It’s Official: Obama’s Trade Policy a Complete Failure

March 8, 2015

Shortly after taking office in 2009, President Obama traveled to Mexico to fulfill a campaign promise to address the failings of NAFTA (the North American Free Trade Agreement).  The trip was a major embarrassment.  Mexico sent him home with his tail between his legs and nothing but new Mexican tariffs to show for his efforts.  (Since then, our trade deficit with Mexico has worsened by 42%.)  In the wake of that spanking, he turned his trade focus to exports, challenging his economic advisors to make America into a Germany-like export powerhouse.  In January of 2010, he vowed to double American exports within five years.

On Friday, the government released the trade figures for January, 2015, so the results are in.  The president’s strategy of focusing on exports instead of imports has been a total failure.  In January of 2010, total U.S. exports were $143.7 billion per month.  Five years later, they have risen to only $189.4 billion – an increase of only 31.8%.  The president has fallen short of his goal by almost $100 billion per month, or $1.2 trillion per year.  As if to punctuate that failure, exports declined in January by $5.6 billion to the same level as December of 2012.  Here’s a chart that graphically displays the extent of this failure:  Obamas Goal to Double Exports.

That’s total exports.  What really counts are exports of manufactured goods, since that’s where jobs are concentrated.  There the news is even worse.  In January of 2010, we exported $86 billion worth of manufactured goods.  Five years later, that figure has risen to only $109.1 billion, an increase of only 26.9%, falling short of the goal by $62.6 billion.  In fact, manufactured exports haven’t risen one bit in almost three years.  Here’s the chart:  Manf’d exports vs. goal.

With this trade strategy, President Obama took the easy way out, preserving his popularity around the G20 punch bowl instead of serving the best interests of American workers.  This trade policy never had a chance of succeeding.  Germany is an export powerhouse because it has America as its trade patsy.  There is no country that would serve as a similar patsy for us.  Exports are determined by foreign demand, over which we have no control whatsoever.  Imports, on the other hand, are completely within our control but, as Obama found out in Mexico, that ruffles some feathers.  He’s had six years to fix our broken trade policy and he’s completely whiffed on what is arguably the most critical issue facing the American economy.  He deserves to go down in history as an utter failure.

Where is the media on this issue?  Will no one hold his feet to the fire on this broken promise?


If the economy is adding so many jobs, where’s the evidence?

March 6, 2015

If there’s one thing that I’ve learned from the two most recent jobs reports (for January and February, the latter released this morning), it’s what a fabrication the report has become, with numbers concocted to fit the administration’s narrative about the strength of the economy.  There’s no better evidence of this than the January jobs report.  If you’ve followed this blog, you may have noticed that I didn’t even comment on the jobs report last month.  That’s because the numbers were preposterous, fabricated to “fit” the Census Bureau’s sudden addition of a million people to our population at the end of 2014 (an adjustment the Census Bureau makes from time to time).  In order to “fit” the new population figure, the January jobs report claimed that the employment level (taken from the household survey) soared by 760,000 in January.  In order to prevent this from making the unemployment rate drop by an unbelievable amount, the jobs report also claimed that over a million people suddenly decided to rejoin the labor force in January when only 600,000 had rejoined the labor force in all of 2014.

Turning to today’s report for February, the establishment survey supposedly showed an addition of 295,000 jobs.  However, the employment level rose by only 96,000.  In spite of that small increase in the employment level, the unemployment rate dropped by two tenths to 5.5%.  Why?  Because the labor force contracted by 178,000.  Come on!  Demographic forces don’t shift so willy-nilly.  If over a million people flooded back into the labor force in January because jobs were becoming so plentiful, then that’s a trend that would have continued into February instead of mysteriously and suddenly reversing to yield a nice decline in unemployment.  And the headline jobs numbers for January and February haven’t been corroborated by ADP, the payroll processing firm, who estimated that job growth slowed in February to 220,000.

