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Where to Now on Protecting Students and the American People?; Global Trade War?; The Chinese “Emperor” and Developing Financial Abyss

Al Tuchfarber

In-Brief

  1. It is not clear yet whether President Trump or the Democrats will control the school-shooting debate. Trump is pushing the debate toward one of safety, away from the gun control versus 2nd Amendment rights battle.
  2. Notwithstanding which side controls the debate, history suggests only modest policy changes at the national level are likely. More changes are likely in Florida and some other states.
  3. Does Trump want a global trade war, or is this a feint or posturing?
  4. China has a new “Emperor” and catastrophic financial problems.

In-Depth

Media

Don’t forget the Tuchfarber 30 Day test — when you get upset about something in the news, ask if it is likely to be IMPORTANT in 30 days or so. Only seldom will it be so and you can usually ignore it.

Tuchfarber Global Political – Economics

China Watch

“Emperor” XI & China’s Political-Economic Reality—Part I

It’s time for a review of China’s politics and economy, as well as a forecast of their economic future. In this issue, I’ll lay out the big-picture in broad terms and in future weeks describe details.

  1. This week, the Chinese Communist Party’s constitution will be amended to allow China’s President to serve more than two-terms. This is designed to allow current President, Xi Jinping, to stay in power indefinitely and probably for life. He can already stay for life as General Secretary of the Communist Party, the most powerful role. Without officially receiving the title, he is becoming the all-powerful “Emperor” of China.
  2. No one and no organization can now seriously contest his power. Xi has power we can hardly even imagine and is willing to wield it in a harsh and thuggish ways. Many party, military, and corporate leaders, as well as political dissidents, have recently discovered that fact. He is an absolute dictator through his direct control of the following institutions:
    • The party
    • The government and bureaucracy
    • The military
    • The press
    • Social media
    • Public and private corporations
    • The regulators and financial institutions
    • The police and interior ministry
    • The power to name and remove provincial and local leaders
  3. In the 1980s, China adopted the Japanese Model for economic growth and development. They did not, however, adopt its democratic political system, keeping to one-party Communist rule. The Japanese economic model was a neo-mercantilist, export-oriented one. It was a top-down corporatist system with the government instructing the corporations and banks where to invest. It included maintaining the yen at a low level of value against the world’s major currencies, especially the dollar. Very importantly, growth was frequently purchased with copious amounts of debt financing provided by the major banks.
  4. That model worked very well for Japan for over 35 years, from the early 1950s until 1990.
  5. Many will recall that in the 1980s, Japan was lionized in hundreds of articles, books, and reports as having developed a new and better form of capitalism—top-down corporatism. Japan was expected to surge past the US as the world’s top economic power in a decade or two. Instead their financial model ended in collapsing bubbles—stock market, real estate, and debt. This resulted in failed banks and corporations labelled as “zombies” because they were not allowed to fail completely but were no longer viable enterprises.
  6. The extent of the financial model’s failure is illustrated by two sets of statistics. The first is that, after almost four decades of 5 to 10% annual GDP growth Japan’s average growth rate since 1990 has been about one-half of one percent per year [0.5%] ever since. The cumulative impact is astounding. In 1990, Japan’s GDP was 52% as large as the US GDP that year. Today Japan’s GDP is about $5T versus the US’s $20T—25% of the American total. China’s destiny is a similar economic fall.
  7. Recall China adopted the Japanese model. They grew at 5 to 15% from the early 1980s until 2008 when the Great Recession hit the globe because of faulty US governmental and financial policies. For political reasons, China’s leaders decided they could not take the political risk of a major recession because of the instability it would probably create in the one-party state. The legitimacy of the Chinese Communist Party is based on economic success, not voting or other democratic principles. You can purchase growth with debt for a while and they did so. But, even though they planned to get off the debt-financing merry-go-round as soon as possible they have not been able to for the last 10 years. Over that decade they have taken on about $3T to $4T in new debt each year to “buy” only $0.8T in GDP growth. That debt was spread between government, corporate, and households.
  8. In 2007, the total societal debt in China—government, corporate and household—was about $7T, in an economy with a $5T GDP—a ratio of debt to GDP of about 1.4 to 1. Today they have about $40T in total debt and a $12T economy—a debt to GDP ratio of over 3 to 1. They have a financial “house -of-cards” that is certain to collapse, as did Japan’s.
  9. “Emperor” Xi knows the day of reckoning is near and cannot be put-off much longer. The debt load will continue to rise to even more extreme levels with each passing year. My analysis is that the Chinese leadership has accepted Xi’s accumulation of total power so that the regime [Communist Party], party leaders, and their families can survive the coming financial and political maelstrom. Most have moved millions or billions overseas and obtained or made arrangements to obtain foreign passports or other safe refuges.
  10. The near-term future is grim as are the longer-term prospects for the Chinese economy. Long-term, only the size of the work-force [now falling in numbers in China] and productivity determine a country’s GDP. Recall what transpired in Japan. A similar outcome will befall China.
  11. Expect a major financial crisis to emerge in China between now and the end of 2019.

