The major central banks have placed down their markers and have moved to stage left.  There are the late-month high frequency data, which pose some headline risks in the week ahead.  The focus for most investors will be on several political developments.

The major central banks have placed down their markers and have moved to stage left.  There are the late-month high frequency data, which pose some headline risks in the week ahead.  The focus for most investors will be on several political developments.

The first US Presidential debate is wild card, in the sense that the outcome is unknown.  In recent weeks, the polls have drawn close.  In early August, Nate Silver’s fivethirtyeight.com, the gold standard of the poll analysis, gave Trump about a 15% chance of becoming President.  It now puts the odds at near 40%.  Rarely have the odds of Trump’s election been higher. 

At the same time, it should quickly be added that Silver has never had Trump the favorite.  In addition, the well-rehearsed narrative of high disapproval ratings of both Clinton and Trump, and the general disdain for both parties, the two leading third-party candidates are polling less than half of Ross Perot’s nearly 19% share of the popular vote in 1992. 

Surveys indicate that nearly 20% of the electorate is either undecided or does not plan to vote this year.  The first of three presidential debates Monday night is expected to draw a large audience, but whether it will help the undecided decide or change many minds, is a different story.   Although momentum has favored Trump since the start of the month, it seemed to stall at the end of last week. 

The weekend elections in Spain’s Basque country and Galicia may resolve the nine-month deadlock in Spain’s national politics.  Galicia is Prime Minister/caretaker Rajoy’s home region.  His party, the PP, is set to win.  The decisive factor may be who comes in second.  If it is not the Socialists (PSOE), pressure may grow on its leader Sanchez to relent and support a minority national government. 

In Basque Country, the local Basque Nationalist Party (PNV) will likely be returned to office.  It is expected to garner a simple majority.  With the right concessions from Rajoy, such as decentralization and territorial reforms, the PNV can support the PP in Madrid. 

The weekend elections set off a period of negotiating and jockeying for position.  A resolution is needed by the end of October, or the country faces a third election in a year.  If necessary, it would be held before the end of the year. 

The OPEC meeting in Algiers may prove anti-climactic.  Speculation of a deal had lifted oil prices, but before the weekend, it became clearer to many, that there would be no deal.  The price of oil slid 4%, the most since mid-July.  The technical condition warns of further losses in the week ahead. 

We are neither experts in the oil market nor specially trained in the nuances of Middle East affairs, but as acute students of political economy, we have consistently warned against ideas that an agreement is at hand, which have arisen on a number of occasions this year.  The bedrock of our argument is that Saudi Arabia will not yield market share to Iran.  Iran cannot agree to freeze its output until its production reaches pre-embargo levels near four mln barrels a day.  It has been stuck at about 3.6 mln barrels for the last few months. 

What seemed to excite many were reports that the Saudi’s offered to cut output if the Iranians froze their production.  We suspect the Saudis understood that this was a non-starter, even if many market participants took the bait and drove prices nearly six percent higher in the four-day rally that ended before the weekend.  The Saudis’ tactics may have been aimed at deflecting criticism of low oil prices away from it, and its near-record output (~10.6 mln bpd in August), to Iran.

Hungary holds a referendum on October 2.  The referendum is on the EU refugee resettlement plan, which attempts to relieve some of the pressure on the frontline states like Greece and Italy.  The phrasing of the referendum points to its outcome:  “Do you want the European Union to be entitled to prescribe the mandatory settlement of non-Hungarian citizens in Hungary without the consent of parliament?” It seems clear that Hungary will vote against the EU plans.

Although Prime Minister Orban will be able to claim popular support for his opposition, it is not as if he waited for it.  A year ago, he sealed the border with Serbia, diverting the refugee flow away from the West Balkans toward Slovenia and Croatia.  He has taken a strong nationalistic and anti-Islam stance.  The risk that the Hungarian referendum emboldens others, especially, in eastern and central Europe, to reject the EU resettlement strategy.  Some fear that the Hungarian referendum is part of the EU existential crisis of which Brexit was the first expression. 

There is a mitigating factor here: Germany.  After the CDU lost two state elections in September, the doubts over Merkel’s willingness and ability to seek a fourth term as Chancellor was a favorite topic among pundits.  We cautioned against repeating the mistake of many of Merkel’s critics who historically underestimated her. 

Although it may not be widely recognized, the beginning of Merkel’s 2017 campaign began last week.  The most important step it to secure her flank.  This means healing the damage in the alliance with Bavaria’s CSU.    Immigration is the largest divisive issue.  Bavaria has borne the brunt of Merkel’s immigration initiative.  

The head of the CSU, Seehofer, demanded a 200k cap on immigration for Merkel to secure its support for a fourth term.   Although Merkel has not endorsed this proposal yet, she does seem to be moving closer to it, and Seehofer appeared optimistic after meetings with the Chancellor at the end of last week.   

Merkel tacked to the left take some of the SPD agenda, as in introducing a minimum wage, and embracing equal pay, which had also antagonized her conservative CSU ally.  In the national campaign, Merkel is expected to shift to the right.   This may entail an emphasis on law and order, and a harder line within the EU itself.  Merkel has about six weeks to make the political pivot.  The CSU holds its party conference in early November, where it is to decide whether to support Merkel or not.  Since the birth of the modern German republic, the CSU has endorsed the CDU candidate. 

Although overshadowed by political developments, some economic data stands out.  In Japan, price pressures in August likely edged in the wrong direction.  Headline CPI is expected to have slipped to -0.5% from -0.4%.  If so, it will match the lowest this year.  Excluding food and energy, prices may have eased to 0.2% from 0.3%.   That would be a nearly three-year low print.  Household spending continues to fall on a year-over-year basis.  The 2.2% decline expected in August follows a 0.5% decline in July and would match the average over the past two years (24 months). 

One bright spot for Japan will be industrial output.  It is expected to have risen 0.5% in August after a 0.4% decline in July.  A positive reading on a year-over-year basis would only be the second such reading of the year. 

The Eurozone reports August unemployment and preliminary September CPI.  Unemployment is expected to have slipped to 10.0%.  That would represent a new cyclical low.  The last time unemployment in the Eurozone was that low was June 2011.   The PMI surveys showed prices rising, and it does seem that the low point in the cycle is behind it.  CPI is expected to tick up to 0.4% from 0.2% in August.  This would match the January high.  Eurozone inflation has not been higher since June 2015. 

A key takeaway from such reports is that it may be difficult to forge a consensus at the ECB to do more than modestly tweak of its current orthodox and unorthodox measures.  After passing on the opportunity to decide to extend the asset purchases program earlier this month, the next opportunity comes in December with updated staff forecasts.  Even if tapering were announced, it would imply an extension beyond March 2017.  A conservative way to ease the anticipated shortage of securities is to modify the -40 bp limit (deposit rate) so that it applies to the average of purchases not to a single asset. 

Both the US and UK report updated estimates of Q2 GDP.  There is a modest risk that the UK’s estimate may be shaved slightly owing to somewhat weaker services spending. The second estimate put UK growth at 0.6% on the quarter and 2.2% year-over-year.  Growth appears to have slowed here in Q3 to 0.3%-0.4%. 

Note that Corbyn handily turned back the challenge to his leadership of the Labour Party.  It represents the tightening the grip of the fundamentalist wing of the party, which seemingly prefers principle to exercising power.  Prime Minister May has ruled out maneuvering to an early election, even though Labour seems unelectable.  However, the more she shifts away from Cameron’s agenda, which did secure a parliamentary majority, realpolitik considerations could encourage her to reconsider.  

