America’s Worst Trade Partner

May 4, 2013

No, it’s not China.  Our largest trade deficit, by far, is with China, but China is also a very, very large country that accounts for one fifth of the world’s population.  And it’s not Japan or Germany, with whom we suffer our second and third largest trade deficits.  Obviously, I need to define my criteria for “worst trade partner.”  I’m putting this into per capita terms.  That is, man-for-man, citizen-for-citizen, which country sucks more trade dollars out of Americans’ pockets than any other?

The hands-down winner is Ireland.  In 2012, every man, woman and child in Ireland was $5,012 wealthier because of Ireland’s $24 billion per year trade surplus with the U.S.  And Ireland has fewer than five million people.  That’s over $20,000  per year for every family of four.  And every family in America is poorer because of it.  But that’s actually an improvement over 2011, when our per capita trade deficit with Ireland set a record of $6,244.  Here’s a chart of our balance of trade with Ireland since 2001:  Ireland Trade.  The improvement in our balance of trade with Ireland in 2012 was due entirely to a slowdown in imports of pharmaceuticals from Ireland.

To put the size of our per capita trade deficit with Ireland in perspective, it’s seven times worse than our per capita trade deficit with both Germany and Japan.  And it’s almost twenty times worse than our per capita deficit with China. 

Ireland is almost twice as densely populated as the U.S., which accounts for some of this trade imbalance.  (There is a strong correlation between the population density of our trading partners and our trade imbalance with them, both in terms of whether the imbalance is a surplus or deficit, and how large the imbalance tends to be.)  But that doesn’t explain such an enormous imbalance with such a small country.  Ireland offers huge tax incentives to foreign corporations to set up shop there.  Pharmaceutical manufacturers in particular have taken advantage of it.  Never mind the fact that this tax policy bankrupted Ireland and landed them on the list of EU “PIIGS” (Portugal, Ireland, Italy, Greece and Spain).  Like those other nations, they have the EU to bail them out.  This situation constitutes a blatant unfair trade practice.  But, as with all unfair trade practices, the U.S. simply turns a blind eye. 

So, the next time you’re sick and at least try to take a little comfort in thinking that your spending for pharmaceuticals may be helping some American workers and the American economy, think again.  Our trade policy with Ireland is a good part of the reason that all of us are becoming increasingly dependent on the federal government to provide us with health care.


Another “New Normal” Employment Report

May 3, 2013

This morning the stock market is soaring on news that the economy added 165,000 jobs in April (slightly more than expected) and unemployment fell to 7.5%.  These aren’t stellar numbers.  The jobs added barely exceeded the rate necessary to keep pace with population growth, and the unemployment rate’s “detachment from reality” index (more on this later), inched down only slightly from the record high set in March.

You have to wonder:  is Wall Street reacting so positively because the news is so good or because it isn’t?  What’s really been driving this bull run on Wall Street is the Federal Reserve’s quantitative easing policy, pumping trillions of dollars into the markets.  And the Fed has tied the end of that policy to an unemployment rate of 6.5%.  Is Wall Street cheering the fact that the official unemployment rate crept down by 0.1% in April, or that it didn’t drop more?

Speaking of the unemployment rate – what’s known as “U3″ – it’s a calculation of the “employment level” divided by the “civilian labor force,” factors determined by the monthly household survey conducted by the Bureau of Labor Statistics.  It’s a simple matter to make the unemployment rate look lower than it really is by claiming that workers have dropped out of the labor force and given up looking for work.  Of course, that’s nonsense.  Whether they’re looking for work and not finding it, or have given up looking because there’s none to be found, they’re just as unemployed.  A more accurate gauge of unemployment – what I call “U3a” – holds the work force at a constant percentage of the population.  After all, everyone needs a source of income. 

Over the past two months, the “civilian labor force” has declined by 290,000 while, at the same time, the population has grown by 350,000.  This kind of creative accounting has resulted in an unemployment rate that is ever more detached from reality.  Here’s a chart of these unemployment rates:  Unemployment Chart.  And to drive home the widening gap between U3 and U3a, this month I’m introducing a new chart, what I call the unemployment “detachment from reality index” – the difference between U3 and U3a.  Here’s the chart:  Detachment from Reality Index.  As you can see, it’s barely off from the record set last month.  Instead of 7.5% unemployment, a more realistic figure is 10.5%. 

The economy isn’t getting better.  If anything, it may be getting worse, as all of the other economic indicators have been telling us.  Only an hour-and-a-half after this unemployment report was published, the monthly report of factory orders fell by 4%, corroborating other reports that show a slowing manufacturing sector. 

Even this supposedly rosy employment report had some bad news.  No jobs were added in either manufacturing or construction in April.  And the average workweek slipped by 0.2 hours. 

Don’t buy all the economic hype.  Unemployment isn’t getting better.  Our trade policy is as broken as ever and rampant immigration is aggravating overcrowding and declining per capita consumption.  I doubt that this illusion can be maintained much longer.


Analysis of Trade with America’s Top Partners Exposes Flaws in Trade Theory

April 1, 2013

An analysis of trade with America’s top fifteen trade partners in 2012 once again reveals a powerful relationship between the population density of its trade partners and its balance of trade, and very little relationship between the balance of trade and the usual suspects blamed for imbalances – low wages and currency exchange rates.

Here are America’s top 15 trade partners in 2012, based upon total imports and exports:  Top 15 Trading Partners in 2012.  These fifteen nations (out of 228 nations in the world) account for 72% of all U.S. trade.  The top three nations – Canada, China and Mexico – account for 43% of all U.S. trade.  Saudi Arabia moved from 12th in 2011 to 9th.  Singapore dropped off the list, replaced by Italy.

It should come as no surprise that a few of our major sources of imported oil appear on the list – Canada, Mexico, Saudi Arabia and Venezuela.  It’s trade in manufactured goods that’s of greater interest, since it’s there that jobs are won or lost.  So let’s see how these nations stack up in terms of trade in manufactured goods.  Here’s the list:  Trade in Manfd Goods with Top 15 Partners.  Aside from China now edging out Canada for the top spot, the list doesn’t look terribly different.

