Democracy has a Way of Sorting Out Problems

inFOCUS: What is your fear for the American economy as you look out into the future?

Prof. Morici: My fear is that we become isolated. That we fail to reach some sort of consensus with the Chinese about how the relationship should be conducted that is beneficial to both societies. That the Chinese continue to operate as they do and basically get to use the technology that we pay for and develop and it they steal from us through various forms of technology theft. It’s very difficult for American companies, or Western companies generally, to compete on that basis and that’s one of the reasons the Chinese are making the strides they are in cellphones, and they’re ahead of us on 5G. They have their market to themselves and they can penetrate our markets. They can steal technology and so forth. All of these things make it impossible for Western companies to compete fairly and it makes Western companies increasing dependent on the Chinese.

iF: Would trade blocks help us better compete?

Prof. Morici: The United States, if Congress chooses to ratify the U.S.-Mexico-Canada Agreement, essentially begins that process, because the agreement dissolves for a participant if they sign a free trade agreement with a non-market economy – you can read in that, essentially, China. It isn’t clear to me that the Europeans would be willing to make a trade deal with us that had those provisions.

I might say it’s a bit of Obama redux. Because one of the reasons for the TransPacific Partnership was to counterbalance Chinese influence in Asia and it would have served to better isolate China. It would have created the calculus or the incentive for more trade between the United States and other Pacific Rim nations as opposed to with China.

Part of the problem is that the major European economies, in particular the Germans, make a lot of money in China and they want to be very careful. Another problem is that China has a lot of influence in some of the former Eastern bloc countries that are part of the European Union.

Dealing with Europe

Prof. Morici: And, even if there were no China, the Europeans could put conditions on trade agreements that are very difficult for another major economy – like the United States – to comply with. They like to be in a position where their standard-setting bodies are setting standards for the world as opposed to, “Well, we’ll accept products that met your standards if you accept products that meet our standards.” It’s really hard to negotiate with the Europeans on the basis of mutual recognition.

Another problem is that the Europeans have become technological laggards, with perhaps the exception of the British. They like to engage in industrial policies that penalize American technology companies so that they – not we – succeed. I don’t know how to deal with that inside a trade agreement because that’s largely in the area of things like anti-trust. They have written some peculiar anti-trust practices over there which are not that amenable to negotiation.

iF: President Trump seems to think that tariffs on their goods is a way to rebalance our trade with Europe. Whatever they do to us, we do to them. Is that reasonable?

Prof. Morici: I don’t think so. Europeans have higher tariffs than we do, but they don’t have terribly high tariffs. One of the things I find humorous about Brexit is that if the British have to start paying tariffs on the products they send to Europe, they’re not going to be very high. Yes, in some cases they are. They have a higher tariff on cars than we do. But overall, Europeans tariffs, E-tariffs are not terribly high.

The Europeans have a lot of pride on this issue and they’re fairly resilient. If we impose high tariffs on them, they’ll impose high tariffs on us. This is very different than China. We can rattle China with tariffs. I don’t think we can rattle the Europeans that way.

Also, the Europeans are always telling us we should negotiate with the Chinese. I don’t buy that. We’ve tried negotiating with the Chinese and using the WTO and so forth and the tariffs have proven useful with regard to China. But with regard to the Europeans, they have strong, diversified economies where I don’t think it would work very well.

iF: Is our best bet with the Europeans a series of bilateral agreements?

Prof. Morici: Our best bet with Europe is to try to accomplish a bilateral agreement and to demonstrate, by effectively dealing with the Chinese, how it can be done. They do have problems with the Chinese similar to ours.

Belt and Road

iF: China’s Belt and Road program appears to be a way for China to get into a lot of countries, create debt, and then suck up their assets. Is that a reasonable description?

Prof. Morici: It has had that effect in places, but it’s more a way for the Chinese to develop considerable influence in emerging economies. Economies that aren’t as advanced as Germany or France. And it’s enabled by the U.S. trade deficit because China would not be able to pursue Belt and Road if it didn’t have lots of dollars to work with – which the trade deficit provides. We not only become indebted to the Chinese, but we have given them the funds they need for soft power.

Brexit

iF: Brexit yes or Brexit no?

Prof. Morici: Brexit yes.

My feeling is the agreements that Prime Minister (Teresa) May has brought back to Parliament for ratification really turn Britain into a European colony. They dictate the terms of the divorce and essentially bind, written one way or another, Britain to European rules.