In the US Q2 GDP is likely to be revised higher to 1.3% at an annualized pace from 1.1%.  The NY Fed’s GDP tracker has the economy growing 2.26% here in Q3, while the Atlanta Fed puts it at 2.9%.  It would be the first quarter in four that expands by more than 2%. 

One of the under-appreciated shifts in the Fed’s dot plot was to cut its estimate long-term US growth (growth potential) to 1.8% from 2.0%.  Some saw this as a dovish signal, but we demur.  It implies that the non-inflationary pace of growth is lower than previously estimated.   It is not the ideal way to close the output gap, but the consequence is the same and justifies the gradual pace of normalization of monetary policy.  Increasing growth potential is not a something that monetary policy can address. It is a challenge for structural reforms and fiscal policy (public investment).

Politics to Overshadow Economics in the Week Ahead is republished with permission from Marc to Market

The post Global Political Developments Take Center Stage appeared first on Economy Watch.

For close to 40 years after 1955, the Liberal Democratic Party (LDP) dominated Japan’s competitive party system. Opposition parties were not able to mount a successful challenge to LDP rule at the national level, but they had an important impact on policy and the political process. Japan had one dominant party but not a one-party system.

For close to 40 years after 1955, the Liberal Democratic Party (LDP) dominated Japan’s competitive party system. Opposition parties were not able to mount a successful challenge to LDP rule at the national level, but they had an important impact on policy and the political process. Japan had one dominant party but not a one-party system.

The opposition was strong enough to prevent the adoption of many policies for which the LDP fought hard — constitutional revision, government financial support for the controversial Yasukuni shrine and the reintroduction of prewar morals education. Broad popular support for the Japan Socialist Party’s (JSP) positions on rearmament and on defending the liberties enshrined in the constitution made it impossible for the LDP to implement key policies it espoused in its initial party platform in 1955.

Half a century later, the LDP is again pushing these policies forward with renewed vigour.

Polarised party systems with deep ideological and policy divisions tend to undermine political stability. However, in postwar Japan the tug and pull between a right-leaning LDP and a left wing opposition dominated by the JSP created a dynamic tension that drew the system towards the centre. Over time the LDP — which started out determined to overturn many of the political reforms adopted during the American occupation and write a new Constitution — downplayed its revanchist goals and made retaining political power its overarching objective. Emphasising a pragmatic approach, the LDP became the pre-eminent party of the centre.

The socialists did not make a comparable adjustment in their political orientation and moved to the left. Doing so led elements on its right wing to break off to form the Democratic Socialist Party and also made room for Komeito, formed in 1964, to occupy space that had opened up to the left of the LDP and the right of the JSP.

In the 1990s, the demise of the JSP seemed to be leading to a reordered political party system centred on competition between the LDP on the centre-right and the newly formed centre-left Democratic Party of Japan (DPJ). It seemed possible that an alternation of power between two dominant parties might become the new normal. That view seemed to be confirmed when the DPJ enjoyed a landslide victory in the 2009 lower house election and took control of the government.

However, it was not to be. The three years the DPJ held power proved to be a disaster for the party and a godsend for the LDP. Many factors contributed to the DPJ’s failure, among the most important being the ineptitude of Prime Minister Yukio Hatoyama, the effort by Ichiro Ozawa to control the party, the party’s bureaucrat-bashing approach, poor handling of the crises created by the Tohoku earthquake and the nuclear disaster at Fukushima. It looked as though the party might be getting its bearings under Prime Minister Yoshihiko Noda, but by then it was too late.

Since losing power to the LDP in 2012, the Democrats have been at a loss as to how to recover public support. Under chairman Katsuya Okada the Democratic Party, as it is now known, opted to define its goals not in terms of what the party stands for but what it stands against. It is against collective self-defence, against the classified secrets act and against constitutional revision.

Now it has a new leader, Renho Murata, the first female to lead a major Japanese political party. The former model and TV presenter, whose father is Taiwanese and mother Japanese, brings a fresh face to a homogeneous Japanese political world dominated by older men. However, she has an enormous task ahead in building party unity and formulating concrete alternative policies, especially on the economy, which is consistently the primary concern of voters.

Renho — she goes by her first name alone — will need to convince the public that she has a realistic understanding of security issues and that if her party held government again, they would not make a mess of it. Escaping the image of a party that stands for nothing but opposing LDP policies will be no easy task.

Public opinion is critical of LDP policies but the kind of intensity that led people to demonstrate in large numbers against the LDP years ago is simply not there anymore. The Democratic Party’s effort to make opposition to constitutional revision the key issue in the 2016 upper house election campaign gained little traction. Prime Minister Abe downplayed the constitutional issue and emphasised the importance of sticking to his economic strategy. Democratic Party leaders never articulated an economic policy of their own.

Now that the LDP is no longer being pulled to the centre by parties on the left, the party’s more conservative members are demanding that the party return to its roots and fulfil the vision of its founders. The changing dynamics of party politics in Japan has set in motion the LDP’s rightward shift.

Those on the party right reject the pragmatic, economics-first strategy of the ‘conservative mainstream’ (hoshu honryÅ«) as an unprincipled betrayal of the party’s ideals and goals. Prime Minister Abe, for example, has criticised his party for becoming a ‘party to maintain power’ rather than seeking to fulfil its original platform — the revision of the American-drafted constitution in particular. Abe believes he has a responsibility to give priority to the LDP’s goals as set out by his grandfather, Prime Minister Nobusuke Kishi, more than half a century ago.

As far as the LDP’s opposition is concerned, there is no future for the Democrats or any party that defines its raison d’etre in terms of what it opposes and that avoids taking clear positions on difficult issues of national security policy. The sad truth is that never in Japan’s postwar history has the political opposition been as enfeebled as it is now. Renho has her work cut out for her.

Japan’s political party system will be reinvented, one way or another. It is possible that reinvention will leave the LDP so strong and the opposition so impotent that Japan evolves into something similar to a one-party system in which the checks and balances essential to democratic governance are drastically weakened. Japan needs to find a new formula to sustain a system that cleaves toward the centre. The tug between revanchist conservatives and Marxist-dominated progressives that helped keep the centre on centre in the past is no longer relevant. Japan requires the presence of a catch-all centre-left party that offers the public a realistic alternative to the LDP.

Weak opposition is a cancer in Japan’s political system is republished with permission from East Asia Forum

The post Japan’s LDP could Use Some Competition appeared first on Economy Watch.

In our age of disparity, it may be easy to accept that all time is not equal.  Touch a hot surface; time seems to move slowly.  Time doing an enjoyable activity goes by lickety-split.  

Another inequality of time is inflection points.  These are non-linear jumps, breaks in time series or investors’ reaction function–how they respond to news.  Is bad fundamental news good for stocks and bonds?  Is a stand pat Fed bad for the dollar?  Is easing by the BOJ positive or negative for the yen?

In our age of disparity, it may be easy to accept that all time is not equal.  Touch a hot surface; time seems to move slowly.  Time doing an enjoyable activity goes by lickety-split.  

Another inequality of time is inflection points.  These are non-linear jumps, breaks in time series or investors’ reaction function–how they respond to news.  Is bad fundamental news good for stocks and bonds?  Is a stand pat Fed bad for the dollar?  Is easing by the BOJ positive or negative for the yen?

