“Cash for Clunkers” an Abysmal Failure

August 27, 2009

 

http://www.reuters.com/article/newsOne/idUSTRE57P5C220090827

When the “cash-for-clunkers” program ran out of funding after only a few days, Congress quickly injected another $2 billion into the program (which was first authorized with funding of $1 billion).  Auto dealers across the nation were hailing it as a huge success.

The intent of the program was two-fold:  to improve the overall mileage of America’s auto fleet by taking old, inefficient gas-guzzlers off the road but, more importantly, to stimulate auto sales and rev up domestic auto manufacturing.  And it did both.  GM added shifts to its Malibu and Cobalt manufacturing plants to replenish depleted stocks, putting 1300 auto workers back to work. 

So the program was a success, right?  700,000 cars and trucks (as reported in the above-linked article) were replaced by more efficient models.  Sales of domestically-produced vehicles were boosted from their recession level lows. 

So why was the program so unceremoniously terminated Monday by an administration that has played fast and loose with cash to boost the economy?  And why am I calling it an abysmal failure?  Because it was eroding our GDP (gross domestic product) at a frightening clip, undoing the effects of other stimulus spending.  More than anything, the Obama administration would like for 3rd quarter GDP to actually show some growth, however modest.  (After all, GDP is the gauge by which the end of the recession will be judged.)  But, if it misses that mark, the blame may very well lie at the feet of the “cash-for-clunkers” program. 

To understand, let’s do some math.  As reported in the linked article, 700,000 vehicles were sold in this program, at a cost to the government of $2.87 billion.  But 80% of these vehicles, or approximately 560,000, were imports.  (This figure doesn’t match the percentages reported in the linked article because some of the sales by GM, Ford and Chrysler were also imports from Mexico or Korea, like the Chevy Aveo imported from Korea.)  If we assume the average value of those imported vehicles to be $17,000, then almost $10 billion worth of vehicles were imported, and every dollar of imports is subtracted from GDP.  (Dollars spent on imports are lost and no longer available to spend in the domestic economy.)  So, for $2.87 billion in taxpayer expenditures, the government managed to reduce GDP by almost $10 billion.  A little of this was offset by boosts in domestic manufacturing, but not much. 

And this $10 billion erosion in GDP took place in the course of only about three weeks.  At that pace, if kept going, the program would have eroded GDP at a quarterly rate of $43 billion.  Actually, the effect upon GDP is doubled when you consider that those imported vehicles could have been produced domestically.  In addition to the subtraction for the imports, an equal amount of domestic business was lost. 

Making matters worse, the share of the “cash-for-clunkers” that went to domestic auto makers fell below the pre-program market share of those manufacturers.  In other words, the program was actually eroding the market share of the big-3, exactly the opposite of what the government – now by far the biggest shareholder in both GM and Chrysler – wanted to have happen. 

Now you can see why the program was terminated without any further calls to keep it going.  As the administration began to evaluate the data and saw that 80% of the money was being used to boost the economies of Japan and Korea (primarily), their response was surely, “Oh, sh#t!”  “This isn’t very smart!”

To its credit, the Obama administration has drawn a line in the sand when it comes to the demise of the manufacturing sector of the American economy – a line that, as owner – it will not allow the domestic auto industry to cross.  But, as owner, they are now also faced with the quandary of how to boost domestic auto sales (and thus the entire economy) within the framework of free trade policy it has inherited.  Now it can see that stimulating auto sales in a way that doesn’t violate trade agreements doesn’t work.  Will it now rely on boosting the quality and competitiveness of American cars?  If it does, it will be ignoring decades of experience that proves that that approach doesn’t work either, as imports will simply match them move-for-move.  Or will it continue to rely on jaw-boning other nations to start importing more American products?  That approach too has been proven a resounding failure.  Sooner or later, either the Obama administration or some subsequent administration must come to the realization that failed trade policy lies at the heart of our economic woes.


Morici Blames Trade Deficit for Economic Flop, but Offers No Solutions

August 26, 2009

 

http://www.realclearmarkets.com/articles/2009/08/24/look_for_an_x_shaped_economic_recovery_97373.html

The above link will take you to an article by Dr. Peter Morici, University of Maryland professor and former Chief Economist at the U.S. International Trade Commission.  The gist of Morici’s article is that while Wall Street is experiencing a rebound, there will be none for Main Street.  I found Morici’s comments on the trade deficit most significant:

Dollars spent on imports that do not return to purchase exports can’t be spent on American products. That saps demand for American-made products, keeps factories and offices shuttered, and idles workers.

