Clumsy Trade Policy

January 31, 2009

I originally began this post as merely criticism of the U.S. Chamber of Commerce for opposing the “buy American” provisions in Obama’s economic stimulus package. But I soon realized that there’s a bigger issue here – that clumsy trade policy at both ends of the spectrum has its costs, whether it’s foolishly placing blind faith in “free” trade or a heavy-handed application of protectionism that threatens all trade.
Let’s begin with the left end of the spectrum – the U.S. Chamber of Commerce’s position. At first glance, it seems hard to believe that they would oppose “buy American” provisions in Obama’s plan.

The U.S. Chamber of Commerce stepped up efforts on Friday to kill a popular “Buy American” provision before it reaches President Barack Obama‘s desk as part of an mammoth economic stimulus bill.

But it’s not surprising. I’ve constantly warned of the consequences of the trade deficit and the method used to finance it – a sell-off of American assets – and this is one of them: that with ownership comes control. Many of the members of the Chamber of Commerce are actually global corporations, largely foreign owned and controlled, with little allegiance to America, and have major stakes in foreign operations that would be jeopardized by any move toward restoring a balance of trade.


“Some have slammed the U.S. Chamber for opposing “Buy American” provisions, calling our position ‘economic treason,'” the group’s president Thomas Donohue said in a statement.

“Try economic patriotism. Such provisions would cost American jobs, trigger retaliation from our trading partners, slow economic recovery by delaying shovel-ready infrastructure projects and cede our leadership role as a longstanding proponent of free and fair trade and global engagement.”

Yes, actually, the Chamber’s position is rather treasonous. Throughout history, traitors have assuaged their consciences by convincing themselves that what they did was actually for the good of the country. Mr. Donahue doesn’t explain how “buy American” provisions would “cost American jobs.” That’s makes absolutely no sense. Only a worsening of the trade deficit would cost American jobs. Anything that reduces the trade deficit, as “buy American” provisions clearly would, creates American jobs. It’s as simple as that. And would “buy American” provisions result in “delaying shovel-ready infrastructure projects?” Possibly, but the delay would be time spent ramping up American manufacturing, creating even more jobs. Isn’t that the whole idea?
But the linked article goes on to raise an important issue:

In Canada, the main opposition Liberal Party called on Conservative Prime Minister Stephen Harper to raise the issue with Obama when he visits on February 19 if the United States has not made clear that Canadian iron and steel will be welcome.

“I presume the prime minister will make this a very important issue when President Obama is here, because it has huge implications for the steel industry obviously but Canada-U.S. relations overall,” Liberal House leader Ralph Goodale told reporters in Parliament.

