Another Call for America to Reinvent Itself

August 31, 2011

Just thought you’d be interested in reading my response to this op-ed piece that appeared on Reuters yesterday – yet another call for America to “reinvent” itself.  (It’s the third of the comments that appears at the end of the piece.)  To make it easy, here it is:

The problem with our economy is not anything that the American people are doing wrong. The problem is that our economic policies are guided by economists. Economists don’t have a clue as to what’s happening to our economy because they steadfastly refuse to consider the effects of the parameter that most dominates our economy today – population growth. They don’t understand the inverse relationship between population density and per capita consumption and the role played by population density disparities in driving global trade imbalances. They continue to lean on population growth as a crutch to prop up macroeconomic growth, which only makes matters worse.

They make proclamations about the cause of our massive trade deficit without ever bothering to verify their claims. They blame it on currency valuations without ever explaining why, in spite of a 300% rise in the value of the yen over the past three decades, our trade deficit with Japan exploded instead of shrinking, or why, in spite of a big rise in the value of the yuan in past few years, our trade deficit with China has done the same thing. Or they blame our trade deficit on low wages without explaining why our biggest trade deficits, in per capita terms, are with wealthy nations like Japan, Germany and a host of others.

And they never explain why America, the most productive nation on earth, seems unable to “compete” with low productivity nations like China. They can’t explain it because they don’t understand what happens when a low population density/high per capita consumption nation like America attempts to combine its economy (through “free” trade) with a high population density/low per capita consumption nation like China (or Japan, or Germany or …). The work of manufacturing is spread evenly across the combined labor force while the disparity in consumption remains. The result is an automatic trade deficit and loss of jobs for America. It’s impossible to “compete” our way out of such a situation.

We don’t need to reinvent ourselves. We need to recognize that we were bamboozled by well-intentioned but badly mistaken “economists” way back in 1947 when they convinced us to sign the Global Agreement on Tariffs and Trade. Prior to that date, the smart use of tariffs built us into the world’s pre-eminent industrial power. But, soon after, our trade surplus began to erode. Since 1975, the last year of a trade surplus, our cumulative trade deficit is approaching $11 trillion.

Our economy will never, ever improve until we take back the right to manage trade in our own best interest, the right that we ceded to the World Trade Organization back in 1947. (By the way, the stated mission of the WTO is not to promote free trade, as many believe, but to enforce protectionist policies in favor of undeveloped and developing countries, nearly two thirds of its member states, to the detriment of America. Don’t believe me? Check their web site.)

Pete Murphy
Author, “Five Short Blasts”




Obama Names New Economic Advisor; No One Cares

August 30, 2011

Yesterday President Obama named Alan B. Krueger to head his council of economic advisors, replacing Austan Goolsbee, who replaced Christina Romer.  How do I know this?  You’d have to have been watching the news last night very carefully, or you’d have missed it.  You won’t find it in the papers or on their web sites.  I searched both Reuters and USAToday for more information but came up empty.  By the time I went to the White House web site, I was beginning to wonder if I had imagined it.  But, no, there it was.  (Link provided above.)

It’s a sad statement on the state of Obama’s presidency, once so full of hope for turning around our economy.  Now, when he names a new economic advisor, no one even cares.  We know what we’re going to get.  Instead of real solutions to our economic problems, we’ll instead get proposals for a patchwork of government spending programs to paper over the economy and create a few token jobs, proposals that will rightfully die in Congress for lack of funding at a time when debt is no longer politicallly palatable.    Of course, then the administration can blame Congress for its lack of progress.

Still, I was curious to know more about this guy.  What I found didn’t excite me.  Another Harvard economist, one whose writings (see seem to cover the gamut of economic minutia. 

The August employment report comes out on Friday.  I expect that the report will be grim, setting the stage for the President’s new jobs strategy, to be announced early next week, to be greeted with skepticism, derision and scorn. 

In terms of the economy, this president has been a huge disappointment.  Yes, he inherited a terrible mess.  But there’s been ample time to make major progress toward turning things around.  It would have taken real leadership to take us onto a new path and off of the road to nowhere that the U.S. economy has been following for decades.  Sadly, all we got was some tinkering on the margins – another care-taker president.  Obama’s done a lot of good things, including winding down the Iraq war, killing Bin Laden, salvaging the American automobile business.  But that’s about it.  His economic policies have failed.  Our trade deficit has exploded, thanks to his failure to follow through on campaign promises to address trade policy shortcomings.  His immigration policy is a disaster. 