Now, let’s test the results of U.S. trade with these nations against economists theories about trade – that trade deficits tend to be the result of low wages or perhaps currencies that are artificially low, and that trade deficits tend to shrink as wages rise in the surplus nation and as their currency grows stronger, making their exports more expensive and our exports more affordable.  And let’s test these results against my own hypothesis – that it’s actually disparities in population density that drive global trade imbalances while the above-mentioned factors so favored by economists actually have little or no impact.

Population Density

Let’s begin with the latter – the effect of population density – and look at a plot of per capita balance of trade in manufactured goods vs. population density.  (It’s important to express the balance of trade in per capita terms in order to remove the sheer size of a nation as a factor.  Here’s the chart:  Per Capita Balance of Trade vs. Pop Density.  (Some of the data points have been labeled with the nation’s name, some not, for the sake of legibility.)

This is a “scatter chart,” the purpose of which is to determine whether or not a correlation exists.  I had the computer generate and insert a “trend line” for the data, including the equation that defines the line and its “coefficient of determination.”  If such a chart yields a shotgun scattering of the data, then no correlation exists, and the coefficient of determination is close to zero.  On the other hand, if the data points tend to fall along a line – the trend line – then a correlation does exist and if all the data points fall perfectly along the line then we’d have a coefficient of determination of “1″ – representing a perfect correlation.

As you can see, the data points do indeed tend to fall along a line – a lined defined by a logarithmic equation with a coefficient of determination of 0.51.  That’s a strong correlation.  Taking a closer look, we find the following:

  • There are four data points (nations) with a population density less than the United States, which is about 86 people per square mile.  They are Canada (10), Saudia Arabia (32), Brazil (61) and Venezuela (83).  The United State enjoys a surplus of trade in manufactured goods with all four of them.
  • There are eleven data points (nations) with a population denisty greater than the United States, and we have a trade deficit with all but one – by far the smallest – the Netherlands.  This isn’t surprising since the Netherlands is barely larger than the tiny city states which fall outside the boundaries of my theory (based on a rather arbitrary cut-off of 1,000 square miles).  They are excluded because cities represent incomplete economies.  They thrive primarily on services and are dependent on the surrounding countryside to complete their economies with resource production and manufacturing.  People who live in cities manufacture relatively little, since they lack the space required for manuacturing facilities.  The U.S. almost uniformly has a surplus of trade with city-states, regardless of their population density.
  • Our biggest surplus of trade in manufactured goods is with the least densely populated nation – Canada.
  • Our worse deficit (in per capita terms) is with Taiwan, which is also the most densely populated nation on the list.
  • Notice that, when expressed in per capita terms, our deficit with China no longer looks so abnormally large.  In fact, it falls right in line where you’d expect to find it.

It’s impossible to overstate the importance of this relationship between trade imbalance and population density.  Accurately predicting a surplus or deficit in 14 out of 15 cases is a very powerful correlation.  It puts into persepctive our very large trade deficit with China.  Of course it’s large; China is a very large country – one fifth of the world’s population.  It’s no wonder that we have a big deficit with China when we applied to them the same trade policy that produced the results we see with Germany, Japan, S. Korea, Taiwan, Mexico and other densely populated countries.  It’s exactly what we should have expected.

Low Wages

It’s impossible to gauge the effect of low wages directly, since the data on wages doesn’t exist and, if it did, it would vary industry-by-industry and even employer-by-employer, making the calculation of an average wage nation-by-nation a nightmare.  But the data is readily available for another factor – “purchasing power parity” (or “PPP”) – essentially a nation’s gross domestic product divided by its population - and it’s a good relative measure of how wages in one nation compare to another.  So let’s plot PPP vs. our per capita balance of trade in manufactured goods:  Per Capita Balance of Trade vs. PPP.

It’s immediately apparent that the data points are not randomly scattered, but tend to form a “V” shape, converging at a zero balance of trade as PPP falls toward zero.  The balance of trade tends to rise upward and outward – in either a positive (trade surplus) or negative (trade deficit) direction as wealth increases.  We already know that those nations on the surplus side (with the exception of the Netherlands) are all nations with population density lower than that of the U.S.  Those on the deficit side are more densely populated nations.

Because the data points fall on both the positive and negative side of the Y-axis, the computer is unable to generate an equation that describes the relationship that seems to be apparent in this chart.  But if we divide the data into two charts, it will be able to tell us the equation and just how strong the correlation may be.  So, first, here’s a chart for the data on the surplus side:  Per Capita Surplus of Trade vs. PPP.   There is a very strong correlation between our trade surplus in manufactured goods and a nation’s wealth.  As we deal with wealthier nations, our trade surplus (if we have a surplus) tends to be larger.  This makes sense.  Wealthier nations, where people earn higher wages, have more disposable income to spend on products both imported and produced domestically.  But, again, it’s important to note the role that population density has played here.  Not only can these people afford to buy more products, but they’re also able to utilize those products because they live in uncrowded conditions that foster high per capita consumption.

It’s also important to note there that, though these are wealthy nations, none are as wealthy (with wages as high) as the United States, with a PPP of $49,800 in 2012.  What this means is that every nation on this chart has a trade deficit with a nation (the U.S.) that actually has higher wages, not lower.  This debunks the notion that low wages cause trade deficits.

Now let’s look at the trade deficit side.  Here’s that side of the chart, with trade deficits now expressed as positive numbers so that a trend line equation can be calculated:  Per Capita Trade Deficit vs. PPP.  What we see here is exactly the same thing – that if we have a trade deficit with any given nation, it will tend to be larger if that nation is a wealthy nation.  While the correlation isn’t as strong – the coefficient of determination is .36 vs. .73 for the surplus nations – there’s still a fairly strong correlation.  Here it’s important to note that every nation on this side of the chart is more densely populated than the U.S. – most of them much more densely populated.  The per capita consumption of these people is stunted by overcrowding, leaving them incapable of consuming enough products to result in a trade surplus for the U.S.  Thus the trade deficit.  But why does the deficit tend to be larger for wealthier, densely populated nations?  These nations have grown wealthy because of their large trade surplus in manufactured goods, not just with the U.S. but with the whole world.  Poorer, densely populated nations are poor because of their overcrowding and because they haven’t been able to elevate their standard of living by manufacturing for export.

So far, it seems we can conclude that low wages don’t necessarily cause trade deficits.  And we can conclude that our trade imbalance (whether its a surplus or deficit) with poor, low wage nations tends to be small, but grows as partner nations become wealthier.  Whether the imbalance is a surplus or deficit seems determined not by wealth and incomes, but by population density relative to the United States.