The trade deficit is mostly oil and Chinese consumer goods. Export more, import less, or the economy flops.

Although I take issue with his emphasis on China, since our trade deficit in manufactured products with China, when put into per capita terms, is dwarfed by those with many other countries like Japan and Germany – this last sentence says it all:  “export more, import less, or the economy flops.”  In other words, get rid of the trade deficit.  Actually, Dr. Morici, a small correction is in order.  The economy has already flopped.  It’s been in a state of “flop” for a long time and will remain there until your advice is heeded. 

As former Chief Economist at the U.S. International Trade Commission, Morici shares some of the blame for trade policy that got us into this mess.  It would be nice if he would now offer ideas for changes to trade policy that will get us out.  It’s easy to say, “export more, import less,” but saying it doesn’t make it happen.  Obviously, some move toward protectionist policy is required to drive such a shift.  We need economists with the guts to come out and say it.


The Missing Ingredient in the Health Care Debate

August 24, 2009

There is no health care crisis in America.  The country is virtually awash in top-quality health care.  It’s available on practically every street corner.  Clinics, medical office buildings and hospitals have become as ubiquitous as gas stations. 

What we have is an affordability crisis.  To be sure, there are many facets to the affordability issue.  Our society promotes over-use of health care – especially with the incessant pharmaceutical advertising in the media.  And our society does too little to promote healthy life-styles, especially with – once again – incessant advertising of calorie and fat-laden junk foods.  Could health care be made more affordable by cutting out the middle-man profits – the private health insurance industry?  Perhaps a little – maybe ten percent, but also perhaps at the expense of efficiency. 

What’s being completely missed in the debate about the affordability of health care is that it has two components – the cost of health care, which has gotten all of the attention, and the availability of income to pay for it, which has been completely left out of the debate.  The failure of incomes to keep pace with inflation over the past few decades, much less the cost of living, is more to blame for the health care affordability crisis than the cost of health care itself.  For most working people, health insurance has long been a component of the compensation package provided by their employers.  As the demand for labor has failed to keep pace with the supply, employers have been able to cut their compensation packages without fear of losing their best employees and, naturally, the component that’s cut first and the most is the one that’s been growing in cost the fastest – health insurance (followed closely by the cost of pensions).  Employers either cut the cost by dramatically raising premiums, or they simply eliminate it altogether.

To a great extent, the crisis in the affordability of health care isn’t the real problem.  It’s a symptom of a deeper, underlying problem and, as such, attempts to treat the health care crisis are akin to treating the flu by wiping our runny noses.  There is no solution without addressing the underlying problem in our economy that is exacerbating the imbalance in the supply and demand for labor. 

The problem I speak of is trade policy that sees trade not as a vehicle for marketing our excess capacity for producing products, but for trading away the jobs involved in meeting even our domestic demand.  In exchange, we get cheaper products, but at the cost of a downward spiral in wages.  When  products like health care, which can only be provided domestically, don’t follow that downward spiral, then a crisis is inevitable. 

If we want a real solution to the health care affordability crisis, we need to consider both sides of the problem – not just the cost of health care, but also the factors involved in driving down the incomes we use to pay for it.  Without addressing the underlying causes of this problem, we’ll find that there aren’t enough bandages in the box to stanch the bleeding.


French Work the Least, but Beat U.S. in Trade

August 20, 2009

 

http://www.cnbc.com/id/32472876

Here’s an interesting little article that supports my economic theory that trade imbalances are driven by population density, and not by cheap labor.  It seems that France is the least productive nation on earth, working fewer hours than anyone. 

The French spend the least amount of time at work, a new survey of 73 cities around the world by Swiss bank UBS shows, while the most hours are worked in Cairo and Seoul.

Our leaders tell us that we need to be more productive to compete globally.  Yet France, the least productive nation on earth, kicks our butts in trade.  In 2008, we had a $15.2 billion trade deficit with France, worse than our trade deficit with China on a per capita basis.  And with a GDP per capita of $32,700, they’re also one of the wealthier nations and have a well-paid labor force.  So why do we lose out to France?  They’re more than three times as densely populated as the U.S.

