The budget crisis that has faced Congress for the last few years is certainly not the only one that has grabbed the attention of the voter and the business community. Most of the fifty states have had their own issues to try to work through along with many of the nation’s cities. The bankruptcy that plagued Detroit has certainly not been resolved and there are at least 50 other urban areas that have the same problems as Detroit has had (and many have it even worse). The list of states in fiscal distress is a long one and it is getting longer. The issue has come down to the most basic of terms as states (and cities) have been confronted with a stark choice. They are either going to have to radically cut the services offered or they are going to have to raise taxes sharply. The constituents will be no help in terms of deciding which direction to go as they insist that they should receive more services and pay less in the way of taxes and that is impossible.
Analysis: The two that are in the news this week are Illinois and Maine. The budget impasse in Illinois has been going on for years and the state has had no budget at all for the last two years. No state has been that long without a budget since the Great Depression. The conflict has been between a group that wants to cut the service offered by the state to the very bone and those who insist that taxes have to be hiked so that this doesn’t happen. To make matters all the more complex, the state has a whole history of fiscal decisions made to buy time or mollify different factions over the years. These all had budget implications and these are all now playing a role. The state legislature passed a bill that would hike income taxes and corporate taxes and at the same time cut some funding for government programs. Even this bill fails to address the issue long term and still leaves the state short of the money needed to handle its obligations. The governor immediately vetoed the legislation but it appears there are enough votes in the legislature to override that veto. The same situation played itself out in Kansas with the legislature approving a bill to raise taxes only to see the measure vetoed by the Governor – forcing a veto override.
In both cases and in all the other states and cities that are still confronting the issue there are unanswered questions. What exactly should the government be doing and how much money is needed to accomplish that stated mission? It seems such a simple question to answer but for the fact that there is no consensus from the greater population. Is government only there for those who are less fortunate and in need of assistance? Is government there to provide for the public good with infrastructure that ranges from good roads to internet access? Is government there to provide incentives for economic growth? Is it there to regulate and control and ensure that there is safety and security for all? Is it there is educate? You get the idea. The answer is yes if one listens to all the voices straining to be heard. If the decision is made to accommodate all these demands there is no choice but to raise revenue sufficient to pay for all this and right now the taxes collected are insufficient.
This is a monumental question and one that has to be brought forward as bluntly as possible. It has been noted that government took on far less than it does now some fifty or sixty years ago. Much of the current welfare system was handled by the private sector through churches and community organizations and by families themselves but the services provided were erratic and far from uniform. The infrastructure demands of fifty years ago were far less complex than they are now. Communities paid for their own schools but that meant radically different budgets in the various communities. The fact is that government responsibilities have become more complex and expensive and there has not been a corresponding increase in the revenue required. A starting point may be for us to start to speak more clearly – what do we really want government to do and what do we propose as an alternative?
The Purchasing Managers’ Index is back to the levels seen at the start of the year and this is far better news than it was in January. The index reading is back to level not seen in three years – 57.8. That level has not been seen since April of 2014 and is a little higher than it was when the index seemed to be propelled by expectations. The surge at the start of the year was attributed to the Trump victory and expectations of rapid economic expansion. As these expectations faded the index fell to more modest levels (in the 54 range). It wasn’t bad as anything above 50 suggests expansion but the bloom seemed to come off the rose. Now the numbers are climbing again.
Analysis: There is a very important difference between the good news at the start of the year and the good news now. The previous enthusiasm was based on what people hoped would happen based on all the campaign promises of deregulation, tax relief, health care reform, trade policy and the like. It has become obvious that most of the reform will be a lot harder to accomplish than originally assumed and that enthusiasm has faded somewhat. The motivation for growth now is more substantial and based on real activity. The US consumer has been a little more active and exports have been better than expected as there has been recovery and growth in the markets the US traditionally sells to. Of the two motivators the key has been expanded exports.
The dollar has weakened a little over the last few months and the economies in Europe and China have improved enough to stimulate demand for US output. The revisions to the anemic first quarter GDP data was mostly due to the revised export data and that trend has been carrying through the second quarter as well. It has been obvious for years that real economic recovery in the US would depend on recovery elsewhere as the US remains dependent on exports for at least 14% of its GDP.
The North Korean government is a danger to the world and to the region. That is about the only thing that everybody can now agree to. What to do about that danger is the question that vexes everybody at this point. The latest provocation is the successful test of an ICBM that has the capability required to target Alaska. Obviously that means the missile can hit South Korea, Japan and most of the rest of Asia. Thus far there is no evidence that they have figured out how to attach a nuclear warhead to that missile but analysts agree it is only a matter of time before that is achieved. It has been routine to declare that North Korea will not be permitted to get this ability but these have been mostly empty threats and the line in the sand keeps moving. What are the realistic options?