Economists may argue that those deficits are due to some other factors – currency manipulation perhaps (and we’ll examine that one soon) – but as wages rise, our trade deficit will shrink as our exports become more affordable and their exports become more expensive for us.  Sounds logical, doesn’t it?  Alright, let’s see what the data says.  Let’s begin with a look at how the wealth of these fifteen nations (as measured by PPP) has changed relative to the U.S. since 2001.  U.S. PPP has risen by 38.1% during that period.  So, if a trade partner experiences the same increase in PPP, then their wealth relative to the U.S. hasn’t changed.  If it rises by 48.1%, then the wealth (and wages) in that nation have risen 10% relative to the U.S.  Using that methodology, here’s how the wealth of these nations has changed relative to the U.S. since 2001:  %Change in PPP Relative to U.S..

As you can see, eleven of our top fifteen trade partners experienced faster growing wealth (as measured by PPP) than the U.S., led by China with a growth rate of 210% in excess of the growth rate in the U.S.  On the other hand, four nations – all European nations – experienced a decline in wealth relative to the U.S., led by Italy with a decline of 20%.  If economists are right, then we should see an improvement in our balance of trade with nations that are growing more wealthy relative to the U.S., and a worsening of our trade balance with those nations where wealth (and wages) are declining.  Let’s take a look at the facts.  Here’s a chart that plots that change of wealth since 2001 vs. the change in our per capita balance of trade in manufactured goods:  %Change in PPP vs. %Change in Balance of Trade.

Here we see a shotgun-like scatter of data.  In trying to insert a computer-generated trend line, I got lines sloped in both directions depending on the type of line – linear, exponential, logarithmic and power.  To emphasize the randomness of the data, consider the following:

  • Eleven of these fifteen top trade partners grew in wealth (as measured by PPP) relative to the U.S., led by China with a growth of 210%.  Of these eleven, the U.S. experienced a worsening of its balance of trade with seven of them – the opposite of how economists say it should have responded to rising wages in those nations.
  • Four nations experienced a decline in wealth relative to the U.S., led by Italy with a 20% decline.  (The others are also European nations – the U.K., the Netherlands and France.  Germany was the only European nation among the five nations to experience an increase in wealth relative to the U.S.)
  • Of these four nations that experienced a decline in wealth (and wages) relative to the U.S., our balance of trade worsened with three of them.  It improved with the Netherlands.  This is in line with what economists predict should happen.
  • Overall, our balance of trade responded to changes in wealth among our top fifteen trade partners as economists would predict in only seven instances – less than 50% of the time.

From this data, we can conclude two things regarding the effect of wealth and wages among our trade partners: (1) The imbalance of trade – both surpluses and deficits – will tend to be larger with wealthier nations.  Whether the imbalance is a deficit or surplus has little to do with wages, but is determined by population density.  (2) Over the 12-year span studied, changes in wealth don’t predict which way our balance of trade will change.  Rising wealth is no more likely to improve our balance of trade than it is to erode it.

Currency Exchange Rates

Finally, let’s see what effect changes in currency exchange rates may have played in changing our balance of trade with these top fifteen trade partners.  Economists say that a stronger currency relative to the U.S. dollar should make a nation’s exports more expensive for American consumers and should make American products more affordable for consumers in that nation.  Thus, our balance of trade should improve.  Deficits should get smaller and surpluses should grow.

If we plot this on a bar chart, with two bars representing the percent change in balance of trade in manufactured goods and the percent change in currency, we should see both bars on the same side of the line, if economists are correct.  A positive change in the value of a nation’s currency should correspond with a positive change in our balance of trade with that nation.  So let’s see what really happened.  Here’s the chart:  %Change in Balance of Trade vs % Change in Currency.

Not only do economists seem to be wrong on this issue, the exact opposite seems to be true.  Growth in a nation’s currency exchange rate vs. the dollar is actually far more likely to correspond with a worsening of our balance of trade – not an improvement.  As you can see, economists’ prediction held true with only four nations – India, Canada, Brazil and the Netherlands.  In the case of India, a slightly weaker currency corresponds with a huge increase in our trade deficit.  In the other three cases, a strengthening of the currency corresponds with an improvement in our balance of trade.   In a 5th case – Saudi Arabia – our balance of trade in manufactured goods improved dramatically while the currency exchange rate held steady.  (The Saudi currency is pegged to the dollar.)  With ten of these fifteen nations, the change in our balance of trade was exactly the opposite of what economists predict.  The most blatant example is Venezuela.  In spite of their currency devaluing by 495% since 2001, our balance of trade in manufactured goods with them actually improved by 184%!  In the case of Italy, the Euro rose by 31% but our balance of trade with Italy worsened by 42%.  In the case of China, their currency rose by 24% while our balance of trade with them worsened by 319%!

Once again, economists are wrong and have the cause and effect relationship backwards.  Instead of currency rates affecting the balance of trade, what appears to be happening is that the balance of trade affects currency exchange rates.  If a nation has a trade surplus with the U.S., their currency strengthens.  If a nation has a trade deficit with the U.S., its currency tends to weaken.

Conclusion:

An analysis of trade between the U.S. and its top fifteen trade partners, accounting for 72% of all American exports and imports, proves that the balance of trade in manufactured goods is determined by the population density of the nation in question.  Almost without fail, America experiences a trade deficit with nations more densely populated, and a trade surplus with nations less densely populated.

Claims that low wages cause trade deficits are false.  Our worst trade deficits are with densely populated, wealthy nations.  Densely populated nations that build their economies on manufacturing for export experience growth in their wealth and wages.

Claims that low currency values cause trade deficits are also clearly false.  The cause and effect is just the opposite.  A trade deficit with a particular nation tends to drive the value of that nation’s currency higher.  A trade surplus tends to drive that nation’s currency value down.

Those who claim that if we’re just patient enough, rising incomes and currencies will reverse our trade deficits, haven’t tested their theories against actual data.

