Is the U.S. economy on the verge of sinking back into recession?

April 28, 2011

The Bureau of Economic Analysis (BEA) released its preliminary estimate of Gross Domestic Product (GDP) this morning.  The news isn’t good.  Real (adjusted for inflation) GDP, the broadest measure of how the economy is doing, fell from an annual growth rate of 3.1% in the fourth quarter of last year to only 1.8% in the first quarter of 2011.  (Here’s a link to the report.)  Actually, inexplicably (perhaps hoping that no one would notice, since the news is bad enough), the BEA committed a rounding error in its report.  If you do the math, the growth rate was actually 1.748% and thus should have been reported as 1.7%. 

But, if you’ve been following this blog, you know that the news is worse than that because of population growth.  What matters is not the size of the pie, but the size of the slice that everyone gets when more and more people show up at the table.  The U.S. population is growing at a rate of about 1% per year.  Therefore, the growth rate in real per capita GDP was only 0.7% in the first quarter.

But wait, the news is even worse.  Although the government stimulus program has fallen off everyone’s radar since it’s nearly over, it’s not over yet.  Stimulus spending added $43.2 billion to the economy in the first quarter.  Take away that spending (because it will soon dry up), and real per capita GDP growth falls to only 0.3%.  That’s perilously close to the resumption of the recession, the 2nd “dip” of the “double dip” I’ve been predicting. 

And, if you’ve been watching the economic data releases in April, you know that the economy has slowed noticeably from the 1st quarter.  Unemployment claims are rising again.  The housing market is slumping further.  And gas prices present a major challenge to consumer spending. 

And the trade deficit gets a lot of the blame for the slump in GDP.  Here’s a quote from the BEA’s summary:

The deceleration in real GDP in the first quarter primarily reflected a sharp upturn in imports, a deceleration in PCE, a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by a sharp upturn in private inventory investment.

“A sharp upturn in imports” and “decelerations in … exports.”  In spite of trillions of being pumped into the economy in the past couple of years by the federal government and by the Federal Reserve, this economy is hanging by its fingernails.  Our idiotic trade policy, which the president promised to address during his campaign but so far hasn’t, gets much of the blame.  There’s simply no hope for this economy until something is done to restore a balance of trade and bring our manufacturing jobs back home.


The “Global” Good?

April 27, 2011

While my previous post, “Another Crack in Globalization,” reported on a study by a Nobel prize-winning economist that concluded that globalization had been a failure for the American middle class – only adding to a growing list of failures of globalization – there’s no shortage of folks eager to slather a little plaster over those cracks. 

Carolyn Woo, a business professor at the University of Notre Dame (my alma mater), has written a piece for Notre Dame Magazine titled “The Global Good,” a defense of globalization based almost solely on the success of globalization in fueling an economic boom in Asia.  It’s as though the global economic collapse that began in late 2007 never took place.  And she takes little note of the effect on the United States.

As I pointed out in my comment at the end of her article, it’s no wonder that economies in Asia have been on a roll when, simultaneously, the United States has been completely bankrupted.  The transfer of trillions of dollars in wealth from one to the other tends to make one wealthier at the expense of the other.  To conclude that globalization is a successful economic model because it makes one group wealthier is like concluding that armed robbery is a successful economic model because muggers get richer. 

You can read both Ms. Woo’s article and my response for yourself.  However, before I finish, there are a couple of additional points to be made that I didn’t cover in my comment.  First of all, regarding the “opening of markets,” Ms. Woo makes the following observation:

In other parts of the world, information technology and liberalization of trade have opened up a variety of markets. At Notre Dame, for example, jewelry made from recycled magazines by women’s co-ops in Uganda was sold during a Christmas fundraiser in the lobby of the Mendoza School of Business. And a women’s collective in Colombia, through the Clinton Foundation, has engaged Notre Dame MBA students for an analysis on how they can increase demand and prices for their spices.

