Copenhagen: A Failure of Economics

President Obama, like other world leaders, returned home from Copenhagen empty-handed.  No binding agreement to reduce carbon emissions.  Some blame Obama for not offering enough.  Others blame Chinese President Jintao for resisting verification.  Others blame developing countries for demanding too much in exchange for reductions in deforestation. 

But the real blame lies at the feet of the field of economics.  For the better part of two centuries, after disowning Malthus and vowing never again to consider the ramifications of population growth, economists have clung to a doomed model of perpetual growth.  They fail to understand that just because limitations have been pushed back a hundred or even a thousand times, doesn’t mean they can be pushed back forever in this finite world.  Closing their eyes to this reality like the “see no evil” monkey, they steadfastly maintain that man is clever enough to overcome any obstacle to growth. 

Until now, nothing has proven them wrong.  Oceans over-fished?  No problem!  Fish are now raised on “farms.”  Oil getting scarce?  We learned to drill off-shore.  Even when the earth’s ozone layer was threatened by CFCs, we were ready with benign, substitute refrigerant compounds.  Global cooperation in the interest of the common good wasn’t a problem when technological solutions were waiting in the wings.  But then came global warming.    

It’s not as though they didn’t see it coming.  We’ve known for at least half a century that we would run out of oil some day in the future.  And suspicion about the climate effects of rising CO2 levels has been building for at least two decades.  Our leaders, scientists and economists calmed our fears with talk of alternative energy – primarily wind and solar.  What they didn’t tell us was that the energy needed to keep the economy humming at its current level dwarfs what could be provided by those renewable sources even in their wildest dreams, not to mention the energy needed by developing nations clawing their way out of poverty and the energy needed to sustain economic growth into perpetuity. 

Some spoke of converting the economy to natural gas on a huge scale, a short-term solution at best.  Others spoke of more nuclear plants, ignoring the fact that nobody wants a nuclear waste dump in their back yard, and there’s no longer any place left that isn’t someone’s back yard. 

What they were counting on all along was the holy grail of energy – nuclear fusion – the energy that powers the sun.  Clean and limitless, it promised to remove energy as a constraint to growth for all time.  But after decades of pouring billions of dollars into research, the sad reality is that it’s simply not feasible. 

So we’re left with nothing.  If you don’t believe this, just read the “cap and trade” legislation that’s pending in the house of representatives.  You’ll find that it relies heavily on technology to capture and store CO2 underground – technology that doesn’t even exist yet – while continuing to burn fossil fuels.  Included in the bill is money to incentivize the development of such technology. 

So for the first time in Copenhagen, political leaders, economists and the scientific community came together to face a global threat to the common good with goals, but no solution.  They reached deep into the economic tool bag and found only one tool left – delaying the inevitable.  Given a choice between acting for the common good of future generations vs. basking in the “we can grow forever” delusion for just a little longer, they chose the latter.  Given the opportunity to finally cast off their failed model in exchange for one built on stability and sustainability, the “see no evil monkey” of economics and its minions of gullible political leaders chose to close their eyes even more tightly. 

Whether you believe that global warming is man-made or not is probably irrelevant.  The point is that the majority of scientists, political leaders and even economists believe that it is, enough so that they convened this conference in Copenhagen to address it.  They came with goals for cutting emissions, but because they were without solutions, they couldn’t bring themselves to pull the trigger.  At Copenhagen, the field of economics,  its model of perpetual growth and its blind faith in man’s ability to push back boundaries was finally exposed as a fraud.

U.S. Trade with Peru

When I published Five Short Blasts in 2007, the most recent trade data available was for 2006.  At that time, the U.S. enjoyed a small trade surplus in manufactured goods of about $1.1 billion with Peru.  But, overall, we had a trade deficit with Peru thanks to high imports of metals and minerals. 

So, as I continue my slog through the 2008 data, I found the evolution of trade between the U.S. and Peru to be particularly interesting.  Because Peru is less densely populated than the U.S. – with 56 people per square mile vs. 85 for the U.S. – Peru is one of those countries that would remain completely free of tariffs under my population density-indexed tariff plan for manufactured goods. 

