Emphasis on Growth Misguided

 

http://www.nytimes.com/2009/09/23/business/economy/23gdp.html?_r=1&emc=eta1

Many thanks to reader Mark Hall for bringing this NY Times article to my attention (see above link).  It seems that at least one world leader, French President Sarkozy, has questioned the value of using GDP (gross domestic product) as a measurement of economic performance, correctly observing that boosting GDP seems to do little to reverse the deteriorating trend in labor market conditions. 

Among the possible casualties of the Great Recession are the gauges that economists have traditionally relied upon to assess societal well-being. So many jobs have disappeared so quickly and so much life savings has been surrendered that some argue the economic indicators themselves have been exposed as inadequate.

In a provocative new study, a pair of Nobel prize-winning economists, Joseph E. Stiglitz and Amartya Sen, urge the adoption of new assessment tools that incorporate a broader concern for human welfare than just economic growth. By their reckoning, much of the contemporary economic disaster owes to the misbegotten assumption that policy makers simply had to focus on nurturing growth, trusting that this would maximize prosperity for all.

The article goes on to note that the study was commissioned by Sarkozy.  But, as pointed out in the article, while the study’s authors challenge the wisdom of using GDP to guide economic policy, they don’t really offer an alternative. 

Indeed, the difficulty comes in turning these general principles into new means of measurement. The report notes that its authors concur on the big picture, but diverge on the methodologies to be employed when it comes to factoring in the value of a better education and cleaner skies.

The old mode of measurement has taken a beating, and yet the new one, it seems, is still a work in progress.

I am reminded of the work of W. Edwards Deming, father of statistical quality and process control and the “Total Quality Management” concept.  One of his fourteen points for improving a company’s performance was to eliminate management by objectives.  His point was that if you focused on all of the important little things, the big things would take care of themselves. 

The same philosophy can be applied to the economy.  Using the two examples provided above, if cleaner skies are important, then focus on that.  If better education is important, then focus on that too. 

Nothing is more important to a healthy economy than avoiding trade deficits.  So make that a key measurement, not GDP.  Nothing is more important to maintaining a healthy labor market than avoiding per capita consumption-destroying over-crowding.  So focus on stabilizing the population at a sustainable level.  Measure unemployment, but be honest about it.  Measure per capita purchasing power while being honest about inflation. 

Just do what’s right and the economy will take care of itself.

Roy Beck Video About U.S. Immigration Policy

 

http://www.youtube.com/watch?v=n7WJeqxuOfQ

The above link will take you to an outstanding presentation by Roy Beck, founder of NumbersUSA, about U.S. immigration policy.

Reshape Global Economy? What Will You Do, Mr. President?

 

http://www.reuters.com/article/newsOne/idUSTRE58G34Z20090921?sp=true

The good news is that President Obama understands that global trade imbalances – especially America’s enormous trade deficit – is what collapsed the global economy, and he will push the G20 at the meeting in Pittsburgh to reshape the global economy:

U.S. President Barack Obama said on Sunday he would push world leaders this week for a reshaping of the global economy in response to the deepest financial crisis in decades.

The bad news is that he, like everyone else – including economists – is clueless as to the root cause of the imbalance:

… Obama said the U.S. economy was recovering, even if unemployment remained high, and now was the time to rebalance the global economy after decades of U.S. over-consumption.

Overconsumption in the U.S. is a myth, perpetrated by images of fat Americans returning from the mall with their gas-guzzling SUVs filled to the roof-line.  While this may be an accurate portrait of the top 2-3% of wage-earners, reality for the vast majority of Americans is quite different.  When American families’ median income is something in the range of $48,000, how much money is left for “over-consumption” after paying the mortgage (or rent), putting food on the table, paying the utilities and buying health care?  Precious little. 

The problem with our trade imbalance isn’t that Americans over-consume.  The problem is that virtually everything we do consume is foreign-made.  Would President Obama have us stop consuming altogether?  What would we wear?  Every stitch of clothing sold in this country is foreign.  Would he have us stop maintaining our homes?  Nearly everything on the shelves at Lowe’s and Home Depot is foreign made.  Would he have us stop maintaining our cars?  Try finding an American-made auto part.  Should we stop replacing burned-out televisions?  There hasn’t been an American-made television in decades.

