August 23, 2017

Economic Scene: Labor Wants to Make Nafta Its Friend. Here’s the Problem.

“Stipulating that countries must pay above-market wages when producing export goods for the U.S. feels like outrageous economic imperialism,” said David Autor, an economist at the Massachusetts Institute of Technology. “Should Germany also impose this rule on the U.S., since our manufacturing workers surely make less than their German counterparts who are working under industry-level labor agreements?”

It is not the first time organized labor has thought along these lines. In the early ’90s, when Nafta had yet to become law, the union-backed Alliance for Responsible Trade argued that minimum wages in the tradable-goods sectors of all three North American countries should “move as quickly as possible toward that of the highest-wage country” and allow for a decent quality of life.

This time, though, labor has a better hand. It can afford to be bolder. A quarter of a century ago, unions reluctantly acquiesced to Nafta based on the premise that American workers would get the better end of the deal — new high-skilled, well-paid jobs in a regional supply chain that sent only its low-skill, low-wage bits south of the border.

What’s more, the cheap labor they so feared would become more expensive over time. Investment in Mexico by multinationals serving the North American market would naturally lift Mexico’s standards of living to converge with those of its neighbor to the north, turning Mexicans into rich consumers hungry for American-made products.

This didn’t quite happen. American manufacturing has lost millions of jobs, and typical household incomes have increased by less than half a percent per year. Most troubling for American workers staring into a future in which Nafta is still the name of the game, the wage gap with Mexico has not closed, even with the tepid wage growth in the United States.

U.S. Manufacturing’s Inexorable Decline

Ever since the end of World War II, the share of American workers employed in the manufacturing sector has been in almost steady decline — a trend that predated the inception of Nafta and China’s entry into the World Trade Organization.

SHARE OF U.S. WORKERS EMPLOYED

IN THE MANUFACTURING SECTOR

40

%

30

DEC. ’01

JAN. ’94

China becomes

member of W.T.O.

Nafta enters

into force

20

10

0

’40

’50

’60

’70

’80

’90

’00

’10

SHARE OF U.S. WORKERS EMPLOYED IN THE MANUFACTURING SECTOR

40

%

30

DEC. ’01

JAN. ’94

China becomes

member of W.T.O.

Nafta enters

into force

20

10

0

’40

’50

’60

’70

’80

’90

’00

’10

By The New York Times

Despite receiving billions in investments in gleaming state-of-the-art factories since Nafta came into being, Mexico’s auto industry still pays wages between a sixth and an eighth of those in the United States.

Mexico’s depressed wages remain a potent symbol of the shortcomings of Nafta as a tool for economic development. They offer a note of caution against the proposition that liberalized trade and investment alone can deliver the developing world from poverty.

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“Wages are really low in both absolute and relative terms, among the lowest wages in Latin America,” said Ben Davis, director of international affairs at the United Steelworkers union.

“Low wages in manufacturing are not because of low productivity,” he said, but because of Mexico’s policy “of keeping wages low as an incentive for companies to locate there.”

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Presented with a new shot at the trade deal, labor unions do not want to be fooled again. “In 1990 we would have been laughed out of the room had we talked about living wage,” said Thea Lee, who resigned as deputy chief of staff at the A.F.L.-C.I.O. in May after two decades at the organization. But “a lot of the comforting narrative didn’t happen.”

Still, the A.F.L.-C.I.O.’s argument does not quite deliver the justice for workers it so forcefully promises. Though Nafta has not produced a rich and prosperous Mexico, the labor federation’s demand for Mexican wages to be pulled up to a North American floor is unlikely to improve jobs or wages in the United States. What’s more, such a move could halt Mexico’s development.

The idea of a living wage, said Dani Rodrik of the Kennedy School of Government at Harvard, “is very difficult to define and can be harmful to employment if enforced too strictly.”

Nafta’s bad reputation is largely undeserved. It did not stop the decline in manufacturing jobs in the United States, but neither did it add much to it. Even the most persistent critics acknowledge that Nafta did not cost American workers more than a very small number of jobs. Neither did Nafta have much of an effect on wages north of the Rio Grande, according to most studies.

Researchers focusing on the most vulnerable sectors have identified substantial wage losses in narrow industries, like textiles and footwear. Yet it would seem strange to argue that protecting traditional low-skill industries should guide trade policy into the future.

Mexico’s dismal wages are an urgent problem. They will not rise by fiat, however, but only by improving productivity across the economy. Mexican labor productivity has grown less than 10 percent since Nafta came into effect, according to the Organization for Economic Cooperation and Development. That’s less than a third of the productivity growth in Canada, and less than a fourth of that in the United States.

What keeps Mexican wages down is not Nafta but Mexico’s vast informal economy outside the boundaries of laws and regulations, where half of the labor force toils in low-productivity jobs in small-scale manufacturing for the domestic market, low-skill services and the like.

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Labor is right to worry about low wages in both the United States and Mexico, noted another economist, Gordon Hanson of the University of California, San Diego. “But a living-wage law would apply only to the formal sector, and that would make the formal sector even smaller.”

Nafta could be improved to better protect workers’ rights, assuming this is what the Trump administration really wants to do. Proposals by the A.F.L.-C.I.O. to facilitate complaints against abusive employers and to ensure quick and effective enforcement of agreed labor standards could prevent violations.

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A vehicle undergoing testing at the Kia assembly plant in Pesquería, Mexico. Production of smaller cars in Mexico helps sustain networks of auto parts suppliers throughout North America. Credit Susana Gonzalez/Bloomberg

An improved Nafta could, indeed, help improve living standards for workers across North America — by further reallocating resources in the ways that are most productive. Regional integration gave the North American auto industry a competitive edge, for example, by adding a lower-wage platform in Mexico to make smaller cars. This increased the scale of production and helped sustain a larger ecosystem of auto parts makers, ultimately adding high-quality jobs that might otherwise have been lost to Asia.