If the demand for labor was so strong, then that should translate into wage growth as the supply of labor begins to dwindle.  It hasn’t.  In February, wages rose by only 3 cents to an average of $24.78 per hour.  For “production and non-supervisory employees,” wages didn’t rise at all.  In the past twelve months, wages rose by only 2.0%, barely keeping pace with inflation.  February’s increase is an annual rate of less than 1.5%.

An increase in demand for labor is typically preceded by a growing workweek.  Employers add workers when the workload rises and overtime pay justifies the hiring of additional workers.  There’s no evidence of that happening.  The average workweek has remained flat at 34.6 hours for the past five months.  The manufacturing work week was flat at 41.0 hours and manufacturing overtime actually edged down by o.1 hours.

Nor is this supposed strong job growth supported by other economic data.  Construction spending has been slowing.  Factory orders are declining.  The trade deficit in goods is steadily worsening.  First-time jobless claims have been rising for the past month.  And layoff announcements have begun to rise.

Even the Federal Reserve seems unconvinced by the jobs data, continuing to hold off on interest rate hikes until it sees more solid evidence of job growth, especially in the form of wage growth.

Former Labor Secretary Robert Reich was always an advocate for American workers.  This evening, Labor Secretary Thomas Perez was interviewed by Judy Woodruff on the PBS Newshour.  (http://www.pbs.org/newshour/bb/job-gains-continue-wages-stubbornly-stagnant/)   I was struck by how he came across not as an advocate for American workers, but as a shill for administration policy, actually suggesting that job growth would be stronger if Republicans would only get behind Obama’s immigration policy.  I was eating dinner and nearly choked!

It will be interesting to see how much longer the administration can continue this narrative of strong job growth in the face of other data that tells a completely different story.


America’s Top 15 Trading Partners in 2013

February 20, 2015

Here’s a chart showing America’s top 15 trade partners (in terms of the percentage of total imports and exports) in 2013:  Top 15 Trading Partners in 2013.  First, some general observations are in order.

  • There are 229 nations on earth.  These fifteen nations alone account for nearly three quarters of all U.S. trade.
  • These fifteen nations represent approximately one half of the world’s population.
  • Those not well-versed in U.S. trade data are probably surprised to see Canada at the top of the list.  It’s not such a surprise when you learn that Canada is America’s largest supplier of oil and gas.  Canada’s share of U.S. trade rose in 2013 to 16.4% from 16.1% in 2012.
  • Second on the list is China – not such a surprise.  China’s share of U.S. trade also rose in 2013 to 14.6% from 14% in 2012.
  • Third is Mexico, with their share of U.S. trade rising to 13.2% from 12.9% a year earlier.
  • These three nations – Canada, China and Mexico – account for about 44.2% of all U.S. trade.
  • Japan, fourth on the list, saw its share of U.S. trade slip from 5.7% to 5.3% in 2013.
  • South Korea leapfrogged ahead of the United Kingdom on the list, rising to sixth place while the U.K. slipped to seventh.
  • France rose from 10th place in 2012 to eighth place in 2013, while Brazil and Saudi Arabia each slipped a notch.
  • Venezuela, 14th on the list in 2012, fell off the list in 2013 and was replaced by Switzerland.

The above list is based on total imports and exports of all goods and services.  But what really matters is manufactured products, since jobs are concentrated in that category.  Exports add jobs to an economy, and imports take them away.  A trade deficit in manufactured products represents a net loss of jobs.  So let’s turn our focus to that category of trade.  I should note here that, from this point on, trade imbalances will be expressed in per capita terms in order to factor out of the equation the sheer size of nations.  If the U.S. has a deficit of $1 billion with a nation of one million people and a deficit of $100 billion with a nation of 100 million people, it would be wrong to conclude that the people of the latter nation are a bigger drag on our balance of trade, since the people of both nations export $1,000 more to the U.S. than they import from us.

Of these fifteen nations, twelve are more densely populated than the U.S. and three are less densely populated.  With the three less densely populated nations, the U.S. enjoys a surplus of trade in manufactured products with all three – Canada ($1,988 per person), Brazil ($112 per person) and Saudi Arabia ($595 per person).

