Recession Continues in 2nd Quarter of ’08, Now Entering 4th Consecutive Quarter

July 31, 2008

http://www.reuters.com/article/ousiv/idUSN3043337220080731?sp=true

The recession that began in the 4th quarter of 2007 continued in the 2nd quarter of this year and is now entering its 4th consecutive quarter. 

“Wait a minute!”, you may be saying.  “GDP grew at an annual rate of 1.9% this past quarter.  How can you call this a recession?”  The classic definition of a recession is two consecutive quarters of decline in GDP.  But that’s a terrible definition.  A much better definition is declining per capita chained GDP – in other words, GDP adjusted for inflation and population growth.  If this figure declines, then that means that every American’s share of the economy is getting smaller. 

In the 2nd quarter of ’08, per capita chained GDP declined 2.6%.  While total GDP grew at an annual rate of 1.9%, inflation rose at an annual rate of 4.2%.  So chained GDP fell by 2.3%.  And since the population grew during the 2nd quarter by about 900,000 people, or about 0.3%, then add that to the drop in chained GDP for a decline in per capita chained GDP of 2.6%.  This was the third consecutive quarter of decline.  Many experts expect at least two more quarters of such decline. 

By far, the biggest contributor to the decline is the trade deficit.  Eliminating the trade deficit would boost GDP by 5.7%.  Cutting legal immigration would also boost per capita chained GDP by 0.1% by slowing the growth in the number of “capitas.” 

Here’s some key excerpts from the article:

An emergency dose of government stimulus helped the economy grow at a 1.9 percent annual rate in the second quarter …

… Revised data from the Commerce Department released with the second-quarter figures on Thursday showed national output shrank in the final quarter of 2007…

… The moderation in core prices came despite a jump in overall prices of 4.2 percent …

… Payrolls have declined for six straight months, and analysts expect a drop of 75,000 to be reported for non-farm payrolls in July.

And matters are getting worse.  Just today, first time unemployment claims rose to 458,000 this week.  That’s an annual rate of about 15.5% of the entire labor force applying for unemployment every year. 

How bad will things have to get before the government acknowledges that our trade policies are unsustainable?


Good News: Illegal Immigrants Leaving

July 31, 2008

http://www.cis.org/trends_and_enforcement

The linked article is from the Center for Immigration Studies.  It’s a report of their findings regarding changes in the immigrant population.  It concludes that, based upon census results that find that the population of illiterate Hispanic immigrants is shrinking, that it is the population of illegal immigrants that is actually declining, a reasonable assumption.  The CIS is a an organization that is dedicated to influencing national policy toward reduced immigration, so one could argue that this is a self-serving report.  However, one could also argue that such a report tends to diminish concern about illegal immigration; thus, it wouldn’t be in the interest of CIS to publish it if it were not true.  So, all things considered, I tend to believe the report as a factual study.  Decide for yourself.  It it’s true, this is indeed very good news and is solid evidence that enforcement is working and that it needs to be sustained and even intensified. 

The following are the key findings of the study:

  • Our best estimate is that the illegal immigrant population has declined by 11 percent through May 2008 after hitting a peak in August 2007.
  • The implied decline in the illegal population is 1.3 million since last summer, from 12.5 million to 11.2 million today.
  • The estimated decline of the illegal population is at least seven times larger than the number of illegal aliens removed by the government in the last 10 months, so most of the decline is due to illegal immigrants leaving the country on their own.
  • One indication that stepped-up enforcement is responsible for the decline is that only the illegal immigrant population seems to be affected; the legal immigrant population continues to grow.
  • Another indication enforcement is causing the decline is that the illegal immigrant population began falling before there was a significant rise in their unemployment rate.
  • The importance of enforcement is also suggested by the fact that the current decline is already significantly larger than the decline during the last recession, and officially the country has not yet entered a recession.
  • While the decline began before unemployment rose, the evidence indicates that unemployment has increased among illegal immigrants, so the economic slow-down is likely to be at least partly responsible for the decline in the number of illegal immigrants.
  • There is good evidence that the illegal population grew last summer while Congress was considering legalizing illegal immigrants. When that legislation failed to pass, the illegal population began to fall almost immediately.
  • If the decline were sustained, it would reduce the illegal population by one-half in the next five years.

We DO NOT Import $700+ Billion Worth of Oil!!!

