China’s Economy: Heavy on Stimulus, Light on Consumption

January 22, 2013

http://www.reuters.com/article/2013/01/20/us-china-economy-idUSBRE90J0I820130120

The above link will take you to an interesting piece that appeared on Reuters this weekend.  Much of the celebrated growth in China’s economy has been driven by debt-fueled infrastructure spending and other private investment-funded development in anticipation of western-style consumption by its 1.2 billion consumers – consumption that has yet to materialize.  The article also notes that the explosion in property values there, while a boon to the developers, is taking a big bite out of the Chinese consumers’ ability to afford anything other than their cramped, overpriced living quarters.  This should come as a surprise to no one, since the price of dwelling space reaches exhorbitant levels in every other densely populated area of the world, whether it’s New York City or the entire country of Japan.  People who spend all of their income on rent and food have little left for the purchase of other products. 

The economy picked up in the fourth quarter as a spurt of infrastructure spending orchestrated by Beijing broke seven straight quarters of a slowdown. Consumption’s contribution to growth fell in the fourth quarter for the third straight quarter even though retail sales were rising in each of the last three months.

Retail sales, or total consumption, continues to grow but consumption’s share of the Chinese economy is declining.  It’s exactly what happens in a society whose population density is beyond that critical point where over-crowding impairs per capita consumption.  It’s happening not only in China, but throughout the world as the global population continues to grow.  While the sum total of the world’s economic output continues to grow, consumption’s share of the economy is declining as unemployment rises, making the world ever more dependent on deficit spending to maintain an illusion of prosperity.  Deficit spending has grown to the point where there aren’t even enough investors willing to fund it, forcing all of the world’s central banks to accelerate their money printing to buy up their nations’ own debts. 

And it’s all to no avail.  Deficit spending is increasingly less effective in stimulating the economy because people living in cramped conditions can’t consume more products no matter how much money you give them to do it.  China’s no different and the world is in for a rude awakening when the big plans for China’s economic growth go bust.


Apartments Shrinking in Major U.S. Cities

December 13, 2012

 As I browsed through the latest issue of AARP Bulletin last night, the following article caught my eye.

Tiny Apartments

 It’s very rare that I come across something like this – hard data on per capita consumption that can be linked to population density.  As reported in the article,  apartments are shrinking in major U.S. cities. 

Compare the size of these apartments to the average-sized home in the U.S.  The average per capita dwelling space in the U.S. is 710 square feet.  That means that the average single person occupies a dwelling (likely an apartment) of 710 square feet.  The average family of four occupies a dwelling (likely a single family home) of 2,840 square feet.  As reported in this article, apartments in large, densely populated major cities of the U.S. are shrinking down to 220-330 square feet. 

The fact that people in large cities tend to live in apartments isn’t news.  Nor is the fact that single young people, just starting out in their careers, choose to live in small apartments.  I did when I was discharged from the Navy and began my career in the Cleveland area.  (My apartment dwarfed those being reported in the above article.)  Even though I was living in the ‘burbs among many nice homes, I chose to live in an apartment because that’s all I could afford at the time and because I had no interest in a bigger home. 

But as I pointed out in Five Short Blasts, population density is a major factor in forcing people into smaller dwelling spaces than they’d otherwise choose.  (See Figure 5-2 on page 88.)  The average japanese citizen occupies a dwelling space less than one third that of the average American’s home, not because they like living in crowded, cramped quarters but, because Japan is ten times as densely populated as the U.S., there isn’t room for anything larger. 

This article is further corroboration of the effect, reporting that small apartments are now getting even smaller as these cities grow more densely populated and as the demand for housing becomes more intense.  Let’s focus on the data reported for San Francisco, where that city is considering reducing the legal minimum apartment size from 290 square feet to 220 square feet.  Consider the impact on per capita consumption.  The per capita consumption of flooring materials is reduced by 24%.  So too is the per capita consumption of materials used in the ceiling.  The per capita consumption of materials used to build the walls – lumber, drywall, nails, tape and joint compount, and paint – is reduced by 13%.  The per capita consumption of wall-hangings is reduced by that amount as well.  And thanks to the 24% reduction in foor space, the consumption of furnishings is reduced even more, since occupants still need the same amount of aisle space between the furnishings. 

The problem is that the denizens of these tiny digs are just as productive as any other workers and just as hungry to earn the income needed to pay for these over-priced dwellings.  Just as productive, but consuming far less.  It’s a trend we find in nearly every aspect of the economy as our world grows more densely populated.  You do the math.  It’s impossible to consume less in per capita terms without having an equal impact on per capita employment.  Worsening unemployment is absolutely inescapable. 

Of course, economists don’t think in these terms.  They see urban population densification as synonymous with a densification of economic activity – more money spent per square mile.  They dismiss  the decline in per capita consumption of dwelling space and other goods with the claim that people will simply spend their money on other things – like services and entertainment, and create jobs in those sectors.  Never mind the fact that the high cost of these apartments leaves people without any additional income or the fact that people in less densely populated conditions enjoy those same services and entertainment in greater measure because they actually do have the money.

