Trade Theory Overlooks Role of Population Density

January 31, 2011

Earlier this month, we began an examination of the U.S. balance of trade in manufactured goods in 2009, and how it may have been impacted by population density.  (See America’s Top 20 Per Capita Trade Deficits in 2009 and America’s Top 20 Per Capita Trade Surpluses in 2009.)  Those two articles dealt with the top 20 deficits and surpluses.  But it would be wrong to draw conclusions from those two shapshots without considering what happened with the other 123 nations involved in the study. 

The following chart breaks down the 163 nations involved in the study (essentially every nation on earth with the exception of tiny island nations) into two categories – those nations above the world median population density and those nations below the median population density.  There are the same number of nations in each grouping.  Here’s the chart, which is the same as Figure 7-4 on page 125 of Five Short Blasts, but updated to include 2009 data: 

Balance of Trade vs Population Density

The difference in trade results with these two groups of nations couldn’t be more stark.  With the less densely populated nations, the U.S. had a surplus of trade in manufactured goods in 2009 of $102 billion.  With the more densely populated group of nations, the U.S. had a trade deficit in manufactured goods in 2009 of $422 billion!  There are some important points to emphasize here:

  • There are the same number of nations in each group.  The only difference is population density.
  • The group of nations above the median population density represents 77% of world’s population.
  • The group of nations below the median population density represents 75% of the world’s land mass. 
  • The 2009 results are perfectly consistent with 2005 and 2006 results.

In the previous two articles, we made lists of America’s top twenty trade deficits in manufactured goods as well as the top twenty surpluses, and then examined whether these lists were dominated by densely populated and sparsely populated nations respectively.  But I was curious to see what the results would be if we looked at it from another angle.  What if we listed the most densely populated nations on earth and the least densely populated nations?  Would we find the first list dominated by nations with whom we have trade deficits, and would we find that the least densely populated nations are dominated by U.S. trade surpluses?  (This is an angle I didn’t include in Five Short Blasts.)

The first is a list of the most densely populated nations on earth:

20 Most Densely Populated

As you can see, the U.S. has a trade deficit in manufactured goods with fifteen of those twenty nations.  So how about the least densely populated nations?  We should find few trade deficits amongs that group.  Well, not only does the U.S. not have a single trade deficit among the twenty least densely populated nations, you won’t find a single trade deficit among the thirty least densely populated. 

30 Least Densely Populated

You can’t see it on this list, but the first trade deficit that pops up on a list of the most sparsely populated nations is Armenia, number 32 on the list.  In fact, of the 55 nations less densely populated than the U.S., we have a trade deficit in manufactured goods with only 4 of them:  Laos, Sweden, Finland and Armenia.

I continue to be absolutely astounded that the relationship between population density and per capita consumption, and the consequences of this relationship for international trade, continue to elude the entire field of economics.  This relationship has the potential to shake the entire field to its core.  Yet, so fearful are economists of the scorn that’d be heaped upon them by other economists for even daring to suggest that population growth could be a problem, that not one is willing to pull his or her head out of their growth models and pseudo-mathematical formulae long enough to consider real-world relationships and effects.


4th Quarter GDP Up, But for How Long?

January 28, 2011

The Bureau of Economic Analysis (BEA) released its first estimate of 4th quarter GDP this morning.  (Link to the report provided above.)  GDP growth picked up steam in the 4th quarter, rising to 3.2% from the 3rd quarter reading of 2.6% 

What matters more than just raw GDP is the share of the pie for each American.  Since the population is constantly growing (unfortunately), GDP must grow faster in order for real per capita GDP to keep from falling behind.  It did in the 4th quarter, rising by 0.57% to $43,032 per person, its first reading above $43,000 since the 3rd quarter of 2008.  The peak was $44,091 reached in the 4th quarter of 2007. 

If stimulus spending is stripped out of the equation, providing an even better measure of the underlying economy, the results are even better.  See the red line on the following chart:

Real Per Capita GDP

Of course, there’s been no real improvement in the employment situation. 

So, is the economy really doing that much better?  Difficult to say.  The growth in GDP in the 4th quarter was driven in large part by a jump in holiday spending, riding a wave of optimism over extension of the Bush tax cuts.  Perhaps some of that was also fueled by the rising stock market, with that rise fueled in large part by the Fed’s QE2 program of buying treasuries.  That program will continue until June.  The stock market rally has continued into January, but will likely begin pulling back soon in anticipation of what happens when QE2 ends. 