“Opened up a variety of markets”?  In fact, what she describes is nothing of the sort.  She describes the startup of more outsourced manufacturing operations.  The only “market” involved is that same one that all parasitic, export-dependent nations have been feeding on – the U.S. 

Secondly, Ms. Woo makes a valid point regarding the peace dividend of globalization:

Considering that the three primary causes of conflict are corruption, poverty and social inequality, it is not difficult to see that commerce can enhance peace.

I suppose one could make the claim that the integration of China, once a cold war threat,  into the global economic community has taken that threat off the table.  But at what cost?  And are the effects only transitory?  Is peace really enhanced permanently when the only nation on earth that has repeatedly come to the rescue of the brutalized and downtrodden, the United States, has been bankrupted and its capacity for responding to crises has been seriously diminished?  Given the wars in Iraq, Afghanistan and Libya and the unemployment-fueled unrest throughout the remainder of the Middle East, the world doesn’t really look like such a peaceful place, does it? 

Globalization could be a force for the global good, but not in its present, unbalanced, anything goes format.  Political leaders, business leaders and academics alike do the world no favors by continuing to champion an economic model that has proven to be a major threat to global economic stability.

Another Crack in Globalization

April 19, 2011

For me, this is exciting news!  (Though many may conclude that I’m too easily excited.)  In the above-linked editorial, Reuters writer Chrystia Freeland tells us of a just-released report that concludes that global capitalism hasn’t worked for middle-class America.  That may not sound like an earth-shaking conclusion since it seems so obvious to so many of us.  But what’s newsworthy is the source of the report.  It’s not from some left or right-leaning think tank or someone whose interests are served by reporting such a conclusion.  It comes from a Nobel prize-winning economist who would never have expected such a result.  Ms. Freeland says it best in her opening paragraph:

Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations.

Ms. Freeland continues:

The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.

I have further news for Ms. Freeland.  Not only is the middle class struggling in America, so is the lower class and so is much of the lower ranks of the upper class.  Virtually everyone is finding things tougher, with the exception of the richest of the rich. 

For someone from the field of economics, so heavily invested in promoting and praising the process of globalization, to come to this conclusion is truly significant.  And, what’s even more satisfying to me can be found near the end of this article.  It seems that Michael Spence, one of the authors of this report, is at a loss to explain the results.  Most gratifying of all is the final paragraph:

Spence is honest enough to admit that he has no easy answers. But he has posed the right question. American politicians in both parties are focused on a budget debate that is superficial, premature and ultimately about something pretty easy to figure out. Instead, we should all be working on the much bigger problem of how to make capitalism work for the American middle class.

Just as important as the fact that a prominent economist has now published a study that debunks the promised benefits of globalization is the fact that a journalist like Ms. Freeland doesn’t challenge the conclusions of the report and rush to the defense of globalization.  Instead, she acknowledges the truth and suggests that it’s time to do something to make capitalism our servant again instead of our master.

Is this not what I’ve been saying all along?  On page 245 of Five Short Blasts, while envisioning a more enlightened future, I spoke of the establishment of new boundaries on capitalism to preclude the use of trade deficits and population growth to pump up sales volumes and stock valuations.  (Thus, the 28th and 29th amendments I’ve proposed on this blog.)

And I’ve been steadfast in maintaining that all other issues pale in comparison to the need to deal with our trade and population (primarily immigration) issues.  It was only earlier this month that I said exactly what Ms. Freeland said – that the budget and debt battles pale in comparison to the need to address this more fundamental issue.   

While I see no evidence of any understanding about the role of population density in eroding per capita consumption and driving up unemployment and how it factors into trade, the world is indeed inching closer to the realization that, for whatever reasons that it can’t yet understand, the process of globalization, rooted in free trade theory, is fundamentally flawed.  World leaders correctly recognized the role of global trade imbalances in collapsing the global economy.  To the chagrin of export dependent nations, the G20 is now focused on ways to eliminate those imbalances.  The World Trade Organization’s process of expanding its trade regime has ground to a complete halt.  And now prominent economists are admitting that, contrary to their claims that freer trade would benefit all, it doesn’t.  The tide is turning, ever so slowly, against the trade policies and their underlying economic theories that have brought America to near-ruin. 