On the other hand, of the twelve nations more densely populated than the U.S., we suffer a trade deficit in manufactured goods with all but one of them – The Netherlands.  The Netherlands has an unusual economy.  As the only nation in Europe with a seaport on the Atlantic coast, it’s economy is heavily focused on trade, buying from the U.S. and then re-selling to other nations.  This is the reason that the U.S. enjoys a healthy surplus with The Netherlands.  Of the remaining eleven nations more densely populated than the U.S., our per capita trade deficits with them rank as follows:

  1. Switzerland:  -$1,859
  2. Germany:  -$822
  3. Taiwan:  -$706
  4. Japan:  -$696
  5. S. Korea:  -$496
  6. Mexico:  -$335
  7. Italy:  -$319
  8. China:  -$259
  9. France:  -$208
  10. U.K.:  -$30
  11. India:  -$11

Surprised?  If you’ve read Five Short Blasts, then you’re not surprised at all.  You understand how population density (and almost nothing else) drives trade imbalances.  When expressed in per capita terms, our enormous trade deficit with China (enormous because of its sheer size and population) seems rather mundane.  Others are much worse because they are much more densely populated than China.  In fact, if we plot our per capita trade deficit in manufactured goods versus population density, we find that the data follows a line that describes a logarithmic decay in our balance of trade as population density rises:  Per Capita Balance of Trade vs. Pop Density.

As you can see, trade with nations less densely populated than the U.S. (about 86 people per square mile) will almost surely be beneficial to the U.S. and produce a trade surplus.  Trade with more densely populated nations will result in a trade deficit and a drag on the U.S. economy.  The U.S. began trading freely with the other nations on this list long before we began trading freely with China in 2000.  For those who understand the role of population density in driving trade imbalances, it would have been easy to predict the results – a huge trade deficit.  In fact, the results of our trade policy with China fall very neatly along that line.

Some argue that trade deficits are caused by low wages in places like China.  Look again at the above list.  Low wages?  Not in Switzerland.  And not in most of the other nations on that list.  In fact, wages in China have risen dramatically and our deficit with them has only gotten worse.  To better understand the real relationship between wages and trade, take a look at this chart that plots PPP (purchasing power parity, analogous to average wages) vs. our balance of trade with our top fifteen trade partners:  Per Capita Balance of Trade vs. PPP.  The truth is that when trading with very poor nations (where wages are very low), we experience neither a large trade deficit or surplus.  As you can see, the relationship between trade imbalance and the wealth of nations forms an almost perfect “V”.  On the right side of the chart (which represents trade surpluses), the per capita surpluses grow larger as the wealth of our trading partner increases.  On the left side of the chart (representing trade deficits), the deficits with wealthy nations are larger than those with poor nations.

When you think about it, this makes sense.  Those nations on the right side (the surplus side) of the chart are less densely populated nations.  Their citizens are capable of consuming products and they are resource-rich, enabling them to produce products and have a self-sufficient economy.  Because they are wealthy, they are able to import products from America.  The right side of the chart, however, is populated with very densely populated nations where their citizens have insufficient space to consume at a high level, and they are resource-poor.  They are heavily dependent on manufacturing for export to sustain viable economies.  Poor people can’t buy and import products.  That’s why there are no big trade deficits (in per capita terms) with poor nations.  Once manufacturing is introduced into their economies, however, wages begin to rise and they are then able to begin importing some products.  That’s why the trade deficits are larger with wealthier nations – because our trade deficit has made them wealthier.  It should be noted, however, that the trade deficit we have with them is never reversed.  Regardless of how wealthy they become through manufacturing for export, it is still impossible for them to consume at a high level.