They have an issue of how to deal with the Irish border because of the Good Friday Agreement that ended the terrorist problem in Northern Ireland. But British sovereignty is being held hostage to that. May has failed to come up with Plan B. If the Europeans won’t be reasonable, we will see what a “hard” Brexit looks like. My feeling it’s possible for the UK to leave the European Union and to deal reasonably with the Ireland problem, but she hasn’t formulated a program to do that.

Sanctions and Trade Policy

iF: Can economic sanctions on countries advance our foreign policy goals? Do sanctions on Iran or Venezuela have a significant impact and can we get what we want from them?

Prof. Morici: They do if our allies participate and participate fully, but it depends on the regime. Sanctions have been applied so many times on the North Koreans that the Koreans have become resilient. They’ve learned how to live with sanctions and they are very resourceful. So, sanctions in case of the Trump sanctions with regard to North Korea’s nuclear arms are going to take a long time to work and to wear them down.

Also, if you’re dealing with a dictator who, if he relinquishes power, has an uncertain future even regarding his personal survival, all the sanctions in the world aren’t going to change his mind. Because after all, he could end up in a jail cell at best and executed at worse. In the case, for example, of Venezuela, I don’t know how well those are going to work unless the military defects.

In the case of Iran, I think they could have worked, but the deal Hillary Clinton proposed and that Barack Obama ultimately agreed to was fatally flawed and Donald Trump is correct.

I don’t think sanctions on Iran are going to work now. The Europeans aren’t participating because they don’t agree with the American policy of abrogating the agreement on nuclear development in Iran. Without them it’s problematic.

Now there’s really another question here: If the United States repeatedly resorts to economic sanctions, do they lose their impact?

iF: That’s a great question.

Prof. Morici: In some measure they do. A good deal of American leverage is based on the fact the world increasingly uses the dollar as the currency for trade – even transactions between countries that have nothing to do with the United States. So, the U.S. economy is denominated in trade in dollars and the U.S. banking system provides the global plumbing to enable that trade. It is possible to build an alternative system of plumbing based on the dollar outside the jurisdiction of the United States – because there are so many dollars already abroad that they can literally provide the reserves for banks that participate in the dollar system beyond the reach of the Federal Reserve. The Europeans are trying to lay that type of plumbing system to trade with Iran; so far, they’re having difficulty. But if we use sanctions too many times then the number and scope of countries interested in an alternative system gets larger, and eventually they’ll find a way around it. Instruments of soft power have limited durability and sanctions are an instrument of soft power.

The American Economy: Decent

iF: Turning to the U.S., things are looking pretty good. Employment is up, unemployment is down, wages are rising. On the other hand, the stock market is up and down, the Federal Reserve appears tentative. First of all, what’s your general assessment of the health of the American economy?

Prof. Morici: The overall health of the American economy is decent; it could be better. Part of the problem is unresolved issues with regard to China and the problem the trade deficit poses to the U.S. economy. Part of the problem is unresolved issues about immigration. We need a better immigration program because U.S. birth rates are falling.

Millennials and Generation Z are marrying later and having fewer children to the point where, without immigration, we could have a decline in population at some point. That is not a world that we want to live in.

Part of the problem is the stresses that have been imposed on young folks by dysfunctions in our education system. Tuition has been rising at twice the rate of health insurance since 1999. Twice the base of the rate of inflation. In turn, people borrow a great deal of money to go to school and lots of times, American universities haven’t given them much value. If you’re going to tell people to borrow money to go to school then school becomes an investment. And, for many young people, school has proven to be a poor investment. In turn, that’s a drag on the economy.

They’re going to be paying student debt forever and many are in jobs that don’t require a college degree. And many don’t earn the kind of money necessary to retire large student debt, they just don’t.

There are a lot of dysfunctions in the educational system. It is increasingly being run for the people that run it and not for the students and not for the faculty. That’s having a lot of negative consequences for the economy broadly.

iF: Continue the thought. What does this mean for programs like Social Security and Medicare?

Prof. Morici: If we have stagnant population, if we don’t come to a consensus on immigration, it becomes more difficult to finance them. If you look at what’s going on in Japan, people are working longer and the government is providing assistance to them to do it – to overcome the physical problems that people have as they age. We’ll likely have to do that no matter what, but we are going to be compelled to do it more quickly and more drastically if we don’t resolve our demographic issues.

A society in which young people are too pessimistic to have children is a society that’s got a virus.

iF: That could be the title of this article. Another thing we talk a lot about is the deficit and the debt.

