With Chris Macke, Founder of Solutionomics
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Steve spoke with Chris Macke, the creator of Solutionomics, which independently works on developing ways to create a more dynamic American economy. Chris has also acted as an advisor to the Federal Reserve and has been a contributing author to “The Hill”, a nonpartisan publication that follows Congress.
The Current State Of Global Trade
The U.S. has essentially been pursuing free trade, an open-door policy that is ideally beneficial to all. But the truth is that though we’re embracing this idea of open trade, we understand that all countries naturally negotiate to further their own best interests.
Clearly, something has to be done to improve our trade situation. In 2018, 13 of the 15 largest economies that the U.S. trades with ended up selling us more goods than we sold them. This means that if we, for example, were an NFL team, our record would be a dismal 2 and 13.
Why We’re Losing The Global Trading Game
Part of the reason for our trade deficit is that we often carry the banner of free trade without also making sure that stance is beneficial for us. We’ve been touting the free trade ideal while other countries haven’t because – surprise! – doing so wasn’t beneficial for them. The idea that everyone wants totally free trade is a myth.
Sometimes import tariffs are both necessary and beneficial, but there are other ways to improve our trading situation, too. For example, Reagan used quotas on Japanese auto imports in the 1980s. A good approach at this point in time? Chris thinks we should use tariffs strategically, not broadly. It’s important to have a clear trade policy because that enables businesses here at home to strategically plan ahead.
Making Ourselves Competitive
When we buy goods from overseas, the expectation is that they’re lower in cost than comparable domestic goods. While we spend more as a country on imports, giving other countries more money (hence, our current trade deficit), we’re importing lower-priced goods, which is a good thing for individual U.S. consumers. So, managing imports and our overall economy at the same time can get rather complex.
Complex problems require creative solutions. If we go overseas for goods, we’re ultimately saying that it’s too expensive to produce those goods at home, that our workers’ wages are too high, making our domestic products less affordable. But suppose that, for example, we offered a tax benefit to certain employers in specific industries. Something like that could make those companies and production in the U.S. more competitive which seems like a realistic alternative to using import tariffs.
Another alternative idea would be instead of just offering companies tax cuts and hoping that will lead them to hire more people, to making those tax cuts conditional on them actually increasing hiring.
When we buy overseas, we also increase the unemployment rate in our own country since, obviously, American workers aren’t producing those goods. Figuring out ways to produce competitively priced goods here at home means we also help workers by providing more jobs. It’s not a black and white situation. There are a lot of grey areas and a lot of complexity. But that’s exactly why it’s important that we look for creative solutions, real solutions that are free from partisan political rhetoric. That’s what Chris is trying to do at Solutionomics.
If you’d like to find out more about Solutionomics or Chris Macke, take a look at https://solutionomics.org/.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: My guest is Chris Macke. He is the founder of Solutionomics, which according to the website, is an independent, nonpartisan platform dedicated to developing and disseminating solutions for creating a more dynamic American economy. Chris Macke has also advised the U.S. Federal Reserve. He’s a contributor to the Beige Book, which is an important item in the Federal Reserve’s platform, and he writes for The Hill, which is a nonpartisan publication following the workings of Congress, et cetera.
Chris Macke, welcome to the program.
Chris Macke: Thank you for having me, Steve. It’s great to be with you and your listeners.
Steve Pomeranz: You know, it’s hard for me to discuss anything that has to do with politics because there’s so much partisan wrangling with every word that’s written or every word that’s spoken. And so I really just want to … And I know that with your publication, you are neutral and nonpartisan. We are the same here. So let’s just try to concentrate on the facts and look at the facts only if that’s okay with you.
Chris Macke: That would be great.