July 30, 2008

This is starting to drive me nuts.  T. Boone Pickens, in his ad about our dependence on foreign oil, included a statement that we are sending over $700 billion to foreign countries every year.  That’s true, but IT’S NOT ALL FOR OIL!!!  Less than half is for oil.  The rest represents our trade deficit in manufactured goods. 

Now I’m hearing this repeated everywhere.  During a campaign stop today, even McCain repeated this misunderstanding – that we’re sending $700 billion to foreign oil producers, “much of which can end up in the hands of terrorists,” he said.  Unbelievable!  Even one of our presidential candidates doesn’t understand even the basics about our trade deficit.  He gets his economic information from ads on TV, and it’s not even accurate. 

Everyone, please, watch the Pickens ad carefully!  You’ll see that he doesn’t say that this money is spent on oil.  Is that any reason to be less concerned?  Actually, we should be much more concerned!  At least the deficit in oil doesn’t also include a loss of eight million manufacturing jobs! 

Our trade deficit is, by far, the single greatest factor behind the destruction of America’s economy.  It merits enough attention for people to at least understand the very basics of the problem.


Report Details Huge Toll of China Trade Deficit

July 30, 2008

http://www.reuters.com/article/politicsNews/idUSN2935619520080730?sp=true#sl_CommentsInputAnchor

A report released by the Economic Policy Institute reveals just how damaging “free” trade with China has been for American workers.  In fact, I believe the report even understates the damage.

The U.S. trade deficit with China cost 2.3 million American jobs between 2001 and 2007, the Economic Policy Institute said on Wednesday in a report likely to fuel debate about free trade ahead of November elections.

Even when they found new jobs, workers displaced by job loss to China saw their earnings decrease by an average of $8,146 each year because the new jobs paid less …

I believe the job losses are actually twice as high.  Do the math.  Our annual trade deficit with China is about $250 billion.  Experts say that 2/3 of the cost of products is labor.  That means that about $164 billion worth of jobs have been lost.  If you assume each such job paid $40,000 per year, that’s a total of 4.2 million jobs, not 2.3 million.  And that’s just trade with China.  Trade with other overpopulated nations accounts for another $250 billion of the trade deficit.  That’s yet another 4.2 million jobs.  A total of 8.4 million high-paying manufacturing jobs lost to idiotic trade policies based on 18th century economic theories.  That’s enough jobs to employ the entire work force of the state of New York.

It’s time for those theories to be tossed onto history’s scrap heap of failed theories.  And it’s time to give their economist proponents the heave-ho as well.  We need a new breed of economists willing to remove the rose-colored glasses and return to the basics of balancing our trade books.


Tide Turning on Globalization?

July 30, 2008

http://www.usatoday.com/money/world/2008-07-29-trade-tallks-collapse_N.htm

First of all, in an article I posted yesterday, I predicted that the U.S. would cave in to the demands of China and India in the “Doha round” of trade negotiations at the WTO (World Trade Organization).  I’ll be the first to happily admit that I was wrong!  As reported in the above article, the talks completely collapsed yesterday, and some say they may not be revived for years, if ever.  Is it possible that the tide is turning on globalization?  Could it possibly be that U.S. leaders are beginning to recognize the incredible damage that’s been done to our economy by parasitic, overpopulated nations? 

We can only hope.  There’s one particularly revealing paragraph in this article that deserves comment:

The talks’ failure may mark a watershed after two decades of increasing globalization. The collapse comes against the backdrop of a weakening global economy and growing opposition to foreign trade and the associated high-profile job losses in the U.S. The Doha Round, named for the Qatari capital where the talks began in November 2001, was designed to benefit poorer nations by reducing trade-distorting farm subsidies. The U.S. and Europe would reduce their generous payments to farmers, it was hoped, in return for broader access to developing countries’ markets for industrial goods.

This is an unusually frank admission that free trade has been harmful to the U.S. economy and that the real agenda of these talks was not to advance the concept of free trade but to benefit poorer nations.  I’ve said over and over again that this is the real agenda of the WTO, to transfer America’s wealth around the world and that it does this by actually enforcing protectionism for two thirds of its member states. 

The following paragraph merits comment as well:

… The issue that scuttled the talks involved a demand by India and China for the right to increase tariffs if food imports surged. Both countries have several hundred million small-scale farmers whose livelihoods would be threatened by larger, more efficient U.S. and European producers.

