangers of nuclear proliferation in a later article.
(Btw, the U.S. gained half a million square miles. one third of Mexico's territory at the time, after provoking the Mexican War in 1846, which the first two Republican presidents criticized, Lincoln speaking out against it at the time in his only term as a House member, and Grant, who served well there, later calling it "one of the most unjust ever waged by a stronger nation against a weaker nation.")