But the biggest driving force behind GDP growth in the 4th quarter was trade.  Exports were up 8.5% while imports (a subtraction from GDP) were down 13.6%.  That’s a big swing.  But, if you’ve been following my reporting on trade, you know that those trade results are suspect, driven largely by gimmicks and swings in oil pricing and import timing.  I’m very skeptical that these trade results are real or sustainable. 

In addition, we’ve already begun to see erosion in economic conditions in January.  The housing market has slipped into a double-dip recession after showing glimmers of life in the fall.  Mortgage applications are falling steadily.  First time jobless claims are spiking up again and durable goods orders are declining.  The economy’s looking shaky again, regardless of the jump in 4th quarter GDP.  This economy isn’t out of the woods yet by a long shot.

State of the Union: “Winning the Future” or Embracing the Status Quo?

January 27, 2011

Obama’s thrown in the towel.  Swept into office two years ago with pledges to tackle the tough issues confronting the nation, he as much as threw up his hands Tuesday night and admitted that he’s willing to muddle along with compromise on trivial issues that, at best, will sustain the status quo.  It was a speech long on platitudes about past American greatness and talk of out-educating and out-innovating other nations to restore the American dream, but woefully short on any details about how we’ll get there.  It was more a patchwork of catchy slogans cobbled together from any and every state of the union speech that preceded it.  There was little worthy of comment, but there are a few things that I thought needed addressing.

At stake right now is not who wins the next election — after all, we just had an election. At stake is whether new jobs and industries take root in this country, or somewhere else.

Translation:  we won’t even try to bring back the jobs of our existing industries.  That would involve a change in trade policy that Obama doesn’t have the courage to make.  Yet, somehow, “new jobs and industries” will be unaffected by the same trade policies that devastated the old ones.

In a single generation, revolutions in technology have transformed the way we live, work and do business. Steel mills that once needed 1,000 workers can now do the same work with 100. Today, just about any company can set up shop, hire workers, and sell their products wherever there’s an Internet connection.

Meanwhile, nations like China and India realized that with some changes of their own, they could compete in this new world. And so they started educating their children earlier and longer, with greater emphasis on math and science. They’re investing in research and new technologies. Just recently, China became the home to the world’s largest private solar research facility, and the world’s fastest computer.

Bull.  China owes their rise to global economic super-power status to one thing:  America foolishly granting them MFN status and not insisting that trade between the two nations be balanced.  He’s blaming technology and productivity for our economic decline instead of stupid trade policy, while at the same time promoting technology and productivity as our future salvation.

So, yes, the world has changed. The competition for jobs is real.  But this shouldn’t discourage us. It should challenge us. Remember — for all the hits we’ve taken these last few years, for all the naysayers predicting our decline, America still has the largest, most prosperous economy in the world.  No workers — no workers are more productive than ours. No country has more successful companies, or grants more patents to inventors and entrepreneurs.  We’re the home to the world’s best colleges and universities, where more students come to study than any place on Earth.

Wait a minute, isn’t the whole premise of this speech that we’ve fallen behind the rest of the world in terms of competitiveness and an educated work force?  So now you’re saying that, although we’re the best, we have to be better in order to compete with less productive nations and less educated work forces?  Something doesn’t add up.

The first step in winning the future is encouraging American innovation. None of us can predict with certainty what the next big industry will be or where the new jobs will come from. Thirty years ago, we couldn’t know that something called the Internet would lead to an economic revolution. What we can do — what America does better than anyone else — is spark the creativity and imagination of our people. We’re the nation that put cars in driveways and computers in offices; the nation of Edison and the Wright brothers; of Google and Facebook. In America, innovation doesn’t just change our lives. It is how we make our living.

That’s not true.  A very small fraction of our work force made its living by inventing things.  The vast majority of Americans have always made their living by manufacturing those things, by farming and mining natural resources, and by providing the services we all need.  It’s impossible to build an entire economy out of “innovating.” 

This is our generation’s Sputnik moment. Two years ago, I said that we needed to reach a level of research and development we haven’t seen since the height of the Space Race. And in a few weeks, I will be sending a budget to Congress that helps us meet that goal. We’ll invest in biomedical research, information technology, and especially clean energy technology, an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.