Oh, I see, it’s OK for China and India to protect domestic production.  They demand the right to raise tariffs if imports surge.  What about the $250 billion of imports (from China alone, in excess of exports) that have wiped out millions of high-paying manufacturing jobs in America?  If America so much as utters a peep of complaint, we’re mocked as “protectionists!” 

It’s time to fight fire with fire and bring back the tariff policies that the U.S. relied upon for the first 171 years of its history to protect domestic industry from such predatory practices.  It’s time to eliminate the trade deficit.  The “developing world” (especially China) likes to brag that it has “decoupled” from the U.S. economy.  It’s time for them to prove it.  Let’s wean them from America’s free trade breast. 


Economists: America’s Worst Villains?

July 29, 2008

http://www.city-journal.org/2008/18_3_economics.html

America is on the brink of what may be history’s greatest economic collapse, similar to but greater in magnitude than the pre-Nazism collapse of Germany. And we have economists to thank – economists advising our leaders and formulating economic policy. This article is a good summary of the sorry state of modern economics. It’s pretty lengthy, so I’ll just comment on a few noteworthy passages, especially the point dealing with free trade.  (It should be noted that the author of this article, Guy Sorman, is a French economist and that France enjoys a large trade surplus with the United States.  No suprise that he’s a big fan of free trade!)

The uncontrolled printing of currency destabilized Weimar Germany, facilitating the rise of Nazism.

History is repeating itself in the U.S. today. The uncontrolled printing of currency to counter the effects of our enormous trade deficit is undeniably destabilizing America. The only question is what will arise in America when the economic collapse happens. Will it survive at all?

Opening economies and promoting trade have helped reconstruct Eastern Europe after 1990 and lifted 800 million people, many of them in China, Brazil, and a now-license-free India, out of poverty. Even in Africa and the Arab Middle East, nations that have embraced capitalism have begun to escape from the terrible underdevelopment that has long plagued them.

Behind all this unprecedented growth is … a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. … No longer does economics lie; no longer would Baudelaire be able to write that “economics is a horror.” For the mass of mankind, on the contrary, it has become a source of hope.

Here, the effects have been correctly identified, but not the cause. All of this rise in wealth around the globe has been bought and paid for by America – by the transfer of $9 trillion from America’s economy to the rest of the world through its staggering trade deficit. No wonder the rest of the world is thriving! Economics now perpetrates the biggest lie in the history of the world on the American people. It has graduated from being a liar and a “horror” to an abomination.

2. Free trade helps economic development.As Smith observed when his native Scotland began to benefit from free trade, it is through access to the world market that poor nations become rich. … Free trade also makes rich countries richer, economists agree.

We now know that free trade helps poor, overpopulated nations become rich, and wealthy, overpopulated nations to become even richer at the expense of wealthy, less densely populated nations like America.

By importing less expensive goods made in low-wage nations like China, wealthy nations effectively increase their own citizens’ income—and the main beneficiaries are poor and middle-class people, who can buy cheaper clothes, electronics, and myriad other goods.

The evidence speaks otherwise. Incomes in America have been steadily declining since free trade took root and began wiping out millions of high-paying manufacturing jobs. And when incomes decline faster than prices, people are poorer. Period. Regardless of the price of junk at Wal*Mart.

In fact, economists have long understood the law of comparative advantage: whenever differences in the cost of producing goods exist between two countries, both will benefit from free trade, a mechanism that allocates their resources most effectively.

That law has now been disproven by the rapid decline of America’s economy. The “law of comparative advantage” breaks down between two nations grossly disparate in population density. Since it doesn’t even consider the role of population density, it is not a law at all but a flawed, incomplete theory at best. At worst, it’s a failed theory that belongs atop history’s scrap heap of failed theories.

Free trade not only generates the greatest possible growth; it tends to distribute it widely, both within nations and among them. For evidence, consider the emergence of vast middle classes in all free-market societies, as well as the economic convergence among nations that have embraced capitalist economics. After less than 20 years of market-driven growth, Brazil, China, and India—whatever their injustices—are closer to the Western level of development than they were before that growth got under way.

This does not mean, as some observers fret or gleefully predict, that the United States is about to stop leading the world economically. Other nations may draw closer to it—Western Europe in 1950 had a per-capita income half that of the U.S.; now it’s 80 percent—but the American economy has remained the world’s most vigorous for more than a century because of its superior efficiency, demographic dynamism, and innovation.