That this obvious inverse relationship between population density and per capita consumption continues to elude the field of economics is astounding and tragic.


We Need Better-Trained Workers to Compete with The Rest of The World?

November 26, 2012

It’s often said by our political leaders and economists that the United States needs a better-trained work force in order to compete with other nations and bring manufacturing jobs back home.  If that’s true, then how do you explain the following? 

Regarding illiteracy among the world’s population, the CIA World Fact Book notes that:

… over two-thirds of the world’s 793 million illiterate adults are found in only eight countries (Bangladesh, China, Egypt, Ethiopia, India, Indonesia, Nigeria, and Pakistan) …

I did some checking.  Of these eight highly illiterate nations, the United States actually has a trade deficit in manufactured products with five of them.  It has surpluses with  Egypt, Ethiopia and Nigeria.  (These surpluses are almost entirely in the form of aid.  The U.S. counts aid as exports.) 

In fact, these five relatively illiterate nations – Bangladesh, China, India, Indonesia and Pakistan – accounted for over 77% of our entire trade deficit in manufactured products in 2011.  Clearly, the outsourcing of our manufacturing jobs can’t be explained by companies seeking out highly-trained work forces.  If training were the issue, then why did our manufacturing jobs leave the best-trained work force in the world in the first place in favor of work forces that were completely illiterate? 

The temptation is to say that these jobs actually left not because of better-trained work forces but in search of cheap labor.  However, that argument falls flat when you consider that our trade deficits with high-wage nations like Japan and Germany are even worse than any of these five afore-mentioned nations. 

What they all have in common is an extreme population density, making them incapable of reciprocating our consumption of their imports with consumption of American goods.  We have trade deficits with these nations not because of the training of their workers or because of cheap labor or even because of manipulated currency exchange rates, but because of American trade policy that fails to account for the role of population density in driving global trade imbalances.


Americans Growing Poorer

July 17, 2012

http://www.cnbc.com/id/47774877

On June 11, the Federal Reserve released its triennial “Survey of Consumer Finances.”  OK, so this news is a little stale, but if the Federal Reserve can take 18 months to release the data, I can be forgiven for taking a month to comment. 

The report was anxiously awaited, for it’s the first such snapshot of family finances since the onset of the Great Recession that began in late 2007.  As expected, it’s not a pretty picture.  As reported in the above-linked article, the median net worth of American families in 2010 fell to $77,300 from its peak of $126,400 in 2007.  Most of that decline was the result of fallling home values since, especially among the middle class, most of their net worth is tied up in the equity in their homes.  But “most” isn’t all.  Median incomes also fell, from $49,600 per year to $45,800 per year over the same period.  Most Americans grew way poorer in the three years from 2007 to 2010.  Only the top 10% of wage earners fared better over the same period.  Their median net worth rose to $1,194,300 in 2010 vs. $1,172,300 in 2007. 

OK, that was the aftermath of the Great Recession.  It’s no surprise that net worth declined.  This edition of the Federal Reserve’s survey only reports data back to 2001.  You’d have to do a lot of digging to see how this data fits into the longer range perspective.  Don’t bother.  I’ve done the digging for you and crunched the data to convert it to 2010 dollars to make it comparable to the new report.  Here’s a chart of the data (an update of Figure 1-14 on page 27 of Five Short Blasts):   

2010 family net worth 

Not only did the median net worth fall from its peak in 2007 (a peak fueled by a bubble in the housing market), it fell to a level one third less than the previous peak in 1976.  In fact, it fell to less than the median net worth in 1969. 

Since Americans’ median net worth peaked in 1976, it has enjoyed only two occasions when it has risen:  during the dot-com bubble of the 90s, culminating in 1998, and during the housing bubble leading up to the onset of the financial crash that began in late 2007.  Take away those two events – the “irrational exuberance” of the dot-com bubble in the stock market and the equally irrational exuberance in the housing market leading up to 2007 (fueled in large part by  government regulators turning a blind eye to outrageous lending practices) – and Americans’ net worth has been in steady decline for 36 years. 

It’s no mere coincidence that 1976, the year that Americans’ net worth peaked and then began its decline, also marked the beginning of a 36-year run of consecutive trade deficits.  Of course Americans are growing poorer.  Their jobs have been sent overseas through misguided faith in flawed trade policy that fails to account for the role of extreme population densities among some trade partners like China, Japan, Germany and others in driving huge trade imbalances.  The resulting glut in the labor force is driving down wages and benefits.

All of this is exactly what the inverse relationship between population density and per capita consumption would predict for our economy as our effective population density rises far beyond our actual density, through free trade, combining our economy with the economies of grossly overpopulated nations.  It’s also easy to predict that, failing to change trade policy and immigration policy, it’s going to get worse.  At the onset of the decline in housing prices, I told a realtor friend that it wouldn’t end until the median house price fell to a level affordable on the median income.  And the median income continues to decline.  So don’t look to a recovery in housing to boost your net worth. 