The richest workers are in New York and Zurich, where they would have to work nine hours to buy an iPod nano, while workers in Mumbai needed to work 20 nine-hour days – nearly one month’s salary – to buy the gadget.

Oh, speaking of rich workers, how about Zurich, Switzerland?  If their workers are so rich, surely we don’t lose to them too, right?  Think again.  Although we have a slightly positive balance of trade with Switzerland, thanks to exports of metals and minerals to Switzerland, we have a large per capita trade deficit with them in manufactured goods.  In 2006 it was our 6th worst per capita deficit in manufactured goods at $657 – four times worse than our per capita deficit in manufactured goods with China.  Why?  Because Switzerland is four times as densely populated as the U.S.

Copenhagen, Zurich, Geneva and New York were the cities where employees had the highest gross wages.

And speaking of Copenhagen, Denmark, the story is exactly the same.  In spite of Denmark having some of the highest-paid workers in the world, our per capita trade deficit in manufactured products with Denmark in 2006 was our 11th worst at $522 – three times worse than China.  Why?  Because Denmark is four times as densely populated as the U.S.

Low wages isn’t what drives our trade deficit.  It’s the gross disparity in population between the U.S. and so many of our trade partners.  In 2006, of our top 20 trade deficits in manufactured goods, only seven were with relatively poor nations.  (China was number 19 on the list.)  But thirteen were with nations much more densely populated than our own. 

As a trade policy, the blind application of free trade is even dumber than a blanket application of protectionism.  Each is nothing more than the two opposite ends of a spectrum of trade policy available to us.  America’s trade policy will continue to be an abysmal failure until it takes into account the population density effect.


U.S. Life Expectancy Stalls at 77.9 Years

August 20, 2009

 

http://www.reuters.com/article/newsOne/idUSTRE57I6BF20090820

http://www.cdc.gov/nchs/data/nvsr/nvsr57/nvsr57_14.pdf

The first of the above links will take you to a Reuters article reporting on Wednesday’s announcement by the CDC (Center for Disease Control) that U.S. life expectancy hit a new high of 78 years in 2007.  The second link will take you to the most recent CDC report, to which the 2007 data has not yet been added. 

Seventy-eight was the headline figure.  But reading more closely, you’ll find that we haven’t reached 78.0 at all.  The actual figure is 77.9.  “Wait a minute,” I thought to myself.  “I thought we were already at 77.9.”  So I did some digging.  Sure enough, the old record, reported on page 173 in my book, was 77.9 years, reached in 2006.  So what gives?  How can the CDC claim that our life expectancy has climbed to a new record when, in fact, it has actually stalled at 77.9?

Easy.  Just do the same thing the Department of Labor does to hold down the unemployment figures – revise your methodology to make the numbers look better.  In this case, if you look at Table 8 on page 27 of the CDC report (the table of life expectancy), you’ll see a couple of footnotes indicating that the data for 2006 was revised.  The 2006 figure used to be 77.9 years.  Now it’s 77.7 years, making the new 2007 data point appear to be an improvement and a new record, when it’s nothing of the sort. 

Also, go to the next page – Table 9 on page 28.  There you’ll see that the death rate for age groups 15-24 and 25-34 have risen to their highest levels in many years.  And the death rate for age group 45-54 remains above its 1999 levels.  The population in these age groups dwarfs the population of the older age groups, where the death rate is declining nicely, but remains extremely high as would be expected for such elderly people. 

My economic theory is that rising overpopulation leads to rising rates of unemployment and, consequently, poverty – real poverty for those at the bottom of the economic ladder and an insidious poverty for most of the rest of us as declining real incomes gradually take their toll.  And poverty is the world’s number one cause of deaths.  This report may or may not be an indication of the beginning of that process.  It’s interesting that death rates are rising in the age groups that represent the newest entrants to the labor force – where incomes are lowest and benefits like health care are less available.  Meanwhile, death rates continue to decline for older Americans, those with Medicare and those with more secure access to health care benefits provided in pension plans.  But those benefits are dying as fast as that segment of the population. 

Has the U.S. life expectancy reached its zenith?  Will unemployment and poverty slowly drive death rates higher?  The jury is still out, but it’s an ominous sign when the CDC starts fudging data to paint a rosy picture.


TIC Report Debunks Fears of Treasury Dumping

August 19, 2009

 

http://www.treas.gov/tic/mfh.txt

The above link will take you to the Department of Treasury’s June report of major foreign holders of treasury securities.  I haven’t posted about this report before, but there’s something of interest in this one. 