I won’t be posting much more about the Obama presidency as it heads into its final year.    (Yeah, I know, “hallelujah!”)  It’s been an opportunity lost.  It’s time to focus on the future, although, frankly, I don’t see much cause for cheer there either.  As I’ve said before, there are no political solutions to our problems.  It’s the field of economics that must emerge from 19th century thinking if mankind is to have any hope of a brighter future.  When economic advisors come equipped with an understanding of how population growth factors into the economy, then there will be cause for hope.

Steve Jobs Resigns as Apple CEO

August 25, 2011

You may be wondering how this story is relevant to the topics addressed on this blog.  I just thought it was a good opportunity to make a point.  Our politicians on both sides of the aisle have often proclaimed that what America’s economy needs is more entrepreneurs and innovators, and more than one has held up the example of Steve Jobs.  No doubt, Steve Jobs was an incredibly successful and creative individual.

In spite of that, where are all of Apple’s products made?  I will freely admit that I don’t know the answer to that question, since I haven’t gone to the Apple store and inspected their packages, but I’d be willing to bet that not a single product is made in the U.S.  I do know that my wife’s Mac Book was made in China. 

This isn’t unusual.  Name any new product that has been introduced in the last 50 years, and you’ll find that that product was created by a U.S. company.  But the vast majority are imported today.   The net result is that all of this innovation has done virtually nothing for our economy.

Politicians are also fond of proclaiming that we need our universities to turn out more engineers.  Why?  Where have all the engineers gone?  To the unemployment lines.  We don’t need more until we put the ones we have back to work.  Too much government spending?  Cut spending on education.  What’s the point, anyway?  You don’t need a degree in engineering to fill out an unemployment application.  High school drop-outs can do as much.

The point here is that it’s not a shortage of people like Steve Jobs or engineers that lies at the root of our economic problems.  It’s trade policy that gives away their innovations to become manufacturing jobs in other countries.

July Unemployment at Worst Level of Recession

August 19, 2011

I’m still catching up on things since returning from vacation, so this is a bit of old news, but news that I can’t let pass without comment – the July unemployment report (link provided above). 

According to the Bureau of Labor Statistics (BLS), unemployment fell in July to 9.1% from June’s level of 9.2% while the economy added 117,000 nonfarm jobs.  On the surface, it sounds OK.  Unemployment came down a little and we added some jobs, right? 

Not so fast.  While the “establishment survey” (the one the BLS uses to measure how many jobs were created) says we added jobs, the “household survey” (the one used to calculate the unemployment rate) paints an entirely different picture.  That survey once again used the “mysteriously vanishing labor force” trick to make it appear that unemployment dropped by a tenth of a percent.  According to the BLS, nearly 200,000 workers vanished from the labor force during July in spite of the fact that the U.S. population actually grew by that many people.  If we assume that a constant percentage of the population needs work to support themselves and their families (my “U3a” calculation), unemployment actually rose to the highest level since the start of the recession in late 2007 – 12.0%.  And the broader measure of unemployment, my “U6a” calculation, also rose to its worst level – 21.3%.  Here’s the data and the chart:

Unemployment Calculation     Unemployment Chart

Also, the “employment level” (the number of people working) fell for the fourth consecutive month, falling by 38,000.  So, not surprisingly, per capita employment also fell for the fourth consecutive month to the lowest level since the start of the recession.  Here’s the chart:

Per Capita Employment

By the way, lest someone think that I’m just manipulating the data to suit my own purpose, here’s a link to the BLS’s calculation and chart of the “labor force participation rate”:

As you can see, it has plummeted to its lowest level since the Great Depression. 

Finally, the number of unemployed workers also rose to the highest level since the start of this recession – just over 19 million workers.  Here’s the chart:

Unemployed Americans

All in all, a really ugly report, with the unemployment rate, per capita employment and the number of unemployed Americans all hitting their very worst levels of the recession.  Given that and what’s happened since the beginning of August to consumer and investor confidence, the swoon in the markets and the collapse in manufacturing, does anyone still believe we’re not already in a double-dip recession, or that things aren’t getting worse? 