It is similar but different from Stephen Gould’s “punctuated equilibrium.”  Recall that the traditional understanding of evolution is slow, incremental changes, which over time can lead to startling and profound changes.  Gould’s innovation was to recognize that, at least sometimes, there are long periods of stasis (equilibrium) disrupted by a sudden change (punctuated) in over a short time.

The capital markets may be at such an inflection point.  The relationship between fundamental news and investors’ response may be changing.  The backing up of interest rates, despite unspectacular real sector data, no particular impulse on measured inflation, and a retreat in commodity prices, including oil, warns that something may be different now.

Many argue that monetary policy is reaching its political and/or ideological limit, even if theoretically interest rates can go deeper into negative territory that the ECB or BOJ have gone (see the SNB, for example).  Similarly, more assets could be bought, but the trade-off between risk and reward appears to be shifting in a more adverse direction.  At the same time, the perceived toxicity of fiscal policy has diminished.

Hollande argued the security pact trumps the stability pact and secured the EC’s blessing for once again overshooting the 3% deficit target.  Canada’s new government campaigned on modest fiscal stimulus.  In Japan, Abe is new fiscal support, even if there the “real water” is somewhat less than the bolder headlines.

The UK’s new Prime Minister appears to have jettisoned the prior Tory government’s fiscal rules, though the extent of this may not be known until the Autumn Statement in November.  Italy’s Renzi want to explore the fiscal flexibility that EC Commissioners and Draghi claim to exist.  Perhaps re-building from the tragic earthquakes may be such an opening.

Germany’s Schaeuble has suggested scope for small tax cut (that could still leave the government with a budget surplus), after next year’s election.  In the US, both Clinton and Trump appear committed to fiscal stimulus.

Nevertheless, investors’ focus will be on two central bank meetings in the week ahead:  the Bank of Japan and the Federal Reserve.  The former is shrouded by a greater degree of uncertainty.  It has repeated surprised investors.  In contrast, investors appear as confident as they can be that despite some signals to the contrary, the Federal Reserve will take the next step on the path that it says it is committed of gradual normalization of its policy rate.

While investors will keenly watch what the BOJ does, they will scrutinize what the Fed says.  If the Fed does not raise rates, then the dot plots will have to be downgraded to reflect the possibility of only one hike.  At the end of last year, the median expectation by Fed officials was that four hikes in 2016 would be appropriate.  The Federal Reserve rejects the criticism that it has over-promised and under-delivered.  Fed officials and Yellen, in particular, have been careful to stress that the dot-plots are not commitments or promises.

However, if the Fed wanted to address the skeptics and keep the market prepared for a hike at the December meeting (there is precedent for a hike in September of an election year, but not November), there are a few things it can do.

First, it can reintroduce a formal risk assessment that was dropped earlier this year. 

Second, it can indicate that the burden of evidence has shifted from needing to show continued improvement to as long as there is no deterioration, the Fed is prepared to raise rates.

Third, it can express greater confidence that the economy has weathered the bulk of an inventory cycle that has restrained growth for the past three-quarters.  It can also be more confident that between rents, medical services, wages, and the diminishing impact of past dollar appreciation and the decline in oil prices, price pressures can be expected to increase gradually.  It can cite the steepening of the yield curve and the increase in the break-evens as evidence that market-based measures of inflation expectations have also been lifted.

Unlike Governor Brainard’s recent comments, the FOMC statement may recognize diminished global risks.  The UK referendum has come and gone with minimal disruption.  The potential disruption from China (from the yuan and equity market) appears to have also lessened, and the world’s second largest economy appears to be stabilizing.  Both the Eurozone and the Japanese economy also are growing near trend.

One dissent to a stand-pat policy at the Fed would not be surprising (e.g. George); but a second one, would be part of a “hawkish hold.”  At the same time, we argue that the impact of a 25 bp rate hike in the Fed funds target is being exaggerated by policymakers and investors alike.  Expected returns for medium and long-term investors do not change very much on a quarter-point hike, especially, as the real rate (adjusted for inflation) remains below zero.

A 25-50 bp Fed funds target does not equate with prudence and caution, and is accommodative, while a 50-75 bp target is imprudent, reckless and is tantamount to introducing a tight monetary policy.  Monetary policy would remain accommodative by nearly every conceivable metric, but simply a little less so.

The Fed’s critics complain of its communication style, even though Yellen strikes us as among the most plainspoken Fed Chairs in modern times.  Recall Greenspan’s admonishments that if one thought they understood what he said, they misunderstood.  Bernanke may have been prone to having a professorial voice and (arguably) over-sensitive to minor nuances.

The BOJ has had an even greater communication challenge.  It has also struggled to shape market expectations.  Remember for many years, including under Kuroda’s predecessors, under deflationary conditions; the BOJ was reluctant to eschew its traditional approach to monetary policy, which was similar to the Bundesbank.

The DNA of the institution was not traditionally activist.  Although Abe has given Kuroda a majority of supporters on the board, the more traditional values are still deeply-rooted with bureaucrats and technocrats inside the central bank.   The unprecedented aggressive monetary policy, the size of the BOJ’s balance sheet and the wide range of assets it holds, and negative interest rates on top of that has not generated strong price pressures or more robust economic activity.

Disappointment with the BOJ’s recent reluctance to take additional action appears to have facilitated yen strength.  It is difficult to see how the BOJ can get ahead of expectations, where comments (sourced and not) have suggested a range of options are being considered from deeper negative rates, applying the negative rate to a wider range of deposits, to steepening the yield curve and buying foreign bonds. 

The market’s reaction to the BOJ announcement may be more important than the action itself.  Investors should be open to the possibility that with global yields rising, curves steepening, monetary policy perceived to be near its political (if not economic) limits, the reaction function may be different.  If the BOJ will not or cannot ease further, investors may sell the yen and, in effect, inject an easing impulse for it.

Most recently, rising (US) yields appear to be more yen negative than the increase in equity market volatility has been yen positive.  This is another anecdote warning that of a paradigm shift of sorts may be taking place.

Lastly, we note that the polls for the US election have tightened considerably over the past fortnight.  Among the most authoritative analysis of US, polls is found on Nate Silver’s fivethirtyeight.com website.  A couple of weeks ago, Trump’s chances of being the next US President were about 15%.  Now a survey of polls put his chances nearer 40%.

In terms of states for tracking the Electoral College, there are three states that Trump has edged into a small lead:  Florida (0.2%), Ohio (1.2%), and North Carolina (0.7%).  Most paths to the White House for Trump requires that he carries these three states, but even if that happens, it might not be sufficient.  Pennsylvania (Clinton ahead by 3.4%) and Michigan (Clinton ahead by 3.9%) appear necessary for a Trump victory.  Where the candidate spend their time may be more important than what is said ahead of the first debate on September 26.

Previously, it looked as if the Democrats would pick up five seats in the Senate to secure a majority.  The odds have narrowed.  The chances that the Democrats could win a majority in the House of Representatives was never particularly strong, and the probability has slipped.

We think that rising interest rates, the drop in oil, and greater equity volatility have weighed on the Mexican peso (new record lows in the spot market) and the Canadian dollar.  However, anecdotally some argue that it is not coincidental that as Trump as narrowed the gap, which his criticism of Mexico and NAFTA have added pressure on the peso and Loonie.

Punctuated Equilibrium and the Forces of Movement is republished with permission from Marc to Market

The post Do the Capital Markets have a Political Limit? appeared first on Economy Watch.