Some jobs are likely to relocate to Mexico under this new deal, though. Policy makers must offer more than lip service to people displaced from their jobs by these transformations — including serious training programs and more robust safety-net services like, say, extended unemployment insurance and maybe even wage subsidies for workers who end up in lower-paying jobs.

But the core challenge is to figure out what will help productive, competitive industries grow in North America. That is something that putting a wage floor under the Mexican labor force will not do.

Email: eporter@nytimes.com; Twitter: @portereduardo

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Article source: https://www.nytimes.com/2017/08/22/business/economy/nafta-labor-unions-wages.html?partner=rss&emc=rss

China, Like U.S., Struggles to Revive Industrial Heartland

A rush of wealth was plowed into new apartment towers and shopping malls in Shenyang. The city still has an industrial air, with central office blocks designed in a near-uniform drab brown, matching its factory complexes.

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Hong Qifan, left, and Ma Ke, founders of Phoenix Valley, a business incubator. “The development in Shenyang is not as fast as in Beijing and Shenzhen, but if start-ups are really good at what they do, they will have more potential to grow,” Mr. Hong said. Credit Yuyang Liu for The New York Times

But as China’s investment binge fizzled, Shenyang and its factories sputtered. Last year, the economy of the northeastern province of Liaoning, of which Shenyang is the capital, shrank 2.5 percent — a shocking figure in a country accustomed to seemingly endless expansion. Other major cities have sped ahead of Shenyang in the development of the high-tech and service companies expected to propel China’s future growth.

The entire northeast of the country, where much heavy industry has been concentrated, runs the risk of being left badly behind. The decay of this factory zone has left Beijing with a similar knotty problem to the one that has plagued Washington for decades: how to resurrect down-on-their-luck areas.

In the United States, President Trump plans to streamline regulation, cut corporate taxes and renegotiate trade pacts to bring factory jobs back to troubled towns.

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Tao Qiuchen, 24, a Shenyang native who founded a company that plans parties. The local government pays the interest on the $23,000 bank loan he took out to start the business. Credit Yuyang Liu for The New York Times

Around the world, state intervention to attempt to stimulate a domestic economy is not unusual. But officials in China, as is often the case, have adopted a much more hands-on approach. With lavish incentives and initiatives, they are trying to attract investment to the region and to upgrade its industries.

Shenyang is a crucial test case. The city has set up a $7 million fund to support high-tech industries, promised a $30,000 bonus for some technology firms, and offered to pare the corporate tax rate for companies in favored sectors.

Mr. Liu’s factory opened inside the China-Germany Equipment Manufacturing Industrial Park, introduced in late 2015 to try to attract advanced production in robotics, automotive components and other industrial sectors. The government offers a 30 percent discount on land, streamlined regulations and other perks for companies that set up in the facility. PQI is now negotiating for rent breaks and cheap land for his current factory, as well as for future investments.

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Employees of a start-up company working from the Shenyang offices of Phoenix Valley, an incubator founded by two local businessmen. The city has set up a $7 million fund to support high-tech industries. Credit Yuyang Liu for The New York Times

Zhang Yanzan, the park’s deputy director, says that, since its opening, more than 140 factories have been completed or are underway, hauling in a total investment of nearly $6 billion. “We hope this park can be an example for other areas,” he said.

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The city authorities are also striving to persuade local college graduates to start companies in Shenyang by offering subsidies. The effort is focused on a shopping arcade of fast-food restaurants and computer outlets that had Start-Up and Innovation Street added to its name in 2015.

On the top floor of one office tower in the area is an incubator called Phoenix Valley, founded by two Shenyang-born businessmen. One room is a cafe, where budding entrepreneurs swap tips over cappuccinos and browse shelves of books on business building. Next door, desks can be rented in a communal office for 300 renminbi, or about $45, a month. The incubator has more than 100 members and will soon open a second office in the city.

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In April, Shenyang opened a branch of the provincial free-trade zone, in which companies can benefit from reduced red tape, discounted land and other advantages. Above, people signed up to register their companies. Credit Yuyang Liu for The New York Times

“The development in Shenyang is not as fast as in Beijing and Shenzhen, but if start-ups are really good at what they do, they will have more potential to grow,” said Hong Qifan, who founded Phoenix Valley with his business partner, Ma Ke, citing China’s capital and one of its southern boom towns.

Shenyang’s taxpayers are contributing to the effort. Some entrepreneurs are eligible for subsidized housing, with rent costing the equivalent of $30 a month. This year, Phoenix Valley received a cash handout from the central and municipal governments worth more than $70,000. Local officials also helped the incubator’s founders negotiate a below-market rent for its headquarters.

Occupying one of the Phoenix Valley desks recently was Tao Qiuchen, 25, a Shenyang native who has founded a company called Hong Mo Fang Enterprise Management, which plans parties. In less than a year, Mr. Tao has hired 20 employees, thanks in part to the local government, which pays the interest on the $24,000 bank loan he took out to start the business.

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The Shenyang area includes apartment towers and shopping centers, and some entrepreneurs are eligible for subsidized housing, with rent costing a mere $30 a month. Credit Yuyang Liu for The New York Times

The government programs “are definitely helping the economy,” he said.

Still, Innovation Street pales in comparison to the efforts in hot spots like Beijing and Hangzhou, a city in the east, which have not only higher salaries, but also entire neighborhoods of start-up centers. And the residents of Phoenix Valley complain that venture capital and talent are scarce in Shenyang.