We have no choice but to continue buying foreign-made products, perpetuating the global trade imbalances.  Nothing is going to change until Obama, or some subsequent president with the guts to do it, finally says to the WTO (World Trade Organization) “enough is enough.”  “It’s clear the rest of the world won’t voluntarily eliminate its dependence on exports to America, so we’re putting tariffs back in our trade policy tool box.”  Only then will there be any hope of rebuilding the manufacturing sector of our economy and fixing the trade imbalances that have brought us to our knees.

Obama understands the problem.  He truly does, as evidenced by this last statement:

“We can’t go back to the era where the Chinese or the Germans or other countries just are selling everything to us, we’re taking out a bunch of credit card debt or home equity loans, but we’re not selling anything to them,” Obama said in an interview with CNN television.

OK, Mr. President, the question now is what are you going to do about it?  Talk, talk, talk and asking other nations to fix the problem for you isn’t action, it’s shirking your responsibility.  What are YOU going to do? 

One final comment about the following paragraph is in order:

For years before the financial crisis erupted in 2007, economists had warned of the dangers of imbalances in the global economy — namely huge trade surpluses and currency reserves built up by exporters like China, and similarly big deficits in the United States and other economies.

What a crock.  Economists’ zeal for one of their pet 18th century theory, Ricardo’s principle of comparative advantage, is what led to the creation of this globalized mess in the first place.  For anyone to claim that economists have been “warning of the dangers” is laughable and the epitome of historical revisionism.  If the U.S. ever does take real action to unwind the mess, it’ll be over the howls of protest from economists. 

The only good news here is that Washington’s patience with globalization’s parasitic predation on the American market is clearly wearing thin.   But real action still seems to be a big leap from where we are today.

E-Mail from Senator Stabenow; My Response

Today I received the following E-mail from Senator Debbie Stabenow of Michigan, with the text of a letter she sent to President Obama, complaining of unfair trade practices in the implementation of “cash-for-clunkers” programs in Japan and Korea:

Dear Pete,

Earlier today, Senator Debbie Stabenow sent a letter to President Obama urging him to call for Prime Minister Yukio Hatoyamaof Japan and President Lee Myung-Bakof South Korea to follow their WTO obligations at the upcoming G-20. Both countries have continued to discriminate against American automakers at great cost to businesses and workers across the country.

Full text of the letter is below:

September 18, 2009

 

President Barack Obama

The White House

1600 Pennsylvania Avenue, NWWashington, DC 20502

Dear President Obama,

When we put together the CARS Program (more commonly known as “Cash for Clunkers”), we followed international law and made it apply to allcars sold in the United States – not just American cars, which is what I and most of my constituents would have greatly preferred.

Instead, we followed the law, and the CARS Program was written to abide by our international agreements. That is why it is so outrageous that Japan and Korea would have the audacity to implement similar programs that discriminate against American automakers.

In Japan, a tangle of complicated paperwork keeps American cars from being eligible. Cars purchased in their program must get “Type Approval” to qualify, but importers commonly use a different method of certification, known as the Preferred Handling Procedure. Cars with this PHP certification are not eligible for Japan’s program, thus excluding almost all American-made cars.

In Korea, any car that is 10 years or older can be turned in for a tax incentive toward the purchase of a new car. This sounds great – except that in Korea, imports face numerous non-tariff trade barriers effectively capping all foreign imports at 5 percent, meaning that American cars are essentially disqualified from the purchase program.

When you meet with Prime Minister Yukio Hatoyamaof Japan and President Lee Myung-Bakof South Korea at the upcoming G-20, I strongly urge you to remind them of their obligations under the WTO. Over the years, you and I have worked together to hold countries accountable who ignore their trade agreements. We cannot allow other countries to violate trade rules and harm American Businesses and American workers, who are the backbone of our middle class.

I look forward to working with you to truly create a level playing field on trade.