MORE DETAILS NEXT WEEK IN PART II

Critical Political & Economic Measures

This is a new section that will appear weekly. The measures are important in their own right, but also influence electoral politics.

POLITICAL MEASURES

  1. Right Direction-Wrong Track— This measure is widely used by pollsters, asking in effect if things are going well or badly in the US. Since 2006, it has proven to be a good indicator before elections if the party “in-power” [controlling the White House] was going to do well or badly. If the “wrong-track” reading is 62% or higher, it bodes ill for them. If 58% or lower, they break even or gain. THIS IS MY MOST-PREFERED ELECTION PREDICTION MEASURE. I use dozens, but this one seems to strip out a lot of noise. Using my adjustments to this measure as described in a note below, “Wrong-Track” is now at 58%, up 3% from last week.
  2. Generic Congressional Ballot—Also used by many pollsters, this indicator measures the current preferences of voters for which party they prefer in US House races. My adjusted measures [see NOTE] are now 47% D and 37% R, a slight widening of the margin for the Ds. Historically, Ds need a solid lead on this measure to win a House majority. They win huge majorities in some states and urban areas while Republican votes produce more wins with smaller majorities—i.e., the R votes are more efficient. This phenomenon is due to both Ds packing themselves into some states and into urban cores as well as political gerrymandering by both parties.
  3. Presidential Approval—Trump’s approval, using my adjusted measure [see NOTE] is now 42%, down 1%. It is at a below average level for recent Presidents. But, because of his unique and often disruptive style, the Gallup organization and others, including myself, believe this measure underestimates his real approval ratings by 5% or more. Many political science models make heavy use of this measure in their predictions. I will report it, but will use it for trend analysis, not election predictions.

# NOTE: For the survey measures reported here, I will start with the RealClearPolitics.com data reported daily. For greater accuracy and timeliness, I will make the following adjustments:

  1. Use only polls conducted by non-partisan pollsters.
  2. Use only polls conducted in the last 14 days or so.
  3. Use only polls reporting results for registered or likely voters, not polls of all US adults. This is preferable for election prediction as compared to measuring overall public opinion.

ECONOMIC MEASURES

  1. Unemployment Rate [official: U-3]—The current level is 4.1%, a 17-year low. Low or falling levels of this measure are a positive for the “in” party. It is low and falling now, down from 4.8% a year ago.
  2. Unemployment Rate [broadest measure including under-employment: U-6]—The current level is at 8.2%. This is a very low level and fell from 9.4% a year ago.
  3. GDP GROWTH—Growth last quarter was 2.6% which is significantly higher than the average growth over the last eight years.

WAR

  1. The jobs issue and war issue are the 500-pound gorillas of American public opinion. If the economy is bad or there is a major unpopular war, the party in power is in trouble. Unpopular wars, like Vietnam and Iraq, shatter the support of the party in power. Small wars, like Afghanistan and Syria are nearly always underway and usually do not have major effects unless they grow substantially in the cost in US lives.

ANALYSIS

Among the Political Punditry, the conventional wisdom for months has been that a Democratic Wave was building that would gain them the House majority and minimize their losses in the Senate where they have many vulnerable seats.