Other initiatives in the city seem to be generating more buzz than business. In April, Shenyang opened a branch of the provincial free-trade zone, in which companies can benefit from reduced red tape, discounted land and other advantages. At its offices, in the corner of a gargantuan, columned hall worthy of a Star Trek set, dozens of businesspeople and their agents lined up to register companies.

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But the zone’s rules do not require these businesspeople to start any actual operations there. Tian Jiawei, a manager at an agricultural company based near Shenyang, registered an export-import firm, but has no plans to open an office or hire workers.

“I’m not sure what kind of tax break I might enjoy, but I didn’t want to miss the opportunity,” he said.

More problematic: Shenyang’s incentive programs are not unique. “Every province and city in China has policies to encourage investment and start-ups,” said Zhao Xijun, deputy dean of the School of Finance at Renmin University in Beijing. “If northeast cities just do the same, they won’t be able to compete with those who are already ahead of them.”

The result is that, even with its active officials, China may find reviving its troubled industrial towns every bit as challenging as Western countries like the United States do.

“Shenyang still has a long way to go,” Mr. Liu, the factory owner, said. “It is like grass that you burn to the ground. It is going to grow back. You just don’t see it at the moment.”

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Article source: https://www.nytimes.com/2017/08/22/business/economy/china-factories-industrial-economy.html?partner=rss&emc=rss

Sharing the Pie: Trump Says More Jobs Will Help Race Relations. If Only It Were So Simple.

In the middle of 2013, when the jobless rate was 7.5 percent, 70 percent of adults thought race relations were somewhat good or very good. By 2015, unemployment was down to a healthy 5.3 percent, but only 47 percent gave that positive reading of race relations.

One likely reason for the shift is the rise of protest movements over police killings of African-Americans. Those protests took off in August 2014, when a white police officer fatally shot Michael Brown, 18, in Ferguson, Mo. Negative polling on the state of race relations has persisted in the years since, even as the economy has continued improving. As a candidate, Donald Trump stressed the idea that immigrants were stealing American jobs.

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President Trump talked about infrastructure at his news conference on Tuesday in Trump Tower, although this was overshadowed by his remarks about Charlottesville. With him were Steve Mnuchin, the treasury secretary, and Elaine Chao, the transportation secretary. Credit Al Drago for The New York Times

Similarly, more distant examples also show racial attitudes moving based on noneconomic events. Perceptions of racial animus spiked in 1992, amid riots in Los Angeles, but quickly improved the next year. And the late 1990s, when the economy was booming and wage growth was strong, featured consistently negative assessments of race relations in public opinion polls.

That’s not to argue that the economy and race relations have no connection. White Americans may well be more comfortable with minority groups’ rising economic status when they themselves have secure jobs and rising incomes. But for nonwhites, a strong economy is not a cure-all. Janelle Jones, an analyst at the Economic Policy Institute’s program studying race and the economy, argues that nationwide averages don’t tell you everything you need to know about the economic experiences of African-Americans and other minority groups.

“The idea that the availability of jobs is the way to solve race relations is misguided,” Ms. Jones said, in that a job alone doesn’t assure a stable, prosperous standard of living.

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“Even if you have jobs available, there’s still discrimination in pay and promotion,” she said. “Being able to have a job that pays well and comes with benefits, to buy a house in a place that isn’t racially segregated, to send your kids to a school that is not racially segregated, these are parts of what makes for a quality economic outcome.”

And then there’s the question of what the Trump administration’s policy agenda would do for those types of opportunities. Job growth has remained steady in the first seven months of the Trump administration, with the United States adding an average of 179,000 jobs a month since February compared with 187,000 a month last year. But wage growth has been only slightly faster than inflation, with average hourly earnings up 2.5 percent over the last year. That number was 2.9 percent in December.

“It has tended to be the case that when the pie gets bigger, there is more willingness to share some of the increase,” said Margaret Simms, a fellow at the Urban Institute. “However, it is not clear that the number of jobs generated by the actions the president has mentioned will provide the quantity or quality of jobs that would be needed to have this impact.”

Even if job growth and wages were to accelerate further, Mr. Trump also promised big things specifically for inner-city America in his comments on Tuesday. “We are spending a lot of money on the inner cities,” Mr. Trump said. “We are doing far more than anybody has done with respect to the inner cities. It is a priority for me.”

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Mr. Trump’s budget, it is worth noting, would cut spending by the Department of Housing and Urban Development by 15 percent.

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Article source: https://www.nytimes.com/2017/08/18/upshot/trump-says-more-jobs-will-help-race-relations-if-only-it-were-so-simple.html?partner=rss&emc=rss

A 2:15 Alarm, 2 Trains and a Bus Get Her to Work by 7 A.M.

“It’s like school,” she said.

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4:58 A.M. Sleep is a popular way of passing the first leg of the trip. Credit Andrew Burton for The New York Times

ACE ridership has doubled over the past decade, to about 2,500 people a day, though the figure is still dwarfed by the number who commute by car from San Joaquin County to the Bay Area. On that recent early morning, as the train wound toward the Altamont Pass, traffic was already forming on the freeway outside the window.

While drivers sat alert and watched the road, the train looked more like a red-eye flight. Blankets, pillows, earplugs, eyeshades. The few people who were not sleeping distracted themselves with smartphones, laptops and the occasional printed book.

One thing people did not do was talk. Even outside the quiet car, there were few audible conversations.

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5:33 A.M. Ms. James and other commuters make the transfer from train to bus in Pleasanton. Credit Andrew Burton for The New York Times

That was starting to change by the time the train pulled into the Pleasanton station. The sun was rising over a bus that waited on the other side of the station’s parking lot.