Analysis: It comes down to either a military intervention or a stricter set of sanctions. The Trump administration has taken the bellicose approach thus far but there is very little support or enthusiasm from the military. The Defense Secretary – James Mattis – has stated this option would engage the US in a war far more serious than anything seen since the first Korean War. An attack on North Korea would prompt a massive retaliatory strike against South Korea that would cost tens of millions of lives and would force the US to engage with the North Korean military to defend the South. That pulls China in to defend the North Koreans and soon the US and China are trading blows with one another. This confrontation would wreck the world economy and plunge the entire international system into global depression. There is almost no scenario that makes the military option viable but that has not changed the tone of the White House rhetoric.
What would tougher sanctions even look like? The country is already a pariah state with very limited access to the rest of the world. It is not referred to as the “Hermit Kingdom” for nothing. The additional sanctions that have been suggested would hit China harder than North Korea in some respects as they would be designed to keep Chinese support away from the North Koreans. Banks would be penalized if they did business with Pyongyang and those companies that trade with the North Koreans would be denied access to the US and presumably other western states.
One of the challenges is now South Korea’s new leader. Moon Jae-in is an advocate of engaging with the North as opposed to isolating it. His stance is that this disagreement is a “family” issue and one that should be sorted out by the Koreans themselves. This is not the US position but the reality is that South Korea has as much to lose from a military solution as the North. The destruction of Seoul would be a given in the event of war and that is to be avoided at all costs. The US may simply be using the threat of force to convince the Chinese to get more engaged in the economic sanctions but that risks being painted into a corner where the US either has to publicly back down or follow through with an attack.
The flow of migrants and refugees into Europe has not slowed and in fact has started to become an even greater issue with a 19% increase in the numbers that have sought refuge in Italy. There have been 85,000 arriving in that country thus far this year and there are similar numbers still trying to get into Greece and other states. The EU has been trying every tactic it can devise – everything from bolstering the Libyan coast guard to sanctioning refugee organizations that are trying to assist the migrants. The fact is that the migration will not end as long as there is instability in the Middle East and North Africa (as well as in South Asia and Sub-Saharan Africa). The migrants are being driven out of their own land by war, famine, poverty and joblessness.
Analysis: The “solutions” are out of the hands of the EU or any other state. The changes needed in these countries will require monumental effort and Europe certainly lacks the money to support that kind of change. One of the more depressing conclusions regarding the region is that there was far less pressure on Europe and the rest of the region when dictators ruled. The regime of Muammar Khaddaffi prohibited this migration by force and so did tyrants like Hafez Al-Assad in Syria and Saddam Hussein in Iraq. The end of these regimes did not mean democracy and progress – these states simply fell apart and now that these countries are in pieces the population has little choice but to flee. The grim expectation is that most of these nations will eventually be taken over by another dictator that will promise order and will use extreme violence to obtain it. The chances are they will get support from Europe and elsewhere if they promise to end the outflow of people.
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The fourth of July is over and once again we look back on a holiday that seems to have little to do with its purported purpose. To the vast majority of Americans this is an excuse to blow things up and eat. It is not that we really pay attention to the other holidays either but at least there are some gestures when celebrating Christmas. Mostly we just party on with friends and family when events like Memorial Day or Labor Day roll around and we have no idea what is behind Halloween any longer.
I am not a huge fan of the fireworks stuff but that is mostly because I have five cats that are not thrilled by the explosions and look at me as if I can do something about it. I also note the number of people that manages to blow themselves and others to pieces every year. I didn’t do anything particularly patriotic either – just hung out at home and grilled some brats. I am not sure what I would want to do to observe the anniversary of our nation’s founding other than to remind myself and others that we have obligations and responsibilities that come along with being part of a democratic nation. We have complaints galore about those who ostensibly lead us at the local, state and national level but according to some observations twice as many people bought fireworks this year than voted last year and that is not a good thing.
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Softwood Lumber Duties on Canada. The US has imposed further duties on Canadian Softwood Lumber, taking the total duties on the commodity somewhere between 17.4% and 30.8%. This comes ahead of NAFTA negotiations and could be a negotiating tactic as the US seeks to “improve the fairness” of the accord.
With the US construction sector seemingly doing O.K, we see that Canadian forest product shipments into the US are down 4% on the year, one of only two commodity classes that are down YTD in the US/Canada cross-border rail business.
The softwood lumber dispute with Canada goes back to 1982 and has been contentious for decades. The US believes that Canadian softwood lumber is unfairly subsidized by the Canadian Government – and it creates an unfair competitive advantage for Canadian lumber companies.
Canadian softwood lumber accounts for about 32% of the US lumber supply (about $5 billion dollars). These duties will have an impact on lumber prices
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