So what’s happened since 2006?  Take a look:

Trade with Peru

As a result of rising prices for metals and minerals, our overall trade balance with Peru deteriorated from 2002 to 2006.  But from that point, their increased wealth enabled them to import a lot more manufactured products from the U.S.  In 2008 we had a slight overall trade surplus with Peru, thanks to our exports to Peru almost tripling in just two years.  The U.S. is Peru’s largest trading partner. 

Once again, we see that free trade with nations similar in population density to the U.S. is a win-win situation for both nations, in stark contrast to what happens when we attempt to apply the same free trade policy to those that are much more densely populated.

U.S. Trade with New Zealand

I’ve resumed my slow slog through all of the U.S. trade data and just finished New Zealand.  New Zealand is a fairly small country, but a relatively wealthy, developed one.  With combined imports and exports of over $3 billion, I thought it was worth a look.  With a population density less than half that of the U.S., the new economic theory I proposed in Five Short Blasts predicts that the U.S. should enjoy a trade surplus in manufactured goods with New Zealand.  Is that what we have?  Let’s take a look.  The following chart displays the balance of trade with New Zealand for five major categories of trade:  food products, energy raw materials (primarily oil and gas), metals & minerals, lumber and manufactured products. 

Trade with New Zealand

As you can see, as the theory predicts, we have a nice trade surplus in manufactured goods with New Zealand.  But that surplus is offset by deficits in food and lumber products.  Thus, we trade manufactured products for natural resources.  This is exactly how free trade is supposed to work to both nations’ benefit when both are relatively comparable in population density, unlike the disastrous results we get when trading with badly overpopulated nations. 

Yet another data point in support of the theory.  What a shame that economists have closed their minds to the consequences of population density.  They’re completely missing the most powerful relationship in the global economy and thus continue to make a mess of it.

Another Study Corroborates Link Between Population Density and Global Trade Imbalances

Last week I reported on a study of global trade balances, using data published by the CIA in its World Fact Book, which showed a clear link between population density and the per capita balance of trade in manufactured goods.  The following is the final chart from that article which shows the correlation:

Manf’d Goods vs Pop Density2

Today we’ll look at this from a different angle.  If population density is a factor in international trade, then what’s really important is not a nation’s population density relative to the rest of the world, but relative to those countries with which it actually engages in trade.  No country trades equally with every other nation.  Most countries’ trade is concentrated with just a handful of other nations.  This is important because a nation with a high population density relative to the rest of the world might actually have a trade deficit in manufactured goods instead of a trade surplus if it trades mostly with other nations who are even more densely populated. 

So I’ve used the CIA data for each nation’s major trading partners to calculate the difference (or disparity) in population density between each nation and a weighted average of its trading partners.  For example, over half of all U.S. exports are sent to only six nations:  Canada (20.1%), Mexico (11.7%), China (5.5%), Japan (5.1%), Germany (4.2%) and the U.K. (4.1%).  And well over half of all of U.S. imports come from these nations too.   In the case of the U.S., the difference (or disparity) in population density is -79.8 people/sq km.  That is, while the U.S. has a population density of 31.26 people per square kilometer, the weighted average population density of its major trading partners is 111.06.  So the density of the U.S. is less than that of its trading partners by 79.8.

My expectation was that this approach would reveal an even stronger correlation between population density and per capita trade balance in manufactured goods.  But this approach is not without problems.  First of all, the CIA data on trade partners includes all trade – not just manufactured goods.  Also, the CIA only provides data for each nation’s top trade partners, accounting for 50-75% of trade for each nation.  Also, it should be remembered that free trade is not universally practiced around the world.  The World Trade Organization (WTO) actually enforces protectionist trade practices in favor of two thirds of its member states for the purpose of helping undeveloped and developing nations.  (The United States is not one of them.)  Such uneven trade practices will tend to obscure the effects of other parameters like population density. 

So what did I find?  Here’s a scatter chart of the results for all nations with per capita purchasing power parity greater than $25,000 per year (in other words, for all developed nations). 

Disparity vs PC Balance

Once again, we see that Qatar is a statistical outlier.  Also, Ireland is nearly one as well.  If we remove these two data points, the relationship between population density and per capita balance of trade in manufactured goods becomes quite strong.