Ms. James and a crowd of other commuters crossed the parking lot to the bus, which was headed to the Bay Area Rapid Transit station. As the bus idled and waited for stragglers, a woman urged the driver to get going so she could make her next train.

“It’s amazing how this commute makes infants of adults,” Ms. James said.

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5:34 A.M. With dawn breaking, Ms. James is still not halfway through her commute. Credit Andrew Burton for The New York Times

Ms. James used to live closer, in Alameda, Calif., about 15 miles across San Francisco Bay from her work. But three years ago, after a developer bought her building and evicted Ms. James and her neighbors, she moved to Stockton.

Stockton has more for the money: Ms. James pays $1,000 a month in rent for her three-bedroom house, compared with $1,600 for the one-bedroom apartment she had in Alameda. She can work from home some of the time, so she now has a home office with a desk and a computer, as opposed to the “home corner” she had in her apartment.

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The trade-off is a brutal commute.

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5:47 A.M. Heading for the third leg, a Bay Area Rapid Transit train. Credit Andrew Burton for The New York Times

Long commutes are a byproduct of the region’s tech boom, which has given rise to a full-blown housing crisis. As home prices have escalated beyond middle-class reach, areas far inland have become an oasis of (relative) affordability. Ms. James wakes up in a city where the median home price is below $300,000, according to the online real estate database company Zillow. Prices rise steadily along her commute until she gets off her last train in San Francisco, where a typical home costs more than $1 million.

As more people move inland, home prices are rising faster in the Central Valley than anywhere else in the state: In San Joaquin County (which includes Stockton) and neighboring Merced County, prices are up about 12 percent in the last year.

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Article source: https://www.nytimes.com/2017/08/17/business/economy/san-francisco-commute.html?partner=rss&emc=rss

U.S. Begins Nafta Negotiations With Harsh Words

While trade with Canada has been more balanced in recent years, Mr. Lighthizer said Wednesday that over time the United States has run a significant trade deficit with Canada, too.

Such trade deficits, Mr. Lighthizer said, “can’t continue.” President Trump has made it clear that he regards trade deficits as a primary measure of the nation’s economic health.

Mexico and Canada, however, are united in discounting the importance of trade deficits. Many economists agree that the focus on bilateral trade is misplaced. A nation may run a deficit with one trading partner and a surplus with another. What matters is the totality.

“Canada doesn’t view trade surpluses or deficits as a primary measure of whether trade works,” Chrystia Freeland, Canada’s minister of foreign affairs, said on Wednesday.

Graphic

How Nafta Changed U.S. Trade With Canada and Mexico

Trade has contributed to economic growth, but changing dynamics have also prompted concerns about lost jobs and the trade deficit. But when something is manufactured in the United States, it is often made up of parts from around the world.

Mexico has been even more pointed in resisting the assertion that there is a problem. The economy minister, Ildefonso Guajardo Villarreal, told a Mexican Senate commission last week that he was “delighted to analyze the situation that we call ‘trade rebalancing’ if and when we manage to improve that through expanding trade, not restricting it.”

A key question looming over the negotiations is how the Trump administration’s public bombast will translate into the details of the negotiations. The administration in its early months has repeatedly talked tough and then sought to conciliate trading partners.

The administration, for example, insists that it wants to do away with a system of independent arbitration that allows companies to seek the elimination of tariffs. The system has been used primarily by Mexican and Canadian companies to force the United States to abandon protectionist measures found to be in violation of the agreement.

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Another area of potential conflict concerns the automobile industry. The United States wants to discourage importation of auto parts from countries outside the Nafta region. Under the current agreement, a car assembled in Mexico can be imported into the United States without paying an import tax if at least 62.5 percent of the car, measured by value, was made in North America. The Trump administration wants to raise that bar, and to require that a significant portion of those parts come from the United States.

The United Automobile Workers union has long sought such a change.

But carmakers are wary. The importation of some cheap parts helps to hold down the cost of the final product. In general, a higher share of Nafta components, and a higher share of American components, means a more expensive car.

“Many in the business community feel that the Nafta is working quite well and they don’t want disruption in existing supply chains,” said Jeffrey J. Schott, a Nafta expert at the Peterson Institute for International Economics in Washington. Both Canada and Mexico said Wednesday that they opposed specific standards for the share of car parts coming from any of the three nations.

There is general agreement among the three nations that Nafta needs to be modernized. It was written before the advent of Internet-based commerce, for example, and there is broad support for stronger enforcement of workplace and environmental protections. Indeed, the three nations already renegotiated Nafta once as part of the discarded Trans-Pacific Partnership agreement.

Some issues appear relatively straightforward. The Trump administration is eager to insert provisions addressing currency manipulation. Canada and Mexico float their currencies, and are unlikely to resist the symbolic gesture.

But on more substantive issues, both Canada and Mexico have shown a growing willingness to resist American demands.

Luis de la Calle, a former Nafta trade negotiator for Mexico, said the shock value of Mr. Trump’s bluster and threats had diminished since the presidential election. “Most people thought back then that he had powers to impose duties, close the border, prevent investment,” Mr. de la Calle said. “Now people have learned what trade experts knew all along, that he doesn’t have those powers.”

Mr. Trump also will need to win congressional support for a revised agreement. Democrats, who have long sought changes to Nafta, share many of his stated goals, but Mr. Trump’s political problems could complicate any alliance.

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There is also little if any congressional support for the administration’s threat to withdraw from the trade agreement if Canada and Mexico resist improvements.

Representative Tim Ryan, an Ohio Democrat, said Tuesday that “being bombastic” was not “the mature way” to seek changes. “Ultimately you can have huge disruptions in the economy if you don’t handle this like an adult,” he said.