Because the majority of the world’s population lives in densely populated conditions, the U.S. is doomed to a massive trade deficit in manufactured goods and a loss of manufacturing jobs as long as it places its faith in flawed free trade theory that fails to account for the role of population density in driving trade imbalances


Trade Deficit with Japan Grows 22% in 2012

March 18, 2013

We now turn our attention to Japan, America’s 4th largest trade partner (by total imports and exports), accounting for 5.7% of all U.S. trade in 2012.  In 2012, the U.S. imported $141 billion in manufactured goods from Japan, an increase of $16.7 billion, while our manufactured exports to Japan rose by only $6.3 billion.  The result was that our deficit in manufactured goods with Japan worsened by 12.6%, contributing the lion’s share to an overall worsening of our trade balance with Japan of 22%.  If you’re president Obama, with his myopic focus on exports, the $6.3 billion increase can be ballyhooed as great news – as long as you’re dumb enough to turn a blind eye to the much worse increase in imports. 

It should come as no surprise that automobiles account for $37 billion of the imports from Japan, dwarfing the next biggest category of products – motor vehicle transmission and power train parts, at $6.2 billion.  That’s a $7 billion increase in imports of Japanese vehicles over 2011.   In comparison, the U.S. exported less than $1 billion worth of automobiles to Japan in 2012.  No suprise.  The Japanese auto market is so badly stunted by overcrowding that even Japanese auto companies have trouble selling vehicles there. 

Here’s a chart of our overall balance of trade with Japan, dating back to 2001:  Japan Trade

In response to my suggestion that the U.S. needs to change its trade policy and return to the use of tariffs to assure a balance of trade, people sometimes reply that “tariffs don’t work; they’ll just raise their tariffs too and we’ll lose all our exports.”  Or I hear that “you can’t do that; it’ll start a war.”  Well, here’s a link to an article that appeared on Reuters just a couple of days ago, reporting on Democratic lawmakers’ alarm that Japan might be included in Obama’s trade talks:

http://www.reuters.com/article/2013/03/15/us-usa-japan-autos-idUSBRE92D14A20130315

“In an industry with razor-thin profit margins, the elimination of the 2.5 percent car tariff (as well as the 25 percent truck tariff) would be a major benefit to Japan without any gain for a vital American industry, leading to more Japanese imports, less American production and fewer American jobs,” the lawmakers said in a letter to Obama.

… Levin (Michigan senator Carl Levin) … played a major role in persuading the Obama administration to renegotiate auto provisions of a free trade pact with South Korea.

The revised pact, which took force one year ago, allowed the United States to keep its 2.5 percent tariff on South Korean autos until the fifth year and to keep its 25 percent tariff on South Korean light trucks until the eighth year, when it will begin to be phased out.

Has anyone noticed that you don’t see any Japanese or Korean trucks on American roads (aside from Japanese-brand pickup trucks that are built in the U.S.)?  That’s because 25% tariffs have been extremely effective in keeping them out, preserving market share for American truck manufacturers.  And have you heard any Americans complaining about that?  Has anyone complained that shipping costs are too high because we don’t have enough cheap Japanese and Korean trucks in our trucking fleets?  Of course not.  People do complain about shipping costs, but that’s because of the high price of fuel.  Virtually no one in America even knows that we maintain high tariffs on Japanese and Korean trucks, with the exception of people employed in the truck-manufacturing industry – people who owe their jobs to those tariffs.

Why don’t we take the same approach with automobiles?  Since the Japanese and Koreans won’t buy our cars, why don’t we raise our tariffs on theirs?  Why don’t we take this same approach to all of our trade imbalances with other nations? 

As I’ve done in my previous articles on our top three trade partners – Canada, China and Mexico, let’s now take a look at how our trade balance with Japan has responded to changes in Japan’s currency and Japan’s purchasing power parity – or PPP – analagous to Japanese wages.  Economists are fond of blaming trade deficits on artificially low currency values and on low wages.  Here’s a chart of our trade deficit in manufactured goods with Japan vs. the yen-dollar exchange rate:  Japan Trade vs Exchange Rate

As you can see, while the yen held steady in value in 2012, our trade imbalance with Japan worsened dramatically.  In fact, over the past eleven years, while the yen has appreciated in value by 37% – rising in value from 124.4 yen per dollar to only 79.22 yen – our trade deficit worsened by 14%, rising from $80 billion in 2001 to $91 billion in 2012.  This is exactly the opposite of what economists say should happen.

In the meantime, Japan’s PPP has increased by almost 40%, rising from $25,900 in 2001 to $36,200 in 2012.  Of course it’s gone up.  The Japanese are getting richer from their growing trade surplus.  In the meantime, Americans’ median income has actually declined.  Here’s a chart of our trade deficit in manufactured goods with Japan vs. the rise in their PPP:  Japan Trade vs PPP

Once again, we see that the “low wages” theory doesn’t hold water.  Our trade deficit with Japan gets worse as their wages have risen.  And, in terms of PPP, Japan ranks among the top 16% of the wealthiest nations on earth.  They’re not a “low wage” nation at all.  In fact, our trade deficit in manufactured goods with Japan, expressed in per capita terms,  is three times worse than our deficit with China, in spite of the fact that wages in Japan are four times higher than Chinese wages.  How do you explain that? 

The explanation is that low wages and currency valuations have almost nothing to do with trade imbalances, while they have everything to do with disparities in population density between the U.S. and its trading partners.  So far, with America’s top 4 trading partners, accounting for 48.7% of all of our trade, population density accurately predicts the balance of trade with all four, while the currency valuation theory is batting only .500 and the low wages theory is batting .250.

In my next two articles, we’ll focus next on our 5th largest trading partner – Germany, followed by an overall assessment of trade with our top 15 trading partners.  Stay tuned.


The ‘Malo’ Half of NAFTA

March 15, 2013

In the previous two articles, we examined trade with America’s two largest trading partners (by total imports and exports):  Canada and China.  We saw that while the U.S. has a fairly large trade deficit with Canada, all of it and more is due to the fact that Canada is by far our largest source of imported oil.  The U.S. actually enjoys a healthy surplus of trade in manufactured goods with Canada, making Canada the good half of NAFTA – the North American Free Trade Agreement.

Now we turn to the other half of NAFTA – Mexico.  Mexico is a fairly densely populated nation – almost twice as densely populated as the U.S.  Mexico isn’t a wealthy nation but, by world standards, they’re not poor either.  With a per capita purchasing power parity (PPP) of $15,300, Mexico ranks 83rd out of 228 nations, placing them in the top 40%.  However, 51% of its people live in poverty, though it’s not for lack of jobs.  Mexico currently enjoys a rather low unemployment rate – 4.5% – a rate that is the envy of the United States.