In fact, the bubble scenarios that could be used to mask the effects of population densities that have grown far beyond an optimal level have probably been exhausted.  It’s difficult to envision another dot-com style bubble in the stock market.  There is nothing on the horizon to drive it.  High tech?  Been there and done that.  Health care?  Impossible in today’s environment.  We’ve moved on from the stock market bubble to the real estate bubble and are now locked into a bond market bubble.  But no one’s getting rich from this one.  At current yields and rates of inflation, people are actually losing money in that market, figuring that at least they’re not losing as much as they could in other markets. 

Americans will continue to grow poorer until trade and immigration policy change.  Making that bet is a sure-fire winner.


America’s 20 Worst Trade Partners

June 11, 2012

Who were America’s 20 worst trade partners in 2011?  First, we have to define “worst.”  By “worst” I mean those nations with whom the U.S. has its biggest trade deficits in manufactured goods.  By that simple measure alone, China is, hands-down, our worst trade partner by far.  But China is also a very large country with one fifth of the world’s population.  So we need to factor out the sheer size of nations to avoid having this list degenerate into nothing more than a list of nations by size.  A more appropriate definition of “worst trade partner” factors out size by expressing the trade deficit in per capita terms – that is, divided by the population of each nation in question. 

Now the results might surprise you.  Using that criteria, here’s a list of America’s 20 worst trading partners:  Top 20 Deficits, 2011

The following are some key take-aways from this list:

  • Of these twenty worst per capita trade deficits in manufactured goods, eighteen are nations more densely populated than the U.S.  (U.S. population density is 85 people per square mile.)  The average population density of these twenty nations is 491 people per square mile – almost six times as densely populated as the U.S.
  • Of these twenty nations, the average purchasing power parity (PPP) is $33,700 per person.  Only six have PPP less than $20,000 per person.  (Only one of the top ten has PPP less than $20,000.)  This tends to debunk the myth that trade deficits are caused by low wages.
  • Ireland is far and away America’s worst trading partner.  That tiny nation of only 4.7 million people (0.07% of the world’s population) accounts for 7% of our total trade deficit in manufactured goods.  On a per capita basis, our trade deficit with Ireland is 28 times worse than our per capita deficit with China.  Ireland’s trade surplus with the U.S. accounts for 16% of their PPP.  Our per capita trade deficit with Ireland in 2011 worsened by 18% from 2010.  Though Ireland is twice as densely populated as the U.S., that doesn’t account for such a gross imbalance of trade.  Ireland is the world’s champ when it comes to employing unfair trade practices, particulary in the form of subsidizing foreign manufacturers with a free tax ride.  Ireland, in turn, is subsidized by the European Union, being one of the first to require a bailout of their banking system. 
  • Of our top ten worst trade partners, five are EU members.
  • China (four times as densely populated as the U.S.) ranks 16th on the list, the same as their 2010 ranking. 
  • South Korea (15 times as densely populated as the U.S.), with whom the U.S. entered into a new free trade agreement early this year, is America’s 13th worst trade partner, the same ranking as in 2010.

It’s China that draws all of the attention in discussions about America’s trade deficit.  But, when you look at this list, it becomes clear that our trade results with China are no different than our trade results with many other nations.  The fault lies not with China’s trade policies, but with our own – a trade policy that fails to account for the role of population density in driving global trade imbalances.  Actually, the fault lies with the field of economics and its stubborn refusal to give any consideration to the potential consequences of population growth. 


U.S. Foreign Trade: A Tale of Two Worlds

May 12, 2012

When I wrote Five Short Blasts, one of the key pieces of evidence I presented in support of my claim that the U.S. balance of trade in manufactured products is heavily influenced by the disparity in population density between the U.S. and its trading partners was Figure 7-4 on page 125.  This was a chart that compared America’s balance of trade in manufactured goods for those nations above the median population density to those nations below the median population density.  The difference in results was truly striking.

I’ve now updated that chart to include the results for 2011:  Deficits Above & Below Median Pop Density.

As you can see, it seems that, with each passing year that the U.S. adheres to the blind application of free trade policy, the effect of population density is intensifying.  With the half of nations with population densities below the world’s median population density, the U.S. has a surplus of trade in manufactured products of $153 billion.  However, with those nations more densely populated – same number of nations – it had a trade deficit of $577 billion.  Both figures are the highest since I began tracking this data. 

And here’s a piece of data that may be even more striking.  If we sort the nations of the world by population density and begin totaling the U.S. balance of trade in manufactured goods, starting with the least densely populated nations, and simultaneously begin totaling the land surface area of these nations, the U.S. has a trade surplus in manufactured goods with 86% of the land surface area of the earth (excluding the U.S. itself and Antarctica).  (We didn’t have a surplus with all of these nations, but the total remains on the surplus side of the tally sheet.)  At that point, the U.S. has a trade surplus in manufactured goods of $82 billion, and a trade deficit with the remaining 14% of the earth’s land surface area of $505 billion! 