The Eurozone finance ministers have accepted the EC’s recommendation that Spain and Portugal not be fined for their fiscal excesses.  A few weeks ago, the EU Commissioner for Economic Affairs, Moscovici explained that punitive actions would strengthen anti-EU sentiment.  However, that consideration did not prevent the EU from threatening to cut off part of the European Structural and Investment (ESI) funds for next year.

The Eurozone finance ministers have accepted the EC’s recommendation that Spain and Portugal not be fined for their fiscal excesses.  A few weeks ago, the EU Commissioner for Economic Affairs, Moscovici explained that punitive actions would strengthen anti-EU sentiment.  However, that consideration did not prevent the EU from threatening to cut off part of the European Structural and Investment (ESI) funds for next year.

The threat of reducing ESI funds can easily be set aside.  Both countries have to move toward compliance with the Stability and Growth Pact and enact the policy recommendations of the EU.  Portugal must take corrective action to bring the budget deficit to the 3% of GDP threshold.  Last year’s shortfall was 4.4%.  That seems optimistic, especially if growth is slower than the 1.3% year-over-year pace the government expects.

Spain has until 2018 to bring its budget deficit to 3% of GDP.  The deficit stood at 5.1% in 2015.  While Portugal elected a left of center government last year, Spain has been unable to break the political logjam.  It has held two elections and still has not been able to cobble a government together.

However, a potential breakthrough has occurred.  The new centrist party Ciudadanos has set conditions for its support.

Previously, Ciudadanos refused to support Rajoy due to unresolved corruption allegations, but its new demands may prove just as onerous for Rajoy and the PP.  The demands include a new parliamentary committee to investigate the slush fund that was allegedly used.  There are several judicial investigations.

Ciudadanos also wants to remove the protections for senior officials and lawmakers from legal cases.  Any politician named in a court corruption probe must step down, and the government should be barred from granting pardons in such cases.

Also,  a new electoral law is sought that would establish an eight-year term limit for the prime minister and reduce the advantage of rural voter over urban voters.  Since the PP does not have a majority, there may be little it can do about the corruption investigations.  Parliament could push ahead with this even if the PP did not agree.  Therefore, it makes little sense for the PP to object.  It is giving up something it does not have.  The electoral reform is reportedly a more difficult pill for Rajoy to swallow.

Ciudadanos has 32 seats, while the PP has 137.  Together they would be seven seats shy of a majority in the 350-member chamber.  If Rajoy and the PP agree to the conditions, then pressure turns to the Socialists, which are the second biggest party.  They won 85 seats in June. There is some thought to avoid yet another election, the Socialists could abstain, and in so doing, allow a PP-led minority government.

To “demonstrate full compliance with the Pact”, Spain is required to make a 0.5% fiscal adjustment and Portugal 0.25%.  The EC is deferring a final decision on suspending structural funds until at least next month.  Effective action is expected to be taken and formally report the details in the middle of October, at the same time as they present the draft 2017 budget plans.

No country has been fined for the lack of fiscal progress.  Before the Great Financial Crisis, Germany and France avoided similar penalties.  On one hand, the absence of fines undermines the credibility of the Stability and Growth Pact.  On the other hand, like other rule-based regimes, exceptions and exemptions are built into the rules themselves, like fouls in many sports.  Moscovici argues that the rules give room to cancel fines.  The Commissioner also noted that more countries respect the rules now than when there were first introduced.

This Great Graphic comes from the Financial Times.  It shows the 2015 deficits for selected European countries and this year’s projections.  The projected progress of Greece is remarkable, while Spain is projected to have the largest shortfall.  Weak growth prevents the denominator for contributing to the reduction of the deficit-to-GDP ratio.  However, that is not the problem for Spain.  It grew an enviable 3.2% last year.  The median economist forecast is for around 2.8% this year, which ironically is 0.1% above the government’s estimate.

ECB bond buying and the quest for yield offset the political and fiscal concerns. In the year-to-date, Spain’s 10-year yield is off 81 bp. A quarter of this was scored in the past month. The yield is off five bp today and is at a new record low of 95 bp. In comparison, Italy’s 10-year benchmark has not penetrated the 1.0% threshold.  Portugal’s 10-year benchmark bond has fallen nearly 32 bp over the past month, which has cut the year-to-date rise to 23 bp.

The euro seems immune to these developments.  It trended higher from the ECB’s disappointment last December (after reaching ~$1.0525 low) to a high in early-May (~$1.1615).  It has trended lower since then and hit a low near $1.09 in response to the UK referendum results.

Since then it has managed to close above $1.12 once.  A trendline drawn off the May high and the pre-Brexit high (~$1.1430) intersects today near $1.1270.  In a week’s time, it is found near $1.1240.  The $1.1265 area also corresponds to a 50% retracement of the euro’s decline since early-May (the 61.8% retracement is near $1.1350).

No Fines for Iberia, but Remedial Action Demanded and Possible Loss of Some ESI Funds is republished with permission from Marc to Market

The post Eurozone Finance Ministers to Iberia: No Fines for You appeared first on Economy Watch.

On 31 July, just over 11 million voters in Tokyo will be asked to return to the ballot boxes to vote for a new governor. This will happen just three weeks after the conservative Liberal Democratic Party (LDP) government under Shinzo Abe was returned to power in the upper house.

On 31 July, just over 11 million voters in Tokyo will be asked to return to the ballot boxes to vote for a new governor. This will happen just three weeks after the conservative Liberal Democratic Party (LDP) government under Shinzo Abe was returned to power in the upper house.

Much attention has been given to the momentum for constitutional change that this result brings. The impact of a younger cohort of voters on the election, with the recent lowering of the voting age to 18, also drew interest. However, there is a third story here, which links the upper house election and the Tokyo gubernatorial election: the 70th anniversary of universal and women’s suffrage in Japan.

After World War II Japanese women won the right to vote and run for office. However, 70 years on, women’s representation in both houses of Japan’s parliament remains low by most statistical measures. In the July upper house election, 28 women out of 96 female candidates were elected. This was an increase on the 2013 result where 22 out of 105 female candidates were elected. The LDP returned 10 of its 12 candidates, the Democratic Party seven of its 11 candidates.

In the Tokyo electorate, which has six members, female Democratic Party candidate Renho was elected first of the six members. Renho’s 1,123,145 votes were a considerable lead over her nearest rival, the LDP’s Masaharu Nakagawa who received 884,823 votes.

Other women who succeeded in coming first in multi-member districts include Kuniko Inoguchi (LDP, Chiba prefecture, 760,093 votes), Junko Mihara (LDP, Kanagawa prefecture, 1,004,877 votes), and Rui Matsugawa (LDP, Osaka prefecture, 761,424 votes). Six women secured the only seat in single member districts, evenly split between LDP and non-LDP representatives.

In the proportional lists, where parties could be more proactive in nominating women candidates on their lists, women secured 11 of the 48 places available.

The LDP suffered a high profile loss when the minister for Okinawa and the Northern Territories, Aiko Shimajiri, failed to retain her seat. Okinawan voters continued to ‘maintain their rage’ over Tokyo’s indifference to the local opposition to a range of issues concerning US military bases there.

Early analysis of the voting patterns of the closely watched 18–19 year old demographic revealed some interesting gender differences. While overall 40 percent of this group voted for the LDP, more young women (22.4 percent) voted for the Democratic Party than men (16.5 percent).

Voter support in this age group for constitutional revision revealed a significant gender gap as well. According to Tokyo Shimbun, 55.4 percent of young men support change and 40.8 percent oppose it, compared to just 37.1 percent of young women for change and 54.5 percent against.