This illustrates the hazards of the far right in the spectrum of trade policy, a clumsy, sledge hammer application of protectionism. Why would we want to anger Canada? Canada is our number one source of oil and is a country with whom we have a balance of trade in manufactured goods. We have a very beneficial trade relationship with Canada. But our overall trade deficit, a composite of trade deficits in both oil and manufactured products with many other countries, is a serious problem – the root cause of our financial collapse.
Our biggest deficit in manufactured goods is with China, simply because theirs is such an enormous country with one fifth of the world’s population. We’d like to reduce our deficit with them, but what rationale would we use to justify protectionist measures? Do we simply tell China “sorry, but we don’t want to trade with you any more?” Or do we try to couch it in some logic, perhaps blaming them for currency manipulation? That hardly seems fair either. Is it their fault that the dollar soars any time there’s the least bit of positive news on the American economy?
And what about Saudi Arabia? How do we reconcile “buy American” provisions with our thirst for cheap, imported oil? Do we exempt them from the provisions? The whole thing starts to sound rather arbitrary, doesn’t it? And we really don’t want the more powerful of these nations to start feeling that they’re being treated arbitrarily and unfairly.
The problem is that we’ve held fast to our free trade policy for decades, in spite of the mountain of evidence that something is wrong – culminating in global financial collapse, without ever questioning why. We’ve taken the 18th century theories of Adam Smith, David Ricardo and others, fathers of free trade theory, at face value without ever researching factors that may limit their application – like population density, for example. And without an understanding of what makes free trade work in some instances while producing horribly skewed results in others, we then have a tendency to lash out at all trade. At least the blunt force application of protectionism would restore a balance of trade, but the U.S. Chamber of Commerce is correct in warning of backlashes.
A trade policy rooted in an understanding of how trade really works and how disparities in population density skew the results could restore a balance of trade while avoiding unwanted consequences. A tariff structure on manufactured goods, indexed to population density, is the answer. Leaving natural resources free of tariffs, oil suppliers like Saudi Arabia, Venezuela, Canada and Norway would have no reason to retaliate. And these same countries, along with many others, would be free of tariffs on manufactured goods because of their low population densities. Protectionist tariffs would be focused like a laser on the real problem – overpopulated nations like Korea, Japan, Germany and China. They may not like it, but at least there would be a consistent and logical rationale behind the policy.  They may like to retaliate with their own tariffs but would probably think better of it, since it would only further jeopardize their exports.
Any policy that moves us toward a balance of trade and restores manufacturing jobs is better than what we have now, but an elegant approach that’s rooted in logic can avoid the unnecessary collateral damage of a trade war that would only buttress arguments for a pendulum-like swing back to the opposite end of the clumsy trade policy spectrum.



Real Per Capita GDP Declines at Annual Rate of 5.0% in 4th Qtr.

January 30, 2009
The Commerce Department announced this morning that GDP (Gross Domestic Product), the broadest measure of the health of our economy, declined at an annual rate of 3.8%. But GDP alone doesn’t adequately describe what happened to your share of the economic pie. A better measure is “real per capita GDP,” or GDP divided by the population of the U.S. (By the way, the term “real” means that the data is adjusted for inflation.) Since the population of the U.S. grew in the fourth quarter at an annual rate of 1.2% (adding 850,000 people in the 4th quarter), then real per capita GDP declined at an annual rate of 5.0%, from $38,413 per person in the 3rd quarter of 2008 to $37,936 per person in the fourth quarter. This is also the fourth decline in the last five quarters, a string interrupted by a small rise of 0.45% in the 2nd quarter of last year. Real per capita GDP is now lower than the 2nd quarter of 2007 when it hit $38,157. And no one expects it to do anything but decline further in the coming months.

So the question is whether population growth is helping or hurting the economy. Now even I wouldn’t suggest to you that GDP would have been the same without these additional people. Take away those 850,000 people and the GDP would clearly decline too. Every person contributes something to the overall economic activity. Even if all they buy is food, clothing and housing, no matter how rudimentary (even if they rent instead of buy), they are boosting the GDP by that amount. But if they are boosting it by an amount that’s below average, then they are a net drag on the economy, contributing just as much to the labor pool but consuming below the level needed to gainfully employ them. Well, the fact that the percentage of people falling below the poverty line is increasing is clear evidence that population growth is occurring primarily in the bottom half of wage earners, actually hurting the economy in per capita terms.

It all makes sense if you think about it. As we cram more people into the same amount of space, per capita consumption declines while the per capita contribution to the labor pool remains the same or may even grow. (As the over-supply of labor grows, putting downward pressure on wages, a higher percentage of the population will enter the work force in a bid to keep up the family’s income.) If you don’t understand the relationship between population density and per capita consumption, then you need to read Five Short Blasts.

It’s time for economists to abandon GDP in favor of a more meaningful economic indicator, one that takes the size of the population into account. Even a child can understand that a bag of jelly beans shared with three kids instead of two means fewer jelly beans for himself. Economists need to look not just at the growth in the supply of jelly beans, but also at how many kids are showing up to share them.


Hitachi Dumping Products on U.S.

January 30, 2009

Now Hitachi has joined the ranks of Toyota and Sony as Japanese companies who admit to losing money in the U.S. market. 