China is a good case in point.  Trade with China started at a low level.  Once it started, wages in China began to grow and they have the fastest-growing economy in the world.  But, as wages have risen in China, our trade deficit with them has actually accelerated instead of moderating, as the low-wage theory would predict.  It has accelerated because the Chinese are incapable of consuming at a high enough level to restore a balance of trade.  Contrast this with a poor, sparsely-populated country.  If manufacturing is introduced there, we will have a trade deficit with them for a brief period of time, but wages will quickly rise as their labor supply is quickly exhausted, and their wealth will quickly enable them to begin importing American goods.  A balance of trade is soon restored.

All of this illustrates just how foolish it is to apply free trade policy equally to both sparsely-populated and densely-populated countries and expect the same results.  Free trade with badly overpopulated nations is a sure-fire loser, guaranteed to produce large trade deficits and to devastate the manufacturing sector of the economy.  It has nothing to do with low wages; nor does it have anything to do with currency valuations, which I’ll cover in an upcoming post.  Our enormous trade deficit is driven almost entirely by attempting to apply free trade policy to nations that are severely overpopulated.

 


Trade Deficit in Manufactured Goods Soars to New Record

February 5, 2015

http://www.bea.gov/newsreleases/international/trade/2015/pdf/trad1214.pdf

The trade deficit news, released by the Bureau of Economic Analysis this morning (see the above link) couldn’t have been much worse.  The headline number was bad enough.  The deficit rose unexpectedly in December to $46.6 billion – the worst showing in over two years.  From 2012 through 2013, the overall trade deficit had been trending in a slightly positive direction.  But through 2014, it has once again taken a turn for the worse.  Here’s the chart:  Balance of Trade.

But the news gets even worse when you examine the details.  The deficit in manufactured products soared to $52.8 billion – shattering the previous record of $49.8 billion, set only four months earlier.  Here’s the chart:  Manf’d Goods Balance of Trade.  The growth in this deficit was driven by a $2.5 billion rise in imports and a $0.9 billion contraction in exports from the previous month.  In spite of the president’s vow to double exports in five years (a goal set in January, 2010), exports have risen by only $0.3 billion since March, 2012.  (Here’s the chart:  Manf’d exports vs. goal.)  To keep pace with the president’s goal, they needed to grow by $53.7 billion.  If they had, we’d now have a trade surplus and we’d be enjoying full employment, rising incomes and prosperity.  Instead, our economy is now hemorrhaging over $600 billion per year thanks to the president’s trade policy failure.

There’s more bad news in the report, which I’ll address in a future post.


Real Per Capita GDP Growth Slows to 1.4% in the 4th Quarter

January 31, 2015

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The government announced yesterday that fourth quarter GDP growth slowed from 5.0% in the third quarter to only 2.6% in the fourth.  That’s a dramatic slowdown – worse than analysts expected, and the stock market reacted accordingly.

But what matters to you is not the size of the pie, but the size of your slice.  Thanks to the president’s immigration policies, a lot more people are beginning to crowd around the table, shrinking your slice.  Each quarter, in conjunction with tracking per capita GDP, I also track the rate of increase in the population.  Check out what’s been happening in the past year compared to the previous 13 years of the century:  % change in population (quarterly).  As a result, the growth in real (adjusted for inflation) per capita GDP slowed to 1.4% in the 4th quarter.  Here’s a chart:  Real Per Capita GDP.

Since the end of 2007, real per capita GDP has risen only 3%.  That’s an annual rate of growth of only 0.4% – barely any growth at all, and that’s if you believe the government’s inflation calculation.  No wonder incomes are stagnant when the economy is too.

One of my predictions for 2015 was that GDP growth would be sub-2% for the year and would be on the brink of recession by the end of the year.  This 4th quarter report already gets us close.


“The shadow of crisis has passed.” Or has it?

January 21, 2015

Last night, at the beginning of what can best be described as a victory lap, President Obama began his State of the Union message by declaring that “…the shadow of crisis has passed …”  The crisis he spoke of included lots of things, but foremost was the economy which, at the time he inherited it, was indeed in a full-blown crisis.  Perhaps two decent quarters of GDP (gross domestic product) growth are enough for him to declare “mission accomplished,” but has the crisis passed or has it merely been swept under the rug?