So what’s the solution, you might ask (if you’re new to this site)?  Is it lower taxes and a more business-friendly regulatory environment?  Well, in spite of historically low tax rates and the most business-friendly regulatory environment ever, Bush left office with the economy in a state of free-fall.  Or is the solution more government spending and stimulus?  Both the Obama administration and the Federal Reserve have simultaneously taken that approach, but to no avail whatsoever.  None of these approaches are working because none address the root problem with our economy.    If you don’t know what that is, I suggest reading more on this site and that you read Five Short Blasts.

* * * * *

The breakdown of the 117,000 jobs that the establishment survey claims were created in July are broken down as follows.  By the way, if an establishment that has been included in the survey fails to respond, as would be the case if it goes out of business, what does the BLS do?  Do they count all of the jobs that were once in that establishment as lost, or do they simply add some other establishment to the survey?  I’m just speculating, but perhaps that accounts for the disparity between the establishment survey and the household survey.

  • Health care:  + 31,000
  • Retail trade:  + 26,000
  • Manufacturing:  + 24,000
  • Professional & techincal services:  + 18,000
  • Mining:  + 9,000
  • Construction:  unchanged
  • Transportation & warehousing:  unchanged
  • Information:  unchanged
  • Financial services:  unchanged
  • Leisure & hospitality:  unchanged
  • Government:  – 37,000

Trade Deficit Soars to Worst Level of Obama Presidency

August 17, 2011

The Bureau of Economic Analysis announced on Thursday that the U.S. trade deficit soared to $53.1 billion in June – the highest level since Obama took office – from $50.8 billion in May (the previous worst level of the Obama administration). 

In January of 2010, the Obama economic team asked, “Why can’t we be a net exporter like Germany?”  President Obama then set a goal of doubling exports within five years.  Since then, instead of making progress toward being a net exporter, our status as a net importer has dramatically worsened.  Since January, 2010, our trade deficit has exploded by 42%.  Here’s the chart:

Balance of Trade

Some might lay the blame on the rise in oil prices, and suggest that manufacturing is actually doing better.  Not so fast.  Yes, oil prices have risen, resulting in a 35% increase in our petroleum products trade deficit.  But the deficit in manufactured products has risen even faster – 42% (just like the overall trade deficit).  Exports of manufactured products fell short of Obama’s goal in June and worse yet, imports have risen even faster.  Here’s a chart of trade in manufactured goods: 

Manf’d Goods Balance

And here’s a chart of how overall trade is doing vs. Obama’s goal of doubling exports:

Obamas Goal to Double Exports

Yes, we’re pretty much on track, but the faster growth in imports has blunted the effect of exports.  Instead of creating jobs, the president’s failure to address the import side of the trade equation has instead outsourced hundreds of thousands, perhaps millions, of high-paying manufacturing jobs.  His strategy, the same strategy employed by his predecessors for decades, has been an abysmal failure.  And now, instead of following through with his campaign promise to fix broken trade agreements – especially NAFTA, he advocates more such “free” trade agreements, especially the agreement he negotiated with South Korea which caps U.S. auto exports at 75,000 per year while leaving South Korean imports unlimited, as a way to create more jobs.  Unbelievable. 

As the trade deficit has worsened, so too has the economy, with GDP now completely stalled and manufacturing in decline, as evidenced by three consecutive months of declines in the Empire State manufacturing survey, with the decline in August being by far the worst.  And there’s no hope that anything will change.  Obama simply doesn’t have the intestinal fortitude to stand up to export-dependent overpopulated nations and take positive action to restore a balance of trade.  His weak negotiating skills, first exposed early in his term when he was sent home from Mexico trade talks with his tail between his legs, were on display again during the deficit reduction negotiations with Republicans.  He caves in every time. 

Based on his promise to fix our trade mess, I voted for Obama.  I was suckered.  This president is another Jimmy Carter and he’s got to go.  I don’t know that we can expect any better from any of the Republican hopefuls but, while holding my nose, I’d rather trade a proven failure for one of these unknown entities.  It can’t get any worse.

Out of Office

August 3, 2011

No, this isn’t a commentary about Obama’s future prospects following the debt deal debacle and the direction of the economy.  Just letting you know I won’t be posting anything for a couple of weeks.  My first post then will be about the July unemployment report to be released in a couple of days, which I expect will be a disaster. 

Stay cool.