* * * * *

Buried amongst the many comments on the piece, you’ll find one that I wrote.  The following was my response:

 Globalization is a fancy name for the process of implementing free trade that began in 1947 with the signing of the Global Agreement on Tariffs and Trade (GATT), forerunner of today’s World Trade Organization. At that time, free trade advocates got the upper hand of trade policy and convinced world leaders that we’d all be better off if each nation put aside trade policies based on their own self-interest and put to the test on a global scale the unproven “principle of comparative advantage,” a free trade theory developed by British economist David Ricardo in 1812.

 Basically, Ricardo said that each nation benefitted if it concentrated on what it did best and traded that product for others made best by other nations. A key stipulation was that each nation had to maintain full employment, and that workers displaced from inefficient industries would find employment in others.

 What Ricardo failed to incorporate into his theory was the effect that extreme population densities could have on eroding per capita consumption, driving up unemployment to such an extent that a nation could become completely dependent on exports to sustain its bloated labor force. Ricardo could be forgiven for that, since no one could envision such a situation in 1812. But today’s economists cannot.

 Today’s economists choose to remain ignorant of the full ramifications of never-ending population growth because none dare to risk being labeled a “Malthusian,” a derogatory term arising from the theory of another British economist named Malthus who, in 1798, theorized that mankind’s population would forever be held in check by food shortages. The theory led to the field of economics being mocked as “the dismal science,” and to this day economists steadfastly refuse to ever again consider the possibility of overpopulation.

 That’s a pity because if economists considered the full implications of population growth – not just the strain on resources and stress on environment, but other economic ramifications too – they might recognize the effect that population density has on per capita consumption.

 What does that have to do with trade? Free trade between two nations – one less densely populated like the U.S. and another more densely populated like China, Germany or Japan (4X, 7X and 10X as densely populated as the U.S., respectively) – results in the spreading of manufacturing work evenly across the combined labor force. But consumption patterns between the two nations are badly skewed by the extreme population density and low per capita consumption in the more densely populated nation. The result is an automatic trade deficit and loss of manufacturing jobs for the less densely populated nation.

 It is a fact that the U.S. consistently runs trade deficits in manufactured goods with more densely populated nations like China, Japan, South Korea, Germany and a whole host of other nations, many of them very wealthy nations with high incomes (thus debunking the myth that trade deficits are caused by low wages). At the same time, the U.S. consistently runs trade supluses in manufactured goods with less densely populated nations like Canada, Australia, every single South American nation, Russia, and so on.

 In fact, if the nations of the world are divided evenly around the mean population density, in 2009 the U.S. had a trade surplus of $102 billion in manufactured goods with the less densely populated nations. With those more densely populated (same number of nations), the U.S. had a trade deficit in manufactured goods of $422 billion!

 The data is there for all to see and the correlation between population density and balance of trade in manufactured products is absolutely undeniable. This is the reason that, since our last trade surplus in 1975, our cumulative trade deficit is approaching $11 trillion and is rapidly getting worse. Yet not a single economist has the courage to even consider the subject.

 Global capitalism has failed America because of this missing ingredient – the role of population density in eroding per capita consumption and the role of disparities in population density driving global trade imbalances. Capitalism should be our servant, not our master. Boundaries need to be applied to make that happen. In the early 20th century we learned that a boundary was needed to protect against the abuse of labor. In the latter half of the 20th century we had to set boundaries regarding abuse of the environment. Two boundaries remain to be discovered and implemented. First, measures must be taken (regardless of whether they are tariffs or import quotas or whatever) to prevent trade imbalances that will surely persist otherwise. And, secondly, capitalism cannot be allowed to rely upon population growth as an engine for economic growth, as rising unemployment and poverty will be the inescapable result, which is precisely where we’re headed.