“Biomedical research?”  Aren’t we trying to cut medical costs?  You can’t build an economy around a sector you’re trying to shrink.  “Information technology?”  Wasn’t that the “new economy” of the ’90s, the one whose manufacturing was quickly outsourced to China and others?  “Clean energy technology?”  That’s fine, but we pretty much already know how to build nuclear plants, wind turbines and solar farms.  The question is what change you’re going to make to trade policy to stop the outsourcing of that equipment as well.

We’re telling America’s scientists and engineers that if they assemble teams of the best minds in their fields, and focus on the hardest problems in clean energy, we’ll fund the Apollo projects of our time.

The Apollo project was funded back in the ’60s, before our financial resources were completely drained by a three-decades-plus trade deficit.  Now there’s no more source for such funding. 

At the California Institute of Technology, they’re developing a way to turn sunlight and water into fuel for our cars. At Oak Ridge National Laboratory, they’re using supercomputers to get a lot more power out of our nuclear facilities. With more research and incentives, we can break our dependence on oil with biofuels, and become the first country to have a million electric vehicles on the road by 2015.

Get serious.  Breaking the hydrogen-oxygen bond in water requires more energy than burning hydrogen could ever deliver.  It was a pipe-dream that serious scientists gave up on long ago.  It’s the very reason that fuel cell technology has stalled.  The only viable source of hydrogen is stripping it from hydrocarbons.  Might as well just burn the damn stuff in an internal combustion engine and get it over with.  And more power from our nuclear facilities by using “supercomputers” to run them hotter?  Oh, boy, can’t wait for that one.

Now, clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling. So tonight, I challenge you to join me in setting a new goal: By 2035, 80 percent of America’s electricity will come from clean energy sources.

That goal was set two years ago.  Have we made any progress?  I wonder how long this goal will be repeated before folks realize that, to get there, we needed to start making progress twenty years ago?  And, oh, by the way, wouldn’t it help if we just stopped importing an additional 1.1 million oil consumers each year?

Over the next 10 years, nearly half of all new jobs will require education that goes beyond a high school education. And yet, as many as a quarter of our students aren’t even finishing high school. The quality of our math and science education lags behind many other nations. America has fallen to ninth in the proportion of
young people with a college degree. And so the question is whether all of us — as citizens, and as parents — are willing to do what’s necessary to give every child a chance to succeed.

The ranks of the unemployed are loaded with college graduates, even those with advanced degrees, who can’t find work.  We have no shortage of educated workers.  We already give them the education they need to succeed.  What we don’t have are jobs.  Where are all these mythical jobs that are going unfilled due to a shortage of educated workers?  Obama’s been listening to too many lobbyists eager to import cheap labor through the H-1B visa program.

That responsibility begins not in our classrooms, but in our homes and communities. It’s family that first instills the love of learning in a child. Only parents can make sure the TV is turned off and homework gets done. We need to teach our kids that it’s not just the winner of the Super Bowl who deserves to be celebrated, but the winner of the science fair.  We need to teach them that success is not a function of fame or PR, but of hard work and discipline.

There’s a hell of a lot of young graduates out there who have been taught these things all their lives and still have a hard time finding work.  We need jobs, not just for the kids who win the science fairs, but for every other kid too, even the ones who came in dead last. 

Because people need to be able to train for new jobs and careers in today’s fast-changing economy, we’re also revitalizing America’s community colleges. Last month, I saw the promise of these schools at Forsyth Tech in North Carolina. Many of the students there used to work in the surrounding factories that have since left town. One mother of two, a woman named Kathy Proctor, had worked in the furniture industry since she was 18 years old. And she told me she’s earning her degree in biotechnology now, at 55 years old, not just because the furniture jobs are gone, but because she wants to inspire her children to pursue their dreams, too. As Kathy said, “I hope it tells them to never give up.”

It would be interesting to follow this story to find out if Kathy has retrained herself to be an unemployed biotechnologist instead of an unemployed furniture-maker.  There’s plenty of biotechnologists out there who can’t find work either.  Trade policy has shipped most of those jobs overseas, just like manufacturing jobs. 

One last point about education. Today, there are hundreds of thousands of students excelling in our schools who are not American citizens. Some are the children of undocumented workers, who had nothing to do with the actions of their parents. They grew up as Americans and pledge allegiance to our flag, and yet they live every day with the threat of deportation. Others come here from abroad to study in our colleges and universities. But as soon as they obtain advanced degrees, we send them back home to compete against us. It makes no sense.

I agree.  We shouldn’t bring them here and educate them in the first place.  Let’s save those seats at the universities for American students and save the jobs for American graduates. 