Sincerely,

Senator Debbie Stabenow

The following was my response to Senator Stabenow:

The real problem with our trade policy is that it fails to account for the role of population density in driving huge trade imbalances. Of course the Koreans and Japanese exclude American cars from their markets. Their markets are so emaciated by over-crowding that even their domestic manufacturers have trouble selling cars there.

The ONLY way to restore a balance of trade and stop the parasitic predation of the American market is to abandon the WTO and return to a system of tariffs that will assure the restoration of balance.

How long will we continue to pursue this failed free trade model? What will it take to force a change? Apparently a cumulative trade deficit of $9.5 trillion, compiled over the past thirty-three years of consecutive trade deficits, still isn’t enough to do the job.

I’m afraid there’s no hope for our economy as long as our lawmakers allow the rest of the world to play us for fools.

Pete Murphy

Author, “Five Short Blasts”

U.S. Chamber of Commerce Betrays Its Membership

 

http://www.reuters.com/article/domesticNews/idUSTRE58E4MH20090915?sp=true

President Obama finally makes one small foreign trade policy move in support of American business and workers, imposing tariffs on Chinese tires in an attempt to prevent the complete collapse of the American tire industry, and the U.S. Chamber of Commerce is all over him.  As reported in the above-linked Reuters article,the Chamber takes Obama to task not just for the tire tariffs, but for keeping Mexican trucks off our roads and for not rubber-stamping free trade deals with Colombia, Panama and South Korea. 

In every case, the Chamber has sided with foreign countries eager for access to the American market, all in the belief that we are missing out on huge increases in American exports.  This, in spite of the fact that our trade results for the past three decades have proven that free trade with overpopulated nations only erodes business for American companies by surrendering our domestic market in greater measure than is ever recovered with exports.  It boggles my mind that, when it comes to trade, American economists, business leaders and organizations see no value to our domestic market, eager to give it away, while every other nation on earth salivates at the opportunity to sell their products here.

“A major surge in exports is our best path out of a recession, out of double-digit unemployment and the exploding deficits we’re now experiencing,” Donohue (Chamber President) said.

The emphasis is always on exports, never accounting for imports.  The Chamber would have us believe that only exports create sales opportunities for American businesses, and that no business is lost to imports.  Such inability to perform the most simple math stretches credulity, and one can’t help but believe there’s something more sinister going on here – that perhaps the U.S. Chamber of Commerce has become a puppet of foreign countries eager to prey on the American market.  There’s simply no other explanation. 

In fact, the article offers some confirmation that that is exactly what’s going on here, with the Chamber’s position formulated by an international trade consulting firm :

Trade Partnership Worldwide, an economic consulting firm that specializes in estimating the impact of trade policies, prepared the report for the business group.

Throughout the article, the Chamber wrings its hands over the potential for others to cut off imports from America in response to any move by the U.S. to preserve domestic market for our own manufacturers.  Never does it consider that we too could retaliate out of proportion and cut off even more of their imports.  Do they not understand that, in this game of tit-for-tat, the nation with the huge trade deficit – the U.S. – holds all the cards? 

A trade war in manufactured goods is nothing to fear.  We can just as easily manufacture any and every product here as anywhere else.  And, while a trade war in natural resources certainly would be something for the U.S. to fear, it’s no coincidence that we don’t rely on the same nations who prey upon our markets for manufacturing jobs as a source for our natural resources. 

The exclusive use of unfettered free trade is stupid trade policy, as proven by thirty-three years of consecutive trade deficits.  The backing of such policy by a powerful and prestigious organization like the U.S. Chamber of Commerce doesn’t confer legitimacy upon it.  Rather, it only makes the Chamber look stupid as well.  The hard-earned money spent by member companies for the purported benefits of this organization would be far better spent with other organizations who understand the value of balance  in trade deals and who demand that others buy as much from us as we buy from them.

Obama Imposes Tariffs on Chinese Tires

 

http://news.yahoo.com/s/ap/20090912/ap_on_go_pr_wh/us_us_china_trade

President Obama, after eight months in office, has made his first trade policy move in support of American workers, imposing stiff tariffs (though lower than the tariffs recommended by the U.S. International Trade Commission) on imports of tires from China. 