Three sentences later, he asked, “Will we accept an economy where only a few of us do spectacularly well?”  Yeah, that pretty accurately sums up the state of the economy.  But that’s not stuff worthy of a victory lap, so he then went on to make some claims that merit closer scrutiny.

  • “We believed we could reverse the tide of outsourcing, and draw new jobs to our shores. And over the past five years, our businesses have created more than 11 million new jobs.”  The implication here is that we did, in fact reverse the tide of outsourcing and bring eleven million jobs home.  If only it were so.  The fact is that, while the economy has grown by 15% in real (inflation-adjusted) terms in the last five years, the trade deficit in manufactured goods has widened by 72%.  The only explanation for that is that the “tide of outsourcing” has actually gotten worse.  That’s no surprise when you look at Obama’s record on trade, especially the terrible deal he signed with South Korea.  And “eleven million new jobs?”  According to the household survey, the employment level has grown by only 9 million.  And, during those five years, the population has grown by 11.4 million.  In other words, almost all of the growth in the employment level is due purely to population growth, and not a matter of putting people back to work.  In fact, during those five years, of the 18.3 million Americans who were out of work in January, 2010, only 3.2 million have been put back to work.
  • “More Americans finish college than ever before.”  That’s because we have more Americans than ever before.
  • “… we’ve seen the fastest economic growth in over a decade … a stock market that has doubled and health care inflation at its lowest rate in 50 years.”  We have had two good quarter of GDP growth, preceded by a really bad quarter at the beginning of 2014, but the president didn’t mention that.  The best in the past decade?  That’s not saying much when you look at the past decade.  The stock market has doubled thanks to the Federal Reserve pumping $4 trillion into the bond market, crowding investors out of that market, leaving the stock market as the only place to invest.  And health care inflation is at its lowest rate in 50 years because overall inflation is also down that much.  Relative to everthing else, especially stagnant wages, the inflation in health care is still pretty bad.
  • “Wages are finally starting to rise again. We know that more small-business owners plan to raise their employees’ pay than at any time since 2007.”  Wages are rising – barely – until expressed in real (inflation-adjusted) terms. In those terms, they’re stagnant.  And planning to raise wages isn’t the same thing as actually raising them.
  • “We set up worker protections, Social Security, Medicare, Medicaid to protect ourselves from the harshest adversity. We gave our citizens schools and colleges, infrastructure and the Internet, tools they needed to go as far as their efforts and their dreams will take them.  That’s what middle-class economics is: the idea that this country does best when everyone gets their fair shot, everyone does their fair share, everyone plays by the same set of rules.”  True, we did all that.  Then we signed the Global Agreement on Tariffs and Trade, initiating a trade regime that completely undermined all of the aforementioned programs, deprived American workers of their “fair shot” and gave away millions and millions of our best jobs.  Is that “middle-class economics?”
  • “Of course, nothing helps families make ends meet like higher wages. That’s why this Congress still needs to pass a law that makes sure a woman is paid the same as a man for doing the same work.”  While I agree that women should be paid the same as men, this would do nothing to raise wages.  No company is going to raise its overall cost of labor.  If forced to equalize the pay between men and women, companies will simply lower the wages for men.  The only thing that can drive wages higher is a higher demand for labor, like we’d have if we really did turn the tide on outsourcing.
  • “… to make sure folks keep earning higher wages down the road, we have to do more to help Americans upgrade their skills.”  Here we go again.  Job training as a solution to unemployment.  No one ever takes note of the fact that we lost our manufacturing jobs to people who were uneducated and practically devoid of job skills.
  • “…  we still live in a country where too many bright, striving Americans are priced out of the education they need.”  That’s because far too many of the seats in our college classrooms are filled with foreign students.
  • “… 21st century businesses, including small businesses, need to sell more American products overseas. Today, our businesses export more than ever, and exporters tend to pay their workers higher wages.”  We don’t sell more American products overseas because so many countries are so badly overpopulated that they can’t even consume their own productive capacity.  Yes, we export more than ever, but not much more.  In the meantime, imports have exploded, draining our economy of those manufacturing jobs that the president admits pay more.  In the past five years, manufactured exports have grown by $27 billion per month.  But imports have grown by $47 billion – all thanks the president taking the chicken’s way out on trade and deluding himself into thinking that exports can be grown by just wishing it so.
  • “I’m asking both parties to give me trade promotion authority to protect American workers with strong new trade deals from Asia to Europe that aren’t just free but are also fair.”  Following this assertion, the president admitted that trade deals have gone badly for American workers.  And now he wants to double down on that trade policy.  (Mr. President, if it doesn’t make any sense to continue the same policy with Cuba that has been a proven failure for 50 years, why does it make sense to continue pursuing trade deals that have been proven a failure for just as long?)  There is no “free” trade.  There is no “fair” trade.  There is only trade, and trade with overpopulated nations is a sure-fire loser.  But bend over America.  Here comes more of it!
  • “… 95 percent of the world’s customers live outside our borders. We can’t close ourselves off from those opportunities.”  This is the very heart of our trade problem – the pursuit of more customers – customers capable of producing more than they consume.  That’s good for companies who couldn’t care less where their products are manufactured, as long as they sell more products.  But it’s an absolute disaster for American workers and the American economy.
  • “More than half of manufacturing executives have said they’re actively looking to bring jobs back from China.”  We’ve heard this for years, but how many of them actually do it?  Very, very few.
  • “I want Americans to win the race for the kinds of discoveries that unleash new jobs: converting sunlight into liquid fuel; creating revolutionary prosthetics, so that a veteran who gave his arms for his country can play catch with his kids again.”  We do win those races, but every time we do, the manufacturing of those new products very quickly ends up in some badly overpopulated country.