Here’s a chart of overall trade with Mexico, through 2012:  Mexico Trade.

Since 2007, our overall trade deficit with Mexico has moderated somewhat, dropping from $73 billion to $61 billion in 2012.  But all of that decline is due to a drop in oil imports.  Our deficit in manufactured goods rose in 2012 to $46.1 billion, only $0.8 billion shy of the record deficit set in 2007.  Expressed in per capita terms, that’s a deficit of $401 with every Mexican citizen.  In 2011, our per capita deficit with Mexico in manufactured goods was our 14th worst – worse than China, with whom our per capita deficit is “only” $258.

So, of our top three trading partners in 2012 (who together account for 43% of all U.S. trade), the U.S. enjoys a surplus in manufactured goods with only Canada, a nation with a population density of less than ten people per square mile.  The U.S. suffers large deficits with China and Mexico, nations with population densities of 361 and 151 people per square mile respectively.  You should be starting to get suspicious that population density may be a factor.

As we did with Canada and China, let’s consider the other factors that economists like to blame for trade deficits – weak currencies and low wages.  The following is a chart of our trade deficit in manufactured goods with Mexico vs. the peso-dollar exchange rate:  Mexico Trade vs Exchange Rate.

As the peso has weakened from 9 per dollar in 2001 to 14 pesos per dollar in 2012, our trade deficit in manufactured products with Mexico has worsened dramatically, almost doubling during that 11-year span.  This is the effect that economists would predict but, so far, the exchange rate theory is only batting 2 for 3, while the population density theory is batting a thousand.  Mexico’s weakening currency may explain why our enormous deficit with Mexico is so out-of-proportion to their population density. 

And I won’t deny that low wages also play a role.  Many American companies have set up shop just across the border for that very reason.  Here’s a chart of our balance of trade in manufactured  goods with Mexico vs. their PPP:  Mexico Trade vs PPP.

As you can see, Mexico’s PPP (analagous to wages in Mexico) has risen by over 50% since 2001.  But, instead of our balance of trade improving as economists would predict, our trade deficit in manufactured goods with Mexico has nearly doubled.    If the “low wages” theory really held water, we should be seeing at least some improvement in our balance of trade with Mexico as their incomes have risen dramatically.  Instead, it has gotten much worse.  Once again, we see that economists have the cause and effect backwards.  Mexicans are growing wealthier because of their surplus with the U.S., instead of rising incomes in Mexico improving our balance of trade.   So far, economists’ “low wages” theory is batting zero.

Taken together, the 55% decline in the value of the peso since 2001 essentially cancels out the 50% rise in PPP (and wages) during the same period in Mexico.  So traditional economic theory should predict that our trade imbalance with Mexico should have held steady instead of nearly doubling.  The real explanation for that is that the effects of the population density disparity are becoming more pronounced the longer we attempt to apply free trade in a situation where it’s a hopelessly inappropriate trade strategy. 

Free trade with sparsely populated Canada – the good half of NAFTA – makes sense and has been enormously beneficial to the U.S.  Free trade with Mexico – the “malo” (or bad) half of NAFTA – has been a trade policy disaster, draining hundreds of thousands of manufacturing jobs from the U.S.  And it’s getting worse as the Obama administration stands idly by and renegs on its promise to fix NAFTA.

Next up, our 4th largest trading partner:  Japan.


U.S. Trade with China: A Trade Policy Disaster

March 13, 2013

In my last article, we examined trade with Canada, America’s largest trading partner.  We saw that free trade with Canada, a nation with a population density of less than 10 people per square mile, is a resounding success.  America actually enjoys a significant surplus of trade in manufactured goods with Canada. 

Today we turn our attention to America’s second largest trading partner (in terms of total imports and exports) – China.  China is a large nation, almost exactly the same size as Canada.  But, while Canada has a population of 34 million people, China’s population is 1.35 billion people – 40 times as many – yielding a population density of 361 people per square mile.  They are more than four times as densely populated as the U.S. and 37 times more densely populated than Canada.

China is still a relatively poor nation, with a per capita purchasing power parity (PPP, essentially their GDP divided by the population) of $9,100 per year.  (America’s is approximately $48,000 per year.)  But their economy is the fastest growing in the world, and their PPP is double what it was only ten years earlier.  In fact, China now ranks 118th out of 228 nations in terms of its PPP.  At today’s rate of growth, they will rank in the top 50% of nations next year in terms of wealth. 

It’s a common misconception that American manufacturers fled for China in order to take advantage of cheap labor there.  The end results certainly seem to corroborate that theory, but that’s not really how it happened.  American manufacturers did indeed flock to China to set up shop, not to save a few bucks on cheap labor (much of which is offset by high logistics costs), but to position themselves in an untapped market of 1.35 billion new consumers.  But, once there, Chinese consumption was very slow to develop, leaving all those newly established Chinese manufacturers with lots of product to sell.  Naturally, they exported it back to the U.S.  American manufacturers, already running on thin profit margins and dependent on maintaining market share for their survival, were driven out of business in droves.  The belief among economists has been and continues to be that, if we’re just patient enough, the Chinese will develop into American-style consumers and the whole process will reverse itself.

Folks, it ain’t happenin’!  It’s not going to happen – ever.  With each passing year our trade deficit with China worsens dramatically.  The year 2012 was no different.  Here’s a chart of trade with China since 2001, shortly after they were granted “most favored nation” status by the U.S. and were admitted into the World Trade Organization:  China Trade.  In 2012, our overall trade deficit with China worsened by another $20 billion.  Of course, the Obama administration, with its myopic focus on exports, is quite pleased with the $9.7 billion increase in exports to China (of which, only $2 billion were manufactured products).  They completely ignore the $26.3 billion increase in imports from China – and the corresponding loss of manufacturing jobs. 

