Mar 6, 2019

Axios Future

By Bryan Walsh
Bryan Walsh

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1 big thing: How to cut the trade deficit

Illustration: Sarah Grillo/Axios

The U.S. trade deficit — how much the country buys from abroad versus how much it sells — rose to a 10-year high last year. And economists surveyed by Axios say there's only one certain way that President Trump can achieve his cherished aim of slashing it — push the economy into recession.

Driving the news: The 12.5% jump in the 2018 trade deficit, reported today by the Commerce Department, is the result of a growing economy, stimulated by Trump's tax cuts, economists agree, and not something amiss.

  • That also goes for a record jump to a $419.2 billion deficit with China, up 11.6% over 2017.
  • "People buy more, which means, in turn, that they import more. If you want to reduce the trade deficit, have a recession. Look at 2009," says William Reinsch, a senior trade adviser at the Center for Strategic and International Studies.
  • Of course no one wants a recession.

Background: Trump is conducting a multi-front trade war, the main purpose of which is to push down the country's global trade deficit, which he calls unfair and bad for Americans. Although most mainstream economists disagree — trade deficits reflect economic health, not malaise, they say — cutting the gap is a pillar of Trump's presidency.

By the numbers:

  • The annual U.S. trade deficit surged to $621 billion in 2018. For December alone, there was an 18.8% jump. In both cases, the gaps are the largest since October 2008.
  • The gap was 3% of GDP, up from 2.8% in 2017. "It’s still significantly smaller than in the decade before the Great Recession, when it approached 6%," reports Bloomberg's Katia Dmitrieva.
  • The annual gap is up by $119 billion since Trump became president. But if you go by economic orthodoxy, that's an issue only because he has emphasized it.

"Trump is over a barrel because he has made reducing the trade deficit a measure of his success in trade policy. And by that measure, he is failing," said Edward Alden, a senior fellow at the Council on Foreign Relations.

A thought bubble: Trump has voiced his view on debt for decades. His obsession doesn't mean he is taking the U.S. into recession, but that — if he wants a materially lower trade deficit — he needs to hope for one. Or pile burdens on the economy that take the country there.

The bottom line: As of now, the relatively robust U.S. economy is staving off recession for the rest of the world. The widening trade deficit lowers 2018 GDP growth to 2.9%, 0.3% below previously reported, and that's likely to be the peak before the next economic downturn, says Joseph Brusuelas, chief economist at RSM.

  • The next step is unhappiness: "The trade balance will turn when the U.S. economy sags," said Gary Hufbauer, a respected trade expert with the Peterson Institute for International Economics. "I doubt there will be cheers when that happens."
2. Back to the debtgeist

Illustration: Aïda Amer/Axios

The law of gravity applies to the national debt after all: Inflation, interest rates and private investment can all still go awry given the wrong set of fiscal events.

What's happening: As we've reported (here and here), a number of mainstream economists and commentators have cast doubt on decades of orthodoxy that denounces the accumulation of government debt.

  • The new thinking urges that — for the moment, at least, and probably longer — we stop worrying about high inflation and interest rates, or crowded-out private investment, all of which textbook economic theory predicts when debt builds up.
  • That is, the government can add to the record $22 trillion debt without fear of igniting the demons that have warded policymakers off of big spending in the past.

But two leading mainstream economists who are part of the debt debate say that even though the old demons have not reared their heads to date, the danger of them surfacing remains.

Specifically, despite the U.S. possession of the global reserve currency — a central point cited by the pro-debt economists — it can't just spend using U.S. treasuries and never pay back what it's borrowed.

Larry Summers, a Harvard professor and former U.S. Treasury secretary, co-authored an article in the current issue of Foreign Affairs titled, "Who's Afraid of Budget Deficits."

  • Though Summers argues for smart and targeted deficit spending, he tells Axios that it has to be measured. The old rules still apply.
  • "We adopted the intermediate position, partway between the traditional advocates of austerity who think that debt is bad" and those who say you can spend as much as you like because interest rates and inflation are low. "You have to pay it back some day. If you borrow too much, you set the stage for hyper-inflation. We are for a balanced approach."
  • In a recent Washington Post article, Summers attacks adherents of "modern monetary theory," who argue for extremely large new deficit spending.

No one knows where the trigger point is — which level of spending, or what set of events, will bring about runaway inflation, a surge in interest rates, or crowd out private investment, says Olivier Blanchard, former chief economist for the IMF and a senior fellow at the Peterson Institute.

  • In January, Blanchard surprised many of those who know him with paper and speech that softened his prior attitude toward debt.
  • But, speaking to Axios, he said, "stuff happens" — that is, the economy can surprise. If U.S. interest rates surge higher than the GDP growth rate, for instance, that's a signal that debt is too high. Taxes would have to be increased to raise more revenue.
  • "But I don't have a clue what the right debt level is, only that we can go higher than we are," he said.

I asked Blanchard if you can finance the entire federal budget with debt, since interest rates and inflation seem under control. He calculated the outcome of such spending aloud, step by step, before concluding: "Nope. You would be crazy to go there."

3. A step back for dollar stores

In Brooklyn. Photo: Spencer Platt/Getty

Four years ago, two discount retail kings — Dollar Tree and Dollar General — were fighting over who would absorb the third dollar store giant, Family Dollar. Dollar Tree won out.

But today, lagging sales at Family Dollar are actually dragging Dollar Tree down, reports WSJ.

Erica writes: As we've reported, discounters have long profited from the rise of income inequality in the U.S. And with a recession likely in the near future, the dollar store business will keep ballooning, Louis Hyman, a business historian at Cornell, tells Axios.

  • Still, Family Dollar has not been able to keep up. While Dollar Tree and Dollar General are sprucing up their shops and adding fresh produce options to lure customers, Family Dollar remains shabby.
  • Since Dollar Tree acquired the chain, its stock price has surged by 20% — a formidable jump but small compared to Dollar General's 50% increase in the same time period.
  • To tackle the gap, Dollar Tree is shuttering 400 Family Dollar stores and turning another 200 into Dollar Trees after renovations.

For Dollar Tree, which owns 15,000 stores across the country, that's a drop in the bucket. But, to add context, 400 stores is almost equal to the total of the Whole Foods chain.

4. Worthy of your time
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Data: The Axios Harris Poll 100; Chart: Axios Visuals

Millions of antiquated voting machines (The Economist)

Facebook's sinking reputation (Scott Rosenberg — Axios)

The troubling rise of the Central American coffin business (Matthew Bremner — Bloomberg)

Vietnam, in China's shadow (Sebastian Strangio — Nikkei Asian Review)

The Amazon divide in American retail (Stephen Grocer — NYT)

5. 1 Mardi Gras thing: 93,000 pounds of beads

After the parade. Photo: Emily Kask/AFP/Getty

Every year, a million people descend on New Orleans' French Quarter for the epic Mardi Gras. Paraders bring around $165 million in tourist revenue, but they also leave behind lots of trash, reports Bloomberg.

Erica writes: A big portion of that trash is made up of shiny plastic gold, purple and green Mardi Gras beads.

  • Last year, after a storm washed the millions of necklaces littered on the streets away, the city said it pulled 93,000 pounds of beads out of storm drains.
Bryan Walsh