Only when we reach China does the balance of trade turn negative.  Our trade deficit with China accounts for $302 billion of that deficit.  Now, China occupies 8% of the worlds land mass (again, excluding the U.S. and Antarctica).  That means that with the last 6% of the world’s land mass, the U.S. still has a trade deficit of $203 billion.  Included in that 6% of land mass are Japan, Germany, South Korea, Taiwan and India – some of the most densely populated nations on earth. 

America’s trade results are truly a tale of two worlds – the positive experience we have with the vast majority of the world (in terms of land mass) – vs. the horribly negative and destructive results we experience with the 14% of the world that is so badly overpopulated.  Yet, as we have for the last 65 years – since the signing of the Global Agreement on Tariffs and Trade in 1947 – we stubbornly and stupidly contine in our efforts to apply the same free trade policy to both worlds, hoping that, some day, free trade with overpopulated nations will yield different results.  Einstein once famously said that the very definition of insanity is doing the same thing over and over and expecting different results.  The application of free trade theory to overcrowded nations is truly insane.


Surprising Facts About 2011 U.S. Trade Data!

April 21, 2012

I haven’t posted much lately because I’ve been working hard on analyzing the 2011 trade data, which was released by the BEA (Bureau of Economic Analysis) in late February.  My focus, of course, is on manufactured products, since that’s where the jobs are.  Separating the trade in manufactured goods from total trade for each nation is no small undertaking, since nowhere does the BEA report on “manufactured products” as a separate category.  It has to be done nation-by-nation, combing through hundreds of product end-use codes for each.  I’m now ready to begin reporting on what I’ve found, beginning with some interesting, surprising facts.  (More posts will follow.)

For those of you new to this web site and the concepts presented here, my goal is to create an understanding of the forces that drive global trade imbalances, especially America’s very large trade deficit in manufactured products with the rest of the world.  Why manufactured goods?  There are two kinds of “goods”:  natural resources and the products into which those resources are transformed through manufacturing. 

The reason for trade imbalances in natural resources is no mystery.  Nations deficient in a particular natural resource, as is the case with the U.S. and oil, will experience a trade deficit in that resource.  Nations with a surplus of such resources will have a trade surplus.  It’s as simple as that.  But there are also very large imbalances in the trade of manufactured products that aren’t so easily explained.  Economists blame many factors including low wages, currency manipulation, trade barriers and lax labor and environmental standards.  Yet, in spite of decades of efforts to address these issues, imbalances have only grown worse. 

In Five Short Blasts, I presented an entirely new explanation for trade imbalances:  the role of population density.  And, since publication of that book, I’ve also presented on this blog data that debunks the role of the traditional scapegoats – low wages and currency exchange rates.  Now we have a fresh batch of data for 2011.  Let’s examine whether population density still holds up as an explanation and whether wages and exchange rates have played any role at all. 

First, some explanation of my methodology is in order.  In my research prior to publishing Five Short Blasts in 2007, I discovered that the inclusion of tiny island nations and city-states in the data tends to obscure the relationship between population density and trade imbalances.  Almost without exception, tiny island nations have unique economies that are totally dependent on tourism.  Because such nations use tourist dollars to purchase manufactured products, the U.S. has a surplus of trade in manufactured goods with virtually every one of them, regardless of their population density.  And the trade with all of these nations taken together is so minuscule that it has no measurable effect on America’s balance of trade.  For those reasons, those nations are omitted from the study. 

Also, tiny city-states are somewhat similar in that they tend to have economies skewed by their imbalance between urban and rural settings and their nearly total lack of resources.  For this reason, I have rolled the data for such city-states into the data of their much larger, surrounding (or neighboring) nations.  (These city-states are Andorra, Gibraltar, Hong Kong, Macao, San Marino, Vatican City, Liechtenstein, Luxembourg, Monaco and Singapore.)  What’s left is a total of 165 nations. 

With all of that background, let’s begin with some basic facts about America’s balance of trade in 2011:

  • In 2011, the U.S. balance of trade worsened by almost $60 billion, with the trade deficit increasing to $560.0 billion – a 12% increase.  Of this increase in the trade deficit, $46.3 billion was due to an increase in the deficit in manufactured products. 
  • The U.S. had a trade deficit of $423.4 billion in manufactured products in 2011, compared to $377 billion in 2010.
  • It’s natural to expect, then, that our balance of trade worsened (trade deficits grew larger or surpluses grew smaller) with the majority of nations.  But that’s not what happened.  Of the 165 nations examined, our balance of trade in manufactured products worsened with only 76 nations (46%).  It actually improved with 88 nations (54%).  (South Sudan is new to the study and did not exist in 2010.) 

 

Evidence of The Role of Population Density in Trade Imbalances

Now, let’s break this down by population density – or, more precisely, by population density relative to that of the U.S. – to see if some relationship emerges.  Of these 165 nations, 111 are more densely populated than the U.S.; 54 are less densely populated.  If population density is not a factor in trade imbalances, then the number of nations with whom the U.S. experienced a worsening in its trade balance – 76 nations – should be distributed proportionately among these two groups – 51 nations among the more densely populated nations and 25 among the less densely populated nations.  But here’s what actually happened:

  • Of the 76 nations with whom our balance of trade worsened, 62 were nations more densely populated than the U.S.; only 14 were among the less densely populated nations.
  • Although only 33% of nations are less densely populated than the U.S., of the 88 nations with whom our balance of trade improved, 44% (39) were among that group. 
  • Of the 54 nations less densely populated than the U.S., the balance of trade improved with 39. 