Disparity vs PC Balance2

Here we can see that the data points conform more closely to the trend line, indicating a stronger relationship.  A couple of other interesting observations can be made:

1. Note that the trend line, which was generated by the computer and not drawn in by me, intersects exactly the zero point of both the x and y axes.  This means that the data indicates that trade between nations equal in population density will, in all likelihood, yield a perfect balance of trade in manufactured goods. 
2. Nations that are more densely populated than their trading partners can, on average, expect a trade surplus in manufactured goods of about $700 per person for each increment of 100 people/sq km by which their population density exceeds that of its trading partners.  The numbers are reversed for nations less densely populated than their trading partners by that amount.  Returning to the U.S. as an example, our population density disparity of -79.8 would predict a per capita trade deficit of about $560 per capita.  The actual figure is $1,344 per capita.  This deviation from the prediction is likely due to U.S. trade with China, who benefits from WTO-enforced tariffs. 

So what does all of this mean for trade policy in general?  Clearly, if you’re a very densely populated nation, it’s in your best interest to advocate free trade with nations less densely populated, which would be nearly everyone.  Such a policy will almost guarantee a surplus of trade.  (Note that, of the ten developed nations that are more densely populated than their trading partners, only one has a trade deficit in manufactured goods.) 

On the other hand, for more sparsely populated nations, while free trade with other sparsely populated nations is just fine, free trade with more densely populated nations is almost a sure-fire loser.  (Only seven of nineteen nations in this situation have a trade surplus.)  If such nations are interested in maintaining a balance of trade, some mechanism is needed to to counter-act the population density effect:  either import quotas or tariffs.

Conclusion:

The effect of disparities in population density between a nation and its trading partners is real and significant.  For nations engaged in trade with others more densely populated, some mechanism to counteract this effect must be factored into their trade policies if trade deficits are to be avoided.

Study Reveals Link Between Global Trade Imbalances and Population Density

 

As judged by the balance of trade expressed in per capita terms, thus adjusting for the sheer size of each nation, the effectiveness of the United States’ trade policies ranks near the very bottom of the nations of the world.  (See U.S. Trade Policy Ranks Among World’s Worst.)  Since the near-total collapse of the global economy last year, most economists who once shrugged off the effects of global trade imbalances now admit that these imbalances were the root cause of the collapse and can’t be sustained. 

The biggest trade imbalance has been between the U.S. and the rest of the world.  In spite of the best efforts of American manufacturers to get leaner and become more competitive, the trade deficit has been worsening for decades.  It begs the question whether there are factors at work that make these trade imbalances inevitable in a free trade environment. 

In Five Short Blasts,  I used U.S. trade data to argue that disparities in population density are a major (if not dominant) factor behind the U.S. trade deficit in manufactured goods.  But if population density is a factor, then the same impact on trade should be evident in the trade data for all nations of the world.  Densely populated nations should tend to have trade surpluses in manufactured goods while more sparsely populated nations should tend to have trade deficits.   To test my theory on such a global scale, I’ve completed a study of trade data for all nations of the world, using trade data provided by the CIA in its World Fact Book.   I began by breaking down the trade balance into exports and imports.  The following spreadsheets rank the exports and imports of all nations* in per capita terms:

Exports Per Capita, All Nations    Imports Per Capita, All Nations

You can see that the U.S. ranks 46th out of 154 nations in terms of exports per capita, and 118th in terms of imports.  But I soon realized that the top of the exports chart and the bottom of the imports chart were dominated by wealthy, developed nations.  That’s why I included the per capita Purchasing Power Parity (PPP, roughly equivalent to per capita GDP) for each nation in the charts.  To determine whether wealth was a factor, as logic would seem to suggest, I plotted x-y scatter charts for each:

Exports vs PPP Chart    Imports vs PPP Chart

As you can see, the wealth of a nation has a powerful influence on the volume of its exports and imports.  It makes sense.  A wealthy oil-producing nation, for example, may export oil in exchange for imports of manufactured goods.  A poor nation, on the other hand, has little to sell and, thus, has little money to buy.  That’s why this effect wasn’t evident when we looked only at the overall trade balance.  A poor nation is just as likely to have a balance of trade because it has nothing to sell or buy as a wealthy nation that exports and imports a great deal while maintaining an overall balance.

