“Five Short Blasts” Theory Explained: Part 4

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.

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