Steve Pomeranz: All right. Let’s talk about global trade. So you wrote in a recent column that the US has pursued basically a free trade. I would call it maybe an open-door policy, saying, you know, free trade will benefit all, so we really just want to try to promote this idea of everybody trading as free as possible. And yet, we know that countries negotiate on their own behalf. As a matter of fact, the president acknowledged in a speech in the World Economic Forum, saying that he expects countries to act in their own interest.
So give us your thoughts about that, and then I think his strategy, obviously, is in order to fix this is the tariffs, and I’d like to hear how you think that’s going.
Chris Macke: Happy to. So something clearly needed to be done. In 2018, 13 of the 15 largest economies we traded with sold more goods to us than we did to them. So think of it this way: If we were an NFL team, that means our record would have been two wins, 13 losses. So something needed to be done.
And part of the reason for us losing in the game of global trade is just as you mentioned. You know, we’re proudly carrying the banner of free trade and free trade, global trade, can be very good for the global economy. But we need to make sure it works for the US, and what had happened is that while we’re pursuing free trade policy, historically, other countries have not. And so that has put us at a strategic disadvantage.
Now, part of the reason why we’ve let that happen is that trade has been used in the service of foreign policy. So that’s the first issue. It’s a myth, that everybody wants free trade and they’re not going to try to get an advantage, so we have to first deal with that myth if we’re going to make an improvement. Now, as far as tariffs, and the effectiveness of tariffs, tariffs are … They’re not like a Swiss Army knife. You can’t use them in every situation, and they’re not effective in every situation, but they certainly have their use and can be effective.
You know, as an example, past administrations like President Reagan, he used quotas, actually, in relation to Japanese auto vehicles, and that had some positive effects. My approach would be to use tariffs strategically and selectively, rather than broadly, would be to indicate to the business community that, look. This is what we’re going to be doing over the next five years. What that would do is that would give businesses time to plan, so you wouldn’t have the dislocation of the supply chains. You also wouldn’t create as much investor angst, but then you also need to make sure that if you do implement tariffs, that you’re covering all the countries of the world, not just one, so you’re not just playing whack-a-mole.
Now, having said that, there actually is another approach that would be better than tariffs and that’s very simple, which is tie each company in the US, tie the corporate tax rate that they pay, to their rate of job creation. Why is that an approach that I’m advocating? Because then what you do is then you’re not getting into a trade war, and two, you’re providing a real, concrete incentive for companies to increase hiring in America, which is the goal of the tariffs that the president is implementing. So that would be a different approach, or if nothing else, I would at least do that in concert with the tariffs.
Steve Pomeranz: Right.
Chris Macke: But I would just take a little different approach.
Steve Pomeranz: Let me understand this. First of all, when we’re buying goods from overseas, I guess the expectation is that they’re manufacturing these goods at much lower prices, and so basically, while we’re paying more and giving them more money, hence the deficit, we are importing lower prices, which helps the consumer. So it’s kind of complicated, and I am not an economist by any means, but I mean, I have read that.
So, if, in fact, the U.S. worker is more expensive, so it’s, you know, it’s cheaper to go abroad. It’s too expensive to manufacture at home. Is this idea about giving a tax rate benefits to the employers a way of reducing the cost of higher wage workers?
Chris Macke: It’s a way of making our companies and producing in the US more competitive. So, there is a labor cost differential. Now, part of what is left out, is relates to the lower cost of goods to consumers is that there’s also a kind of an unnoticed cost, which is that when you have the Verazzano Bridge in New York buying steel from China and, I forget if it’s the Golden Gate Bridge in San Francisco from China, what that does is you get cheaper steel. But then you also have lots of unemployment in the US. So it’s not a simple, “Hey, you know what? We’re getting lower-priced goods. That’s good for American consumers.” That puts downward pressure on wage growth in the US.
So, as you pointed out, it’s not a black and white. It does get complicated. But we need to start accounting for some of those costs of the cheaper goods from overseas because if I’m getting paid a lower wage, or I just don’t have a job, those quote-unquote cheap goods are actually very expensive to me.