Therefore, it becomes necessary to confine our analysis of trade to developed, wealthy nations in order to avoid having other influencing factors muted by the wealth effect.  So I chose to confine my analysis to those nations with purchasing power parity (PPP) per capita (roughly a measure of GDP per capita) of $25,000 or greater.  (For reference, the U.S. had PPP in 2008 of $47,500.)

The following spreadsheet ranks the balance of trade of the 31 nations with a per capita PPP greater than $25,000. 

Trade Balance Per Capita, PPP GT 25K

I included a column with each nation’s balance of trade in oil and natural gas because I noticed what seemed to be a strong correlation.  High-lighting the net oil-exporting nations in yellow, it becomes easy to see the effect.  Like the effect of wealth, the effect of oil isn’t surprising either.  Naturally, those nations that export huge volumes of oil and gas are going to have favorable trade balances.  (As an aside, I found it interesting that, among developed nations with a deficit in oil and gas, America’s deficit, when expressed in per capita terms, is rather mundane – about the same as other nations.)

Since natural resources tend to be distributed unevenly around the world, trade in resources is vital and beneficial to all.  What’s really important is how nations use trade in manufactured products to offset deficiencies in natural resources and to maintain an overall balance of trade.  Unfortunately, no data for manufactured goods is available.  (If it is, I haven’t found it.)  However, I know from my experience in analyzing U.S. trade data that oil and gas tend to dominate trade in natural resources.  Subtracting them from the overall trade balance usually yields a pretty good approximation of trade in manufactured products.  So, using the CIA’s data and subtracting oil and gas from the overall trade balance, the following is a ranking of developed nations’ balance of trade in manufactured goods:

Manf’d Good Trade Balance, PPP GT 25K

Because my goal in analyzing this global trade data for manufactured goods was to determine whether or not there is any evidence of population density having an effect, it was here that I included the population density data.  And a relationship seems to jump out at you when you compare the population density of the nations at the top of the list (those with the most favorable balance of trade in manufactured products) to those at the bottom of the list.  (Here I should note that the overall population density for this group of 31 nations combined is 30.4 people per square kilometer.  The United States is almost right on this figure, at 31.3.  But the only proper way to determine whether a relationship exists is to plot the data on an x-y scatter chart and then have the computer generate a trend line.  A flat line indicates no relationship while a sloping line indicates the presence of a relationship.  Here’s the chart:

Manf’d Goods vs Pop Density

There is a fairly strong relationship evident.  But the slope of the line is somewhat muted by the presence of what is known in statistics as an “outlier” – a data point that is so far out of the range of the other data points that it’s statistically insignificant.  In this case it’s Qatar, the world’s champ in oil exports, at least in per capita terms.  Qatar exports so much oil that it has no need whatsoever of producing anything else.  They simply kick back and enjoy the good life with a PPP that far exceeds that of any other nation, net oil exporters included.  So, if we delete that data point, the chart changes as follows:

Manf’d Goods vs Pop Density2

Now the trend line conforms more to the data.  And if we were to eliminate Ireland, the data point at the other extreme end of the scale, but not quite an outlier, it’s easy to see that the trend line would conform to the data even more closely. 

It’s also important to note that by confining this analysis to developed nations – those with per capita PPP exceeding $25,000 – I excluded the most dominant player in world trade today:  China.  If China’s data point were included, it would fall right on the trend line, with a population density of 140 people/sq km and a balance of trade in manufactured goods of $351. 

It’s impossible to overstate the significance of this relationship.  Because economists adamantly refuse to give any consideration to the role of population growth in economics, they have completely overlooked the relationship between population density and per capita consumption, and its ramifications for trade.  (To learn more about the relationship between population density and per capita consumption, see “the theory explained” category on this blog.)

Finally, it’s worth noting here that population density also plays a role in driving trade imbalances in oil.  Very densely populated nations tend to be net oil importers, forcing them to export even more manufactured goods in order to maintain a balance of trade, combining with the effect of population density on their low per capita consumption.  High oil consumption and low domestic consumption of manufactured products team up to make such nations heavily dependent on exports of manufactured products. 