There is a message here for the Democratic Party (and other non-conservative parties) about the potential to embrace the support of this group of young voters as they begin their engagement with the democratic process.

Still recent electoral successes don’t change the number of women in parliament in a dramatic way. This week, that figure stood at 82 out of 715 with two by-elections pending.

One of those by-elections has been triggered by Yuriko Koike, now one of the leading contenders for the governor of Tokyo. At the close of nominations, 21 candidates, including three women, opted into the race after the former governor, Yoichi Masuzoe, was forced to resign over mishandling public funds.

Koike has stood out since turning her hand to national politics in 1992. She has held various ministerial portfolios including the environment and (briefly) defence. She announced her intended candidacy early and publicly without LDP consultation and consent.

This caused much consternation among LDP playmakers who were aiming for an uncontroversial election. She belatedly sought LDP backing but withdrew her request when she realised it would not be forthcoming. Koike is in a head-to-head battle, with leading progressive candidate, Shuntaro Torigoe.

Koike presents a dilemma for people seeking the election of Tokyo’s first female governor. She is pitching her campaign very much as an independent woman against the party machine but she also carries a legacy of conservatism that progressive voters find difficult to support.

In her campaign so far, she has actively pursued the female vote. Early observations suggest she is capturing a disaffected element of Komeito supporters who do not want to support the LDP (Komeito’s senior coalition partner) as it moves down the path of constitutional revision.

Opinion polls are favouring Koike’s candidacy thus far. Her candidacy along with the formally endorsed LDP candidate, former Iwate governor Hiroya Masuda has the potential to split the conservative vote, making it easier for Torigoe to get over the line.

However, the non-LDP parties have had problems converting social media engagement and supporter enthusiasm into actual votes in a country where voting remains non-compulsory. There will be great expectations on the night of 31 July as the votes are tallied.

In this 70th anniversary year of universal suffrage in Japan, there remains an overt focus on the low number of women in national and regional political institutions. However, as these last few weeks in Japanese politics suggest, it is not over yet.

Will Tokyo elect its first female governor? is republished with permission from East Asia Forum

The post Women Running for High Office, this One in Tokyo appeared first on Economy Watch.

As uncertainty over Japan’s fiscal stimulus roiled the yen and domestic equities, Prime Minister Abe was forced to announce his fiscal intentions earlier than he initially intended.  The JPY27 trillion (~$265 bln) package.  

The details are far from clear, which may help explain why the dollar is in the middle of the two yen range (~JPY104.65-JPY106.55).  Note the high for the week was set on Monday near JPY106.70.  An unspecified part of the spending will be included in fall supplemental budget, which Japan regularly introduces. 

As uncertainty over Japan’s fiscal stimulus roiled the yen and domestic equities, Prime Minister Abe was forced to announce his fiscal intentions earlier than he initially intended.  The JPY27 trillion (~$265 bln) package.  

The details are far from clear, which may help explain why the dollar is in the middle of the two yen range (~JPY104.65-JPY106.55).  Note the high for the week was set on Monday near JPY106.70.  An unspecified part of the spending will be included in fall supplemental budget, which Japan regularly introduces. 

In addition, there is no distinction between spending and programs that offer low interest rate loans.  It is also not clear how much new borrowing in entailed or how it will be done.  A Dow Jones report claiming the introduction of 50-year government bonds was denied. 

Another reason that Abe may have felt compelled to announce the size of the fiscal plan, which we suggest is flattered by combining programs and the like, is to create a set of optics that would encourage not only immediate support for the stock market (Nikkei rallied 1.7%) but also to encourage the BOJ to be similarly bold.   

There had been conflicting media reports about the fiscal stimulus, and there has been no better clarity into the BOJ’s action at the end of the week.  A newswire poll found 80% of the surveyed expect the BOJ to take some action, with an increase in ETF purchases most favored.  However, this alone would not likely satisfy the government or investors.  There is talk of adding to its JGB purchases, for which the new supply is not yet publicly known. 

The Australian dollar also has been whipsawed by uncertainty over the policy outlook.  The market went into the Q2 CPI report leaning (~almost 60% chance according to the derivatives market) toward a rate cut next week.  The headline CPI rose 0.4% in Q2 for a 1.0% year-over-year rate, down from 1.3% in Q1.  This is the slowest pace in almost 20 years.  The RBA puts more emphasis on the trimmed mean and weighted median measures.  The former was a little firmer than expected, unchanged at 1.7%, while at 1.3% the latter was as expected. 

The market reduced the perceived chances of a rate cut next week to nearly a 50-50 proposition.  The Australian dollar initially rallied to around half a cent to $0.7565 but then dropped like a stone and briefly slipped through yesterday’s lows.  It has been chopping around a $0.7475-$0.7495 range through the European morning.  On balance, we are still are inclined to look for a rate cut next week. 

News that the UK grew faster than expected in Q2 was unable to sustain the higher sterling bias seen in Asia.  The UK’s first estimate for Q2 GDP draws on around half the data.  It was 0.6% after a 0.4% pace in Q1.  The year-over-year rate ticked up to 2.2%.  The 2.1% surge in industrial production was front loaded in the quarter, but it was the largest increase since the late 1990s.  Manufacturing and energy output were strong.  Services rose 0.5%, while construction fell 0.4%. 

This week sterling has been capped in the $1.3165-$1.3175 area.  The lower end of the range seems to be around $1.3060.  Similarly, the euro has been carving out a shelf in the GBP0.8340-GBP0.8350 area, above last week test on GBP0.8300 and the previous week GBP0.8250.  At the same time, despite the probes, it has not been able to establish a foothold back above GBP0.8400. 

Eurozone money supply and lending figures were reported.  As expected M3 rose 5.0% year-over-year.  Lending to non-financial corporation and households edged higher to 1.7%.  The news was unable to breathe fresh life into the lethargic euro trading.  The single currency was confined to less than a quarter cent range.  It has yet to make a convincing break of the $1.10 level but is spending more time below it than above it. 

The US reports durable goods orders and pending home sales prior to the release of the FOMC statement, which is the highlight of the session. The details of the durable goods orders report will likely be better than the headline.  The report could also impact last minute adjustments to Q2 GDP estimates.  Pending home sales are expected to recoup some of the weakness seen in May.   

We expect the FOMC statement to reflect the greater confidence than was apparent in June.  Economic data has been firm.  Activity seemed to pick-up in June.  The global markets have been fairly resilient in the face of the Brexit decision, the coup in Turkey (and the bloody aftermath), as well as the depreciation of the Chinese yuan and Chinese stocks.

The re-introduction of the risk-assessment would be a way that the Fed can signal that it is still prepared to raise interest rates.  This could point can also be underscored if there another official joins George in dissenting from the steady policy the majority will back. 

Speaking of Chinese stocks, a large loss was recorded Shenzhen (-4.5%) and somewhat smaller loss in Shanghai (-2.0%), even though the MSCI Asia-Pacific Index managed to rise 0.25% and extend its gains for a third session.  Reports have linked the sell-off reports that the regulators are going to curb the wealth management products from investing in some equities and other assets, such as loans.

Yen Falls on Fiscal Stimulus, while Sterling and Aussie Can’t Sustain Upticks is republished with permission from Marc to Market

The post Fiscal Stimulus Questions Force Abe’s Hand appeared first on Economy Watch.