Debt and Deficits

Prof. Morici: The national debt has been going up by the pace of the deficits, and the deficits are close to a trillion dollars per year. The debt is financed by Treasury securities, but there is a limited capacity for the world to absorb them. It has increased in recent years because the world uses the dollar more as a means of transaction and U.S. bonds are as good as U.S. dollars for backing up the world’s banking systems. Banks around the world, not just American banks, issue dollar denominated deposits and they use the U.S. Treasury securities for reserves. It’s the same thing with countries’ central banks.

There is an appetite for Treasury securities, and so we’ve gotten away with having bigger deficits, but it’s not infinite. The dollar is so important. The future of the Chinese yuan, for example, is uncertain because of the nature of the Chinese government is uncertain. Property is insecure there. If you have dollars, you can buy property in New York and feel that the property is secure. If you have British pounds, you can buy property in London and feel that it’s secure. The only other large economy is the European economy and the future of the Euro is uncertain because if the Italians were to decide to leave the Euro Zone (and it would serve their interest to do so) and perhaps leave the European Union in the wake of Brexit – a hard break – that would be the end of the Euro. Euro-land doesn’t really exist; it doesn’t issue bonds.

So, my feeling is that the dollar is the only alternative right now, but just like the plumbing system with regard to U.S. sanctions, the world will find a way around the Federal Reserve printing currency if it needs to.

iF: Printing currency as in?

Prof. Morici: Issuing dollars. If the world decides if it no longer wants to hold a very large number of Treasuries, it will find something else to hold. It’s only paper.

iF: What would be an effective American strategy to reduce the deficit and therefore the debt?

Prof. Morici: To grow more. And that would be accomplished by cleaning up entitlements, having more adults participate in the labor force, improving the education system, and improving the healthcare system. The education system and the healthcare system absorb huge amounts of American wealth and they don’t run very well. The U.S. healthcare system is extraordinarily expensive and it’s hard to say it’s as good as, for example, the German system.

Deregulation and Growth

iF: Are President Trump’s deregulation policies a step in the right direction?

Prof. Morici: Generally, deregulation is good. The Obama folks went too far in the other direction. This is a sort of course correction. We need regulations so that there are rules of the road for competition. But it doesn’t work if people are so pinned down by filling out forms that they can’t get anything done – and it’s gotten to that point for a lot of smaller banks, for example, it just became too cumbersome to make mortgages. Unfortunately, there’s a certain deafness in Washington to the legitimate prize of the private sector and that is an unfortunate situation in America.

iF: Deafness to what?

Prof. Morici: Deafness to needs of businesses; to being able to do business. If you have a regulatory objective, the idea is to accomplish it with the least burden. It seems in Washington that the bureaucracy’s objective is to accomplish the business objective with the greatest amount of paper.

Healthcare Reform

iF: I want to wrap up with two questions. If you had to choose a single thing that would spark the kind of growth you’re looking for, what would be the most effective thing that Washington could do?

Prof. Morici: Genuine healthcare reform, because healthcare costs so much money. That’s the biggest problem.

iF: What would it look like – are we talking about single payer healthcare?

Prof. Morici: It depends on what Americans want. When they say every civilized country in the world has socialized medicine, that’s likely true. There are all different kinds of government-run programs. In Germany, they have private insurers that look like the Blue Cross Blue Shield system we used to have. Non-profit insurers as we used to have.

And the Germans largely have Obamacare – everyone has to buy health insurance unless they can post a very large bond of some kind. They show that they are very, very wealthy and that they can pay for their own medical care if they have to. So, Warren Buffet wouldn’t have to buy.

The rest of us would have to buy. But the German system only costs about two-thirds as much as ours does, because they have meaningful price regulations and they seem to have a lot less bureaucracy.

Frankly, healthcare is the kind of service in which it is very difficult to have competitive markets. If competition were capable of solving the problem, as the Republicans say, then California being the 6th or 7th largest economy in the world, should be quite large enough to have much lower healthcare prices, but it doesn’t.

So interstate competition and tort reform, the usual palliatives of the right, is hardly going to be enough. If Americans are not willing to regulate the price of drugs for example, then drug companies are going to continue to take advantage of the fact that the federal government buys more than half of the drugs and they will charge the government whatever they want.

iF: One last thought for us please. Overall, are you optimistic, pessimistic or somewhere in the middle?

Prof. Morici: Overall, I’m optimistic about America because of our technology and the fact that democracy has a way of sorting out problems in the long run.

iF: On that positive note, and on behalf of the members of The Jewish Policy Center, Professor Peter Morici, thank you for a very enlightening conversation.