 And let’s stop expelling talented, responsible young people who could be staffing our research labs or starting a new business, who could be further enriching this nation.

Is he actually saying that American students are too stupid to staff labs and start businesses?

Our infrastructure used to be the best, but our lead has slipped. South Korean homes now have greater Internet access than we do.

Could that be because their population is so dense that one wi-fi connection serves a lot more people than one connection does here?

Countries in Europe and Russia invest more in their roads and railways than we do.

They’re also even more bankrupt than we are.

China is building faster trains and newer airports.

That’s because they have a huge stockpile of trade surplus money to work with.

Within 25 years, our goal is to give 80 percent of Americans access to high-speed rail.  This could allow you to go places in half the time it takes to travel by car.

It will also cut the per capita consumption of cars, putting thousands more out of work.

To help businesses sell more products abroad, we set a goal of doubling our exports by 2014 — because the more we export, the more jobs we create here at home. Already, our exports are up. Recently, we signed agreements with India and China that will support more than 250,000 jobs here in the United States. And last month, we finalized a trade agreement with South Korea that will support at least 70,000 American jobs.

Exports are up, but not at a pace that will double them in five years.  And imports are up even more.  The result is a net loss of jobs.  And notice that the president says that his trade deal will support X number of jobs.  That’s because these exports are already baked into the existing capacity of manufacturers like Boeing.  No new jobs will be created.  We don’t just need orders for a few more planes.  We need for entire industries to return to our shores.

Now, before I took office, I made it clear that we would enforce our trade agreements, and that I would only sign deals that keep faith with American workers and promote American jobs. That’s what we did with Korea, …

Oh, really?  Signing a trade deal that caps U.S. auto exports at 75,000 while leaving South Korean imports unlimited is your idea of promoting American jobs?  Only a fool would enter into such an agreement.  This was the most disturbing portion of the speech – Obama’s willingness to sign more destructive free trade deals, not to help American workers, but out of desperation to show bipartisanship with Republicans, perhaps giving him a small boost in the polls.

We are living with a legacy of deficit spending that began almost a decade ago. And in the wake of the financial crisis, some of that was necessary to keep credit flowing, save jobs, and put money in people’s pockets.

… So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years.  Now, this would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was President.

First of all, a 5-year freeze in domestic spending is chump change relative to the size of our fiscal mess.  Secondly, it’s completely bogus to state spending as a fraction of the economy.  GDP has grown many times over since the Eisenhower administration while the population – the people who have to pick up the tab – has only doubled, while their incomes have barely grown.  In per capita terms, the spending has skyrocketed. 

Let me take this one step further. We shouldn’t just give our people a government that’s more affordable. We should give them a government that’s more competent and more efficient. We can’t win the future with a government of the past.

We live and do business in the Information Age, but the last major reorganization of the government happened in the age of black-and-white TV.

Yeah, that’s bad.  But, hell, that’s nothing.  Our constitution hasn’t been amended in any meaningful way since passage of the 19th amendment, giving women the right to vote in 1920.  Our consitution and the bill of rights pre-date the discovery of electricity and the entire field of economics.  Land west of the Mississippi was unexplored. 

Our founding fathers couldn’t conceive of a day when speech would be controlled by the media and sold to the highest bidder, or that something like pornography would ever be considered “speech.”  They couldn’t envision global corporations or imagine that they would ever be interpreted to be “the people.”  Since no trade theories had yet been formulated, they couldn’t imagine spending any more on imports than we’d earned for our exports.  Surely no one would be dumb enough to do such a thing on a consistent basis.  Nor could they imagine spending more than revenues taken in, year-in and year-out.  That our population could ever grow to the point where it would outstrip the resources of this seemingly infinite new land was unfathomable.  The constitution was meant to be a statement of high principles, not a mundane laundry list of common sense approaches that should go without even saying.  Yet it seems that that’s exactly what we need, since a dearth of common sense has us in the fast lane on the road to ruin.  It’s high time for a constitutional convention to define the kind of country we want to have in the future.  The executive and legislative branches will never take us in that direction without it. 

To be fair, the Republican response was little better.  There was more emphasis on cutting the debt, but in the belief that smaller government will somehow grow our economy.  I’m always amazed at logic that hasn’t been tested at its limits.  If this were true, then the most prosperous nations on earth would be those without central governments at all – nations existing in a state of anarchy.  I don’t think Tunisia will be taking the title of World’s Most Prosperous Nation any time soon. 