President Trump?

April 15, 2011

Reader Ken asked me the other day my opinion of Donald Trump’s position on trade and I admitted that I hadn’t heard anything about it.  So the above-linked Reuters article intrigued me. 

I’ve never been sure of what to make of Donald Trump.  Sometimes I love the guy.  Often I’m suspicious of him.  Sometimes he repulses me.  You have to admire his work ethic and can’t argue with his success in the business world.  On the other hand, his habit of marrying trophy wives, fathering a child or two with each and then casting them aside like last year’s Bentley isn’t an endearing trait.  But then, regarding his kids, it’s hard to draw accurate conclusions from the few interviews I’ve seen, but it seems he’s done an outstanding of job of raising intelligent, proper, well-mannered well-spoken kids – something that seems to be a source of pride to him.  But, like everything he says, you’re left wondering if he’s being genuine or saying and doing what’s in the best interest of his image. 

And so it is when he expresses a deep love for America.  Is it genuine, or is it what serves him best at the moment?  When he says he’s interested in running for president, is it another self-serving, attention-grabbing ploy to pump up the ratings of his reality show or would he really do it? 

Let’s take him at his word and assume he’s serious about running.  If you’ve been a reader of this blog, you know that in my mind there are two issues that dwarf all others:  trade and immigration.  There’s nothing in this article about his views on immigration, nor have I heard or read any elsewhere.  I’m suspicious that he may be a big immigration advocate, but have nothing to support that.  But there’s plenty in this article regarding trade, which can be summed up with these quotes:

Under a President Trump, China would be forced to end currency manipulation or face a 25 percent tariff on all exports to the United States. OPEC oil-producing nations would have to drop the price of a barrel or oil to $40-50 or face America’s wrath. And Arab nations and South Korea would pay for benefiting from America’s military might.

He singled out the recent trade pact with South Korea, signed after a military showdown with communist-ruled North Korea, saying it was a “joke” with insufficient benefits for the United States.

… “I would put a 25 percent tax on all goods coming in from China to the United States and I would do it without hesitation,” Trump said.

“I would tell (OPEC) that oil is not going to $150 a barrel … it’s going to be at $40-50 a barrel.”

First of all, regarding China, this is really nothing more than Obama promised, but done with a little more bluster.  Obama promised to label China a currency manipulator which, under World Trade Organization rules, paves the way for punitive tariffs against them.  There’s just one problem.  (Well, two, actually.)  What exactly is “currency manipulation?”  For every example you might cite, someone else could provide an example of something worse done by the U.S.  Besides, the Chinese yuan has been rising – slowly, but rising nonetheless. 

Which leads us to the other problem with this approach.  Undoubtedly, faced with such a threat, China will let the yuan appreciate a little faster to make The Donald happy.  So what?  Since June of 2005, the Chinese yuan has risen in value by 25%, making Chinese imports more expensive while making American exports more affordable.  But instead of improving, our trade deficit with China has actually worsened by 29%! 

Some economists say that’s because the yuan hasn’t strengthened enough – it needs to appreciate by 40% to have an effect.  So, we’re to believe that while an appreciation of 25% has had the opposite effect on trade, an additional appreciation of another 15% will completely reverse all of this and actually restore a balance of trade?  Give me a break!  The fact is that currency exchange rates have nothing to do with trade imbalances, yet this would be the cornerstone of Trump’s trade policy. 

Regarding his approach to OPEC and oil prices, this illustrates the problem with Trump or anyone else with an entrepreneurial spirit, used to demanding and getting their way, in a role of national leadership where diplomacy and compromise are required.  We have absolutely no leverage regarding the price of oil.  Our only choice is to pay the price or walk away.  But The Donald would threaten them with facing some sort of “wrath.”  What exactly would that be?  Would we attack them?  I doubt it.  Would we withdraw military support?  That would only force them to cozy up to China.  Want to have a real impact on the price of oil?  Start talking about plans to reduce our population to a level that could be supported by domestically produced oil alone. 