No, the crisis hasn’t passed.  Nothing has been done to fix the problems that caused it in the first place – our trade deficit and our use of population growth as a crutch for economic growth.  In fact, these issues have gotten worse.  The crisis has been swept under the rug and will slither back out sooner than most people – especially the president – think.


Unemployment Rose in December, “Detachment from Reality Index” Hits Record Level

January 13, 2015

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

The Labor Department reported on Friday (see the above link to the report) that the economy added 252,000 jobs and that unemployment fell by two tenths to 5.6% in December.  But the report wasn’t all good news.  Analysts noted that hourly earnings actually fell by five cents in December.  And the labor force participation rate fell too.  (Here’s a chart:  Per Capita Employment.)

When you look more closely at the details, you begin to understand why earnings and the labor force participation rate fell (signs of a weak labor market) when the other headline numbers were so good.  The following is the bad news that escaped the headlines:

  • The employment level – the number of people employed according to the household survey (and not the establishment survey which produced the 252,000 jobs figure) – rose by only 111,000 – the second consecutive month that that figure was weak, following growth of only 71,000 in November.
  • The decline in unemployment was once again due to the “smoke and mirrors” tactic of claiming that 273,000 people actually left the work force in December, in spite of the fact that population growth actually adds about 100,000 workers per month.  (If the Labor Department is to be believed, the labor force is actually smaller than it was in March.)
  • Not included in the employment report is the fact that the Census Bureau did a correction to its estimate of the U.S. population in December, resulting in a population that grew by 610,000 in December instead of the usual monthly growth of about 200,000.

Roll the above factors together and you find that the number of unemployed Americans actually grew in December:  Unemployed Americans.

A more accurate gauge of unemployment – one in which the labor force grows along with a growing population – shows that unemployment actually rose by one tenth to 9.3% unemployment in December.  Because of this, my unemployment “detachment from reality index” (the difference between an accurate gauge of unemployment and the official number) actually hit a new record in December.  Here’s the chart:  Detachment from Reality Index.

Recent economic data (like durable goods orders, mortgage applications, housing starts and manufacturing activity) have hinted at a cooling economy.  More evidence of this is found between the lines in Friday’s December employment report.


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