I have disagreed and the predictions in the next section quantify that. I’ve disagreed because my preferred metric [right direction-wrong track] is in territory that predicts success for the Rs. In addition, the economic situation is excellent, and there is no major war.

A poll for the New York Times now shows a majority of Americans approving of the Republican Tax Cut Bill as they see more money in their paychecks.

The measures above could change, but as long as they stay where they are, the Democrats will make only modest gains in November. If the indicators change, so too will my predictions.

The Parkland FL shootings do appear to have turned the indicators several points more negative in the last two weeks.

Predictions

Changes this week

Election Predictions

Policy & Legislative Predictions

*NOTE: Remember that after being impeached by a Republican controlled House in 1998, not one Democratic Senator voted to remove Bill Clinton from office. It takes 67 votes and is more of a political process than a legal one. NO President has ever been impeached and removed. Richard Nixon resigned before the House and Senate could impeach and remove him from office.

Musings

The Tuchfarber Report is grounded by facts rather than advocacy or wishful thinking. But there are times when a little speculation is appropriate which is why I periodically include this Musings section.

Trump’s School Shooting Strategy

Both the left and the right seem to be compelled to make the post Parkland school shootings debate all about gun control and the 2nd Amendment. The Democrats and the mainstream media are clamoring for assault weapons bans and other degradation of the right to defend oneself against others, as well as from the government itself.

The right and conservative media are afraid to give an inch for fear it puts those rights on a slippery slope to eventual loss of far more such rights.

President Trump appears to have a strategy to change the dynamic of the debate to one of the safety of the American people, including students.

The most basic role of government is to protect the safety of citizens and their property. The Declaration of Independence proclaims the right to “Life, Liberty and the Pursuit of Happiness.” The 2nd Amendment is a method of protecting those rights.

But, the goal here is not guns, but public safety. That seems to be where Trump is trying to guide the discussion. He is taking stands, some of which appeal to the left, and some of which appeal to the right.

Both sides will have to give in order to actually improve public or student safety.

Keep that in mind as you watch the debate develop.

Free-Trader or Protectionist?

Is Trump a free-trader or a protectionist?

Given previous actions by him and promised tariffs on steel and aluminum imports, the President is labeled a protectionist. Fears are he wants a trade war or will accidentally provoke one. An accidental trade war is possible.

But, what is Trump’s strategy?

Many will say he doesn’t have one and is just fulfilling campaign promises.

In my analysis, that is part of the picture but not the core of his strategy.

Recall that some of Trump’s fortune and the profits of the Trump corporation come from the benefits of free trade, and the company’s investments, and real estate development around the world. Does it make sense to kill the Golden Goose? Also, does it make sense to put into serious question the US role as the world’s lead economy? Not really.

So, what gives?

Trump calls himself a free-trader to the derision of many. But, he also attacks predatory trade, especially by China. Those are not mutually exclusive positions. Free trade and benefitting from economic comparative advantage is a good thing although there are clearly losers from such a commitment. The losing companies and workers deserve more redress than they have been provided.

But predatory trade includes dumping goods below cost and seeking future monopolies. Those are bad things.

Trump doesn’t want a trade war as he knows all will lose if there is a major one.

But, he is sending a clear shot across the bows of China, Mexico, S Korea, and others that the US will no longer be a patsy and accept unbalanced trade deals.

There is NO GUARANTEE he will successfully execute his strategy, but he has one that is much more nuanced than he is given credit.

Again, keep those thoughts in mind…

Until next week…
Al Tuchfarber
Professor Emeritus of Political Science, University of Cincinnati

Al.Tuchfarber@gmail.com
Tuchfarber Political-Economics LLC, Inc.

Dr. Tuchfarber founded the Ohio Poll, one of the nation’s most accurate, while directing the social science Institute for Policy Research from 1975 to 2004. He also founded and directed the Institute for Health Policy from 1996 to 2004. He is an engaging and dynamic speaker and has published over 100 articles and papers about politics, society, and research methods.

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