Summary and conclusions:

1. The balance of trade of the U.S., a nation with a low population density relative to most other nations, ranks near the bottom of all nations.
2. Global trade is dominated by oil and gas.  Oil exporting nations use their profits to purchase other natural resources and manufactured goods.  Oil importing nations export manufactured goods to fund their purchases of oil and gas.
3. How successful a nation will be in using manufactured goods to maintain a balance of trade is heavily influenced by its population density.  The effect is real and significant. 
4. The practice of free trade between two nations grossly disparate in population density is very likely to result in a trade deficit in manufactured goods for the less densely populated nation. 
5. Failure to account for the population density effect in global trade policies will likely result in sustained trade imbalances. 

—————————————–

* Small island nations, whose economies are dominated by tourism, are excluded.  Tiny city-states are included in their surrounding or neighboring countries.  (Example:  Hong Kong is included in the data for China.)

Obama Returns from Asia Empty-Handed

http://www.reuters.com/article/newsOne/idUSTRE5AK0K920091121

President Obama has returned from his week-long trip to Asia empty-handed.  No commitment by China to unpeg its currency from the dollar.  (In fact, Obama barely even raised the subject with the Chinese.)  No promises to  rebalance trade.  No promises to boost imports of American products.  And now we see that his big plan to boost American exports (see http://petemurphy.wordpress.com/2009/11/13/obama-has-plan-to-boost-exports-i-smell-a-rat/) was nothing more than a vague hope.  The whole trip was a complete waste of time – time that would have been better spent in the oval office, signing executive orders that could do far more to restore our economy and put us on track to a sustainable future for our children.

Speaking as an independent who voted for Obama, primarily because of his promises to do something about our trade imbalance, this is what I find most disappointing – that he has the power to single-handedly accomplish what needs to be done.  Sure, Congress moves at glacial speed on issues like health care reform and global warming, but Obama doesn’t even need the help of Congress to address our most critical issues.  He doesn’t need Congress’ help in changing trade policy.  He has full authority to impose tariffs and bring millions of manufacturing jobs back home.  He has full authority to halt the annual importation of a million more oil consumers, a million more carbon emitters and a half million laborers to compete with Americans for a dwindling supply of jobs.  All it takes is the courage to sit there at his desk and sign the executive orders.  In one eight-hour work day he could completely change the trajectory of the American economy and help put us on a path to a sustainable future.  Instead, he does nothing. 

During the campaign, his interest in and admiration of Lincoln was widely reported.  But it was not eloquence or diplomacy that made Lincoln a great president.  It was action – bold action that angered many but, ultimately, was in the best interest of his country.  He abolished slavery, resulting in a split in the union.  He led the nation through the bloodiest war in history.  He blockaded confederate ports and imprisoned confederate sympathizers.  At one point, he even authorized the naval bombardment of New York city to put down an anti-war uprising.  He authorized his generals to completely destroy the civilian infrastructure of the confederacy to assure the finality of its defeat.  Lincoln made gut-wrenching and often unpopular decisions that changed the course of history, not just for the U.S. but the entire world.

President Obama has similar opportunities.  The global economy has been collapsed by an over-reliance on faulty economic theories, developed by people blind to the economic consequences of unending population growth.  He was elected because we believed in change and hope for something different.  We were promised action to correct our trade imbalance.  But so far, all we’ve gotten is talk, diplomacy and now, as reported in the above-linked article, appeals for patience. 

The American people are patient.  We have the patience to allow action and change to produce the desired results.  It’s the lack of action for which we have no patience.

U.S. Trade Policy Ranks Among World’s Worst

In Five Short Blasts, I based my conclusions on the relationship between population density and per capita consumption on trade data between the U.S. and the rest of the world.  However, if my theory is valid, the same effect upon global trade imbalances (in manufactured products) should be found for every nation’s trade relationship with the rest of the world.  Clearly, America’s trade imbalance in manufactured goods with other nations is driven by the disparity in population density between us and our trading partners, especially those much more densely populated.  America has huge trade deficits with nations like Japan, Germany and China, for example.  So it stands to reason that nations like these should have large trade surpluses with the world as a whole – not just the U.S.  And sparsely populated nations like Australia and Canada should have deficits in manufactured goods, much like the U.S.