Populism has become a defining feature of the political landscape on both sides of the Atlantic. In addition, populists succeed by “instilling fear of various real or imagined dangers.”

Populism has become a defining feature of the political landscape on both sides of the Atlantic. In addition, populists succeed by “instilling fear of various real or imagined dangers.”

In the U.K., those in favor of Brexit cited European Union immigration policies to build support for the “leave” campaign. In the U.S., similar fears over immigration have been joined by heavy criticism of globalization as populists call for a greater focus on domestic interests.

This populism comes at a steep cost, as the U.K. has learned in the aftermath of Brexit. It shows the dangers of turning away from market institutions like the EU and of introducing political uncertainty into the marketplace.

These results should send a powerful warning to those in the U.S. who want to pursue a similar strategy.

Populism on the rise

Both the Republican and Democratic 2016 platforms illustrate this shift away from support for globalization toward more populist ideas. For example, the Democratic platform criticizes American trade agreements more heavily than in past elections. This may be a result of Bernie Sanders’ success.

Perhaps more telling, trade agreements were largely omitted from the Republican platform, which had made promoting globalization a key issue for decades. This omission is a direct result of disagreement among Republicans resulting from the party’s new focus on working-class labor interests.

Polls suggest that such populist appeals that blame immigrants or globalization for domestic problems are an effective way to frame economic policy debates, even if the facts are wrong.

A growing number of voters face stagnating wages and greater job insecurity. The result is widespread economic disillusionment. It’s therefore no surprise when politicians promise to retreat from a global system that many think does more harm than good.

However, what are the economic costs of this populist upsurge? While economists have expressed skepticism, there was little tangible evidence until recently.

Now, we need only look to the aftermath of Brexit for answers. Market responses to the EU referendum send a clear message. Specifically, these reactions show the dangers of prioritizing populism over political stability.

Has the U.K.’s populist pro-Brexit surge subsided? Paul Hackett/Reuters

Brexit’s economic consequences

The short-term impact of Brexit has been decidedly negative.

The British pound tumbled close to 10 percent as referendum results were announced and has since steadied near a 30-year low. The morning after saw the FTSE 100 open 400 points lower. Similar losses were seen worldwide as US$2 trillion was lopped off the value of global markets.

Equity markets now show strong signs of recovery, but this is only one part of the overall picture.

More telling – and more significant – is the behavior of investors making longer-term commitments. Property funds with substantial U.K. holdings have seen downward revaluations of their portfolios, the pound continues its downward trajectory and U.K. government bond yields recently hit record lows.

The activity on bond markets may provide one of the principal warning signs moving forward. Demand for bonds has surged as a direct result of political uncertainty. Purchasing increased as investors shift toward greater safety in their portfolios, reducing yields and sending a signal that markets remain concerned.

The timing of these market outcomes is not a coincidence. It’s telling that all of this occurred after a period of relative optimism. Prior to the referendum vote, many markets reached near-record highs, bolstered specifically by hopes of a “remain” victory. What we see now are the consequences of shattered market confidence and of increased uncertainty.

NAFTA, which former President Bill Clinton signed in 1993, has received particular scorn from populists this year. Win McNamee/Reuters

What lessons can be learned?

The reaction to Brexit reminds us of one fundamental fact about markets: They don’t like political uncertainty. Uncertainty over the policy environment leads market actors to be more cautious. Unfortunately, this is precisely the problem with the populism currently standing center stage in countries like the U.K. and U.S.

Take, for instance, the aforementioned opposition to free trade prominent in the recent primary campaigns. In a curious case of cross-party alignment, Democratic and Republican candidates have been united in their opposition to trade liberalization. Trump stated that trade was “crushing American workers” and that it had “wiped out” the middle class. Both Sanders and Hillary Clinton (under pressure from her more populist rival) agreed, saying that the current global economy disadvantages American workers.

Drawing the most ire have been free trade agreements, past and present. NAFTA – signed by Clinton’s husband in the 1990s – has been criticized for expediting the downfall of American manufacturing. Trump called it the “worst trade deal in history” and promised to remove the U.S. from its “unfair” rules.

He does not stand alone among Republicans on this issue. Republican senators have expressed dismay about the pending Trans-Pacific Partnership, a deal that would join the U.S. with 11 Pacific Rim partners to govern roughly 40 percent of global trade.

The language of U.S. trade opponents largely mirrors many of the arguments the “leave” campaign made about the EU. For example, Brexit backers claimed that EU rules constrained U.K. enterprise and argued that leaving the bloc would lead to increased market opportunities abroad.

Here’s the problem. The “constraints” that trade agreements place on members are precisely what makes them so valuable.

The value of free trade

Trade agreements do not just boost trade. A growing volume of political economy research, including my own, shows that they also stabilize economic partnerships. In particular, trade agreements include rules and regulations designed to limit governments’ policy discretion.

One example is providing formal rules for interstate dispute settlement. Dispute settlement ties governments’ hands, deterring them from introducing ad hoc policy changes. In this way, trade agreements take the global economy out of the Wild West.

Viewed through a populist lens, forfeiting autonomy looks like a bad thing. However, it isn’t. Trade law helps prevent states from pursing exactly the kinds of protectionist policies that introduce market risk.

Consider Trump’s campaign promises. He has repeatedly threatened to raise tariffs against key U.S. trade partners by as much as 45 percent. He also welcomed the idea of a trade war, alienating markets like China in the process. These kinds of ad hoc policy shifts will only do harm to American firms and trigger greater volatility in global markets.

Trade is just one issue, but it illustrates what the current populism gets wrong about economic policy. It is costly for countries to retreat from global markets or from the rules that govern those markets. Brexit shows that such a retreat will not accomplish populists’ intended goals of greater job security and higher wages. U.K. job and growth forecasts have been revised downward and consumer confidence has evaporated. These effects are not arbitrary. They are a direct result of the political uncertainty.

The same holds in the U.S., where it is estimated that the destabilizing effects of Trump’s policies would lead to another recession. One study puts the estimated opportunity cost of Trump’s policies at as high as 4 million lost jobs.

Moving forward

The danger now is that Brexit’s consequences will be ignored. Observers have drawn comparisons to other eras in which populism shaped economic policy. Most prominently, the Smoot-Hawley tariffs of the 1930s illustrate the potential downside of widespread protectionism. For some, the current populism suggests a dangerous return to the kind of thinking that deepened the Great Depression.

However, we need not go back that far. More recent history shows just how important the health of markets is to retirement and savings accounts. It also reminds us how important stability is for consumer confidence, employment and overall growth.

It is perhaps a small irony that echoes of 2008 are a key  behind the current push toward populism.

If nothing else, the Great Recession should highlight the need for greater certainty in the political climate. However, this means a deeper commitment to the kinds of market institutions populists want to abandon.

Brexit shows economic costs of pursuing populist policies like Trump’s is republished with permission from The Conversation

The post Countries Beware, Populism can be Expensive appeared first on Economy Watch.

The upheaval sweeping through Zimbabwe comes with a new economic and political reality – the informalisation of the country’s economy. In Zimbabwe today, the informal sector is the economy.

The upheaval sweeping through Zimbabwe comes with a new economic and political reality – the informalisation of the country’s economy. In Zimbabwe today, the informal sector is the economy.

In Beitbridge, on the border with South Africa, furious cross-border traders set fire to a warehouse in protest against import bans recently imposed. In Harare, taxi operators protested against the cost of continuous police roadblocks, where spot fines are extracted.