That data on the change in our trade imbalance from 2010 to 2011 seems to show a relationship with population density.  But that’s just the change in the imbalance.  What about the imbalances themselves?  Of the 165 nations included in the study, the U.S. had a trade deficit in manufactured products with only 51 of them.  Since 67% of these nations are more densely populated than the U.S., we should find 34 of these trade deficits among the more densely populated nations and 17 of them among the less densely populated ones.  But here’s what actually happened in 2011:

  • Of the 111 nations that are more densely populated than the U.S., the U.S. had a trade deficit with 47.
  • Of the 54 nations less densely populated than the U.S., the U.S. had a trade deficit in manufactured goods with only 4. 
  • Of the 51 nations with whom the U.S. had a trade deficit in manufactured goods, 47 (or 92.2%) were with nations more densely populated than the U.S.  The four less densely populated nations with whom we had a trade deficit in manufactured goods were Estonia, Laos, Sweden and Finland.

That is powerful evidence of a a strong relationship between population density and trade imbalances in manufactured goods. 

 

What about Low Wages as a Cause for Trade Deficits?

Unfortunately, it’s not possible to evaluate the role of wages directly.  This would require knowing the unit labor costs for every product imported and exported, and doing a complicated calculation to determine the average unit labor costs for the sum total of imports and exports.  However, we do know the “purchasing power parity” (“PPP,” roughly the nation’s gross domestic product divided by its population) for each nation, and PPP gives us a pretty good way to compare relative wage rates of one nation vs. another. 

In terms of PPP, the U.S. is one of the wealthiest nations in the world and, therefore, its workers are among the best-paid.  With a PPP of $48,100, the U.S. ranks fifth among the 165 nations included in the study.  Only Qatar, the Falkland Islands, Norway and United Arab Emirates have higher PPP.  So 161 of the 165 nations included in the study have lower-paid workers than the U.S.  But, since we have a trade deficit with only 51 nations, this immediately casts doubt on the claim that low wages cause trade deficits.  If lower wages cause trade deficits, then we should be experiencing trade deficits with 161 nations – not a mere 51. 

OK, maybe much lower wages are required.  So let’s divide these nations around the median PPP of $8,000 – 82 nations above the median and 83 nations below.  Surely we will find our 51 trade deficits concentrated among the low PPP nations.  Right?  That’s the theory.  Now here’s the facts:

  • Of the 82 nations above the median PPP, the U.S. had a trade deficit in manufactured goods with 32. 
  • Of the 83 nations below the median, the U.S. had a trade deficit in manufactured goods with only 19. 

Not only does this data not support the claim that low wages cause trade deficits, it seems to be solid evidence that either exactly the opposite is true or, more likely, that the cause and effect are reversed.  It may be that a large trade deficit with a nation tends to boost wages in that nation by driving up the demand for labor to fill manufacturing jobs.  As an example, consider Germany and Japan – two relatively high wage nations.  When put in per capita terms (thus adjusting for the relative size of a nation), our trade deficit with each is far larger than our trade deficit with lower-wage China.  Why?  Because their high wages are the result of a prolonged, strong demand for manufacturing labor created by our demand for their exports.  Wages in China, much newer to the stage of world trade, are rising fast.  If something besides low wages is the cause of a trade deficit (like population density?), then it’s logical to expect that high wages in the surplus country will follow, as happened in Germany and Japan and as is happening now in China.

 

What about Currency Exchange Rates as a Cause of Trade Imbalances? 

Finally, let’s examine what role, if any, currency exchange rates play in driving trade imbalances.  Economists and political leaders have been blaming “currency manipulation” by China for their enormous trade surplus with the U.S.  By keeping the value of the Chinese yuan artificially low, they claim, China’s exports are cheaper while imports into China are more expensive to Chinese consumers.  On the surface, this argument seems to make sense.  But because it seems to make sense, perhaps too little effort has been made to validate that theory.  If that theory holds water, then an examination of changes in currency exchange rates for all 165 nations should find that our balance of trade has tended to improve with those nations whose currencies rose relative to the dollar, while worsening among those nations whose currencies declined.  Here’s what actually happened in 2011:

  • Of the 165 nations studied, 99 had a stronger currency in 2011 than in 2010.  19 experienced no change in exchange rate with the dollar.  Only 46 had weaker currencies. 

That fact alone already casts doubt on the currency theory since, as noted earlier, our overall balance of trade worsened in 2011.  Since the currencies of 99 nations (60%) – including China – rose in 2011 while only 46 nations (28%) saw a decline in their currencies, the U.S. should have experienced an overall improvement in its balance of trade.  It did not.  More facts: 

  • With the 99 nations who had stronger currencies, the U.S. experienced an improvement in the balance of trade in manufactured goods with 52 of them (52.5%). 
  • With the 19 nations with unchanged currency exchange rates, the U.S. experienced an improvement in the balance of trade with 12 of them.
  • With the 46 nations who had weaker currencies in 2011, the U.S. experienced an improvement in the balance of trade with 24 of them (52%). 