Hitachi Ltd (6501.T), Japan’s biggest electronics maker, warned of a record $7.8 billion annual loss, hit by slumping sales, a stronger yen and costs to restructure its sprawling operations.

Their citing a “stronger yen” as one of the key factors in their loss is an admission that they’re losing money in foreign markets – the U.S. being the biggest.  Previously, Toyota and Sony announced the same thing. 

Regardless of how you feel about “free” trade, even its  most die-hard supporters agree that “dumping,” the practice of selling products at a loss in a foreign market, is an unfair trade practice that cannot be tolerated.  It’s banned by the WTO (World Trade Organization). 

The time has come for the U.S. to crack down on this situation.  It should immediately lodge a complaint with the WTO, demanding that Japanese companies raise prices significantly.  If they do not, or if the WTO fails to act swiftly, then the U.S. would be entirely within its rights to impose tariffs on Japanese products. 

Some of you, oblivious to the fact that our trade deficit (which now totals $9.2 trillion since 1975, the year of our last trade surplus) is directly responsible for our economic collapse, are probably thinking to yourself, “this guy is nuts.”  “At times like this, we should be encouraging Japan to cut prices, not raise them.”  If so, you’re forgetting that consumers and workers are one and the same, and are only thinking of yourself as a consumer.  That’s the mental trap used so successfully by the purveyors of globalization.  They want you to think only in terms of low prices and forget about the downward pressure on wages caused by the loss of manufacturing jobs. 

If forced to raise their prices, Hitachi, Toyota, Sony and others will be faced with a choice:  surrender U.S. market share or move their manufacturing to the U.S. to avoid tariffs or the currency exchange rate issue.  If they opt for the former, someone else will surely fill the void and swoop in to build factories in the U.S., fueling a demand for labor that will drive wages higher than prices.  You have to understand that it is a strong demand for labor that drives purchasing power higher.  A weak demand for labor will erode purchasing power every time.

World Economy May Lose 51 Million Jobs

January 28, 2009

The International Labor Organization (ILO), an agency of the United Nations (UN), has forecast that the best case scenario for the global economy would result in the loss of 18 million jobs in 2009 but, under the worst case scenario, job losses could reach 51 million.  As recently as October, their worst case was a loss of only 20 million jobs.  Clearly, no one really knows how bad things may get, as predictions deteriorate just as fast as present conditions. 

I believe we’re witnessing the very economic “collision” I warned of with Five Short Blasts – a collision between falling per capita consumption, a consequence of worsening over-crowding, and rising productivity – leaving rising unemployment and poverty in its wake.  “Nonsense,” some may say.  “This is just an economic down-turn, another in the long line of inevitable business cycles.” 

Perhaps.    Business cycles have certainly come and gone with regularity over the last century or so.  But there’s something different about this one. It’s the culmination of decades of attempting to hold back the tide of unemployment and poverty by propping up consumption with debt.  As business cycles came and went, there was one parameter of the economy that never stopped its exponential growth beyond all capability to deal with it – the 800 lb gorilla in the economy – population growth. 

In the last 150 years we’ve stuffed six times as many people into the same space, this little terrarium called planet earth, and somehow expected that it would have no effect on our ability to consume products and gainfully employ everyone.  It was so unbelievable that we concocted a “field of science” that we called “economics,” bestowing impressive Phd degrees on its practitioners who promised they could make it work, like Wizards of Oz, fooling us with their bags of tricks. 

And it’s not as though global unemployment took a sudden turn for the worse.  It has been rising steadily for the past few decades, in spite of what those who proclaim the benefits of globalization would have you believe.  Sure, development has flourished in places like China and India, and many have prosperred. But the fact is that dramatic increases in productivity in those countries have put many people, mostly in rural areas, safely out of view of the adoring fans of globalization, out of work. 