This is the biggest lie of all. In spite of the listed advantages of the American economy, it has lost badly to predation by the parasitic economies of overpopulated nations. We now stand at the precipice of total economic collapse, our economy having been drained of trillions of dollars of wealth and our assets sold off and placed in control of the parasites. We’ve been transformed from the world’s greatest industrial power – the wealthiest and most envied nation on earth – into the world’s economic laughingstock, a pathetic, hollowed-out shell of what it once was.

There are a very few good, open-minded economists who objectively evaluate the destruction of America’s economy and acknowledge the folly of unfettered free trade. This is not an indictment of them. But the remainder are an absolute disgrace, clinging like drowning rats to the sinking ship of their failed 18th century theories of Smith and Ricardo, in spite of the mountain of evidence piling up to discredit the very “laws of economics” they use to rape and plunder America’s economy. If America survives, a very open question, they will likely go down in history as America’s greatest villains.


WTO Negotiations: U.S. Gives, China and India Take

July 29, 2008

http://www.reuters.com/article/GCA-Agflation/idUSL747098220080728

Here’s yet another example of America’s prowess in trade negotiations and why the U.S. economy is now collapsing under the weight of an unbearable trade deficit. The WTO (World Trade Organization) is in a panic to conclude its Doha round of negotiations before Bush leaves office, knowing that he is a patsy who will sign anything. And, of course, America’s ambassador to the WTO cares nothing about the U.S. economy. He’s a Bush stooge who is working hard to please his boss. So he has literally given away the farm (by agreeing to huge cuts in farm subsidies, not to mention more cuts for American manufactured goods), and is now surprised that China and India are reneging on previous “voluntary” agreements.

The outcome here is predictable. The U.S. will cave in and back off of its demands, and there will soon be an agreement. The U.S. will cut subsidies and tariffs (what few remain) and China and India will not. There’s nothing you or I can do about that. But when the agreement comes to a vote in Congress, that’s where we’ll have our say. I’ll keep you posted as to when this happens and when we all need to bombard our legislators with calls and letters to prevent the further compounding of our national economic disaster.


“Five Short Blasts” Theory Explained: Part 5A

July 28, 2008

This post is the fifth in a series of articles that explains the new economic theory I proposed in Five Short Blasts. If you haven’t read the previous articles yet, just go to “The Theory Explained” category of this web site. This series of articles will be archived there in reverse chronological order. Just scroll down to find the beginning of the series.

* * * * *

In Part 4, we learned how the U.S. economy is feeling the effects of overpopulation, the effects predicted by the theory presented in Five Short Blasts – rising unemployment and poverty. We saw how these effects are accelerated by free trade with overpopulated nations, effectively importing their unemployment and poverty and exporting our jobs and financial assets. In essence, we are participating in a “misery-sharing” program, relieving overpopulated nations of their unemployment and poverty and taking it upon ourselves.

At the end of Part 4, I said that Part 5 would be the last in the series. Well, I soon realized that it would take much too long an article to do this final subject justice, so I will split it into Parts 5A and 5B. In these parts, we’ll examine policies that would reverse the damage done to our economy by our own overpopulation and by the imported effects of overpopulation, and we’ll begin with the latter – the trade deficit. Although the damage that’s been done is staggering and has brought our economy to the brink of total collapse, this damage could easily be unraveled in less than ten years.

How? Well, let’s begin by listing the actions that have proven to be failures over the past thirty-three years since our last trade surplus in 1975.

  1. Negotiating with our trade partners and relying upon their promises to consume more American goods.
  2. Filing complaints with the World Trade Organization about unfair trade practices and waiting for enforcement action, affording the offending trade “partner” time to come up with a new scheme for maintaining their trade surplus.
  3. Cajoling trade partners to stop manipulating currency exchange rates. Even if and when they do, nothing changes because the currency exchange rate isn’t the root cause of the trade deficit.
  4. Placing blind faith in economists who assure us that trade will return to a balance once our trade partners have become wealthy enough and begin to consume at the same rate as Americans. Decades of experience has proven them wrong.
  5. Fiddling with interest rates to stimulate the economy or to squelch the purchase of imports.
  6. Tax breaks to encourage corporations to invest in domestic production.
  7. Improving productivity, cutting costs, working smarter and all of the things that consultants come up with to make us more “competitive.” The American worker is working him/herself to death to be more competitive and it hasn’t made one iota of difference. Our trade deficit just gets worse.
  8. Job training programs. American workers have been trained and retrained more than circus chimps, but to no effect because the programs lack one essential ingredient – jobs that are going unfilled due to a lack of trained workers. Despite what some special interest groups may say, groups interested in importing more workers to keep the labor supply and demand balance in their favor, there are no such jobs. The end result is that the glut of labor is moved from one sector of the economy to the next, eroding wages in each as it goes.