So an increase in a nation’s currency was just as likely to produce a worsening of our trade imbalance as an improvement, and vice versa.  In other words, there’s absolutely no relationship between currency valuation and trade imbalance evident here. 

I’ll be the first to admit that a one-year move in currency exchange rate may not be enough to change the momentum of trade imbalances.  However, I’ve previously conducted a similar study of the effect of 18-year changes in currency exchange rates and found exactly the same thing.  (See http://petemurphy.wordpress.com/2010/11/17/study-finds-no-relationship-between-currency-exchange-rate-and-trade-imbalance/.)

How can this be?  Perhaps looking at it from another angle will shed some light. 

  • Of the 51 nations with whom the U.S. had a trade deficit in manufactured goods in 2011, 40 nations’ currencies rose in value.  Two were unchanged.  Only 9 experienced a decline in their currency.
  • Of the 114 nations with whom the U.S. had a trade surpluse in manufactured goods in 2011, 37 experienced a decline in their currency. 

From this we can conclude that currencies rise relative to the dollar in response to trade surpluses with the U.S.  However, changing exchange rates have absolutely no effect in reversing trade imbalances.  Therefore, those who pin their hopes on a rising Chinese yuan to bring manufacturing jobs home from China are going to be sorely disappointed, just as they have been as the yuan has risen in value for years.  Our trade deficit with China has only grown worse, just as our trade deficit with Japan only grew worse as Japan’s yen rose by over 300% over the past three decades. 

Conclusion:

From the United States’ 2011 trade data we can conclude two things: 

  • it’s population density that drives our trade imbalances.
  • wages and currency exchange rates play absolutely no role in those imbalances. 

I’ll be presenting some even more fascinating facts from the 2011 trade data in upcoming posts.  Unfortunately, those posts will probably have to wait for a couple of weeks.  But stay tuned!  You won’t want to miss them.


Failures of Economics

April 2, 2012

http://blogs.reuters.com/chrystia-freeland/2012/03/29/manufacturing-redux/?pending=1&cp=0#comment-2884

I found this Reuters op-ed piece by Chrystia Freeland interesting, not so much because of the reported championing of manufacturing by the director of the National Economic Council, but because it sheds light on some fundamental flaws in the field of economics.  The following sentence near the end of the piece sums it up well:

Unless you have a doctorate in economics, your intuition probably accords with Sperling’s point that building things is essential to a country’s economic well-being.

Economics is all about meeting wants and needs.  Vital economies are built around the processes of meeting those wants and needs.  It’s intuitively obvious that manufacturing plays a key role in that process.  But not to economists, for that doesn’t accord well with the real results of the practical application of their free trade theory.  How to explain away that failure?  They do it by mis-applying another theory – creative destruction.  It seems we are to believe that, through the process of creative destruction, new needs (apparently for services) will materialize out of thin air to fill the void created when the manufacturing sector of the economy was carved out and handed over to someone else.

That begs the question:  if such needs for services can materialize and result in an economy that was better than the one that relied on manufacturing, then why didn’t China (and Japan and Germany and others before them) build their economies around those needs for services, instead of plundering the manufacturing sector of our economy?  (See my comment on the op-ed piece – the 6th comment down – for more thoughts on the subject.)

And speaking of “creative destruction” – the process by which each product and service is eventually replaced by one that is more efficient and requires less labor to create and utilize – what will people do for a living, ultimately, when every product and service can be made available without any labor input at all?  It’s like other axioms of economics – that economic growth can go on indefinitely in a finite world, that mankind is clever enough to overcome every obstacle to further population growth, and so on.  Every one of them fails when tested at its limits.

How do economists respond to such challenges?  By changing the subject.  They’ve moved on from such matters to new distractions, like “game theory” and “behavioral economics.”   They can’t be bothered with the shortcomings and failures of classical and neo-classical economics.  Those issues are so “yesterday.” 

So our political leaders are stuck with failed economic axioms to guide economic policy.  Although it was obviously failed trade theory that decimated the manufacturing sector of our economy, we dare not admit to such and alter trade policy, for that would constitute an admission of failure and a case for rethinking trade theory altogether, something economists simply aren’t willing to do.  Better to tinker at the margins, boosting tax breaks for R&D and manufacturing, as though our entire manufacturing sector fled the U.S. because their insignificant tax breaks were infinitesimally too small. 

It never ceases to astonish me that, in the 21st century, the field of economics still gets a free pass on its obvious and numerous failures. 

* * * * *

Another commenter on Freeland’s piece provided an interesting link that will be the subject of my next post. 