This is an economic and trade policy disaster for the U.S.  Our trade deficit with China alone has cost us five million manufacturing jobs and probably an equal number of ancillary, supporting jobs.  What’s going wrong?  Economists can’t admit that there may be a flaw in free trade theory that makes free trade with badly overpopulated nations a losing proposition.  Instead, they have two popular scapegoats.  The first is that the Chinese currency is kept artificially low, making their exports cheaper and making our exports more expensive to Chinese consumers.  It sounds logical.  But, if the theory is valid, then any strenghtening of their currency should begin to reverse our trade deficit with China or, at the very least, begin to slow its growth.  Here’s a chart of our trade deficit in manufactured goods with China, plotted against the Chinese yuan – U.S. dollar exchange rate:  China Trade vs Exchange Rate

Since 2005, the exchange rate has fallen steadily from 8.22 yuan to the dollar to 6.31.  (A drop in the exchange rate means that the yuan has gotten stronger.)  That’s a drop of 23.3% – enough that we should begin to see some effect.  But, aside from an improvement in the trade deficit in 2009 that was due entirely to the global slow-down in trade resulting from the deep global recession, there’s been absolutely no slowing of the growth in our trade deficit.  Does the stronger yuan hurt Chinese manufacturers’ profits?  Absolutely.  But does it make them stand idly by and watch their U.S. market share erode?  Of course not.  They respond as our own manufacturers do when profits are squeezed; they cut costs in order to hold onto (and even grow) their market share.  The result is that our trade deficit with China has actually gotten worse as their currency has strengthened.

We saw the same thing happen in trade with Japan.  While the yen-dollar exchange rate plunged from approximately 300 in the late ’60s to about 90 today, our trade deficit with Japan, instead of shrinking as economic theories suggest should happen, actually exploded.  The data shows that economists have the cause and effect backwards.  Instead of trade deficits falling in response to a falling exchange rate, it’s actually the exchange rate that falls in response to a worsening trade deficit. 

So much for that theory.  What about the claim that low wages in China are to blame for our trade deficit?  Again, it sounds logical.  But then it’s also logical that rising wages in China should be reversing or at least slowing the growth of our trade deficit with China.  Here’s a chart of our trade deficit in manufactured goods with China vs. China’s PPP, a good approximation of Chinese incomes:  China Trade vs China PPP.  Instead of our balance of trade improving while China’s PPP grew by 348%, our deficit in manufactured goods has exploded by 380%, from $83 billion in 2001 to $315 billion in 2012! 

And, by the way, if low wages are what’s fueling our trade deficit with China, then how does one explain that, in per capita terms, we have much larger trade deficits with fifteen other nations (including Ireland, Switzerland, Israel, Taiwan, Denmark, Austria, Japan, Germany, S. Korea, Mexico and Italy), all of whom have much higher incomes than the people of China?

How can this be?  It seems completely illogical – that is, until you understand that, once again, economists have the cause and effect backwards.  Instead of rising incomes producing an improvement in our balance of trade, incomes are rising in China because of our trade deficit.  Incomes in China will continue to rise as China drains more money from the American economy.

So, economists, now you’re left with nothing – no explanation whatsoever for why the same trade policy so highly successful with Canada has yielded such disastrous results with China.  The answer lies where economists dare not go – overpopulation.  People living in crowded conditions are incapable of consuming products at the same rate as Americans or Canadians.  On a per capita basis, Canadians import 135 times more from the U.S. than the Chinese.  The problem is not that Americans import too much from China, but that China imports far too little from the U.S.  They can’t.  Their overcrowding renders them incapable of absorbing their own manufacturing capacity, let alone importing more from the U.S.

When it comes to America’s trade deficit, China gets all of the attention simply because of the sheer magnitude of their trade imbalance.  But in upcoming articles we’ll see that our trade results with China are consistent with other overpopulated nations and are exactly what should have been expected when we applied a failed trade policy to a nation with one fifth of the world’s population.  China isn’t the problem.  The problem is our own trade policy, rooted in a flawed, antiquated and failed 19th century theory.


Rebuttal to The State of The Union

February 14, 2013

Tuesday night’s State of The Union address by President Obama will likely go down in history as one of the least inspiring – mostly a themeless chronicling of the woes we face, followed by a brief attempt at cheerleading an agenda for a brighter tomorrow, seemingly led by one who hadn’t listened to the first part of his own speech. 

It began in the usual fashion:

Fifty-one years ago, John F. Kennedy declared to this Chamber that “the Constitution makes us not rivals for power but partners for progress…It is my task,” he said, “to report the State of the Union – to improve it is the task of us all.”

Tonight, thanks to the grit and determination of the American people, there is much progress to report. After a decade of grinding war, our brave men and women in uniform are coming home.

Good.  That’s a relief.  OK, what else have you got? 

After years of grueling recession, our businesses have created over six million new jobs.

Uhhh, wait a minute, that’s just a little disingenuous.  Yes, the economy has added six million new jobs, but we’ve also added that many workers to the labor force, thanks to growing the population by twelve million.  In other words, no progress has been made in putting the unemployed back to work, and our labor force participation rate is left incrementally lower than it was four years ago.  That’s not really good news, Mr. President.  Got anything else?

We buy more American cars than we have in five years, and less foreign oil than we have in twenty.

In other words, sales of American cars hasn’t grown in five years, while our population has grown by 15 million people, so our per capita consumption of American cars has actually declined even further.  And our consumption of foreign oil has declined because people can no longer afford bigger cars.  Yeesh.  I’m still looking for some evidence of “progress” here.  Anything else?

Our housing market is healing, our stock market is rebounding, and consumers, patients, and homeowners enjoy stronger protections than ever before.

The stock market is rebounding, thanks mostly to the Fed’s quantitative easing programs to buy up treasuries and mortgage-backed securities, effectively crowding other investors out of those markets into the only market left – the stock market.  It has little to do with economic recovery.  And are you sure about that housing market part?  A rise of a few percent from a 50% decline is scant evidence of a recovery, and just yesterday morning the Mortgage Bankers’ Association announced that mortgage applications fell 10% last week, erasing much of the previous gains. 

Together, we have cleared away the rubble of crisis, and can say with renewed confidence that the state of our union is stronger.

Stronger than it was at the depths of the Great Recession, that’s for sure, but weaker than it was before the onset of the recession and, one could argue (especially based upon what’s happened to our national debt), that it’s weaker than it’s been in decades. 

And that was it.  That was the extent of the “much progress to report.”  One paragraph, the first paragraph, in a speech approximately 80 paragraphs long.  Most of the remainder of the speech dealt with slowing the growth of our national debt, raising revenue and cutting spending, sharing the burden and trying to breathe life back into the middle class.  In other words, the minutae involved in managing our decline. 