Every one of these approaches has been tried repeatedly for decades, and matters have only gotten worse. None of these things have worked because none address the fundamental problem or address it in a way that puts control of the outcome in our hands instead of relying on our trade partners to solve our problem for us.

It’s time for the U.S. to take control and take actions that are assured to restore a balance of trade in manufactured goods. Notice that I have consistently qualified my discussion of the trade deficit to limit it to manufactured goods, and have consistently identified overpopulated nations as the source of the problem. Free trade in natural resources is indeed beneficial, as is free trade in manufactured goods between nations approximately equal in population density. A large, persistent trade deficit in natural resources, as in oil for the U.S., is not an indictment of free trade in natural resources. Rather, it’s a clear indication of a state of overpopulation. And a persistent trade deficit in manufactured goods with a nation of roughly equal population density isn’t an indictment of free trade, but a clear indication of being uncompetitive.

But when it comes to trade with overpopulated nations, it’s imperative that those nations compensate the U.S. for their overpopulation-induced inability to provide us with access to an equivalent market. The only way to accomplish this is with a return to the trade policies employed by the U.S. for the first 171 years of its history to build it into the world’s wealthiest and most envied nation – tariffs. It’s only through tariffs that the price of imports from overpopulated countries can be kept high enough to provide the profit potential motive for companies to manufacture products domestically, assuring a balance of trade. The best way to do this fairly is to implement a tariff structure that is indexed to nations’ population densities, assessing the highest percentage tariffs on products from the most densely populated nations. (This would also provide them with incentive to tackle their overpopulation problem.)

For example, we could structure a system of tariffs on manufactured goods that would tack on 5% for every increase in population density of 100 people per square mile. Every nation with a population density of 100 or less would be tariff free. (The U.S. is at 85 people per square mile.) Every nation with a population density between 100 and 200 people per square mile would be subject to a 5% tariff. Each with a density between 200 and 300 would be subject to a 10% tariff, and so on. Under such a tariff structure, China would be subject to a 15% tariff. Germany would be subject to a 25% tariff, Japan – 40%, Korea – 55% and so on. This tariff structure could be adjusted up or down based upon trade results. The goal, after all, is to achieve a trade balance, not a surplus and not to generate federal revenue. Isn’t it only fair to expect the rest of the world to buy as much from us as we buy from them? As long as a balance of trade is maintained, the tariffs could be steadily reduced, but immediately raised again if the balance begins to tilt back toward a deficit.

The beauty of such a system is that overpopulated nations are not prime sources of natural resources. So those nations who do supply us with natural resources would be mostly tariff free. There would be no tariffs on the natural resources and most would be free of tariffs on their manufactured goods as well. Consequently, they’d have no incentive to implement retaliatory tariffs. The only nations who would tend to retaliate would be those with whom we have large deficits and, in such a trade war, it is only the nation with the trade surplus who would come out the loser. We could simply match them tariff for tariff, effectively cutting off imports from that country. They may briefly attempt such a foolish move, but would soon realize that some exports to the U.S. are better than none at all.

Such a system would have to be implemented slowly, ratcheting up the tariffs a little at a time, affording domestic industry the time needed to recognize the new profit potential in manufacturing in the U.S. and implement plans to build new capacity here. For example, since we still have domestic auto manufacturing capacity, it could be ramped up very quickly to meet new demand. But it may take years to restore our capacity to manufacture electronics products. Also, it’s critically important to implement tariffs across the board, and not product by product. For example, early in the administration of President Bush, he imposed tariffs on steel to help the domestic steel industry survive. But soon, domestic auto manufacturers complained that they were being made uncompetitive by high steel prices. An across the board tariff system would have prevented this problem.

Ultimately, I believe this nation would be well-served by amending the constitution to forbid running a persistent trade deficit. Our founding fathers probably couldn’t envision that our nation’s leadership would ever be so stupid as to allow such a situation to persist. If they were here today, they’d probably have such an amendment drafted and ready to submit to the states for ratification by tomorrow.