Both these incidents highlight how Zimbabwe’s economy has changed dramatically. Formal unemployment runs at 90% or more, but this doesn’t mean that not all these people are doing things. They are, but not in the jobs of the past.

Livelihoods are improvised and flexible. Different ways of earning income – farming, trading, dealing, manufacturing, mining, selling services and a host of other distributive activities – have been combined. These shifts are reliant on deeply embedded social relationships.

However, little is known about the informal economy. In addition, policies often upset and disrupt, rather than support and nurture. Therefore, it is no surprise that the government’s decision to arbitrarily impose import controls – on everything from mayonnaise to body lotion and building materials – was resisted. In the name of domestic manufacturing protection, the livelihoods of many thousands of traders who bring goods from South Africa were affected. No wonder they were angry.

Nature of the informal economy

The informalisation of the economy is a pattern across Africa, as James Ferguson eloquently describes. New networks of economic activity have emerged, as has a vibrant spirit of innovation and entrepreneurship. This is in the context of extreme hardship for sure, as economies fail to deliver equitable growth.

Ferguson argues that the improvised livelihoods of the poor are creating a new distributive economy, and with this a distributive politics. This is having a major impact on the way we understand African political economy – and not only in Zimbabwe.

The shock is perhaps greater in Zimbabwe, as in the past the “formal” sector was larger and stable, where “jobs” and “wages” were expected, especially for men at a certain age. However, the post-structural adjustment growth of informality is a phenomenon everywhere; and is accelerating, especially in countries where reliance on a core commodity sector was the economy of the past.

Thus, the informal sector – a huge and massively varied category – represents a very substantial proportion of Africa’s economic activity. In the rural areas this has always been the case – small-scale farming dominates and rural dwellers have always engaged in a diverse range of activities, both on and off farm.

Today such complex livelihoods are the norm in town too. The jobs of the past in the factories, mines, farms and so on no longer exist. When they appear, the jobs come temporarily. The alternative is a set of activities that don’t fit the former expectation of a “job“ or “employment”, and are so not counted as such.

Ever since Keith Hart wrote about Africa’s informal economy long ago, many people have pointed to its importance. In recent years, there has been a growth in scholarship that has attempted to grapple with the economic, social, cultural, political and geographical dimensions of informal economies. These include the excellent work of Kate Meagher in Nigeria and more broadly.

Ignored, dismissed, berated

However, in public policy, statistical data collection and media commentary, the new real economy in so many places has been ignored, dismissed or berated. Responses have been inappropriate too.

Formalising the informal is not the point, and attempts at converting everything into a projectified “small enterprise” are misguided. Controlling and regulating will not work, and will be resisted, sometimes violently. In addition, yes, while much activity is outside the ambit of the state, and not taxable, it is the lifeblood of the economy – and certainly is in Zimbabwe.

Yet glorifying and romanticising the informal is not the solution either. Living in the informal sphere is tough. Informal activity is precarious, fragile, sometimes illegal and often subject to arbitrary taxation from those in authority. This is the case with the roadblocks affecting informal transport operators across Zimbabwe. Incomes are small and highly variable and the costs of patronage, coercion and control can be high, economically and psychologically.

The events of the last few weeks in Zimbabwe point to the need for a new accommodation between the informal and formal and between the economies and livelihoods of the 90% and the state. A new political economy is emerging, where the class relations of the past are no longer relevant. State-economy-citizen relations must be rethought.

Rather than imagining the informal economy as somehow outside, and needing to be brought in, it has to be thought of as central to development. Providing support, generating legitimacy, assuring accountability and preventing exploitative predatory, patronage relations are all roles for the state; ones that the Zimbabwean state is failing on currently.

This means attempts at controlling; regulating and incorporating have to be avoided, despite the knee-jerk temptations. These are the key lessons from rioting in Beitbridge and Harare. The 90%, after all, are the electorate. They will protest in many ways if livelihoods in increasingly difficult circumstances are jeopardised.

This does not mean that attempts to rebuild the formal sector should cease. Far from it. Finance Minister Patrick Chinamasa was in London making that case for Zimbabwe last week to the usual howls of protest. However, the refinancing that will hopefully flow from the International Financial Institutions and other private investors will need to find its way to the new economy, and not just prop up the old.

For in the longer term, it is the informal entrepreneur, the niche market trader, the small-scale artisan and manufacturer and the smallholder farmer who will scale up and multiply the massive, but uncounted and perennially unsupported informal economy.

Managing and supporting such a transition is the central economic challenge of the future. The standard models and forms of expertise derived from the old economy are inadequate. A new politics and economy of the informal urgently needs inventing.

Zimbabwe’s riots: the rise of the informal trader and a new political economy is republished with permission from The Conversation

The post Zimbabwe’s Informal Sector has become its Economy appeared first on Economy Watch.

Surveying democratic election results around the world, it’s clear the high water mark for globalisation has been met. Free trade, always-questionable economics, is no longer good politics and in many ways has jumped the shark.

Surveying democratic election results around the world, it’s clear the high water mark for globalisation has been met. Free trade, always-questionable economics, is no longer good politics and in many ways has jumped the shark.

We’ve seen Trump on the populist right (or wherever Trump is as he has his own political pendulum), and Bernie Sanders on the left turning US trade politics upside down. Both helped drive Democratic nominee Hillary Clinton to reverse her position on the Trans Pacific Partnership (TPP).

Ironically, the Republican Party, known as the Grand Old Party (GOP), was originally northern and protectionist and the southern based Democratic Party pro free trade. Now Trump on the right and Sanders on the left have made protectionism popular again.

Brexit in the UK and other populist forces across Europe have sprung largely from an anti-globalisation and anti-immigration platform.

In the Asia-Pacific, we’ve seen Rodrigo Duterte elected in the Philippines and nationalist impulses on the rise everywhere from Indonesia to Peru.

In Australia, we’ve seen the rise of the Nick Xenophon Team, with Xenophon himself questioning the benefits of free trade. In addition, with the revival of Pauline Hanson (who questions both Asian immigration and trade with Asia), and a fractured Senate, there’s likely to be more negative messages on free trade.

The Australian economy can survive a split parliament – the fears that it will harm business confidence are largely exaggerated. However, the presence of Pauline Hanson in the Senate (with her rhetoric of “Australia is being swamped with Asians”) is far more dangerous given our strong trade, investment and education links with Asia.

What is it that has allowed the Donald Trumps, Nigel Farages and Pauline Hansons of this world to thrive politically?

Three reasons driving anti-trade sentiment

The first reason has been the rise of inequality in developed economies.

The failure of US real wages to keep up with productivity growth, while the top 1% of US society gets richer (including Trump himself), explains the anger in the US. Instead of blaming labour market deregulation, it is easier to blame immigrants from Mexico and Asia, or the Federal Reserve.

Ironically, if labour markets had been strengthened and workers’ rights and wages supported, free trade might have built a bigger constituency.

The second has been the failure of global economic institutions to adapt to changes in the global economy.

We’ve seen the EU overextend to the brink of collapse, the WTO dead as a Doha, the IMF and World Bank in a transatlantic straight jacket despite the rise of Asia and the emerging economies. Instead of forging truly open trade agreements, we’ve tried to protect corporate rights alone via the TPP and its forerunner the Multilateral Agreement on Investment (MAI). If global institutions can’t even aim to have a level playing field then no wonder large parts of the constituency retreats into isolationism and protectionism.

Finally, it’s the political salesmanship of free trade.