Steve Pomeranz: Yeah, if you don’t have money, everything is expensive. You know, General Motors just announced they’re laying off 14,000 workers, and in one of your articles, you wrote that they still, of course, got the benefit of the big tax cut last year. And I think what you’re saying is that your idea would be to say, “Hey, you don’t really get a tax cut if you’re now going to turn around and lay off 14,000 workers.” It kind of goes against this sense that the tax cut is supposed to give companies more money and give them an opportunity to take that extra money, invest it in the economy, to create more jobs, but you have a company like GM, which is actually doing the opposite. Where does that fit into the spectrum?
Chris Macke: Well, it fits into the spectrum of missed opportunity, and you know, I come from a background of ROI, or return on investment. So that’s the framework by which I evaluate things. And so, again, while something needed to be done to our tax code, it was a missed opportunity, because what they could have very simply said was, “Okay. If the return that we want is more American jobs, then simply make the tax cut conditional for each company on actually increasing hiring.”
Instead, what they did was they had a universal and unconditional tax cut, so companies creating jobs would get the cuts. Companies firing Americans would get the cuts, and again, coming from a background of return on investment, that was just not the best approach. And they could have said, “Look, companies, you increase hiring, you’re going to lower your tax rate. If you don’t, it’s just going to stay the same.” It’s really just that simple.
Steve Pomeranz: You know, but here’s the problem I have with that. I don’t understand how a company can just create jobs. I mean, the jobs are there based upon the amount of business that’s done, and the cost of doing business and all that. You can’t just like wave a magic wand and say because I’m getting, you know, $3 billion back from the government in taxes or something like that that I can start to create jobs. I don’t see how the two come together.
Chris Macke: Well, based on that premise then, we should have never done the tax cuts. Because if what you said is true, and I don’t necessarily disagree with it, then cutting the tax rate would’ve had no impact on job creation, so there was no point to do it.
Steve Pomeranz: I guess that’s a good point.
Chris Macke: Yeah, you make an interesting point. So what I’m saying is, I’m trying to bridge the gap between those who believe that if you cut taxes, that will generate more jobs and those who are skeptical and believe that companies don’t create jobs just because they’ve got a lower tax rate. And there’s real validity to that. I’m trying to bridge that by using a concept from my background in finance called an earn-out, which says, “Okay. You believe if you do something, cut taxes, that’s going to create more jobs. I’m skeptical, so let’s do this. If you actually create more jobs, we’ll cut your tax rate. If you don’t, then we won’t.” And that’s how you bridge the gap between those two different philosophical views.
Steve Pomeranz: Well, you know, unemployment—the June numbers were announced, and unemployment shot up to 224,000 new jobs is what I’m saying—is new jobs were created. Which is a terrific number. So when you look at the amount of jobs that are being created in 2019, 2018, it does seem like overall … I don’t know if it’s due to the tax cut, but overall, the economy’s doing extremely well. How would you look at the 224,000 in some historic light?
Chris Macke: Sure. Well, I think what’s important to keep in mind is that we’re still adding a robust number of jobs. I mean, 170,000 a month, especially at this late point in the cycle, is … That’s a good number. That’s an ample number for the economy. And we’ll keep the economy going.
Steve Pomeranz: That 170 is the average for 2019, right?
Chris Macke: Yes. Thank you for clarifying. Yes. Yep, so for the first six months of 2019, we’ve been adding about 170,000 jobs a month. And so that’s good. Now, some people say, there’s a concern because we were 223, but what you have to look at is that 223 was artificial. That was due to fiscal stimulus. And so, you know, most people didn’t expect that to be maintained. What we expected was we’d go back basically to the future, or to 2017, and go back to where the job growth was prior to the fiscal stimulus. So the economy’s doing what it should be doing right now. It’s going back to a more sustainable level.