That’s the solution to the trade deficit – the importation of unemployment and poverty from overpopulated nations. In Part 5B, we’ll tackle solutions to the problem of overpopulation right here at home.


Housing Rescue Bill: Another Example of Treating Symptoms Instead of the Disease

July 26, 2008

http://www.reuters.com/article/newsOne/idUSN2141192720080726?sp=true

The U.S. Senate was expected to approve a massive housing market rescue bill on Saturday and President George W. Bush was ready to sign it soon, amid questions about how much it will help.

… The 694-page legislation would set up a $300 billion fund under the Federal Housing Administration to help distressed homeowners get more affordable, government-backed mortgages and get out from under exotic mortgages they cannot afford.

Here is yet another example of treating a symptom of our economic ills instead of the disease itself.  Instead of addressing the root cause of declining incomes and benefits – high-paying manufacturing jobs lost to free trade with overpopulated nations and steadily rising overpopulation right here in the U.S. – we try to mitigate the effects by making it easier for people to borrow money to stay afloat.  It’s exactly the same thing as treating the unaffordability of health care by providing government-funded insurance instead of by boosting incomes by bringing back all of the jobs that we gave away with our free trade global welfare program. 

All the while, the government calculates an inflation index, the Consumer Price Index, or CPI, that makes it appear that incomes are keeping pace with inflation when, in fact, the CPI grossly understates increases in the cost of living  (something the government itself admits).  In effect, anything that rises faster than the CPI becomes unaffordable – especially health care and, more recently, housing. 

We don’t want to continue mortgaging our descendants’ future to keep up an illusion of prosperity, Uncle Sam.  We want our jobs back!!


“Five Short Blasts” Theory Explained: Part 4

July 25, 2008

This post is the fourth in a series of articles that explains the new economic theory I proposed in Five Short Blasts. If you haven’t read the previous articles yet, just go to “The Theory Explained” category of this web site. This series of articles will be archived there in reverse chronological order. Just scroll down to find the beginning of the series.

* * * * *

In Part 3, we visited a hypothetical world and learned how an expanding population density, beyond a certain point, actually begins to drive down per capita consumption. Coupled with rising productivity, the inevitable consequence is rising unemployment and poverty.

As we went through that hypothetical example, did the situation sound familiar? Let’s leave that hypothetical world and return to the real world of the 21st century on planet Earth. Consider the fact that the U.S. population has doubled in the last fifty years and continues to grow at a rate that adds a new Chicago to the U.S. population every year. Take a look around and take note of crowding at work. Apartment and condo buildings are displacing single family homes. More people give up their cars as roads become choked with traffic. There’s more crowding everywhere you look – schools, parks, beaches, shopping centers, golf courses, airports, marinas – everywhere.

Now think beyond the U.S. Did you know that the population of the rest of the world is growing even faster than in the U.S.? It’s adding enough people to fill a large NFL stadium every eight hours – enough to fill a new Chicago every ten days – enough to fill another California every four months. There are many countries that are far more densely populated than the U.S. China is four times as densely populated. So is almost all of Europe. Japan is ten times. Korea is almost fifteen times. Taiwan is almost twenty times. Bangladesh is thirty times. Imagine what such extreme population densities have done to their per capita consumption. It’s very low.

I’ll share with you just one example from the book – an example of what happens to per capita consumption as population density rises. Figure 5-2 is a chart of dwelling floor space per person as a function of population density. Our dwellings are the largest, most important products that most of us will ever own. You only need to look at what’s happening in America’s economy today to get an appreciation for what a downturn in the housing industry can do to an economy.

figure-5-2

As you can see, the decline in the per capita consumption of housing is dramatic as population density rises. In Japan, a nation ten times as densely populated as the U.S., their per capita consumption of dwelling space (the size of their homes) has been cut by 70% from the level that we enjoy in the United States, due to nothing but overcrowding. The U.S. economy has been crippled by a decline in the housing industry of only a few percent. Imagine what would happen if it declined by 70%!

I found the same pattern with every product for which I was able to find data. The decline in per capita consumption was greatest for the largest products, the ones that would be most susceptible to elimination in overcrowded conditions. I could not find one product for which per capita consumption increased with a rising population density.