Ms. Freeland spoke first on Wednesday, and began by holding up pictures of American and Canadian firefighters working together, images that she said “illustrate the deep friendship that our countries share.”

Mr. Guajardo Villarreal struck a similar tone. “Nafta has been more than a trade agreement,” he said. “It has made us think of ourselves as a region.”

Mr. Lighthizer began by acknowledging that Nafta had benefited groups including American farmers and communities along the Mexican border.

Then he insisted that the agreement was broadly damaging to the United States, causing the loss of hundreds of thousands of jobs.

“The views of the president about Nafta, which I completely share, are well known,” Mr. Lighthizer said. “I want to be clear that he is not interested in a mere tweaking of a few provisions and a couple of updated chapters.”

He concluded, “And now, we will get down to work.”

Elisabeth Malkin contributed reporting from Mexico City.

Follow Binyamin Appelbaum on Twitter @bcappelbaum.

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Article source: https://www.nytimes.com/2017/08/16/business/economy/nafta-negotiations-canada-mexico.html?partner=rss&emc=rss

Fed Officials Confront New Reality: Low Inflation and Low Unemployment

But the weakness of inflation, which the Fed now expects to remain below its target annual pace of 2 percent for the fifth-consecutive year, is prompting some Fed officials to hesitate.

Most Fed officials subscribe to a view of inflation in which prices rise more quickly as unemployment declines. The basic idea is that companies must offer higher and higher wages to keep their workers.

Now, the Fed is confronting “the coexistence of low inflation and low unemployment,” a phenomenon that inverts the “stagflation” experience of the 1970s, when both inflation and unemployment climbed.

The meeting account said most officials continued to regard low unemployment as the most important factor. They said inflation was rising slowly because of temporary factors, like a decline in cellphone service prices. And they remain inclined to raise the Fed’s benchmark rate later this year.

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Janet Yellen, the Federal Reserve chairwoman. Low inflation is prompting some Fed officials to hesitate on an interest rate increase. Credit Pablo Martinez Monsivais/Associated Press

But as low inflation persists, alternative theories have blossomed. Some Fed officials see evidence that the low unemployment rate overstates the health of the job market, and therefore that the Fed should wait to raise interest rates. Low rates support job growth by encouraging borrowing and risk-taking.

Others see evidence that the connection between unemployment and inflation has been overstated.

Some Fed officials have suggested that the public is losing confidence that the Fed will raise inflation back to a 2 percent annual pace, which could make it harder for the Fed to do so, because inflation expectations can become self-fulfilling.

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The account said some voting members of the Fed’s policy arm, the Federal Open Market Committee, wanted reassurance that inflation was rising before voting to raise rates again.

The slow pace of wage growth is driving a parallel debate. Wages have increased modestly in recent years, and the minutes noted again there was “little evidence of wage pressures.”

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Some officials see further confirmation that the economy is weak.

Others, however, see the data as misleading. One possibility, advanced by the Federal Reserve Bank of San Francisco, is that aggregate wage measures remain low because the baby boomers are retiring. In this view, older, high-wage workers are being replaced by younger workers who make less simply because they are at an earlier stage in their careers. That is holding down measures of average wages, but individual workers may still be seeing healthier wage growth.

And there are also those who contend that wage growth is doing about as well as one would expect given the slow growth of productivity.

Fed officials continue to retreat from the expectation that the Trump administration will deliver a large dose of fiscal stimulus, whether in tax cuts or increased infrastructure spending. The Fed reported that companies, too, are losing hope.

“Uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade and health care, was tending to weigh down firms’ spending and hiring plans,” the minutes said.

The Fed also included in the minutes a warning about the Trump administration’s plans to reduce what it regards as overly burdensome financial regulation.

“It would not be desirable,” the minutes said, “for the current regulatory framework to be changed in ways that allowed a re-emergence of the types of risky practices that contributed to the crisis.”

Follow Binyamin Appelbaum on Twitter: @bcappelbaum

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Article source: https://www.nytimes.com/2017/08/16/business/economy/federal-reserve-minutes.html?partner=rss&emc=rss

Economic Scene: It’s the Economy, Democrats, but Inequality Is Not the Issue

The focus on inequality misses the mark on more than substance, he argued. In a country where only a quarter of voters identify as liberals, and two-thirds believe that “big government” is the main threat to the nation’s future — and where over the last decade the Democratic Party has hemorrhaged governorships, seats in Congress and half of its seats in state legislatures — focusing on income redistribution could amount to political suicide. Instead, he argues, Democrats should aim at what he defined as the scarcity of opportunity afflicting so many Americans, “the great moral cause of our time.”

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Senator Elizabeth Warren of Massachusetts is among the progressive Democratic leaders hoping the party can appeal to voters who feel as if their lives and aspirations have been derailed. Credit Manuel Balce Ceneta/Associated Press

Mr. Cowan’s exhortation might be understood as the typical call for repositioning that follows a lost presidential election. Third Way, which organized the gathering, is, after all, an intellectual heir to President Bill Clinton’s centrist politics — more skeptical of deregulation than in the Clinton era, and less interested in fiscal balance, but equally at loggerheads with the Democratic Party’s left.

And yet the Democratic infighting over message and strategy in the wake of November’s stunning defeat suggests that something existential is going on. Only eight years after they boldly proclaimed the economic crisis to be a critical opportunity, Democrats lost touch with their voters.

The financial crisis and ensuing recession scrambled Americans’ fears and desires, leaving an electorate defined by some variety of anger: at stagnant paychecks, at bank bailouts and government spending, at police shootings of blacks and at women’s lower wages; anger against a “rigged system.” Unfortunately for the Democratic Party — the party of government — most voters tend to think government is doing the rigging.