If the politicians who promote free trade deals are also advocating the abolition of penalty rates in the labour market, opposing minimum wage rises and attacking public health and public education, no wonder people get suspicious. In addition, if they are goading the car industry to leave the country, that doesn’t help either.

I have always thought you can make a progressive case for trade, as exporters on average pay higher wages; provide better occupational health and safety standards, more job security and equal employment opportunity, on average than non-exporters. Support for an open economy should go hand in hand with support for improved labour standards. After all, in all economies, developed or emerging, you want wages to rise with improved productivity as you open your economy to trade and investment.

The major parties of the centre have some work to do to tackle these protectionist threats from the populist left and right. A first step is to decouple support for free trade from support for labour market deregulation (whatever that means in practice) and make a pro-worker and pro-environment case for an open economy. In addition, at the same time tackle the racist elements of the populist politicians (and their “swamping with Asians” anecdotes). However, that’s another story.

Three reasons free trade has become a political football is republished with permission from The Conversation

The post The Popularity of Protectionism appeared first on Economy Watch.

Donald Trump has been bashing free trade for much of his campaign. However, in recent weeks he’s taken his anti-trade tirades to a whole new level in lashing out at the Trans-Pacific Partnership (TPP), a deal that was signed by its 12 Asia-Pacific members but has yet to be ratified.

Donald Trump has been bashing free trade for much of his campaign. However, in recent weeks he’s taken his anti-trade tirades to a whole new level in lashing out at the Trans-Pacific Partnership (TPP), a deal that was signed by its 12 Asia-Pacific members but has yet to be ratified.

On June 22, he told a crowd in New York City that the TPP would “ship millions more of our jobs overseas – and give up congressional power to an international foreign commission.” Six days later, he claimed it would not only “undermine our economy, but it will undermine our independence. The TPP creates a new international commission that makes decisions the American people can’t veto.”

If that weren’t enough, he upped the ante in a campaign stop in Ohio later that day when he declared:

The Trans-Pacific Partnership is another disaster done and pushed by special interests who want to rape our country, just a continuing rape of our country. That’s what it is, too. It’s a harsh word: It’s a rape of our country.

As researchers on the economics of trade and trade agreements, we wanted to zero in on a few of Trump’s claims and assess whether there’s any truth to them. In particular, will the TPP destroy millions of jobs and result in the loss of U.S. economic independence?

The impact on jobs

First, trade agreements are complex, and even the best forecasts about what will happen once they take effect can be wrong, let alone a strong claim that millions of jobs will be destroyed.

However, most importantly, there is little overall relationship between the level of trade barriers to which a country agrees and aggregate employment in that country. Rather, the effects of trade on employment are distributional: Some industries and occupations grow, while others shrink, with no net impact on the overall number of jobs.

The question, then, is whether the TPP will create better jobs than what we have today. Here, there is reason to be cautiously optimistic, especially for those workers most able to upgrade skills or move to regions or sectors that benefit from better market access to other TPP partners.

Relative to previous trade agreements that the United States has signed, the TPP is expected to have a large impact in areas in which the U.S. has a strong comparative advantage – especially digital trade, agriculture and tradeable services – which means that many of the new jobs will be good ones.

In contrast, previous waves of trade liberalization, including the Uruguay Round of the General Agreement on Trade and Tariffs (GATT), focused more on reducing barriers to manufacturing trade. Even though the TPP aims to completely phase out some of the remaining tariffs on manufactured goods among members, these barriers are already so low that the impact of further reductions on American workers is likely to be small. (This is not to minimize past job displacement, however.)

Combined with technological change and China’s accession to the WTO in 2001, lower tariffs contributed to the 18 percent decline in manufacturing employment between 2001 and 2007. Although most of these displaced workers found work in other sectors of the economy, research suggests that the new work paid less, on average.

On the other hand, the United States is likely to see increased output and employment in services and agriculture. The U.S. International Trade Commission (USITC) recently estimated that the service sector would see a US$42 billion increase in sales over the next 15 years due to the TPP, while the agricultural and food industries will gain $10 billion. That’s about five times the estimated $11 billion loss in sales of manufacturing, natural resource and energy output. The USITC estimates that these output gains may lead to a modest rise of around 130,000 U.S. jobs.

The most widely reported estimates of the economic impact of the TPP (see here or here) predict modest gains in annual real U.S. income. That’s because the TPP is expected to boost economic activities in which the U.S. has a comparative advantage. While it is important to note that these models are based on a host of assumptions about the global economy – some of which may turn out to be wrong – it is safe to say that the TPP is highly unlikely to lead to millions of job losses.

Impact on congressional power and economic independence

The question of whether the TPP threatens U.S. economic independence and congressional authority is most likely a reference to an element of the agreement known as the Investor-State Dispute settlement (ISDS).

In brief, ISDS is an arbitration procedure intended to resolve disputes between investors and TPP signatory countries. Most commonly, it is framed as a way for foreign investors to protect themselves against seizure of their assets by foreign governments.

Of course, there is little risk of such an extreme outcome (seizure of assets) for owners of U.S.-based assets given the country’s historical respect for property rights and the reliance on rule of law.

The concern for many TPP critics is that a foreign investor may claim that, for instance, the U.S. minimum wage constitutes a seizure of profits, and an arbitrator with corporate sympathies may then rule against the U.S. government. The fear is that, in this case, a ruling against the U.S. could force changes in its labor laws – thus eroding U.S. sovereignty and Congress’ legal authority.

However, this seems to be a misinterpretation of the TPP text. The White House has stated explicitly that ISDS cannot require changes in a country’s laws or regulations. It can only impose financial penalties.

Furthermore, over 50 trade agreements to which the United States is currently a signatory contain similar provisions for arbitration as part of a dispute settlement process. The White House points out that there have been only 13 cases brought against the U.S. over the 30 years spanned by those agreements, and each ruling was in favor of the U.S.

Most importantly, the TPP improves on existing ISDS language by increasing transparency, limiting investors’ ability to bring spurious cases and penalizing so-called “venue-shopping.” With so many ISDS provisions already in force around the world, the ISDS genie is out of the bottle.

The TPP offers a chance to roll out a new, narrower, more cautious approach to ISDS on a world scale. If successful, these revised ISDS provisions could ultimately replace the existing ISDS language that has (justifiably) come under fire in public discourse.

A bit overblown

Both of Trump’s claims seem overblown.

First, while there is quite a bit of uncertainty associated with the TPP projections, it is difficult to support the claim that millions of U.S. jobs will be lost. The TPP will increase competition among the signatories in economic areas (for instance, finance and technology) in which the United States is a dominant player – and that should be a good thing for the U.S.

The truth is that trade agreements change the composition of jobs in the economy. Some workers will be happier with their new jobs, and others will not. Whatever the job losses from the TPP, a roughly equal number will be created.

Second, in theory the ISDS could be a disaster for governments that seek to enact or enforce laws and regulations that they believe are in the public interest but conflict with corporate interests. However, the TPP seemingly addresses these concerns, and the White House has detailed the many specific ways in which the TPP will go beyond previous agreements in order to protect against frivolous claims and threats to signatories’ sovereignty.

Claims about the impact of trade, and especially trade agreements, will continue to animate the ongoing presidential campaign. Given the importance of the topic, it is essential that claims be weighed against the evidence and that voters understand what trade can and cannot do.

Is Trump right that the TPP will destroy millions of jobs and cede US sovereignty? is republished with permission from The Conversation

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