And with the world’s population adding a quarter of a million people every single day – a million people added to the available labor supply every single week – it’s easy to predict that matters will get worse.  Oh, sure, the Wizards of this Oz may pull a few more tricks out of their bags – setting up “bad banks,” spending on infrastructure and printing money – but the effects won’t last and we’ll be back in the same boat. 

It’s time to send the wizards and their bags of tricks packing, and it’s time for the field of economics to grow up and get serious about crafting a sustainable economic future.

Grassley to Microsoft: Cut H-1B Workers First

January 28, 2009

Senator Charles Grassley (R-Iowa) has told Microsoft that they have a moral obligation to cut H-1B visa workers ahead of American workers.  Microsoft has been a leading advocate of flooding the labor market with immigrant labor, a strategy for suppressing wages.  Senator Grassley, to his credit, has been a leading critic of the H-1B program.

Unfortunately, companies like Microsoft are under no legal obligation to retain American workers ahead of immigrants.

But there is nothing in the law that requires a company to cut the jobs of H-1B workers before U.S. workers, said experts. David Kussin, an immigration attorney at Pillsbury Winthrop Shaw Pittman LLP, said, “In fact, the law is very well designed to say that you have to treat H-1Bs the same as U.S. citizens in all regards.”

Such laws are a product of the decades-long war on wages, the main front in the government’s and Federal Reserve’s battle against inflation.  Anything that held wages in check was perceived to be a boon to the economy, including flooding the country with immigrant labor, outsourcing and off-shoring, among other strategies.  With the willing support of lackey economists, corporate lobbyists had no problem convincing our leaders that driving down incomes to hold down prices was the road to economic nirvana.  In fact, one could argue that it was this perverse economic strategy of driving down wages while propping up consumption with debt that led to our economic collapse.  Only a fool could fail to see the fallacy of that strategy, but it seems that there were plenty of them around. 

With 1.5 million immigrants granted visas each year for “temporary work” and another quarter million given legal permanent resident status under employment preference programs like H-1B, this would be a great place to start if the Obama administration is really interested in reducing unemployment in America.  Let’s get started on fixing these laws and require that immigrants be the last to be hired and the first fired.  This isn’t discrimination.  It’s just common sense.

Immigration Hearing for Obama’s Aunt

January 28, 2009

The linked article chronicles a series of events surrounding the potential deportation of Obama’s aunt, Zeituni Onyango, his father’s half-sister.  It’s a confusing story, so I’ll try to simplify it here:

  1. Obama’s aunt arrived in the country from Kenya some years ago and then sought asylum status, which would have allowed her to stay.
  2. Approximately four years ago, an immigration judge denied her application for asylum and ordered her deported.  She never left. 
  3. On October 31st, the Department of Homeland Security issued a directive that agents obtain permission from ICE (Immigration and Customs Enforcement) field office directors or deputy directors before arresting fugitives.  While not mentioning Obama’s aunt by name, its intent was to avoid negative publicity that would be associated with her arrest, if that were to happen.
  4. On November 26th, the Bush administration lifted the directive, potentially clearing the way for her arrest.
  5. On December 17th, an immigration judge stayed her deportation and ordered a new hearing, to be held in April. 

The question now is whether Obama will somehow intervene on his aunt’s behalf.  Or has he already signaled that he has no intention of doing so?  Perhaps Obama, in consultation with Bush, agreed with lifting the directive following the election.  It will be very interesting to see how events unfold – a good test of Obama’s integrity, his respect for the law and his attitudes toward immigration.  Stay tuned.

Obama Recovery Plan Bars Loans to Firms Hiring Illegal Aliens

January 28, 2009

The above is a link to the House version of the Obama economic recovery plan.  In an encouraging sign that the new administration will maintain a hard-line stance against illegal immigration, the plan bars loans to companies who hire illegal immigration. 

On page 92, you’ll find the following:


(1) ALIENS UNLAWFULLY PRESENT IN THE UNITED STATES.- A loan guarantee may not be made under this section for a loan made to a concern if an individual who is an alien unlawfully present in the United States –

(A) has an ownership interest in that concern; or

(B) has an ownership interest in another concern that itself has an ownership interest in that concern.

