United States President Donald Trump may be a successful businessman, but he doesn’t understand how trade relations work, according to well-known economist Horace ‘Woody’ Brock.
Brock – who was in Australia recently at the invitation of Perennial Value Management, to which he provides advice – argues international trade is very different from business transactions.
“He [Trump] is the master of the deal: ‘You and I will make a deal’, ‘Australia, you and I will make a deal’. That is how business works to a certain extent: they are binary relationships between you and me,” Brock said at the [i3] Equities & Equity Alternatives Luncheon in Sydney last month.
“[But] it would take a good 500 years to make deals with our 180 trading partners. Trump misses that point.
“You need to deal with blocks of South-East Asia, blocks of Europe, otherwise it is just unworkable physically.
“He has simply not understood that; he thinks he can turn it into a set of binary relationships, but there are just too many.
“He doesn’t understand trade, but some of the people that work with him do and I hope he will turn around on that.”
Despite Brock’s disagreement with Trump’s statements on trade policies, he warns it is very difficult to predict what economic policies he will actually put in place.
“Most of what you hear about Trump is gossip. I don’t think that until the end of June we have much idea about what he and his cabinet is going to propose,” he said.
“He says a lot of ridiculous things, but I’m more interested in his actions.”
Protest of the Middle Classes
The election of Trump as US president has often been painted as a protest of the middle classes against a deterioration in their financial circumstances.
But Brock points out despite the often gloomy picture portrayed, most people have experienced a substantial improvement in their lives over the past 35 years.
Yet, the official government figures on gross domestic product (GDP) do not reflect this situation.
Brock says this is partly due to the way real GDP is calculated and a failure to account for much of the productivity of the digital economy.
“The way you compute real growth is the same as the increase in output per worker. You can produce x per cent more pizza this year because of a new oven, or more steel per person, more cupcakes per person. Output growth is productivity growth per person.
He has simply not understood that; he thinks he can turn it into a set of binary relationships, but there are just too many.
“One of the things GDP misses today, and we don’t know how big of a problem it is, is that GDP does not reflect what we call ‘the free goods product’. I don’t care whether Google has 3 million hits or 5 trillion, 5 trillion times zero is still zero.
“But here is the real problem: Simon Kuznets, who invented the concepts of GDP and national income accounting in the late ’20s, made it crystal clear that the system we adopted was a system that measured and defined productivity as a system that measure more output, more steel, more pizza. That’s what the system was about: more.
“The problem is that it is no longer about more; it is about better.
“The colour TV went up from $700 to $750, but it became half as light, a third as thin, four times bigger and 88 times better. When things become better but not more, you’ve got a problem.”
Estimating Economic Growth
Brock pointed to the work of Martin Feldstein, Professor of Economics at Harvard University, who has argued many times that official GDP figures systematically underestimate economic growth.
“The most important macroeconomist in the world, in my view, is Martin Feldstein at Harvard. He is willing to think outside the box,” he said.
Feldstein has argued that according to the methodology of calculating GDP, products are only considered better if the marginal cost of producing these items goes up. This may have been the case in the 1930s, but is definitely not so today, he reasons.
“That made sense when my father paid more for an automatic transmission 50 years ago so he didn’t have to shift the car. Making automatic transmissions was more expensive than making regular [transmissions],” Brock said.
“But the industrial revolution changed that. It is now all about making things cheaper and better. This is a radical change that our system doesn’t take into account.
“[Feldstein] says, by considering this, we have been exaggerating inflation by a minimum of 2 per cent a year. If nominal growth, which we do know, is 4 or 5 per cent, but inflation is not 3 but 1 per cent, then real growth is increasing.”
This means people may not have experienced much of an improvement in the amount they are paid, but their living standards have increased dramatically, he points out.
“This changes the story completely. ‘You hadn’t had a raise in four years’, remember all that nonsense?” he said.
“In the elections it was said that adjusted for inflation the average worker hasn’t really had a raise. It has been a lousy 30 or 40 years … really?
“Let’s talk about living standards: there is only one way to measure living standards in the correct way. What could you buy with your money 35 years ago and what can you buy today?
“Only if you are indifferent to the two, then you’ve had no increased living standards.
“Remember, you died four years earlier, there was no viagra, no free phone calls to Hong Kong, I could go on and on. Do you think that anyone would prefer the same consumption bundle from 35 years ago? Of course not.
“People are living better these days and longer. Things are great for a lot of people, but you read the press and everything is terrible.
“I think that Feldstein is right and we should all be happier than what we think we should be.”
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