Analysis of Trade Data Exposes Flaw in U.S. Trade Policy

March 5, 2012

No nation on earth is more devoted to the concept of “free trade” than the United States.  And no nation on earth pays more dearly for that misguided policy.  America’s trade deficit is the worst in the world – six times worse than the 2nd ranked nation – India.  Because of that trade deficit and the need to draw dollars back into the economy through the issuance of debt, its external debt is also the worst in the world – 50% worse than the next most indebted country – the U.K.

China accounts for the lion’s share of the U.S. trade deficit.  Economists and political leaders would like you to believe that our deficit with China is the result of low wages, currency manipulation and unfair trade practices because, if you believe this, then you believe that a “level playing field” can be achieved with China by addressing those issues, thus restoring a balance of trade and bringing manufacturing jobs back to the U.S.  What they don’t want you to believe is that the entire concept of “free trade,” at least in many situations, may be fatally flawed. 

For those of you who are new to this site and who haven’t read my book, the data that I present below will come as a surprise, for no economist has ever made the linkage between balance of trade and population density.  For those of you familiar with this site, the chart below is a new, concise way of presenting an analysis of U.S. trade data that exposes the real flaw in our trade policy.

I’ve just completed an analysis of our trade results with America’s top 15 trade partners, breaking down the balance of trade in goods into several categories of natural resources and manufactured products.  The following chart tracks the balance of trade in manufactured products for those 15 nations, from 2001 through 2011.  But the trade data is presented in per capita terms instead of in raw dollars in order to factor out the sheer size of nations like China.  Of course China dominates our balance of trade.  They account for one fifth of the entire world’s population.  Would the results be any different if China was actually a cluster of smaller nations?  Probably not.  So how can we tell whether our trade policy with China is any less effective than the same policy applied to a much smaller nation?  The way to do it is by dividing the balance of trade by the population of that nation and expressing it in per capita terms.

On this chart you’ll find each nation identified on the right axis, next to its 2011 data point.  Below each nation, you’ll see two numbers.  The first number is the ratio of that nation’s population density compared to the U.S.  For example, the top nation on the chart – Canada – is 0.11 times as densely populated as the U.S.  The second number is that nation’s “purchasing power parity,” a figure that approximates each nation’s GDP (gross domestic product), divided by its population.  It’s a good measure of the wealth of each nation and a good indication of wages paid there. 

The list of America’s top 15 trade partners was taken directly from the Census Bureau’s “Foreign Trade” web site.  They are determined by the total of both imports from and exports to each country and account for 96% of all U.S. trade.  Those top 15 trading partners are:

  1. Canada
  2. China
  3. Mexico
  4. Japan
  5. Germany
  6. U.K.
  7. South Korea
  8. Brazil
  9. France
  10. Taiwan
  11. Netherlands
  12. Saudi Arabia
  13. India
  14. Venezuela
  15. Singapore

With that explanation, here’s the chart:  Trade in Manfd Goods with Top 15 Partners

Some observations are in order:

  • Of these 15 nations, the U.S. has a trade deficit in manufactured goods with eight of them:  India, France, China, Mexico, South Korea, Germany, Japan and Taiwan.  Every one of these eight nations is more densely populated than the U.S.  Mexico is almost twice as densely populated.  France is more than 3 times as densely populated.  China is more than four times as densely populated.  The rest are much more so.
  • In per capita terms, our trade deficit with China is rather unremarkable.  In 2011, the deficit with Taiwan was four times worse.  The deficits with Germany and Japan were three times worse. 
  • These deficits are not one-year anomalies.  In every case, they have been consistent or worsening over this 11-year span. 
  • The worst per capita trade deficits are with wealthy nations.  Among our four worst per capita trade deficits, all of those nations rank among the top 20% of the world’s wealthiest nations.  This debunks the myth that large trade deficits are caused by low wages.  As I’ve reported before, the cause and effect is exactly the opposite of what economists claim.  High wages among these trade partners are the result of their trade surplus with the U.S. Wages in China are rising fast as their trade surplus with the U.S. expands.  The trade deficits are caused by the disparity in population density.  Wages are the result of the trade imbalance, not the cause.
  • It’s often said that a lack of competitiveness is also a cause of our trade deficit.  Yet, in per capita terms, we have a trade deficit with France, arguably the least competitive nation in the developed world, that’s nearly as large as our per capita deficit with China.  It has nothing to do with competitiveness.  It has everything to do with population density.
  • Our deficit with India, in per capita terms, is very small; yet, they’re nearly three times more densely populated than China.  Why?  It’s difficult to explain.  There was never the rush of manufacturers into India like we saw with China.  Perhaps India’s hyper-population density and accompanying poverty made corporations skeptical of India’s ability to develop into western style consumers.  Perhaps there’s a limit to the conditions that wealthy corporate executives are willing to endure in their quest to grow profits.  And now that China has cannibalized virtually all of the world’s manufacturing capacity, especially America’s, there’s little left for India. 
  • Now, turning our attention to the positive, surplus side of the chart, we find that of these seven nations – Canada, Singapore, the Netherlands, Saudi Arabia, Venezuela, Brazil and the U.K. – four are less densely populated than the U.S.:  Canada, Saudi Arabia, Venezuela and Brazil. 
  • Of the three more densely populated nations that appear on the surplus side of the chart, the one with whom we have the highest per capita surplus is also the tiniest:  Singapore.  Singapore is actually a city state, with a population of about 5 million people – smaller than some U.S. cities and metropolitan areas.  Such tiny city states represent only a thin slice of what constitutes a real economy.  In such cases, the relationship between population density and trade imbalances isn’t valid.  However, if the trade results with Singapore were rolled into the surrounding nations of Malaysia and Indonesia, the U.S. would still have a large trade deficit with those nations, just as the population density relationship would predict.
  • The Netherlands is a similar situation – a tiny state consisting of two large cities:  Amsterdam and Rotterdam.  However, with the only seaport on the Atlantic coast of Europe, the Netherlands has develped their economy around trade and financial services and enjoys a unique trade surplus in spite of their extreme population density.  Singapore and the Netherlands combined account for only 0.3% of the world’s population.
  • That leaves the U.K. as the only densely populated country of any significant size with whom the U.S. has a very slight surplus of trade in manufactured goods.  The U.K. has one of the most unique economies in the world in that they are the only nation of any significant size (in terms of population) that still manages to be a net oil exporter.  Most nations with large populations are unable to meet their oil needs from domestic sources.  This oil income, combined with the powerful financial sector of their economy, provides them with a stream of income that can be spent on imports, including imports from the U.S. – primarily civilian aircraft and pharmaceuticals. 