So my theory is this: that as population density rises beyond some optimum level – the level at which people are forced to begin crowding together – per capita consumption begins to decline. And when falling per capita consumption collides with rising productivity, the inevitable consequence is rising unemployment and poverty – a slow but steady erosion of the standard of living and quality of life. It is this collision that I warn of with Five Short Blasts. (Read the preface for an explanation of the book title.) This theory can be graphically represented as shown in Figure 7-7:

figure-7-7

However, if you try to analyze each country individually for the effect of this theory, you will soon come to the conclusion that it doesn’t work. For example, consider once again Japan. In spite of being ten times as densely populated as the United States, they enjoy even lower unemployment than we do.

The reason for this seeming failure of my theory lies in our definition of “country.” We tend to think of a country in geographic terms, a land defined by borders – lines on a map. But in economic terms, those borders are erased when nations engage in free trade with each other. It’s the reason that everyone in the United States enjoys the same standard of living, whether they live in a sparsely populated state like North Dakota or a densely populated state like New Jersey.

So economic borders and the effects of population density have been blurred by globalization. But we should be able to find those effects in our trade results. Let’s stick with our example of Japan. What would this theory predict about our trade results with Japan? Well consider what happens when we engage in free trade with a nation that is much more densely populated. Our economies combine, as do our labor forces. The work of manufacturing is spread evenly across this new labor force. But, while the labor force of Japan gets free access to our healthy market, where over-crowding has not yet taken much of a toll on per capita consumption, all American workers get in return is access to a market that is badly emaciated by overcrowding and low per capita consumption.

The net result is an automatic trade deficit and loss of jobs to the Japanese work force. Our trade deficit in manufactured goods with Japan is approximately $100 billion per year. It may be easier to comprehend if you consider the extreme. If per capita consumption of some product in Japan is zero because of their over-crowding, then when we engage in free trade with them, they will take a big share of our market while we get nothing in return.

So if we examine our trade results, we should find a strong relationship between a high population density and a trade deficit. In fact, using our trade results for 2006, we find that, of the top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations more densely populated than the U.S. Thirteen are with nations at least twice as densely populated. Seven are with nations at least five times as densely populated. And it doesn’t matter whether these nations are rich or poor. Some of our biggest per capita trade deficits in manufactured goods are with wealthy nations like Ireland, Japan, Taiwan, Switzerland, Malaysia, Germany, Korea, Italy and others.

Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Look back again at Figure 7-7. In the case of our trade with these overpopulated nations, the U.S. is represented by “Nation A.” A more overpopulated nation is represented by “Nation B.” When we engage in free trade with them, the standard of living gravitates toward a point represented by “C.” For us, our standard of living declines. For them, their standard of living is improved, in some cases dramatically. As we trade with more and more such countries, point “C” slides ever further down the curve.

This is precisely what is happening in the U.S. today. As we add each nation to the free trade gravy train, our per capita consumption is effectively lowered more and more, driving unemployment ever higher, and driving wages and benefits steadily downward. Some things become ever more unaffordable – the things that outpaced the average rate of inflation – things like health care, education, retirement and so on. The government tries vainly to compensate by cutting interest rates, spreading printed money like pixy dust and cutting lending standards. All of it is financed by a sell-off of American assets. And still our problems grow. Yes, our own problem of growing overpopulation is nibbling away at our economy in the same fashion, but the effects of rising unemployment and poverty have been shifted into “warp drive” by importing overpopulation through our misguided trade policies.

But while our economies combine as described above, they remain very much economically divided along geographic boundaries in another way – the way in the trade imbalance is financed. Our trade deficit is all financed by a sell-off of American assets – treasury bills and corporate stocks and bonds. Everything in America is for sale, steadily shifting control of all of our public and private institutions into the hands of foreign owners and just as steadily draining away all of our assets. In the meantime, foreign countries are building a mountain wealth. They get all of the benefit. We get all of the debt.

Many look to the falling dollar to reverse this trade imbalance. It won’t work because the trade deficit has nothing to do with currency valuation. Exporting countries won’t cede their share of the U.S. market just because of falling profits. They simply get aggressive about cutting costs and margins to maintain their share. Rather, the trade deficit is rooted in this discrepancy in population density and per capita consumption between the U.S. and so many of our grossly overpopulated trading “partners.”

So what’s to be done? That’ll be the focus of Part 5, the last in this series of articles.