Subsequent whining by the Chinese about protectionism and violation of World Trade Organization rules was predictable.

“China strongly opposes this serious act of trade protectionism by the U.S.,” a statement posted on China’s Ministry of Commerce Web site said. “This act not only violates the rules of the World Trade Organization but also violates the relevant commitments made by the U.S. government at the G-20 financial summit.”

Obama’s move will harm U.S.-China economic and trade relations, the statement said.

One could only hope. 

Obama had until Sept. 17 to accept, reject or modify a U.S. International Trade Commission ruling that a rising tide of Chinese tires into the U.S. hurts American producers. The United Steelworkers blames the increase for the loss of thousands of American jobs.

The federal trade panel recommended a 55 percent tariff in the first year, 45 percent in the second year and 35 percent in the third year. Obama settled on slightly lower penalties — an extra 35 percent in the first year, 30 percent in the second, and 25 percent in the third, White House press secretary Robert Gibbs said.

… Governments around the world have suggested the United States talks tough against protectionism only when its own industries are not threatened. U.S. rhetoric on free trade also has been questioned because of a “Buy American” provision in the U.S. stimulus package.

What the rest of the world criticizes as “protectionism” is any tariffs imposed by the U.S. on their imports – any violation of the “free trade” spirit of WTO rules.  The fact is this:  while the WTO talks about “free trade,” it actually enforces protectionist tariffs in favor of two thirds of its member states, including China, but not the U.S.  These nations eagerly cry “foul” and deride the U.S. as “protectionist” any time we even consider moves to support our own industries, while they are, in fact, the biggest beneficiaries of WTO-enforced protectionism. 

… Roy Littlefield, executive vice president of the Tire Industry Association, which opposes the tariff, said it would not save American jobs but only cause tire manufacturers to move production to another country with less strict environmental and safety controls, less active unions and lower costs than the United States.

The Tire Industry Association is an international organization representing all tire manufacturers of the world.  Gee, let’s see.  95% of the world’s tire manufacturers are foreign, but the biggest market is the U.S.  Is it any wonder that the Tire Industry Association is opposed to U.S. tariffs?  And notice how these industry associations all adopt American-sounding names and have American presidents.  That way, it sounds like these are American businesses supporting free trade and criticizing American tariffs.  There’s no shortage of these American executives who, for the right price, are perfectly willing to take up the cause of foreign interests to the detriment of their own countrymen. 

Littlefield makes a valid point, though.  What’s to stop the tire imports from shifting to Japan, Korea, Mexico or some other nation where labor is in a gross state of over-supply?  We need import tariffs on tires from all such countries, not just China.  But we need even more.  Domestic auto manufacturers are being put at a competitive disadvantage without access to cheap Chinese tires.  What we need are tariffs on all manufactured products imported from all overpopulated nations.  It’s the only way to eliminate the global trade imbalances that have wrecked our economy, trade imbalances driven by huge disparities in population density.   

For the Chinese government, the tire dispute threatens an economic relationship crucial to China’s economic growth. There was speculation before the decision that new tariffs could produce public pressure on Beijing to retaliate, potentially sparking a trade war.

Let’s see, what’s the worst that could happen in a trade war with China?  A total cessation of trade.  The net result is that $250 billion worth of manufacturing returns to the U.S., boosting GDP by $500 billion.  Sounds like an outcome we could live with!  Bring it on!  So what if China threatens to dump its U.S. Treasury holdings?  Such a boost to the U.S. economy would send the dollar soaring, making other nations eager to buy up every bond the Chinese sold! 

There’s a lot more work to be done on our badly-broken trade policy.  Let’s hope this is a start of that process and not just a token gesture.  Let’s hope it’s a sign of impatience within the administration with the lack of progress by nations who have promised to rely less on exports and to expand their domestic economies.  Maybe they just need a little help in keeping that promise.