While these 15 nations account for the bulk of U.S. trade, the U.S. engages in robust trade with nearly every nation, and if we expand this analysis to include them, the same pattern is evident.  With most densely populated nations – including most of Asia and Europe – the U.S. suffers trade deficits in manufactured goods.  With most more sparsely populated nations – including all of South America and most nations of Africa – the U.S. enjoys a surplus of trade in manufactured goods.  With poor nations, our trade imbalance (whether a deficit or surplus) tends to be very small.  With wealthy nations, the imbalance (again, whether surplus or deficit) tends to be large.  Whether a nation is poor or wealthy has no effect in determining whether the balance will be a surplus or deficit. 

If you’re new to this site and this concept, I encourage you to read further to learn more about how population density supresses per capita consumption and, consequently, drives global trade imbalances.


Trade Deficit with China Hits Record in 2011 in Spite of Rising Yuan and Chinese Incomes

February 16, 2012

Our economists and political leaders say that the weak Chinese yuan, held at an artificially low level by China, is to blame for our trade deficit with China.  They also say that trade deficits are caused by low wages. 

The yuan ended 2011 at 6.45 to the dollar, rising 5% in 2011 and 22% since 2005.  And incomes in China have risen by 115% since 2001 to $8,400 per person.  That’s not high relative to American incomes, but it’s high enough to place China in the top 50% of nations ranked according to income. 

So in 2011 we should have seen some decline in our trade deficit with China, or at least signs that it was beginning to level off.  Right?  Well, not only did it not decline, there is no sign of it leveling off, either.  In fact, our trade deficit with China grew to a new record of $295.5 billion in 2011, blowing past the previous record set just last year by another $22 billion.  And the trade deficit in manufactured products soared to almost $322 billion.  Here’s a chart of our balance of trade with China since 2001:

China Trade

As you can see, there has been no slow-down in the growth of our trade deficit with China whatsoever.  (There was only a tiny dip in 2009 when all global trade slowed dramatically during the recession.)  How can this be?  If economists are right, with the Chinese yuan on the rise and with Chinese incomes growing dramatically, we should at least see some effect.  But there is absolutely none.

That’s because currency exchange rates have absolutely nothing to do with trade imbalances.  The only thing a rising yuan will do is make the Chinese cut costs and become more productive in order to hang onto their market share.  A leaner, more productive Chinese work force is the last thing we need to help cut our trade deficit with them. 

And while there is a relationship between incomes and balance of trade, it’s exactly the opposite of what economists have maintained, which they’d soon discover if they put a little effort into gathering actual data.  In trade with nations much more densely populated than the U.S., low incomes correlate to small imbalances of trade (including surpluses!), while high incomes correlate with high U.S. trade deficits.  That’s because it’s through exports to the U.S. that the people of badly overpopulated nations are able to raise their incomes.  It’s the very reason that, in per capita terms, our trade deficits with wealthy nations like Japan and Germany are far worse than our trade deficit with China.  Take away free trade and their huge trade surpluses with the U.S. and their incomes would decline and their unemployment would rise precipitously. 

The data is clear that trade imbalances are caused by disparities in population density which cause disparities in per capita consumption.  We have trade deficits with badly overpopulated nations not because of currency exchange rates, low incomes or a lack of competitiveness.  We have trade deficits because they consume too little while being just as productive as we are.  The only way to restore a balance of trade with such badly overpopulated nations is through the use of tariffs. 

In all likelihood, our trade deficit with China will level off in the next few years, not because of a rising yuan or rising Chinese incomes, and certainly not because of any intelligent U.S. trade policy moves, but because there’s little manufacturing left in the U.S. to cannibalize.


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