The most inspiring campaigners, Senator Sanders on the left and Donald J. Trump on the right, did not convince voters of the wisdom of carefully honed policy prescriptions. They ran on an apocalyptic vision of America under siege, with clear enemies in sight. Mr. Trump, an interloper of scant ideological baggage who took over a Republican Party at least as clueless as Democrats about voters’ preoccupations, offered the more powerful apocalypse.

The question for Democrats looking for a path out of the wilderness — for Mr. Cowan and Senator Sanders; for Senator Warren and the Senate minority leader, Chuck Schumer, who hopes to woo voters by offering a “Better Deal” — is whether they can appeal to voters still angry because their lives, their aspirations and their sense of self have been derailed over the last few years.

The problem is hardly unique to American politics. Across the Atlantic, populist parties have arisen to rattle the established political class, though nowhere have they achieved the sort of upset pulled off by Mr. Trump.

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Two years ago, three economists from the Free University of Berlin, the University of Bonn and the University of Munich published an analysis of the political fallout from financial crises in 20 advanced economies, including the United States, over the last 140 years. On average, they estimated, far-right parties increased their share of the vote by 30 percent in the years after the crisis, as voters blamed minorities and foreigners for their plight.

Voting for governments in power declined, and the share going to the opposition grew. Politics became more fractionalized as voters who lost faith in standard political pitches sought alternatives. Governing, of course, got much tougher. And some of these effects persisted 10 years or more.

It is hardly surprising that government — not Wall Street or big business — gets the blame. As noted in another study by economists at Princeton, the University of Chicago and the University of British Columbia, it is the government that mediates the competing interests of creditors and debtors.

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Banks got a bailout after the financial crisis of 2008. Homeowners whose mortgages were underwater got next to nothing.

“From this selective intervention, additional economic inequality and political polarization may ensue, compounding and amplifying the initial political effects of the crisis,” the researchers wrote.

How much attention to devote to income inequality is only one of the decisions Democrats have to make.

To recapture the presidency, Democrats must recover the support of the middle class — people in families earning $50,000 to $150,000, whose vote went to Mr. Trump. Three-quarters of voters in swing states are white, according to data from the Cook Political Report presented by Third Way. Mr. Trump won white voters by 21 percentage points.

Photo
Donald J. Trump, left, as he campaigned for the Republican nomination in 2016, and Senator Sanders each ran on apocalyptic visions of America under siege. Credit Mark Makela and Max Whittaker for The New York Times

Does this mean Democrats should de-emphasize racial discrimination? Should they stop talking about guns and the right to choose to get candidates elected in, say, Louisiana? What will voters elsewhere think?

Joan C. Williams, a professor at the University of California Hastings College of the Law who this year published “White Working Class: Overcoming Class Cluelessness in America,” a critique of liberals’ inability to understand this constituency, argues Democrats can offer an inclusive platform that appeals to all Democratic constituencies, like the proposal presented by Senator Schumer focused on jobs.

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“We must realize that we forgot an important sector of social disadvantage, which is social class,” she added. “But it is not convincing to say we should go beyond identity politics. That is like telling women and blacks, O.K., you had your 40 years of attention, and now we have to move on.”

Still, Professor Williams argues against a move to a Democratic center that is friendly toward Wall Street and favors trade agreements, “two of the reasons that the working class is so done with the Democratic Party.”

There is much that makes sense in Third Way’s approach. Mr. Cowan argues that the battle for redistribution of wealth that shaped Democratic politics over the 20th century culminated with the Affordable Care Act — the last missing piece of the social safety net, offering health insurance to all. Now, he adds, the critical task is to remedy the lack of opportunity faced by so many Americans seeking to make a decent living in the tech-heavy, globalized 21st.

Offering free college is not the way to do it. That can sound meaningless in the large swaths of the country where fewer than 30 percent of residents have a bachelor’s degree. Half of the people who start a four-year program do not finish it. A national apprenticeship program that could help connect people to good jobs is a more fruitful option.

The government could also encourage small-business formation — often stifled for lack of credit and seed capital. It could take a more proactive role to lean against market power that shuts rivals out of markets.

The challenge is not to prepare for a jobless future but to ensure available jobs offering decent incomes to working families, Mr. Cowan adds. A $15-an-hour minimum wage is a bad idea. But wage subsidies and a regional minimum wage adjusted for the cost of living might do the trick. To bolster retirement finances, employers could be required to contribute a minimum to workers’ private retirement plans.

This platform, by the way, would probably mitigate income inequality. It would just do so in a more business-friendly manner than the one suggested by the slash-and-burn talk further to the left. It has a shortcoming, however: It will be harder to sell a program that lacks villains.

Email: eporter@nytimes.com;
Twitter: @portereduardo

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Article source: https://www.nytimes.com/2017/08/15/business/economy/democratic-party-economy-inequality.html?partner=rss&emc=rss

Japan’s Economy Grows Again, in Longest Streak in 11 Years


Where Did the Growth Come From?

From Japan, unusually. Foreign trade had done most of the heavy lifting since the start of the expansion, aided by a broadly recovering global economy and the weak yen. Abenomics calls for Japan’s central bank to inject more money into the financial system. That weakens the country’s currency, which makes Japanese cars, electronics and other products more competitive when sold abroad. Multinationals like Toyota have profited, but the tactic has failed to significantly bolster consumer spending at home.

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Exports are still crucial to the economy. But Japanese are buying even more goods from abroad: A surge in imports last quarter meant that trade was a net drag on G.D.P.