One of the major consequences of our huge trade imbalance, especially with China, is that we have become dependent on them buying our treasuries – in effect loaning us the money to support the trade deficit.  Free trade advocates now warn that if we were to resort to protectionist measures to restore a balance of trade, China could retaliate by dumping their treasury holdings.  They claim that this would cause the Treasury Department to dramatically raise interest rates to attract other buyers – the result being economy-killing high interest rates in the general economy. 

I’ve suspected that this is a bogus argument.  Any change in trade policy that would tend to restore a balance of trade would send the dollar soaring, making U.S. treasuries such attractive investments that other buyers would eagerly step in if one or more countries, upset with the effect on their trade position, decide to retaliate by dumping their treasury holdings. 

In the month of June, that’s exactly what happened.  As you can see, China, who has been threatening to begin reducing its treasury holdings, did exactly that, reducing their holdings by $25 billion, from $801 billion in May to $776 billion in June – a big change for one month.  Yet, Japan stepped in to snap them up.  The net result is that interest rates have actually been falling, not rising, as China reduces its holdings of U.S. treasuries.

It all makes sense.  An economy that has balanced trade is stronger than an economy with a huge trade deficit.  A strong economy is a more attractive place for investment than a weak economy.  While the threat of dumping U.S. treasury holdings in retaliation for any moves toward protectionist trade policy may be real, the interest rate consequences are purely imaginary.  It doesn’t matter a bit if one or more nations wants to reduce their exposure to treasuries when other nations are even more eager to buy.  I think we can safely say that this scare-mongering tactic by free trade shills has been disproven.


June Trade Deficit More Evidence of Pain in American Economy

August 18, 2009

 

http://www.bea.gov/newsreleases/international/trade/2009/pdf/trad0609.pdf

On Wednesday, August 12, the Bureau of Economic Analysis (BEA) released the June balance of trade figures.  The above link will take you to the full report.  The U.S. balance of trade is by far the most important economic data tracked by the federal government, with more influence on the financial well-being of Americans than even GDP (gross domestic product). 

As usual, the report is a mix of good news and bad news, more heavily weighted to the latter.  The good news is that, at $27.0 billion, the June trade deficit remains at far lower levels than just a year ago.  The bad news is that it’s up from $26.0 billion in May.  The really bad news is that $27.0 billion per month is still an enormous deficit.  It’s this trade imbalance that ultimately led to the global financial collapse last year, a financial collapse that would surely have yielded a severe depression were it not for the shaky, jury-rigged, hastily-constructed financial scaffolding that now props up our economy.

The table in this report that really tells the story is “Exhibit 9” found on page 11.  There we can see that petroleum imports were a huge drag on the deficit, worsening by $3.9 billion from May to June.  But it’s the non-petroleum goods that interests me most, because that’s the category that essentially is made up of manufactured products – the real job engine of the economy.  The good news there is a reduction of $2.6 billion in the deficit.  Exports in that category rose by $1.6 billion, while imports fell by $1.0 billion – both moves in the right direction.  And imports of non-petroleum goods fell to a decade low. 

But is this really a measure of any real correction in the trade imbalance – a shift back to domestic manufacturing – or is it merely a measure of just how badly Americans are hurting?  Data on retail sales and on manufacturing don’t support an explanation that Americans are turning to domestically-manufactured products.  And while the June rise in exports from May is nice, exports are also hovering near decade lows. 

The Obama administration has focused virtually all of its efforts to improve our balance of trade on China, constantly driving home the point with China that they must begin to boost their own economy and rely less upon America as an export market.  Predictably, this approach is an abysmal failure.  Our deficit with China rose from $17.5 billion in May to $18.4 billion in June.  And, as proof of the point that I constantly try to drive home in this blog – that our trade deficit is the result of our own failed trade policy and not anything in particular that China is doing – our trade deficit with Japan nearly doubled from May to June, rising from $1.9 billion in May to $3.7 billion in June.  (Almost all of that rise was due to a boost in auto imports.) 

The evidence seems to suggest that the trade deficit remains low (though it’s bottomed out and seems to be rising again) because Americans, whose incomes continue to decline, have snapped their wallets shut.  Improvements in our trade balance are great, but ruining the economy is no way to go about it.  No fundamental improvement can take place until the administration addresses our trade policy in a way that restores domestic manufacturing.