Conversely, the nation with the most rapid growth, China, is also arguably the one with the most central control of its economy.  I’m not arguing for bigger central government.  The fact is that it isn’t so much the size of the government that’s important, but whether it’s acting in the best interest of its people.  Ours does not, placing the principle of free trade – a failed 18th century economic theory – ahead of the interest of the American people.

So the president has abandoned his vision of tackling the tough issues and rewriting trade deals to benefit U.S. workers in favor of a new agenda:  tinkering at the margins.  Cut a little spending here and move it over there.  Eliminate a few tax loopholes while enacting some new ones.  Build a few token clean energy plants.  Create a few new jobs and pretend we don’t notice others that are being eliminated.  Boost exports and ignore imports.  Use more immigration to stoke “economic” growth.  When we run out of rugs under which we can sweep our problems, simply install wall-to-wall carpeting. 

I’ve heard it all before, year after year, decade after decade.  Each president puts in his time, puts out a few fires, and writes his memoirs congratulating himself on a job well-done.  Just what we need – another care-taker president maintaining the status quo.  Another opportunity lost and another 4-8 years wasted.  America is a rudderless ship adrift amidst a school of sharks.

Obama Hears a Hu, Jeffrey Promotes Exports-R-Us, and Other Childish Things

January 24, 2011

I’ve been side-lined for a while dealing with some issues, so there’s lots to catch up on.

I think the title of this post pretty well summarizes the major stories of the past week or so.  The names in the news evoke images of childish things like a Dr. Seuss book and the iconic giraffe representing Toys-R-Us.  (OK, so the spellings are different.)  The policies on display with the visit by Chinese premier Hu Jintao and Obama’s naming of GE CEO Jeffrey Immelt as the head of his new “jobs and competitiveness” council are no less simplistic. 

 These fairy tales about the big push to boost exports and competitiveness are designed to create the illusion of doing something to help the economy.  After all, perception is reality.  Reality is not.  As long as the electorate perceives that something is being done, what do results really matter?  These approaches have been tried by every administration for the past three decades, all with the same result – failure.  This time will be no different.

Let’s begin with Hu’s visit.  (See the first link above.)  Much was made of the $45 billion export deal that Obama struck with Hu during his visit – most of that deal consisting of a Chinese commitment to buy 200 Boeing planes in the next couple of years.  First of all, does anyone believe that these aren’t planes that the Chinese had planned to buy anyway?  Did Obama convince Hu to buy planes China didn’t really need?  Perhaps Hu figured he might find some use for them somewhere over there. 

Prior to this deal, if China went to Boeing to place an order for planes, do you think that Boeing would have turned them away saying, “sorry, but you first need to make a public show of striking a trade deal with the administration?”  Of course not.  If British Airways needs to order ten planes, does Britain first have to strike a trade deal with Obama?  Don’t be ridiculous.  They simply go to Boeing and place an order.  If these 200 planes were something that wasn’t already on Boeing’s horizon, there would have been a big jump in the price of Boeing stock.  There wasn’t.  It’s been basically flat since Hu’s visit.

If anything, the number of planes involved is probably a disappointment.  After all, how long will it be before a nation capable of building its own stealth fighters begins cranking out their own civilian planes, likely putting Boeing out of business sometime in the not-so-distant future?  It’s not as though China lacks the techology, labor force or money to start up their own airplane manufacturer. 

And what other concessions did Obama extract from the Chinese premier?  To quote the article:

China agreed to “delink its innovation policies from its government procurement preferences,” and also repeated a promise not to discriminate against foreign goods or services based on where their intellectual property content is developed or maintained, the White House said in a fact sheet.

Wow, there’s a real iron-clad guarantee for you!  Anyone care to place a bet on how soon we’ll see concrete results from that concession? 

Trade talks like these are the root of our economic problems, not the solution.  The problem is that, while the best interests of China are at the top of the Chinese premier’s list of priorities, that’s not the case with Obama, just as it has not been the case for any of his modern-day predecessors.  The best interests of the American people are well down on the list of priorities, somewhere below world peace, providing leadership for the free world, and the principles of free trade and fair play, just to name a few.  Take care of these, American leaders believe, and the interests of the American people will be served.  Foreign leaders like Hu Jintao, on the other hand, take a much more direct approach.  Give us your market, your jobs and your money. 

