Three Things That Weren’t Supposed to Happen, But Did
On trade, on immigration, on finance, reality keeps ignoring the experts
A few statistics of perhaps not obvious connection floated across the transom in recent days:
What do these developments from the worlds of globalization, immigration, and financialization have in common? They point to the three-dimensional collapse of the narrative atop which we built our economy over the past generation.
The reason I talk so much about all three topics is that they represent three sides of the same coin—a peculiarly shaped coin, I suppose. In each case, the American elite demanded, obviously to their own benefit, release from a constraint traditionally placed on capitalism for the benefit of everyone else. In each case, they constructed an absurd-on-its-face rationale for why their preference was best for everyone else and used their own standing to assert the correctness of this view and humiliate anyone who tried to disagree.
They wanted to invest in foreign markets where labor was more easily exploited and capital more aggressively subsidized. This “free” trade would accrue to the benefit of American workers who would somehow get better jobs as a result. They wanted to bring cheap labor into the domestic market to take jobs at wages and in conditions that Americans would not. This “humane” immigration policy would help American workers move into better jobs instead. They wanted to offload the risk of trading piles of assets in circles and collect fees for their troubles, rather than produce anything of value. This “efficient” capitalism would—you guessed it—lead to fantastic new job opportunities for all.
When the bill came due in declining investment and productivity, stagnating wages, rising inequality, and social decay, the argument became that nothing could or should be done. Interfere with free trade? Unthinkable. Secure the border? Impossible. Regulate financial markets? Simple-minded.
But we are seeing now that a different course has always been available. A 10% global tariff and tariffs approaching 50% on China are in effect. Consumer sentiment is up and inflation is down. The stock market is up and the dollar is down. As the story about Japan illustrates, higher prices do not necessarily pass directly to consumers.
With aggressive immigration enforcement, the United States has ceased releasing illegal migrants into the country entirely: “border agents didn’t release a single illegal migrant into the US last month — down from 62K under Biden.” Maybe climate change wasn’t the cause of the border crisis? As the analysis of the immigrant population suggests, one million people in the country illegally may already have departed.
The financial sector is embarrassing itself all on its own. My recent favorite was the Wall Street Journal report that hedge funds impeccably mistimed the market in April while retail investors bought low. As Morningstar wrote last month, “everyday investors keep making Wall Street pros look dumb with this one simple move.” And as the State Street index shows, a basic S&P 500 fund has been outperforming the private equity industry over every timeframe.
Of course, tariffs are not without costs—some of which should be expected to show up in prices. Border security will always be a challenge and rigorous interior enforcement will bring pain of its own. I’d even bet hedge funds will manage to have a good year at some point. But Federal Reserve governors are already beginning to rethink their own assumptions.
At the American Enterprise Institute, James Pethokoukis has just published a helpful guide to the many ways of explaining away the economy’s “stubborn vitality.” My favorite: “a predictable game of transshipment that is blunting the protectionist edge. JPMorgan figures this shuffle is shaving a full percentage point off America’s effective tariff rate, just enough to help ease inflation and keep goods flowing” (emphasis added).
For all of the world’s inherent uncertainty, though, one thing is certain. There will be no accountability for getting it all wrong. I was sticking up for economists the other day (not really) and insisting we not denigrate them with the term “forecaster,” when Nate Silver jumped in to say, “A forecaster is an economist with skin in the game. It’s an upgrade actually.”
Ha!
What economist has paid any price for getting the major macroeconomic choices of the past 30 years backward? How many have even acknowledged a mistake? If the private equity and hedge fund industries have undertaken mass layoffs over the past 1, 3, 5, and 10 years of underperforming the S&P 500, I missed it. And I can say, from my own decade of experience in the think tank world, “got anything right” tends not to be among the criteria on the end-of-year evaluation.
No, for all the celebration of competition and markets, disruption and dynamism, the celebrators operate in a world remarkably insulated from such forces. The rewards for “risk-taking” accrue mainly to those who take no actual risk—though they will gladly take 2% of the principal as a management fee regardless of performance.
But get fired for missing a day of work because your car broke down and they’ll be glad to lecture you about how markets work or, even better, suggest we find an immigrant who isn’t so lazy.
Experts need not be right every time, but they do need to acknowledge when they are wrong, explain why they were wrong, and show that they are updating their thinking accordingly. Anyone who does that deserves respect and attention. Anyone who does not deserves to be ignored. It is a great problem for our society that, right now, nearly everyone we thought we were supposed to listen to about economic matters has disqualified themselves.
I don’t think the typical American pays much attention to the nuances of various policy debates. But I do think he is aware that globalization has not worked out as promised, that border crises come and go with the policies of our presidents, and that the financial sector’s hallmark function has become to mint multimillionaires who do nothing of value. No surprise that he trusts the commentators and the leaders who will acknowledge such things over the ones in denial.
- Oren
Oren, not that I always agree with you, but when it comes to what is "risk taking", we are on the same page. A trader on a hedge fund desk is only risking his employment at that hedge fund if he screws up in the course of "risk taking", whether he's well meaning and just a lousy trader or a crook. In my mind, he or she is not a true risk taker. If he or she is living beyond their means while they collect outsized bonuses, and it all goes poof, that's on them.
My favorite way to convey the idea of true risk taking is to tell the story the famous golfer Lee Trevino once told when asked by a reporter what its like to stand over a two foot putt to win a championship. He wanted to know about managing all that...pressure and risk. Trevino responded that there was no risk in that putt, no pressure. The worst that would happen is that you win the second place money instead of the first place money. "Pressure" Trevino responded "is when you are standing over a $10 putt and you only have $5 in your pocket. That's pressure."
I gotta say, there’s something deeply nuts about American society: most of the social scaffolding isn’t handled by bureaucrats, tradition, or even communities—it’s funneled through the stock market. And that thing’s gone totally off the rails in the last decade, thanks mostly to algorithmic trading. So we’ve basically made this hyper-volatile, irrational, black-box system the backbone of social stability. That’s insane, if you ask me.