By contrast, the domestic side of the economy jolted to life. Consumer spending grew by 3.7 percent in annualized terms, the data showed, while business investment expanded by nearly 10 percent — a sign that companies are becoming more optimistic that the good times will last.

Is the Government Helping?

Not all of the domestic growth came from private citizens and businesses. Mr. Abe announced a major government spending program a year ago, and the data suggest the money is beginning to find its way from account books to the real economy. Public investment grew at a 22 percent pace.

Japan has the largest public debt in the world, relative to the size of its economy, but ultralow interest rates let the government borrow cheaply. The central bank is, in effect, underwriting public spending by buying up government bonds — an arrangement criticized as reckless by fiscal conservatives, but welcomed by others who say Japan needs the pump-priming.

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Article source: https://www.nytimes.com/2017/08/13/business/economy/japan-second-quarter-gdp-rises.html?partner=rss&emc=rss

Beneath Markets’ Calm Are Signs of Growing Investor Caution

Earlier, the Nikkei index in Japan closed down 1.29 percent, while the Kospi index in South Korea ended down 1.10 percent. European stocks were also lower, with London down 0.56 percent and Frankfurt down 1.12 percent.

Prices of United States Treasury securities — often in demand in times of turmoil — rose early in the day, driving their yields, which move in the opposite direction, lower. But Treasury prices gave up ground in the afternoon, and the yield on the benchmark 10-year Treasury note slipped to 2.25 percent, from 2.26 percent on Tuesday.

Gold futures rose 1.59 percent, to $1,282.40 an ounce.

Gold tends to outperform stocks when the markets are sliding, so it is unusual for such a conservative investment to beat equities when they have been on a tear as has been the case this year.

What is driving this anomaly, some say, is a recognition that eventually investors will not be able to ignore recent headline risks — whether nuclear tensions with North Korea, a trade war with China or a debt ceiling crisis in Washington.

“There has been a Pavlovian response by investors to disregard any piece of bad news or any spike in volatility, and that has been a very profitable strategy,” said Russ Koesterich, a portfolio manager for BlackRock’s $39 billion Global Allocation Fund. “But we do think that there are risks in the world that are not being priced in.”

The Dow Minute by Minute

To Mr. Koesterich’s point, some of the best-performing investments in the world this year have been exchange-traded vehicles that investors can use to bet against the VIX, the Chicago Board Options Exchange Volatility Index, better known as Wall Street’s fear gauge.

The VIX rose nearly 9 percent on Wednesday after Mr. Trump’s comments about North Korea, before settling up just 1.37 percent, at 11.11 for the day. The index has been trading at historically low levels, and many investors continue to wager that lots of money pouring into markets and an improving global economy will keep the index quiescent.

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Mr. Koesterich, however, has been taking the opposite side of that trade. Since the beginning of the year, he has been adding to his gold position, and it is now the Global Allocation Fund’s second-largest position, according to Y Charts.

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“Gold can help especially if the dollar is not a safe haven anymore,” he said, referring to how the dollar has weakened in response to the spate of news from Washington. “It is a good headline hedge.”

Mr. Koesterich is not alone in adopting a wary stance, especially now in August, when trading desks on Wall Street empty out and lower levels of buying and selling can result in sharper downward moves in the market.

While few people are predicting an actual crash, a growing number of stock market specialists are warning that in the coming months, markets are likely to start reacting more to so-called macro events such as political volatility and the realization that central bankers in Europe and the United States are moving toward a more restrictive stance on interest rates and intervening in markets.

That is because the benign market conditions of recent months have been spurred by better economic news, and, in particular, by a very good spate of second-quarter earnings.

Once investors return from vacation, the theory goes, and with no good earnings news to inspire them, they will be more sensitive to headline events.

That could result in sharper moves downward in stock market indexes.

“There are risks,” said Marko Kolanovic a market strategist and derivatives specialist at JPMorgan Chase, who warned in a recent report about an increase in trading volatility this fall. “China, North Korea and the normalization of policies by central banks, which has been underappreciated by the market.”

Since 2012, after a sharp rise during the financial crisis, gold, as an investment, has not performed well as investors have chased returns in buoyant stock and bond markets.

But while many investors have shaken off scares such as Britain exiting the European Union or political unrest in Washington, the view is taking hold that gold can be a very good hedge against more serious threats like nuclear confrontation in Asia.

“There has been a wall of money supporting markets so far,” said Stuart Culverhouse, a market strategist at Exotix Capital in London. “But this time we are not just talking about a macro surprise — we are talking about full-on military action.”

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Article source: https://www.nytimes.com/2017/08/09/business/dealbook/stock-markets-investor-caution.html?partner=rss&emc=rss

Economic Scene: The Danger From Low-Skilled Immigrants: Not Having Them

This proposition underpins President Trump’s threat to get rid of the 11 million unauthorized immigrants living in the country. It is used to justify his plan to cut legal immigration into the country by half and create a point system to ensure that only immigrants with high skills are allowed entrance in the future.

But it is largely wrong. It misses many things: that less-skilled immigrants are also consumers of American-made goods and services; that their cheap labor raises economic output and also reduces prices. It misses the fact that their children tend to have substantially more skills. In fact, the children of immigrants contribute more to state fiscal coffers than do other native-born Americans, according to a report by the National Academies.

What is critical to understand, in light of the current political debate, is that contrary to conventional wisdom, less-skilled immigration does not just knock less-educated Americans out of their jobs. It often leads to the creation of new jobs — at better wages — for natives, too. Notably, it can help many Americans to move up the income ladder. And by stimulating investment and reallocating work, it increases productivity.