Then there’s the story about Jeffrey Immelt, CEO of GE, being named to head up the president’s new “council on jobs and competitiveness.”  I like the title of this article:  “Obama names GE’s Immelt to lead fresh push on jobs.”  This distinguishes it from the previous, stale pushes.  In fact, that’s why this “council” is new – to avoid labeling Immelt’s predecessor a failure.  Immelt has done a good job of talking about American manufacturing in recent years.  (See G.E. CEO Immelt’s Comments a Glimpse into Economic Policy? and then forgive me for unjustified enthusiasm.)  But his record as a “Chief Executive Outsourcer” tells a different story. 

Regardless, Immelt has been tasked with boosting America’s global competitiveness.  Uh oh.  You probably know what that means.  Increasing competitiveness means boosting productivity.  That means only one of two things:  cutting workers or boosting output while maintaining the same workforce.  The latter approach will only happen if demand picks up.  Until it does, it’ll be the first approach that prevails.  It has for years … for decades. 

No doubt, it involves other approaches as well, most notably reductions in business taxes, accelerated depreciation for capital spending and lower capital gains taxes.  And probably some job retraining programs.  The end result is that corporate profits are going to do very well the next few years.  And, to be fair, that will provide at least some small boost to the economy as rising stock prices catalyze optimism and borrowing.

Ultimately, though, this approach is doomed to failure, just as every such attempt before it failed.  The problem is that our loss of manufacturing is not about competitiveness.  It never was.  The U.S. was always the most productive nation on earth by far.  If it’s a matter of competitiveness, then how does one explain the fact that the U.S. has a large trade deficit in manufactured goods with a nation like France, perhaps the least competitive and productive nation in the developed world – where workers enjoy a 35-hour work week, vacations, pensions and other benefits that American workers can only dream of? 

I suppose that there is some good news in all of this.  If nothing else, for the first time in decades, it has dawned on an administration that manufacturing is crucial to the health of our economy.  For decades the attitude had been “good riddance, who needs it?”  Manufacturing is so “yesterday.”  We don’t need the smoke stacks and polluted rivers.  Let someone else do the dirty work.  We’ll build a new economy, an economy built on service jobs, on dot-com ventures, on building McMansions we can’t afford and, finally, on smoking and eating ourselves nearly to death and then paying others to make us well again.

Obama’s epiphany came when he challenged his economic team early in his administration with “why can’t we be like Germany?”  “Why can’t we be a major net exporter of manufactured products?”  Had I been in the room, he’d have gotten his answer.  It’s because Germany has us, a gigantic trade patsy lacking the common sense to protect its market from parasitic, overpopulated nations utterly dependent on manufacturing for export to sustain their bloated labor forces.  Do you see another United States out there?  What nation, besides us, has such a huge appetite for manufactured products while lacking the domestic labor force to produce them?  There is none. 

So now, at least, Obama appreciates manufacturing.  Let’s hope another fifty years doesn’t pass before some future administration finally concludes that we can’t export our way out of our trade deficit mess and maybe – just maybe – we need to look at putting a lid on imports.

Pharma Trade Masks Rise in Trade Deficit in November

January 13, 2011

The November trade deficit held steady in November, dropping by $0.1 billion from October.  However, a big jump in exports of pharmaceuticals, coupled with a big drop in imports of the same, masks an overall worsening of the trade deficit.  Pharma exports rose by $1.0 billion in November while imports of the same fell by $0.9 billion.  Take away this $1.9 billion improvement in the balance of trade in pharmaceuticals and the balance of trade in non-petroleum goods worsened by $1.4 billion. 

Each month there seems to be some fluke that is capping the trade deficit at around $40 billion.  This month it’s pharmaceuticals.  Last month it was an anomaly in oil and food.  The bad news is that there’s no real improvement where jobs are concentrated – in manufactured products. 

Here’s an update to my charts of trade and the progress toward meeting Obama’s goal of doubling exports in five years. 

Balance of Trade     Obamas Goal to Double Exports, 1st year     Obamas Goal to Double Exports

While exports are tracking pretty close to (but below) that goal, the trade deficit hasn’t budged.  Imports have risen just as fast.  The end result is that unemployment holds steady at historically high levels. 

I’ve said it before, often, but it bears repeating:  the U.S. can’t export its way out of its trade deficit.  The only way is to completely abandon its commitment to the blind application of free trade theory and return to the sensible and targeted use of tariffs to assure a balance of trade.

December Unemployment Falls To 11.9% From 12.0%

January 11, 2011

On Friday the Bureau of Labor Statistics (BLS) released it’s “Employment Situation Summary” for the month of December.  (Link provided above.)   The headline was that 103,000 jobs were created in December, and unemployment plummeted to 9.4% from 9.8% a month earlier. 