To determine whether this is true, I’ve begun a study of global trade for every nation on earth*, using data provided by the CIA on “The World Fact Book” page of its web site.  Once I had compiled all of that data onto a spreadsheet and calculated the balance of trade for each nation, I was interested in learning how each nation compared when its balance of trade was expressed in per capita terms, putting large and small nations on an equal basis. 

Essentially, this is a measure of the effectiveness of each nation’s trade policies.  An effective trade policy works to the benefit of that nation’s citizens, with a trade surplus contributing to their wealth.  An ineffective trade policy results in a deficit, resulting in a drain of wealth and low or negative savings rates.  Effective trade policy trades what a nation has in abundance for what it lacks, while at least maintaining an overall balance.  For example, a Middle East nation may trade oil for other resources like food, as well as manufactured products.  Or an extremely densely populated nation, lacking resources, may trade manufactured products to obtain those resources. 

Here’s the data:

Trade Balance Per Capita, All Nations

Some observations are in order:

1. I’ve made no attempt to correlate this data with population density.  (That will come in a subsequent article.)  This is just the total trade balance for each nation, divided by the population of that nation. 
2. By this measure, the United States ranks near the very bottom of nations, coming in at 147th out of 154 nations.  Every man, woman and child in America is poorer each year by more than $2700, thanks to our trade policy.  (That’s over $10,000 for a family of four!) 
3. Of the top 13 nations, all are oil-producing nations except one – Ireland.  Ireland is world champion in terms of trade among non-oil-producing nations, followed by the Netherlands and Germany.
4. For all of the talk about China’s trade surplus with the world, they rank only 36th,  with a per capita trade surplus that is less than 3% that of Ireland’s.
5. It’s interesting to note that Britain, one of the very worst in terms of trade policy effectiveness, especially considering their exports of North Sea oil, sits right next to Ireland, the world’s best among non-oil producing nations.  Ireland is doing something right while the U.K. (like the U.S.) is clearly doing something wrong. 

This isn’t an indictment of Obama’s trade policies in particular.  It took many years of trade policy bumbling by both Democratic and Republican administrations to get us into such a mess.  But it is a call to action for Obama to stop tip-toeing around the issue and begin making bold moves to restore a balance of trade.  What should he do?  Is our trade balance problem a function of too few exports, too many imports, or both?  Where should he focus his attention?  I’ll tackle that in the next article.

In a future article, I’ll zero in on manufactured products.  In the meantime, I though this data might explode some myths out there in regards to global trade.

* – Small island nations with economies based on tourism are excluded from the study.  Tiny city-states like Hong Kong, Singapore and Luxembourg are rolled into the data of their surrounding or neighboring nations.

American Labor Numb to Trade-Related Job Losses

http://www.reuters.com/article/domesticNews/idUSTRE5AG30Y20091117

Just at the very time when it is finally dawning on American leadership that our enormous trade deficit lies at the heart of our economic problems, American labor, numbed by decades of brow-beating about the supposed benefits of free trade and globalization, seems to have given up the fight.  Just when President Obama most needs for American workers to rally behind his efforts to restore a balance of trade – while meeting with the Chinese premier in an effort to stop Chinese manipulation of the currency exchange rate – the labor movement has fallen silent.  America’s most powerful labor union prepares for a summit on job creation without one mention of correcting our trade imbalances. 

As reported in the above-linked Reuters article, AFL-CIO President Richard Trumka is preparing for a December 3rd White House Summit on job creation, focusing on such things as steering government stimulus spending toward small businesses.  His plan doesn’t include a single mention of trade. 

In a preview of labor’s contribution to Obama’s December jobs summit, AFL-CIO President Richard Trumka said money from the Troubled Asset Relief Program could be lent directly to small- and medium-sized businesses at commercial rates.

He said TARP money could also help small community banks that were ignored during the financial rescue effort by having them manage the loans.