The key to reinvigorating out economy is bringing manufacturing jobs back home, and that fact isn’t lost on the president:

Our first priority is making America a magnet for new jobs and manufacturing.

After shedding jobs for more than 10 years, our manufacturers have added about 500,000 jobs over the past three. Caterpillar is bringing jobs back from Japan. Ford is bringing jobs back from Mexico. After locating plants in other countries like China, Intel is opening its most advanced plant right here at home. And this year, Apple will start making Macs in America again.

Remember the six million jobs the president boasted of adding during his first term?  Half a million – or 8.3% – were in manufacturing.  Sounds good until you realize that the manufacturing sector accounts for 12% of our economy.  So, in other words, while we’ve grown the economy by stoking it with population growth, manufacturing’s share of the economy has actually declined.  And for every example of companies bringing manufacturing jobs back home that the president cited, I could give you two examples of companies outsourcing more jobs.  For every step forward there have been two steps backward that the president doesn’t mention. 

There are things we can do, right now, to accelerate this trend. Last year, we created our first manufacturing innovation institute in Youngstown, Ohio. A once-shuttered warehouse is now a state-of-the art lab where new workers are mastering the 3D printing that has the potential to revolutionize the way we make almost everything. There’s no reason this can’t happen in other towns. So tonight, I’m announcing the launch of three more of these manufacturing hubs, where businesses will partner with the Departments of Defense and Energy to turn regions left behind by globalization into global centers of high-tech jobs. And I ask this Congress to help create a network of fifteen of these hubs and guarantee that the next revolution in manufacturing is Made in America.

Mr. President, there’s no mystery about how to revive manufacturing.  Stop importing everything we consume and leave something for us to manufacture.  Government-funded showpieces that will vanish as soon as the funding dries up (and it will dry up) isn’t the way to do it. 

The president then launched into a long laundry list of ideas for putting Americans back to work – supporting research, achieving energy independence, infrastructure modernization, support for homeowners, pre-school education, upgrading high school curriculums and making college more affordable.  All of it followed by this:

Our economy is stronger when we harness the talents and ingenuity of striving, hopeful immigrants. And right now, leaders from the business, labor, law enforcement, and faith communities all agree that the time has come to pass comprehensive immigration reform.

After rattling on for half an hour about the challenges of putting Americans back to work, the president then slaps all American workers in the face by intimating that Americans are too stupid to do the job and we need to import people who are better-equipped.  He’s falling back on economists’ age-old macroeconomic crutch:  we need more people.  In other words, what business  needs is more customers.  So much for the preceding issues of unemployment, over-dependence on foreign oil and global warming.  To hell with all of that!  Business wants more total sales volume, so we’ll give it to ‘em regardless of the fact that it will exacerbates all of the overpopulation-driven problems he just spent 45 minutes addressing. 

And speaking of exacerbating our problems, then comes this:

To boost American exports, support American jobs, and level the playing field in the growing markets of Asia, we intend to complete negotiations on a Trans-Pacific Partnership. And tonight, I am announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union – because trade that is free and fair across the Atlantic supports millions of good-paying American jobs.

Mr. President, has it escaped your attention during your four years in office that, thanks to the drive toward free trade, we now have a trade deficit with the EU of $116 billion (the final tally for 2012) – a figure that’s seven times worse than it was just 15 years ago?  And you want to make it worse?  Are you nuts?

The second terms of the last two presidents both ended the same way – in recession.  Clinton left office with the stock market in a state of collapse.  Bush left office with the stock market and the global economy and financial system in a state of collapse.  Both made the mistake of attempting to cut the federal deficit without addressing the root cause of deficit spending – the trade deficit.  Now, under intense pressure to unwind the deficit spending necessary to stave off the near-depression he inherited, President Obama is headed down the exact same path.  How much worse will things be next February after he’s sucked more taxes out of the economy and put less of that money back into it, while turning us into more of a trade patsy and exploding our population with more immigrants?  How bad will things get before he finally, mericfully leaves office?


Trade Deficit Falls by $10.1 Billion in December. Good News?

February 8, 2013

The Bureau of Economic Analysis announed this morning that the U.S. trade deficit fell dramatically in December to $38.5 billion – down from $48.6 billion in November.  (See the full report.)  Exports were up and imports were down sharply.  Experts hailed this as good news – further evidence of improvement in the economy. 

Just don’t look at the report too closely.  Yes, exports were up.  Exports of manufactured products rose by $2.2 billion, but from a fairly depressed level.  Here’s a chart of how manufactured exports have tracked since President Obama set a goal in January of ’10 of doubling exports in five years:  Manf’d exports vs. goal.  The rise in exports was a step forward, but in the one-step forward and one-step-back pattern that persisted throughout 2012.  The rest of the $3.9 billion jump in exports is explained by oil exports ($0.9 billion), services exports ($0.6 billion) and a small increase in food exports ($0.1 billion). 

Imports fell a sharp $6.2 billion.  Oil imports fell by $3.8 billion.  Not a surprise, when you realize that oil stockpiles are at historically high levels – 372 million barrels (as announced by the Energy Information Administration on Wednesday).  Manufactured imports declined by $2.3 billion.  That would be good news if it could be explained by some change in trade policy that was bringing manufacturing back home.  But no such change in trade policy has taken place.  The only change in trade policy in 2012 was the enactment of a new free trade pact with South Korea.  The result?  While our overall trade deficit fell by 3.5% in 2012, our trade deficit with South Korea worsened (as I predicted, contrary to the president’s claim that this was a big win for the U.S.) by 25%. 

  A more likely explanation for the drop in imports is a slow-down in the economy, just as we saw imports decline at the onset of the recent “Great Recession.”  This drop in imports is just further evidence (on top of the 4th quarter decline in GDP followed by an up-tick in unemployment in Janaury) of an economy that’s stalled and on the brink of decline. 

Take a look at this chart of our monthly trade deficit:  Balance of Trade.   Now take a look at this chart of the balance of trade in manufactured goods:   Manf’d Goods Balance of Trade.  We’re beginning to see clear evidence of a decline in our overall trade deficit but, at the same time, the worsening trend continues in manufacturing (in spite of the slight improvement in December).  The former is evidence of a slowing economy.  The latter is a continuation of the long-term decline in manufacturing that’s been going on for decades, thanks to trade policy that doesn’t account for the role of population density disparities in driving global trade imbalances. 

