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Op-Ed: US should focus on the economy and skip irrelevant talking forums

  • Trade deficits matter, Ivanovitch says
  • Trump needs his tax cuts and infrastructure spending first
  • Mid-term election in 2018 seen make-or-break for Trump policies
German Chancellor Angela Merkel and U.S. President Donald Trump arrive for the group photo at the G7 Taormina summit on the island of Sicily on May 26, 2017 in Taormina, Italy.
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German Chancellor Angela Merkel and U.S. President Donald Trump arrive for the group photo at the G7 Taormina summit on the island of Sicily on May 26, 2017 in Taormina, Italy.

Seeking to cut $610 billion from health care for the poor, and $192 billion from food assistance to 43 million Americans struggling to make ends meet, while spending millions of dollars on European jamborees will probably strike most people as an example of bad and insensitive public policy.

Given the vacuity of last week's European meetings, one may question why was it necessary for the U.S. president to spend four days and all that money to repeat for the nth time to people who took $165 billion net out of their U.S. trade in 2016 what he has been telling them over the last two years.

No European leader has been in any doubt for quite some time that (a) trillions of dollars in U.S. trade deficits and a soaring net foreign debt of $8.1 trillion could not continue, (b) trade policies would be reviewed with particular attention to countries running systematic and large trade surpluses with the U.S., (c) the treaty on global warming would be closely scrutinized and (d) U.S. would insist on all member countries honoring their financial obligations to the NATO alliance.

All these issues have been explained in bilateral and multilateral forums and constantly amplified by the European media.

The White House should have taken a cue from Italy's former (and most probably future) Prime Minister Matteo Renzi. Outraged by do-nothing summits in Brussels, he scolded the spendthrift Eurocrats for squandering public money and precious time on matters where a simple SMS could have taken care of their trivial agenda.

Yes, tweeting would have saved a lot of money and an embarrassing French and German media portrayal of a "confused and isolated America."

German push-back lectures

That would have also spared Washington the German G-7 lecture about the virtues of free trade.

Lacking no chutzpah, the German chancellor Angela Merkel told President Trump last week that the U.S. should not complain about trade deficits with Germany. Why? Simple, she said: Germany is a big investor in the U.S. creating thousands of jobs.

There was no repartee from the U.S. side because our trade experts failed to slip a note to the president to tell him that these investments were financed with the money we gave them to buy German goods.

Running large trade deficits with Germany enables German companies to recycle their dollar earnings in the U.S., killing whatever is left of jobs and incomes in our manufacturing – Detroit automakers being one of the prominent cases in point. Yes, we are giving them the rope … and the German chancellor apparently wanted more of it.

Thanks in large part to these kinds of trade policies we now have the stock of human and physical capital that sets the limits to potential (and noninflationary) growth rate at a miserable 1.5 percent.

Undeterred, our free-traders insist that we should focus on services, leave the manufacturing sector to Germans and the Chinese, keep piling on foreign debt and still think that we can make the country safe and secure, maybe even run the world on the side.

A wonderful picture, isn't it? Hospitality industries, Silicon Valley and Hollywood will be our big money spinners.

Maybe. But that's not the public policy platform that won the presidency last year. So, let's see what the vox populi says during the all-important mid-term Congressional elections in November 2018. These elections could seal the fate of this administration and of the legislative control by the Republican Party.

Killed by imports

The U.S. has to pursue a coherent economic growth strategy and growth-supporting foreign trade policies that directly drive one-third of the economy. The impact of changes in the external trade sector (technically called the multiplier effect of net exports) rips through the entire economic system and sets activity trends in manufacturing and services.

For example, the negative trade balance has taken off 0.2 percent of America's weak 1.2 percent GDP growth in the first quarter of this year.

Tax code adjustments are an urgently needed part of the foreign trade policy. U.S. asset markets are currently trading on expectations that the White House and the Congress will deliver the promised tax changes quickly and effectively.

The fiscal stimulus is also necessary to rebalance the policy mix that has entirely relied on an exceptionally easy monetary stance since the onset of the financial crisis in the second half of 2008. Cheap money is a tired workhorse; the help of the fiscal policy is now crucially important.

A tax cut is needed to stop and reverse the decline of the real disposable household income. Its slowdown to an annual rate of 1.8 percent in the first three months of this year -- from an already weak 2.3 percent growth in the preceding two quarters -- is a strong headwind to economic activity.

An income tax cut is the key to raising the households' purchasing power and enhancing the effectiveness of low credit costs to stimulate private consumption and residential investments, which represent 72 percent of GDP.

A revival of these two segments of the economy would spur business capital outlays, where spending on new equipment literally collapsed in the twelve months to the first quarter of this year.

That is an ominous signal. American companies are telling us that they have no incentive to invest in new machines and larger factory floors because the weak sales are being met with existing production capacities and imports from abroad.

And that's what we see: U.S. goods imports accelerated to an annual rate of 7.6 percent in the last two quarters – indicating that American manufacturing industries are being overwhelmed by producers from Europe and Asia.

Investment thoughts

The White House looks increasingly distracted from its urgent task of propping up a weakening economy with tax changes, effective foreign trade policies and infrastructure investments.

Erstwhile fears that tax cuts would boost growth and trigger vigorous interest rate hikes are gone. Bond markets don't see any of that on the horizon, and the Fed's balance sheet (i.e., money supply) management suggests a total agreement with bond vigilantes.

It would be a great pity if we were to witness a disappearing sense of urgency and enthusiasm of an administration that had a correctly identified course of action to restore the American economy.

Facing crucially important elections a little more than a year from now, the Republican majority in the Congress has a huge stake in staying united, and in helping out and green-lighting the administration's fiscal and trade agenda.

Recalling Tip O'Neill's mirabile dictu "all politics is local" should be a reminder of where the priorities are. Washington cannot lead with a bad economy; it can only be the laughing stock our great European friends and allies are taking us for.

Trump trades are hanging on an increasingly fragile reed. The White House should eschew glad-handing foreign talk fests. It should focus instead on its urgent and difficult economic programs.

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