… The AFL-CIO jobs plan also calls for extended unemployment benefits, food assistance and healthcare for the unemployed, more money for infrastructure projects and state and local governments, and job creation aimed at distressed communities.

Never mind the fact that the President’s emphasis on currency exchange rates will have little effect on the trade deficit with China, or that his whole approach to trade has been far too timid.  Without the support of American labor on this issue, he has virtually no chance of softening foreign opposition to trade policy inititatives. 

I suppose that labor leaders like Trumka can hardly be blamed for giving up the fight after decades of being ignored on the trade issue by their own party and mocked by business leaders and economists as being unwilling to “compete” in the global economy.  For decades, labor complained bitterly about the effects of trade policy while administrations and both political parties remained enamored with the false promises of a doomed model of free trade and globalization.  But the climate on trade policy is changing rapidly in the wake of the global economic collapse and this is exactly the wrong time to give up the fight and become dependent on government largesse.  The very moment in history when you were proven to be right all along is not the time to admit defeat.

Obama Has Plan to Boost Exports. I Smell a Rat!

http://www.cnbc.com/id/33898862

The above-linked CNBC article reports that Obama has a plan for boosting exports to Asian nations, a plan he’ll unveil in his upcoming trip to the region.  

President Barack Obama said on Thursday he planned to discuss a strategy with Asia Pacific leaders calling on their countries to import more U.S. goods and the world to rely less on exporting to the United States.

“In the coming days, I’ll also be meeting with leaders abroad to discuss a strategy for growth that is both balanced and broadly shared,” Obama said before leaving on an Asia trip that includes a meeting of APEC (Asia Pacific Economic Cooperation) leaders in Singapore.

“It’s a strategy in which Asian and Pacific markets are open to our exports, and one in which prosperity around the world is no longer as dependent on American consumption and borrowing, but rather more on American innovation and products,” Obama said.

Since boosting exports is something over which the U.S. has absolutely no control, I smell a rat.  Exports are a function of foreign demand for U.S. products and we have no control over that.  We’ve been trying for decades – cutting our manufacturing costs, complaining about exchange rates, filing complaints with the WTO (World Trade Organization), boosting “innovation” - all to no avail.  If our trading partners are unwilling or, more precisely, unable to import more American products, they won’t.  So what’s the plan?  Does President Obama plan to send container ships-full of American products to Asia and then dump them in the ocean?  Hey, I have a plan to boost book sales, too.  I can advertise and cut the price of the book all I want but, unless I put a gun to your head, you won’t buy the book unless you want to. 

Well, perhaps there is another way.  I could give you $20 to buy the book, which retails for $16.95.  Who wouldn’t jump at that deal?  Of course, I’d have to just print money to keep that offer going for very long, but at least I could delude myself into believing that book sales are going gangbusters and, as long as you’re willing to overlook the fact that the money is couterfeit, then you’ll be happy too.  And my printer will be happy as a clam. 

Could it be that Obama’s plan is something similar?  We’ve seen that he and Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke have no qualms about cranking up the printing press to boost the economy.  The problem has been that Americans then use that money to fund the purchase of imports, boosting foreign economies and not our own.  So wouldn’t a more effective use of that money be to just give it to China, Japan and Korea on the condition that they use it to buy American products? 

Yeah, yeah, I know:  it’s a stupid idea that’s doomed to failure, once mountains of American products pile up on the wharves at their ports, and once we realize that those funds are being diverted to expand China’s military.  But it would boost American manufacturing in the short term, for maybe a few years, which is all President Obama needs to win a second term and to claim a legacy of having revitalized the manufacturing sector of America’s economy.  Publicly, both Obama and the Asian nations will claim that this money is a “loan” from the U.S., but privately they will agree that it’s nothing of the sort; just printed money that’s never to be repaid. 

If this isn’t the president’s plan, then something equally twisted is likely to emerge.  If our leadership isn’t smart enough to fix our broken trade policy in a way that’s within our control, by returning to the sensible application of tariffs that once built this nation into the world’s preeminent industrial powerhouse, then its only alternative is to strike preposterous deals that gloss over our trade imbalance and give the appearance having done something meaningful.