Then there’s the whole issue about Obama’s place of birth.  It’s blatant pandering to the far right that simply won’t work with moderates and independents.  It makes him seem more like a conspiracy theory nut than someone who’s presidential.  But he’s never had to worry much about what he says.  He’s The Donald.  If he says “jump,” his lackeys ask “how high?”

Finally, there’s this:

… his message that America needs radical change draws support from some voters dismayed by diminished economic prospects at home and growing challenges to U.S. power abroad.

“Radical change.”  Oh, boy.  Where have I heard that before?  Seems like there was a lot of talk about that in ’08.  Has anybody seen any, at least for the better? 

Don’t get me wrong.  I could see myself voting for the guy.  Obama has already proven that his talk of addressing our trade deficit was just campaign rhetoric.  Trump’s probably is too, but at least with him there’s still the chance that he might actually do it.  And I’m sure that there’d never be a dull moment for the next four years.  It might actually be entertaining.  At least when things didn’t go well, heads would roll with a little more flair.  “You’re fired!”

Another Lame Defense of The Dismal Science

April 14, 2011

Thanks to reader Clyde for forwarding the above-linked article to me, the text of a speech by William McGurn, writer for the Wall Street Journal,  delivered at Hillsdale College last month.  McGurn’s speech was a defense of The Dismal Science, otherwise erroneously known as the field of “economics.”  It seems that McGurn felt the need to come to its defense.  That alone tells you that the attack on the subject of economics is significant and credible. 

As with all such defenses of The Dismal Science, McGurn’s is mired in 19th century writings and events and a complete failure of logic.  He begins his defense with an explanation of the origin of the term “dismal science.”  Thomas Carlyle used the term in the mid-1800s to deride economists who opposed slavery.  But earlier, and more famously, he used the term to mock the theories of Malthus, who predicted that the human population would be held in check by food shortages. 

McGurn then goes on to link concerns about overpopulation with the Nazi extermination of Jews and with draconian population management practices, including infanticide, employed in China and India, as though such practices are somehow the only logical outcome of concern about overpopulation.  So, once McGurn has made the implication that those who deride the field of economics and worry about overpopulation are racists and murderers, his task of defending the field of economics on purely economical grounds has been made much easier. 

Good thing, because his defense of economics from that point on is completely illogical and is summarized in the following excerpt:

In the two centuries since Malthus first predicted the apocalypse, the world population has risen sixfold—from one billion to more than six billion. Over the same time, average life expectancy has more than doubled—and average real income has risen ninefold.

In the four decades since Paul Ehrlich declared the battle to feed humanity over, a Chinese people who saw millions of their fellow citizens perish from famine as recently as the early 1960s are now better fed than ever in memory.

And in the years since Mr. McNamara predicted we could not sustain existing population levels, we have seen the greatest economic takeoff in East Asia—among nations with almost no natural resources and some of the largest and most crowded populations in the world.

McGurn makes a classic blunder of logic, drawing a cause and effect relationship between two unrelated events.  Yes, the world’s population has grown a lot in the last two centuries and life expectancy and real income are up.  But the same could be said about the preceding centuries as well, when mankind rose from the dark ages through the period of the renaissance.  The growth in life expectancy and income were no less impressive, yet the growth in the population was a tiny fraction of that in the last two centuries and the field of economics didn’t yet even exist!  That such progress continued for another two centuries can in no way be attributed to population growth or the field of economics.  Rather, a more likely explanation is human nature’s drive to prolong and enhance the quality of our own lives.  That drive is so strong that it’s likely the progress McGurn speaks of came in spite of the field of economics and population growth, not because of it.