Federal Reserve Balance Sheet

 

Ever wondered what the Federal Reserve’s balance sheet looks like?  Take a look:

http://www.federalreserve.gov/releases/h41/Current/

You can see that the Federal Reserve pumped almost $1.2 trillion into the economy in the last year.  And it’s still growing, but at a slower rate.  Last week the balance sheet grew by $6.3 billion. 

I won’t even pretend to be able to analyze all of this.  Just thought you’d be interested.

Renewable Energy Jobs Go Bye-Bye

 

http://www.reuters.com/article/newsOne/idUSTRE5833F220090904

The above-linked article is a little old, but I didn’t want to let it pass without comment.  When the administration began championing “green jobs” and renewable energy as the solution to our unemployment problem, I countered that the manufacture of solar cells and wind turbines was just as likely to end up in foreign plants as any other product. 

Now comes the first evidence of this:

German solar firms Conergy and Solarworld have voiced strong concern about the pricing practices of Chinese panel makers — who undercut their German peers’ products by around 20 percent.

Industry experts say U.S. firms share those German concerns.

… The once red-hot solar sector faces a massive oversupply of cells and modules that has driven down average selling prices for solar systems by more than a fifth in Germany and the United States — two major solar markets — and Chinese companies are grabbing market share by slashing costs.

… Making solar energy affordable through subsidies was always a challenge for Western governments promoting clean energy use, but resisting low-cost imports from China may prove a bigger hurdle.

Equipment for the renewable energy industry is no different than any other product.  It can be manufactured anywhere and, without tariffs to make domestic manufacturing the logical alternative, it will by default end up in the hands of countries where labor is in the worst state of over-supply.  There is no way to gimmick our way out of this fundamental economic truth.

July Trade Deficit Far Worse Than Expected

 

http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

The Census Bureau released foreign trade data for the month of July this morning, and the results were far worse than forecasts.  Consensus among economists was that the deficit would worsen slightly, rising from $27.0 billion in June to $28.0 billion in July, with the high end of expectations being $29.5 billion.  Instead, the actual July trade deficit soared to $32.0 billion!  (The above link will take you to the full report.)

Exports rose slightly, but the rise was dwarfed by a rise in imports.  The rise in imports was led by non-petroleum goods (in other words, manufactured products), rising by over $6 billion.  Auto imports led the way, fueled by the “cash-for-clunkers” program. 

This was the worst one-month increase in the trade deficit since 1999. 

Since our last trade surplus in 1975, our cumulative trade deficit (in current dollars) has risen to $9.55 trillion, every penny of which has been financed by a sell-off of American assets. 

These trade results are a slap in the face for President Obama, whose jaw-boning of other nations like Japan, Korea, China and Germany resulted in promises by them to rely less on exports and to stimulate their own domestic economies.  But these results are predictable.  These nations will never, ever reduce their reliance on exports voluntarily.  They won’t because they can’t.  If I’ve said it once, I’ve said it a thousand times, the ONLY way to eliminate the global trade imbalances that collapsed the economy – the only way for the U.S. to restore a balance of trade – is through tariffs. 

The Obama administration, as well as the Federal Reserve, knows full well that the trade deficit lies at the heart of all of our economic problems.  I predicted that Obama would, for some time, try the traditional mamby-pamby, Mr. Nice Guy approach to the trade problem, trying to convince other nations to fall on their own swords and fix our problem for us.  This July trade deficit figure is the clearest evidence to date that that approach is a failure.  The August figure will be even worse, since the “cash-for-clunkers” program was primarily in August, and foreign car-makers were only then scrambling to boost depleted inventories. 

How much worse does it have to get before Obama acts?  Will he sit by and do nothing while our deficit slowly returns to the pre-recession levels?  If he does, he’ll go down in history as another place-holder, do-nothing president who didn’t have the courage to do right by the American people.

Globalization Giving Way to the “Deglobalization Paradigm?”

 

http://www.fpif.org/fpiftxt/6399

In the above-linked article (one I strongly encourage you to read) Philippine economist Walden Bello, who the Economist magazine credits with coining the term “deglobalization,” advances what he calls the “deglobalization paradigm,” a new economy that he proposes to replace the failed model of globalization.  His article includes what he calls “11 pillars of the alternative” – key features of this new economy.  First and foremost among them is domestic manufacturing. 