The plunge in unemployment fooled no one.  Three quarters of that decline was due to another 317,000 workers mysteriously vanishing from the labor force – people counted as “no longer seeking employment.”  Since the beginning of the recession in late ’07, the official “civilian labor force” has actually contracted by almost 100,000 workers at the same time that the population has grown by over 8 million people.  That’s just not plausible.  No one believes it, aside from the folks at the BLS and the president’s administration. 

Employing a more accurate method of calculating unemployment, U3 unemployment actually fell by only 0.1%, from 12.0% in November to 11.9% in December.  The broader measure, U6, which includes discouraged and marginally employed workers, fell to 21.0% from 21.3% a month earlier.  Here’s the data and a chart of the various measures of unemployment:

Unemployment Calculation     Unemployment Chart

To be fair, part of the decline in unemployment, about 0.1%, was due to a jump of over 300,000 in the employment level.  That’s good news, but we need to see this happening consistently, on a month-by-month basis, before we conclude that the labor market is improving.  This is only the third improvement in the employment level in the last eight months and the first improvement in the last three months. 

Per capita employment remains very close to the lowest level since the recession began.  Here’s the chart:

Per Capita Employment

The number of unemployed Americans remains near its worst level, just shy of 19 million:

Unemployed Americans

And here’s a chart of the labor force and employment level:

Labor Force & Employment Level

The 103,000 jobs added in December (which comes from the BLS’s “establishment survey”) break down as follows:

  • Leisure and hospitality:  + 47,000
  • Health care:  + 36,000
  • Professional & business services (temp help):  + 16,000
  • Retail:  + 12,000
  • Manufacturing:  + 10,000
  • Mining:  + 5,000
  • Construction:  – 16,000

The gain in manufacturing jobs is the first improvement in five months.  Including that gain, manufacturing jobs have actually declined by 37,000 during that five-month period. 

The December employment report, rather than offering hope of an improving jobs picture, merely reinforces the fact that the economy has settled into a “new normal” of 9-10% unemployment.  What’s scary is that the economy has flat-lined at this level in spite of over $2 trillion in stimulus by the Fed and another $800 billion in government stimulus spending.  And that doesn’t even include the $900 billion in stimulus provided by extension of the Bush tax cuts.  All of this stimulus has to end soon.  Something has to give, and soon.

America’s Top 20 Per Capita Trade Surpluses in 2009

January 7, 2011

My previous post examined America’s top 20 per capita trade deficits in manufactured goods for 2009.  We saw that 18 of the these 20 nations were characterized by a high (in most cases, very high) population density.  Only two were less densely populated than the U.S.  And, in contrast to conventional wisdom that says that trade deficits are caused by low wages, we saw that 16 of those top twenty deficits were with relatively wealthy nations.  All of this supports the theory that it is actually a large disparity in population density that drives trade deficits, a result of the inverse relationship between population density and per capita consumption.

But that’s just one end of the spectrum representing only 20 out of approximately 160 nations that were included in the study.  What about the other end of the spectrum?  Logic would dictate that, if high population density causes trade deficits, then America’s top 20 per capita trade surpluses in manufactured goods should be with nations characterized by low population density.  With that said, here’s the list:

top 20 surpluses

(Sources:  U.S. Census Bureau Foreign Trade – trade data; CIA World Fact Book – population, area and purchasing power parity data)

As expected, thirteen of the top 20 surpluses are with nations less densely populated than the U.S.  But there are seven exceptions, and it’s worth noting how  these densely populated nations ended up on the surplus (and not deficit) end of the spectrum.  First of all, Qatar, United Arab Emirates and Kuwait are very small, densely populated nations that just happen to sit atop vast oil reserves.  Each sells lots of oil and manufactures virtually nothing, using the proceeds from oil exports to finance the purchase of everything they need, including manufactured products from the U.S.

The inclusion of Lebanon on this list is probably a short-term fluke.  The CIA’s World Fact Book has this to say about the Lebanese economy:  “The Israeli-Hizballah conflict in July-August 2006 caused an estimated $3.6 billion in infrastructure damage, and prompted international donors to pledge nearly $1 billion in recovery and reconstruction assistance. Donors met again in January 2007 at the Paris III Donor Conference and pledged more than $7.5 billion to Lebanon for development projects and budget support, … Political stability following the Doha Accord of May 2008, helped boost tourism and, together with a strong banking sector, enabled real GDP growth of 7% in 2009 despite a slowdown in the region.”  In other words, international aid has fueled a surge in imports into Lebanon during their rebuilding.