And, yes, Asia has experienced explosive growth in the past four decades.  But virtually any thinking person would conclude that that growth came in spite of the challenges of population growth, not because of it.  And did the field of economics play a role?  In a perverse way, it did.  It was our faith in the flawed economic theories about free trade that produced such growth in the undeveloped and developing world, primarily in Asia, but at the expense of the developed world, primarily the United States.  America’s wealth has been completely depleted by that development in Asia and Americans now find their incomes and net worth in serious decline.  An illusion of prosperity has been sustained only by a succession of bubbles and economic gimmicks for the past two decades.

The real question is not where we’ve been – what’s happened in the last two centuries or in the last four decades.  The real question is why global unemployment has escalated into a global epidemic.  The real question is why a process of globalization inspired by economic theories resulted in huge imbalances that led to a catastrophic collapse of the global economy.  And, most of all, the real question is where do we go from here. 

Increasingly, the field of economics seems out-of-step.   Its reassurances about bright prospects and our ability to overcome obstacles to further growth seem more like unfounded, wild-eyed optimism than an achievable outcome.  Virtually no one denies that the end of the supply of oil that has fueled the growth of the last two centuries is in sight.  And Malthus’ prediction of food shortages now seems more plausible than at any time since he formulated his theory, given the demand-driven and supply-constrained rise in food prices and the fact that much of the increase in food productivity made possible by oil-based fertilizers and pesticides is now threatened by escalating oil prices.  And economists’ recent abandonment of growth models in favor of “happiness” models, in which we all consume less in order to make room for more people, smacks of rationalization and desperation, further eroding their credibility.

But what makes the field of economics “dismal” today is not an early 19th century theory about the potential for food shortages, but its cowardly, bull-headed, steadfast refusal to behave like a real science and question the full ramifications of population growth – by far the parameter that most dominates our economy today.  Economics isn’t “dismal” today because Malthus may have been a couple of centuries early with his prediction, but because some of its other theories – most notably on free trade – are so horribly flawed by economists’ failure to take the effects of population density into account.  A science that lacks the courage to consider the full ramifications of the most basic, powerful parameter at work in our economy today isn’t just “dismal,” it isn’t even a “science” at all.

U.S. Falls Further Behind In Goal to Double Exports

April 12, 2011

In January of 2010, President Obama challenged his economic team with the question, “if Germany can be a net exporter of manufactured products, why can’t we?”  And he set a goal of doubling exports within five years.  Though the goal was stated in broad terms of doubling “exports,” the real goal is to double exports of manufactured products, thus rebuilding the battered manufacturing sector of the economy. 

In January of ’10, our manufactured exports were $131.05 billion per month.  To stay on track for meeting that goal, exports of manufactured products should have grown to $152.25 billion by February, ’11. 

This morning the Bureau of Economic Analysis released February trade figures.  The overall balance of trade improved slightly from January, falling from $47 billion to $45.8 billion, though the January deficit figure was revised higher, from $46.0 billion to $47 billion.  Here’s a chart of the balance of trade since President Obama set this export goal:

Balance of Trade

No improvement evident there!  Worse, we continue to lag in our goal to double the exports of manufactured products.  In fact, the shortfall between the goal and actual exports is the worst since the goal was set, coming in at $146.73 billion vs. the goal of $152.25 billion.  Here’s a chart of trade in manufactured goods:

Manf’d Goods Balance

We were on track to meet Obama’s goal through July, but have faltered since.  The shortfall in February of nearly $5.5 billion is the largest since tracking of this goal began, and represents approximately 900,000 manufacturing jobs alone, and perhaps as many services jobs that would support these manufacturing operations.  The February trade deficit of nearly $22.0 billion in manufactured goods represents approximately 3.6 million manufacturing jobs and, again, perhaps as many supporting services jobs. 

It’s no mystery why we’re failing to meet the president’s goal.  Setting a goal is one thing.  Actually taking action to assure that the goal is met is an entirely different matter.  To that end, the president has done nothing, other than to cajole our trade partners to boost their imports of American products and to pursue policies designed to weaken the value of the dollar.  The problem is that promises to boost imports of American goods are unenforceable and meaningless, and currency valuations have absolutely nothing to do with trade balances, as proven by the study I conducted last year.