At the same time, an article in the Economist (see 

http://www.economist.com/world/international/displaystory.cfm?story_id=13145370) observes that globalization seems to be in full retreat on all fronts.  Of course, this is a source of great consternation for the Economist, since the failure of globalization would be an indictment of the economic theories at the foundation of the Economist’s core beliefs.  What hope would there be for a magazine peddling what has been proven to be utter nonsense? 

Bello is right on in his observations of the current state of economics.  All major economies of the world have acknowledged the need to depend less on exports and more on domestic consumption as the foundation of their economies.  But none have taken any concrete steps to move in that direction.  Toyota isn’t closing any dealerships in the U.S.  LG Electronics isn’t pulling TVs from the shelves to make room for American-made alternatives.   And China hasn’t told any of its ships to turn around.  Nor has the U.S. taken even the smallest step toward tariffs designed to make domestic manufacturing the logical choice.  Instead, our government is desperately trying to resume the force-feeding of debt for the American consumer.  Like a comatose patient kept alive with feeding tubes and breathing machines, our economy is sustained with an IV drip of printed money by economic doctors who have no clue as to what to try next.  They heave a collective sigh of relief at seeing the vital signs stabilized, but know very well that it’s all an illusion – that the patient is surely dead if that life support is removed. 

Although Obama has publicly disavowed any moves toward protectionism and has, until now, pinned all his hopes on promises by export-dependent nations to boost domestic consumption and rely less on those exports, Monday’s move by Obama to name Ron Bloom a sort of manufacturing czar for the economy may be the first hint that he’s beginning to hedge his bets.  Perhaps it’s a sign that he’s losing patience with the current approach and recognizes the need for a real strategy for boosting domestic manufacturing.  Surely it hasn’t escaped his attention that the economies that have fared best in recent years, most notably China, are those that have been built on a backbone of manufacturing, while those that have eschewed manufacturing in favor of financial wizardry, as the U.S. has done, are now paying a heavy price.  And it was probably no small source of irritation that countries like Korea and Japan, who have promised to rely less on exports, pounced on his “cash-for-clunkers” program, siphoning sales away from domestic auto manufacturers, further eroding their market share and turning the program into a GDP-destroying boost in the U.S. trade deficit. 

The “deglobalization paradigm” is coming, and not a moment too soon.  But before we write the epitaph for globalization, it’s critically important to understand why, instead of boosting all economies, it produced persistent trade imbalances that finally brought the global economy to its knees. Otherwise, there will be constant attempts to re-start the process again.

The hopes for globalization were rooted in a free trade theory that all nations benefit when each specializes in what they do best, trading that product for those of other nations. But this theory failed to account for the relationship between population density and per capita consumption, and what happens when nations grossly disparate in population density attempt to trade freely with one another. When one understands this relationship, it becomes easy to predict that a nation like the U.S. would experience large, persistent trade deficits with nations like Japan, Germany, China and others that are all far more densely populated. And it becomes easy to predict the trade imbalances that finally ground the global economy to a halt.

Nations like Japan, Germany, China, Korea and others didn’t become so heavily dependent on exports out of choice or out of neglect of domestic consumption. Their extreme population densities make them incapable of domestic consumption at a rate that will gainfully employ their bloated labor forces. Globalization allowed their economies to thrive through manufacturing for export, siphoning jobs away from the U.S. and other less densely populated markets. Efforts to boost domestic consumption in such overpopulated nations will fail and without the exports that they’ve come to rely upon so heavily, unemployment in those nations will soar. And it’s just as easy to predict that, unless nations are given the freedom to set tariffs aimed at maintaining a balance of trade, nothing will change and global trade imbalances will persist.

For some period of time, the new “deglobalization paradigm” will spell huge problems for economies now dependent on exports. But in the long run, they’ll be far better off, as long as they recognize that a sustainable economic strategy is one that includes reductions in population densities to a level where domestic consumption isn’t choked off by over-crowding.