Immigration’s bad reputation is largely due to a subtle yet critical omission: It overlooks the fact that immigrants and natives are different in consistent ways. This difference shields even some of the least-skilled American-born workers from foreign competition.

It’s more intuitive than it seems. Even American high school dropouts have a critical advantage over the millions of immigrants of little skill who trudged over the border from Mexico and points south from the 1980s through the middle of the last decade: English.

Not speaking English, the newcomers might bump their American peers from manual jobs — say, washing dishes. But they couldn’t aspire to jobs that require communicating with consumers or suppliers. Those jobs are still reserved for the American-born. As employers invest more to take advantage of the new source of cheap labor, they will also open new communications-heavy job opportunities for the natives.

For instance, many servers and hosts in New York restaurants owe their jobs to the lower-paid immigrants washing the dishes and chopping the onions. There are many more restaurants in New York than, say, in Oslo because Norway’s high wages make eating out much more expensive for the average Norwegian.

Where Immigrants Do the Work

Immigrants take up a disproportionate share of many lower-skill occupations — such as farm or janitorial work — as well as some higher-skill ones, like computer science.

Top 10 occupational groups by

immigrant share of workers, 2014

UNAUTHORIZED

IMMIGRANTS

LEGAL

IMMIGRANTS

TOTAL

Farming, fishing and forestry

26

%

20

%

46

%

Building/grounds cleaning and maintenance

16

19

35

Construction and extraction

15

12

27

Computer and mathematical science

5

19

25

Production

9

14

23

Food preparation and related service

10

12

22

Life, physical and social science

4

18

22

Personal care and service

5

16

21

Health care support

4

16

20

Transportation and material moving

6

13

19

Top 10 occupational groups by

immigrant share of workers, 2014

OCCUPATIONAL

GROUP

UNAUTHORIZED

IMMIGRANTS

LEGAL

IMMIGRANTS

TOTAL

Farming, fishing

and forestry

26

%

20

%

46

%

Building/grounds

maintenance

16

19

35

Construction

and extraction

15

12

27

Computer and

mathematical science

5

19

25

Production

9

14

23

Food preparation

and related service

10

12

22

Life, physical and

social science

4

18

22

Personal care

and service

5

16

21

Health care support

4

16

20

Transportation and

material moving

6

13

19

By The New York Times

Similar dynamics operate in other industries. The strawberry crop on the California coast owes its existence to cheap immigrant pickers. They are, in a way, sustaining better-paid American workers in the strawberry patch-to-market chain who would have to find a job somewhere else if the United States imported the strawberries from Mexico instead.

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One study found that when the Bracero Program that allowed farmers to import Mexican workers ended in 1964, the sudden stop in the supply of cheap foreign labor did nothing to raise the wages of American farmworkers. From the cotton crop to the beet crop and the tomato crop, farmers brought in machines rather than pay higher wages.

Another found that manufacturing plants in regions of the United States that received lots of low-skill immigrants in the 1980s and 1990s were much slower to mechanize than plants in low-immigration regions.

A critical insight of the new research into the impact of immigration is that employers are not the only ones to adapt to the arrival of cheap foreign workers by, say, investing in a new restaurant or a new strawberry-packing plant. American-born workers react, too, moving into occupations that are better shielded from the newcomers, and even upgrading their own skills.

“The benefits of immigration really come from occupational specialization,” said Ethan Lewis, an associate professor of economics at Dartmouth College. “Immigrants who are relatively concentrated in less interactive and more manual jobs free up natives to specialize in what they are relatively good at, which are communication-intensive jobs.”

Looking at data from 1940 through 2010, Jennifer Hunt, a professor of economics at Rutgers, concluded that raising the share of less-skilled immigrants in the population by one percentage point increases the high school completion rate of Americans by 0.8 percentage point, on average, and even more for minorities.

Photo
A janitor cleaning the jury assembly room at the Bronx County Courthouse. Immigrants could help fill the tremendous demand expected in coming years for low-skilled workers. Credit Michael Appleton for The New York Times

Two economists, Giovanni Peri of the University of California, Davis, and Chad Sparber of Colgate University, compared the labor markets of states that received lots of low-skilled immigrants between 1960 and 2000 and those that received few. In the states that received many such immigrants, less-educated American-born workers tended to shift out of lower-skilled jobs — like, say, fast-food cooks — and into work requiring more communications skills, like customer-service representatives.

Interestingly, the most vulnerable groups of American-born workers — men, the young, high school dropouts and African-Americans — experienced a greater shift than other groups. And the wages of communications-heavy jobs they moved into increased relative to those requiring only manual labor.

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It is not crazy for American workers who feel their wages going nowhere, and their job opportunities stuck, to fear immigration as yet another threat to their livelihoods. And yet for all the alarm about the prospect of poor, uneducated immigrants flocking across the border, this immigration has been mostly benign.

Take the Congressional Budget Office’s analysis of the immigration reform bill submitted without success by a bipartisan group of eight senators in 2013. By 2033, it estimated, the plan would have increased average wages by 0.5 percent, and do next to nothing to the wages of the least skilled. It would have made the economy some 5 percent bigger, over the long term, mainly because there would be 16 million more people.

If there is anything to fear, it is not a horde of less-educated workers ready to jump over the border. The United States’ main immigration problem, looking into the future, is that too few low-skilled immigrants may be willing to come.

As the National Academies noted about its report, “The inflow of labor supply has helped the United States avoid the problems facing other economies that have stagnated as a result of unfavorable demographics, particularly the effects of an aging work force and reduced consumption by older residents.” There will be an employment hole to fill.

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Article source: https://www.nytimes.com/2017/08/08/business/economy/immigrants-skills-economy-jobs.html?partner=rss&emc=rss