Only actions that are within our control and enforceable have any hope of restoring a balance of trade and, with it, the manufacturing sector of our economy.  That means tariffs.  And only a tariff structure designed to counteract the driving force behind global trade imbalances – the gross disparities in population density – can correct the imbalances that are destroying our economy without simultaneously damaging beneficial trade.  That means a tariff structure that is indexed to population density and applied only to manufactured products. 

If you’re a newcomer to this site, I encourage you to read more about this new economic theory.

The Titanic Budget Battle

April 6, 2011

As the fur flies in Washington this week, I think it’s appropriate to take the time to remind my readers that, regardless of which way this fight turns out, it won’t make a damn bit of difference for the future of this country.  It can’t because it does nothing to address the two issues that have ravaged our economy:  worsening overpopulation and the effects of trading freely with other nations that are even more, much more, overpopulated. 

It’s like two committees formed on the Titanic to solve the problem of rising water.  The approach of one committee, the Democrats, is to put every passenger to work hauling lumber from the carpenter’s shop and building additional decks to keep everyone’s head above water as the lower decks disappear.  Never once do they consider that there isn’t enough lumber to keep building decks until the ship has sunk to the bottom.

Then there’s the Republican committee.  They’ve decided that the solution is to jettison passengers, lightening the load to keep the ship afloat a little longer, giving the poorest of the passengers the heave-ho first. 

All the while, water gushes in through the breach in the hull.  It never seems to dawn on anyone to plug the hole.  Or if it has, no one is willing to go below, get their feet wet and do some dirty work. 

And so it is with our economy.  The Democrats’ approach will work for a while:  just throw money at the problem.  Things will be fine for a while, until we drown in debt.  If the Republicans can be believed (a stretch, given what happened to the debt the last time they had anything to say about it), they can prevent the debt problem if we just throw some people under the bus and hope no one notices, or that no more than 50% of voters care.

The reasons for our budget deficit, now estimated at about $1.6 trillion per year, are no mystery.  First of all, there’s all the unfunded Middle East wars.  Secondly, there’s the stimulus spending to piece back together the economy following the financial collapse (a direct result of our $10 trillion, 3-decades-long trade deficit).  And then there’s the social safety net spending to offset the ongoing effects of the trade deficit and the loss of millions of manufacturing jobs. 

The spending on the wars is taking care of itself as first the Iraq war, followed by Afghanistan, are being wound down, though given the recent bombing of Libya, one has to wonder if anything has been learned. 

The trade deficit and loss of manufacturing jobs is another matter.  The Democrats’ approach is to throw money at the unemployed and at everyone else whose wages and benefits are now in decline as our over-supply of labor grows ever more out of balance with the demand.  Truth be told, the Republicans’ approach while they were in power was little different.  But now we’re to believe that in Reagan-era style, their solution is to cut taxes, slash spending, and let the trickle-down put everyone back to work. 

This isn’t 1980, when stimulus spending in the form of tax cuts was spent on products still made in America and the trickle-down effect actually worked.  Our manufacturing base is gone and “trickle-out” has replaced trickle-down.  The economies of China, Japan and Germany get all the stimulus while all we get is debt piled onto our future generations.  And, come on, does anyone believe that the voting electorate will tolerate the poor being turned away from hospitals because the fixed lump sum allocated to Medicaid has been exhausted?  A budget is one thing, looking so good when the votes are cast.  Sticking to it is an entirely different matter.

What really ails this economy is the steady loss of our manufacturing base and millions of manufacturing jobs (not to mention millions more in supporting them) since our last trade surplus in 1975.  At least the administration seems to have finally come to that realization.  Give them credit for that much.  But all of the spending and tax cuts in the world won’t have one iota of impact on changing that situation.  Neither will Obama’s efforts to boost exports of the few products we do still make – mostly machinery used by foreign manufacturers to boost their capacity to drown us in even more imports. 