Steve Pomeranz: Yeah. Okay. So with that, that’s good news. You know, let’s look at some of the other news. Inflation is very tame. Now, I started in the investment world in the early 80s, and I actually came in and, you know, 2.5 year CDs were at 16%, and-
Chris Macke: Yep.
Steve Pomeranz: And 30-year Treasuries were at 13%, and inflation was 10, 12, 14%, and now, this idea, you know, inflation’s at 2%, and you know, that people … The Fed’s actually worried about deflation just seems still such an oddball thing to me, because all we ever wished for was low inflation. So we have that. We have low inflation. Interest rates have remained extremely low as the 10-year Treasury is about 2.1% now. I remember there was a time when we never thought it would get to 5% or to 7%, and now it’s been hovering around this 2% level for so many years.
We have good job growth. We have good economic numbers. And yet, here’s what my question … You know, I work with a lot of individuals investing money, and the stock market’s been rising, and nobody really believes it. Nobody’s happy about it. Everybody is waiting for the next crash or next shoe to drop. And so on. I don’t know any bull market that’s ever died on such pessimism. What do you think about where we stand right now?
Chris Macke: Well, it sure is an interesting environment. The one thing I would like to point out is that we’ve got the job growth. We’ve got decent wage growth. It’s come down a little bit, but, you know, that was to be expected. Manufacturing is slowing somewhat. Yes, global growth is slowing somewhat. There is trade policy uncertainty. And, you know, but we still have an expanding economy, and so it seems like the choices are always, “Oh, we’re going into a significant equity market decline tomorrow,” or “The stock market’s going to continue going up forever.” And the reality is that if you look at the economics of the situation, the stock market … As long as things keep going the way they are, should have decent earnings growth.
Now, should we be setting records? What I can say is that I’m not comfortable with an environment where we’re setting stock market records with a market that is so heavily dependent on a Fed rate cut.
Steve Pomeranz: Yeah.
Chris Macke: That’s actually the biggest concern I have, is that this market is just … It’s got a high degree of dependence on the Fed rate cut, and that does not give me a lot of confidence in the market, because theoretically, if the equity markets are that strong, you shouldn’t need a Fed rate cut.
Steve Pomeranz: Yeah. Well, you know, the market so far is up about 18% this year, plus or minus, depending upon the day, of course. Had a kind of a bad May and a terrific June and now July. So you know, I guess, dividends are still rising with the underlying stocks. Even international stocks, with all the bad news that seems to be going on about that, those international stocks have done pretty well. So I mean, do you expect some kind of disaster right around the corner?
Chris Macke: No. Certainly, I don’t expect a disaster right around the corner. What I do expect is that we’re going to have continuing volatility because the markets are going to be buffeted by continuing trade policy uncertainty, and you know, if we do have a Fed rate cut in July, then the markets will love that. Although interestingly, that would indicate that the Fed sees some headwinds in the economy, so I’m not quite able to reconcile those two. But even after, if we do get that Fed rate cut, you know, they’re still going to be faced with the reality of earnings and what those look like and the reality that while still okay, the economy is slowing, both domestically and globally, and what are the implications of that for earnings.
Steve Pomeranz: Well, Chris, we’re out of time. Thank you so much for spending your time with us. Chris Macke is founder of Solutionomics, which you can Google and find his great site there. And you can follow him as well on reading The Hill and other publications. To hear this and any interview again or if you have a question about what we’ve just discussed, visit our website, which is StevePomeranz.com, as you know, and join our conversation. Ask us any questions that you may have. We’d love to answer your questions. And while you’re there, sign up for our weekly update, where you’ll get in your inbox every single week, just a one-pager saying what we’ve discussed, and you can listen to the entire show. You can listen to one segment, or just read the segment, or read the full transcript. It’s up to you, depending upon your interest and time. But don’t forget to go to StevePomeranz.com.
Chris, once again, thank you so much.
Chris Macke: Certainly, been my pleasure. Look forward to doing it again.