Panama is only slightly more densely populated than the U.S.  Their economy is fueled by income from the Panama Canal that enables them to import a lot of manufactured products.

Of the seven nations more densely populated than the U.S. that appear on this list, that leaves only Belgium and The Netherlands – both among the most densely populated nations on earth.

In general, sparsely populated nations tend to be rich in resources, and they trade those resources for manufactured products.  Canada is America’s biggest source of imported oil.  Likewise, Australia is also a big exporter of resources.  Even tiny Guyana and Suriname are on the list for the same reason.  Suriname depends on exports of bauxite, gold and alumina.  Guyana depends heavily on exports of six resources:  sugar, gold, bauxite, shrimp, timber, and rice – which represent nearly 60% of the country’s GDP.

Belize has a tourism-based economy, somewhat unusual for a non-island nation.  Tourism dollars fuel their purchases of manufactured products.

Finally, as we saw in my study of the relationship between income (PPP) and trade, we see that the largest surpluses are with wealthy nations, just as our largest trade deficits (in per capita terms) are with wealthy nations.  High incomes tend to drive trade imbalances, both deficits and surpluses, while low incomes tend to produce smaller trade imbalances.

Now that we’ve looked at both ends of the trade spectrum, representing 40 nations, we’ll examine in an upcoming post the effect of population density of the sum total of all nations on the 2009 U.S. balance of trade.

America’s Top 20 Per Capita Trade Deficits in 2009

January 3, 2011

How do our trade deficits with Japan and Thailand compare to each other?  How do they compare to China or Germany or Taiwan?  Of course our trade deficit with China is enormous.  They are a very large country.  Would it be sensible to focus all of our trade policy efforts on China when, if size were factored out of the equation, our deficit with them was no worse than with other nations?  The only way to properly assess the impact of U.S. trade policy on a nation-by-nation basis is to express it in per capita terms, factoring out the relative size of each. 

Table 7-2 of Five Short Blasts listed America’s top 20 per capita trade deficits in manufactured goods for 2006.  It’s time to take a look at the list for 2009.  (Trade data for 2010 won’t be complete until February.)  The following document displays table 7-2 again at the top, followed by the new listing for 2009:

top 20

The list is little changed, with some nations moving up a little and others moving down.  A couple of them dropped off altogether –  Brunei and Jordan – to be replaced by Costa Rica and Cambodia.  Trinidad and Tobaggo fell the furthest, dropping from third to seventeenth.  Some additional observations are in order:

  1. As in 2006, the list is dominated by very densely populated nations.  Only one nation in the top ten – Sweden, at ninth place – is less densely populated than the U.S.  The only other nation in the top twenty less densely populated than the U.S. is Finland.  Eight are more than five times as densely populated.  The average population density of the top twenty is 470 people per square mile, more than 5-1/2 times the population density of the U.S.
  2. By contrast, only one nation in the top ten has purchasing power parity (PPP, a good approximation of income) of less than $21,800 per year (which represents the top quartile among all nations).  These are quite wealthy nations, debunking the myth that trade deficits are caused by low wages in foreign countries.  Only four nations on the list – China, Thailand, Lesotho and Cambodia – have PPP below the world median value of $9,100. 
  3. Our per capita trade deficits in manufactured goods with the top eight nations on the list – Ireland, Israel, Switzerland, Denmark, Taiwan, Japan, Malaysia and Austria – are all at least double the deficit with China, who comes in at 16th on the list.  (In 2006, they were 19th.)  
  4. 2009 was a “down” year for world trade in general, coming on the heels of the global financial collapse.  This is why most of the per capita trade deficits in manufactured goods actually declined.  But not all.  The deficit with Israel soared from $604 to $1,019 per person.  The deficit with China rose from $172 per person to $181 in spite of the fact that, during those three years, Chinese PPP rose by 31% and the value of the yuan has increased by almost 25%.  So much for blaming our trade deficit on low wages or currency exchange rates. 

I don’t know how much more plain it can be that the disparity in population density between the U.S. and these overpopulated nations is to blame for our enormous trade deficit in manufactured goods, and the corresponding loss of millions of jobs in manufacturing.  Let’s stop blaming China and turn the focus on the real problem – our own trade policy that ignores this underlying root cause.