We’ve got to start making every product that we consume.  We’ve got to build and start up factories to produce iphones, ipads, laptops, appliances, clothing and every other product you find on the shelves at the big box stores.  There is only one way to make that happen and that’s to impose tariffs on the importation of those products.  If you were a manufacturer in such an environment, would you continue to make your products in China, only to have all your profit and more eaten up by tariffs?  Or would you bring your plant back to the U.S. where it would be tariff-free? 

Don’t worry, consumers.  Sure, your prices will go up.  But let’s not forget that you’re also workers, whose wages and benefits will be driven up even faster by a high demand for labor.  That’s how the economy worked – how America built itself into the world’s preeminent industrial power – before we pulled the trigger on free trade, not realizing that the barrel was pointed in the wrong direction.

Finally, let’s not forget the role of home-grown overpopulation in driving up spending on social safety net programs.  For all the talk about how we need talented immigrants to drive our economy forward, the facts tell a different story.  As population growth and over-crowding erode our per capita consumption, each new immigrant only adds to a labor pool already out-of-whack with the demand for labor.  It doesn’t matter whether the immigrant is illegal or legal.  Unless that immigrant brings with him or her an ability to consume products that outstrips his or her productive capacity, unemployment will worsen and, with it, poverty and social safety net spending to offset it. 

The budget battle playing out in Washington is like the band playing on deck, distracting our attention from the water rising around our ankles.  Just pass a damn budget already and turn your attention to something that really matters, like fixing our idiotic trade and immigration policies.

March Employment Report Little Cause for Cheer

April 4, 2011

On Friday the Bureau of Labor Statistics (BLS) released its monthly employment report for the month of March.  The addition of 216,000 jobs and the drop in the official U3 unemployment rate to 8.8% was widely cheered as evidence of an economic rebound gathering steam.  This is good news, no doubt.  But a closer look at the data reveals that it’s statistically insignificant – little more than “noise” in the data.  Here’s the calculation of U3, along with my own tally (using the government’s data) of a more realistic figure.

Unemployment Calculation

Beyond those headline figures, there’s really little cause for cheer.  Consider the following chart of the number of unemployed Americans:

Unemployed Americans

The figure continues to rattle around the 18 million mark as it has since the beginning of the great recession. 

And here’s a chart of per capita employment in the U.S., or the percentage of the total population that’s employed:

Per Capita Employment

This figure too hovers near its lowest level.  March marked the fourth consecutive monthly gain in this figure, but that happened once before in early 2010, and the March figure is now lower than it was at the end of that previous 4-month streak, in spite of being helped by new census data that actually reduced the U.S. population slightly.  Following that previous 4-month streak, per capita employment actually fell back to nearly the lowest level of the recession. 

It may happen again.  The employment data may be at or near its zenith.  Though the economy enjoyed a nice little bounce driven by consumers throwing caution to the wind for Christmas, the economy is once again facing stiff headwinds.  Oil prices are skyrocketing and inflation is beginning to permeate the broader economy.  Congress is making serious efforts at slowing spending.  And, perhaps most significantly of all, the Federal Reserve is nearing the end of QE2, its program for pumping a hundred billion dollars per month into equities.  It’s now April and the old Wall Street saw of “sell in May and walk away” could turn into a stampede when the timing coincides with the Fed’s removal of the punch bowl.  It’s not hard to envision the beginning of a second dip of inflation by summer. 

Back to the jobs report.  The 216,000 new jobs reported in March break down as follows:

  • professional and business services:  + 78,000
  • health care:  + 37,000
  • leisure and hospitality:  + 37,000
  • manufacturing:  + 17,000
  • mining:  + 14,000

The gain in manufacturing was the fourth consecutive gain.  However, it also marks the third consecutive decline in those gains, falling from + 49,000 in January.  That’s not a good sign for the health of the overall economy going forward – a sign that although this jobs report was a good one, the gains in employment may be peaking.