Obama on Trade: “If Germany can do it, why can’t we?”

http://www.reuters.com/article/newsOne/idUSTRE59U0N220091102

With joblessness continuing to escalate, Obama challenged his economic team on Monday to come up with a new economic growth model and turned his attention to trade and exports.  Give him credit.  Instead of swallowing the line that our trade deficit is an inevitable consequence of low wages in foreign countries and eschewing the usual pissing and moaning about exchange rates, he asked an incisive question:

U.S. PresidentBarack Obama warned on Monday that more U.S. job losses lay ahead despite a turnaround in the economy, and he called for a new “post bubble growth model” with greater focus on U.S. exports.

“If Germany, a wealthy, highly unionized industrial nation, can generate 40 percent of its economy as export-based, then it seems to me that there is something we’re missing that they are doing right, and we have got to figure that out,” he told a meeting of his Economic Recovery Advisory Board.

Indeed.  Why can Germany generate so much of its gross domestic product (GDP) through manufacturing for export?  The same question could be asked about Japan, Ireland, Denmark, Switzerland, Korea and a whole host of other nations, none of whom have significantly lower labor costs or better productivity than the U.S.  Nevertheless, the U.S. has a huge trade deficit in manufactured products with all of them.

The answer is that all have two things in common.  First of all, all of these nations are more densely populated than the U.S.  Most are badly overpopulated, making them incapable of per capita consumption at a rate that enables them to absorb the productive capacity of their own labor forces, much less able to consume imports from a nation like the U.S.

The second thing that all have in common is a huge market where per capita consumption is high and where the government is too dumb to implement trade policy designed to assure a balance of trade – the United States.

The question that Obama should be asking is not “What is Germany doing right?”  Rather, he should be asking “What are we doing wrong?”  The answer lies in trade policy that fails to account for the effect of extreme population densities on per capita consumption and global trade imbalances.

Obama went on to question why we can’t have the kind of economy we once enjoyed, with strong manufacturing and exports, and emphasized that big trade deficits can no longer be sustained:

“Are there mechanisms that we can start putting in place where we see the kind of growth that used to characterize the U.S. economy — export-driven growth, manufacturing growth,” he demanded of the panel, which included business leaders as well as former Federal Reserve Chairman Paul Volcker.

He said past U.S. growth had been “debt-driven” and that was no longer feasible. With the United States running record budget deficits as it spends furiously to try to stimulate the economy, Obama said it is going to be vital to find innovative new ways to finance growth, and the old approach would not do.

“The kinds of current account deficits, trade deficits we were developing were not ones that would serve as a model for long-term economic prosperity,” Obama said.

It’s refreshing to hear a president who recognizes the role of trade in the demise of American manufacturing and the economy as a whole.  He understands that it can’t go on but, predictably, his approach of chiding other nations to start buying more American products has yielded zero results.  He’s frustrated and clueless, and his economic team is of no help since, to a man, they’re free trade cheerleaders.  So he thinks it’s a matter of competing harder:

“Part of what we want is an aggressive trade policy that says we can compete, we’re not afraid of competing, we want to make sure we are competing in a fair way, and that other countries are not seeing the U.S. markets as simply the engine for their growth, without any reciprocity,” he said.

It’s not a question of being competitive.  No nation on earth has more aggressively cut labor costs and improved productivity than the U.S., all to no effect.  Any effort to identify some magical ingredient in Germany’s manufacturing or to mimic them is doomed to failure.  Unlike Germany, we have no other country like the U.S. to serve as our patsy customer, as we do for Germany.  Boosting exports is now something that’s within our control.  The only way that exports can rise is if other nations start buying more American-made products.  It’s not going to happen.

President Obama, here’s an idea:  instead of trying concoct a global economy where Germany, China, Japan and Korea manufacture everything we use, while we manufacture everything for someone else, how about an economy where we all just manufacture our own stuff?  Imagine the oil burned in transoceanic shipping that could be saved!  Trade imbalances are eliminated and Americans are put back to work in high-paying manufacturing jobs.  Problem solved!  What will Chinese, German and Japanese labor forces do?  That’s their problem.  Put tariffs back in our trade policy tool bag and make it happen.  Start being a president for Americans and do what’s right for American workers.