(2) FIRMS IN VIOLATION OF IMMIGRATION LAWS.- No loan guarantee may be made under this section for a loan to any entity found, based on a determination by the Secretary of Homeland Security or the Attorney General to have engaged in a pattern or practice of hiring, recruiting or referring for a fee, for employment in the United States an alien knowing the person is an unauthorized alien.

Although Obama’s support for amnesty for illegal aliens already here (a “path to citizenship”) is worrisome, he has prefaced it with the need to gain control of our border and the inclusion of this wording in his economic plan is one encouraging sign that he means business.

I haven’t had a chance to read through the whole thing yet but I plan to do just that and will post more about what I find.  I’ll especially be looking for the reported inclusion of hundreds of millions of dollars for contraceptives.  If you beat me to it, feel free to bring it to my attention!

Toyota Fires American Workers, None in Japan

January 24, 2009

Earlier this month, Toyota announced their first-ever annual loss in their 70-year history.  (See “Toyota Dumping Cars on U.S. Market.”)  The strenghtening of the yen is one of the major factors.  In response to this, Toyota announced a couple of days ago that they would be laying off 1,000 workers in North America and Europe.  Then today comes this announcement – that they will be cutting production in their Japan plants by 60%. 

Toyota Motor Corp (7203.T) plans to reduce vehicle production in Japan by nearly 60 percent in April, a level that could force it to cut its domestic workforce amid slumping car sales, Tokyo Shimbun newspaper reported on Saturday.

Yet, in spite of this huge cut in production in Japan, not a single Toyota employee will lose their job.

Toyota, the world’s biggest automaker, is whittling down its non-permanent workforce by letting contracts expire, but executives have said they intend to leave full-time staff untouched despite unprecedented factory suspensions in Japan.

Toyota has announced plans to close all its domestic factories for a combined 14 days between January and March, reducing work to a single shift at 17 assembly lines, out of 75 globally, at different times from January and February.

What I find interesting is that, if the currency exchange rate is now a major factor in Toyota losing money, it would make sense to shift operations and production to North America and Europe, where the currency is weak, and cut operations in Japan.  Yet, they are doing just the opposite. 

This is a good example of what I’ve been saying about currency exchange rates – that a falling dollar will do nothing to reduce the trade deficit.  Japan and other nations who are utterly dependent on sustaining a huge trade surplus with the U.S. in order to avoid high unemployment will do anything to keep production in their home country, even if it seems to make no business sense.  They’ll do anything to hold onto their domestic production, including dumping, subsidizing their automakers, etc.  They do this because they know that it’s a relatively cheap way to keep jobs, much cheaper than government programs and unemployment insurance.  They voice support for the concepts of “free” trade and market forces but, when a global recession takes hold and it becomes every man for himself, see how quickly they retreat into taking care of their own. 

You may point to the big drop in the trade deficit in November as evidence that the weakening dollar is having  an effect on the trade deficit, but that’s not true.  The trade deficit fell in November due to an over-all slowdown in consumer spending, and not due to any shift in consumer spending away from imported products to domestically made products. 

I bring all of this up to emphasize the point that it is absolutely futile to count on outside forces – things like currency valuation and trade negotiations – to rein in our trade deficit.  Decades of experience with this approach have only yielded a trade deficit that has exploded completely out of control.  The only way to get the deficit under control is to take positive action in the form of tariffs to assure a balance of trade.  It worked for the first 171 years of our history – from 1776 to 1947, when we signed the Global Agreement on Tariffs and Trade – and it would work again.  Our trade policy for the last six decades has been an abysmal failure.  It’s time to go back to what has been proven to work.