By the way, we are now a full three years into President Obama’s five-year plan to double exports.  In order to meet that goal, exports need to be rising at a rate of 15% per year.  How’d we do in 2012?  Exports rose only 4.4%.  Most of that increase can be explained by inflation alone.  December marked the 17th month in a row that overall exports have lagged the president’s goal.  And it’s the 15th month in a row that manufactured exports have failed to keep pace.


Unemployment Rises in January

February 1, 2013

The January jobs report, released this morning by the Bureau of Labor Statistics (BLS), was disappointing all the way around.  Nonfarm jobs fell to 157,000 from the December upwardly-revised reading of 196,000.  Private sector jobs rose by 166,000 – short of the consensus forecast of 185,000. 

Unemployment rose by 0.1% to 7.9%.  (If the government was being honest about it, the unemployment rate actually rose to 10.5%.  If they were really, really honest about it, unemployment actually rose to 18.7%.)  The average workweek fell by 0.1 hours.  Per capita employment edged down slightly for the third month in a row – the first time that’s happened since November, 2010 when the economy was still struggling to emerge from the recession. 

On Wednesday, we learned that GDP actually contracted in the 4th quarter.  Economists shrugged it off, attributing it to a one-off plunge in defense spending.  But today’s report may begin to corroborate that the economy is, in fact, struggling once again. 

Here’s the charts of the employment data I’ve been tracking:  Unemployment Chart, Labor Force & Employment Level, Unemployed Americans, Per Capita Employment.  These four charts paint a picture of an economy that’s been stalled for the past few months.  Factor in Wednesday’s GDP report and you have an economy teetering on the brink of recession. 

Not a surprise.  As President Obama pointed out early in his administration, resuscitating American manufacturing is the key to putting the economy back on solid footing.  But here’s an excerpt from today’s report:

Manufacturing employment was essentially unchanged in January and has changed little, on net, since July 2012.

Why should it have changed?  Obama has done absolutely nothing to fix the trade policy that has largely destroyed the manufacturing sector of the economy.  He promised he would, but it was a lie. 

This stubbornly high rate of unemployment is exactly what one would expect when you understand the role our growing population has in eroding per capita consumption (and, with it, per capita employment) and the role that attempting to trade freely with badly overpopulated nations has in fueling our trade deficit. 

* * * * *

Here’s a breakdown of the change in employment reported this morning by the BLS:

  • Retail trade:  + 33,000
  • Construction:  + 28,000
  • Health care:  + 23,000
  • Wholesale trade:  + 15,000
  • Mining:  + 6,000
  • Manufacturing:  no change
  • Financial activities:  no change
  • Professional & business services:  no change
  • Leisure & hospitality:  no change
  • Government:  no change
  • Transportation & warehousing:  – 14,000

 


Unemployment Rises 0.1% in December

January 4, 2013

http://www.bls.gov/news.release/empsit.nr0.htm

This may get a bit rambling because much has happened since the holidays, and to break these issues into separate posts would only assure that all but the most recent would quickly scroll out of view.

So let’s begin with the big economic story of the day – the employment report.  The headlines read something like “Economy adds 155,000 new jobs; unemployment rate holds at 7.8%.”  Regarding the latter claim, it’s only technically true because the figure is rounded to only one decimal place.  Unemployment actually rose by 0.1%, from 7.75% in November to 7.848% in December.  That’s thanks to a paltry increase in the employment level compared to the growth in the labor force.  Unemployment remains stuck in the “new normal” of about 8% (the official “U3″ rate, manipulated to understate unemployment by claiming that more and more people drop out of the labor force) or, more accurately, around 10-1/2% when the labor force is held steady at a percentage of the population, which is constantly growing.

Here’s the chart:  Unemployment Chart  (Notice how “U3″ has been trending down, creating the illusion of a recovering economy, while “U3a” is holding steady around 10.5% – a more accurate depiction of a sour economy stuck in neutral.)

Per capita employment, the employment level as a percentage of the population, remains near its lowest level of the recession.  Here’s the chart:  Per Capita Employment

And take a look at this chart:  Labor Force & Employment Level.  Notice that the employment level remains several million below the start of the recession, while the population and labor force have grown by 13 million and 6 million respectively.  In other words, not a single worker (out of six million) added to the labor force in the last five years has found work.  In fact, three million workers have lost their jobs in the last five years.

And don’t be fooled into thinking that things will improve this year.  Though the “fiscal cliff” deal made permanent the Bush tax cuts for about 98% of Americans, it didn’t stop the payroll tax from rising by 2%.  So virtually every American worker took a 2% pay cut on January 1st.  That’s likely to shave about 1% from GDP – not good for an economy that, by most estimates grew at only a 1% rate in the 4th quarter.  In other words, the economy is likely to stall for that reason alone, not to mention the big spending cuts that were delayed by only two months.

But there’s bigger reasons brewing to be pessimistic about the economy.  We’re facing another debt ceiling crisis in less than two months.  The last time this happened, in August of ’11, the stalemate in Congress very nearly drove the nation to default.  Markets plunged violently and the economy very nearly sank into recession again.  This time, it could happen.  President Obama has already said that he won’t negotiate over the debt ceiling, and House Republicans have already signaled that they won’t raise it without getting big spending cuts in return.

Secondly, the Federal Reserve is getting cold feet about its quantitative easing, which has pumped $3 trillion into the economy in the last few years.  Fed governors are worried about unintended consequences.  It may be no coincidence that their concern is intensifying as the debt ceiling fight approaches.  They may be worried that the Fed’s massive holdings of treasuries may make default seem less scary to lawmakers, who may rightly believe that the U.S. could choose to default selectively on only the debt held by the Fed, sparing foreign investors from any pain.  That would be a truly dangerous precedent.  So, although one of my “long shot” predictions for 2013 was that the Fed may reverse course, only 4 days into the year we’re already hearing rumblings that it could happen.  Any of these scenarios – big spending cuts, another near- or actual default, or an end to quantitative easing by the Fed – would surely drive the economy into recession.

The economy is painted into a corner from which there is no escape without tackling the trade deficit that put it there in the first place.  Mark my words, the economic gimmicks that have been used to create an impression of a recovery following the Great Recession have just about been exhausted.  The economy we have right now – the new normal of high unemployment – may be as good as it gets for a long time.


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