China Reacts to Geithner Testimony

January 24, 2009

When I posted about Treasury Secretary nominee Tim Geithner’s testimony during a confirmation hearing the other day, I failed to point out the real significance of his agreeing with the committee that China is manipulating its currency.  This is a clear signal that the Obama administration plans to officially label China a “currency manipulator.”  By so doing, the Treasury Department would then be required under U.S. law to enter expedited negotiations with China to reduce our trade deficit with them and to eliminate any currency advantage. 

As you can imagine, as reported in the above linked article, the Chinese are reacting with horror.  The loss of their trade surplus with the U.S. is China’s worst nightmare.  They are utterly dependent on their exports to gainfully employ their vast over-supply of labor.  Without these jobs that have been taken from the U.S., unemployment would soar to depression-like levels and likely cause widespread civil unrest and violence in China. 

This is a clear indication that Obama plans to get serious about the trade deficit.  That’s the good news.  Very good news.  However, the tactic of branding China a currency manipulator is a rather crude way to go about it because currency exchange rates have very little to do with the trade deficit.  The huge disparity in population density between the U.S. and China (and many other trading “partners”) is a much more powerful factor.  When expressed in per capita terms (divided by the population of the nation in question), our trade deficit in manufactured goods with China is quite run-of-the-mill.  In 2006, there were eighteen other nations with whom our trade deficit was worse.  For example, our per capita deficit with Ireland, a nation twice as densely populated as the U.S. and number one on the list, was 25 times worse than that of China.  The per capita deficits with Japan, Germany, Korea, Taiwan, Switzerland, Israel, Austria, Denmark and Mexico, among others, all much more densely populated that the U.S., were all worse than China’s – most of them much worse. 

So why single out China?  Our trade results with China are exactly what we should have expected when we applied to them the same trade policy that was already a proven failure in all these other nations.  The sheer size of the deficit with China, which dwarfs the deficits of these other nations, which is what gets everyone’s attention, is just a function of them having one fifth of the world’s population. 

If we’re going to effectively address the trade deficit, it has to be done in a way that addresses the root cause.  Of our top twenty per capita trade deficits in manufactured goods, only seven are with relatively poor countries.  Many are with countries that no one ever accuses of currency manipulation.  But eighteen of these top twenty deficits are with nations much more densely populated than our own.  So I’m not saying that there aren’t other factors at work, but population density is the 800-lb gorilla in the room. 

What’s needed is a tariff structure for manufactured goods that is indexed to population density, leveling the playing field by extracting compensation from those nations whose over-crowding renders them incapable of offering us access to markets comparable to ours.  Any other approach that’s based on faulty logic is going to appear arbitrary and may put us in an indefensible position when challenged by others sympathetic to China.

Nearly 600,000 Jobs Lost in a Week

January 22, 2009

The Labor Department reported today that nearly 600,000 people filed for unemployment last week.  That’s an annual rate of over 30 million workers losing their jobs – over 20% of the work force. 

I thought you might be interested in some anecdotes from the state of Michigan.  It was reported yesterday that in one month, from November to December, unemployment in Michigan rose by a full percentage point to 10.6%.  And it seems that the unemployment offices have been completely overwhelmed.  Phone lines are jammed.  The web site has crashed from overuse.  People are forced to take their questions directly to the unemployment office.  The local news showed a line at one such office that appeared to stretch for a full city block.  I’m reminded of pictures of the unemployed waiting in lines during the Great Depression.  And many of these are highly skilled people.  One guy interviewed had two master’s degrees and worked in an IT department.  Yet, some politicians still offer up “job retraining” as the solution.  Retraining to do what?  Where is the huge demand for labor that’s going unmet because Americans are too uneducated to fill the positions?  The only retraining needed around here is how to fill out unemployment application forms. 

I’m also reminded of a visit to Michigan by Mitt Romney during the Republican primary campaign.  He told Michiganders condescendingly that we’re in a “one-state recession.”  Well, it isn’t a one-state recession any more, is it?  It makes you wonder whether the state of Michigan is the canary in the coal mine for the U.S. economy.  If we are, the rest of you had better hunker down because it’s going to get much, much worse!