Liberal Media Ignoring the Trade Deficit

January 30, 2012

http://inthesetimes.com/working/entry/12626/liberals_inequality_narrative_leaves_big_holes/

Thanks to reader Ken for sending me the above link to an editorial that appeared on “In These Times,” a blog devoted to championing the cause of unions and the labor movement. 

First of all, understand that I’m neither pro or anti-union.  Unions have their place.  When labor is in tight supply, they’re very effective at winning improvements in the lot of their members, and when their lot improves, so does the lot of all workers.  (Some may like to deny that fact, but it’s a fact nonetheless.)  But, when labor is in a state of oversupply, as is now the case, they have no leverage whatsoever.

With that said, the author of this piece makes a very valid point, that the liberal media has been ignoring the role of U.S. trade policy – the blanket application of “free trade” – in driving the income disparity – the 1% vs. the 99% – that has become the overriding issue in the presidential campaign. 

The “Occupy” movement gets the credit for bringing this issue to the fore, but it too seems to have largely missed the role of free trade, save for the protestors in Oakland who have, on a couple of occassions, shut down the port of Oakland, one of very few deep-water ports on the west coast.  My hope is that the “occupy” movement will yet come around.  But I fear that the global element of the movement may preclude that.  “Occupy” protestors the world over are angry at income disparities.  None yet understand the inverse relationship between population density and per capita consumption and its role in exacerbating the imbalance between the supply and demand for labor, and so they certainly don’t get its role in driving trade imbalances.

Without that understanding, the debate over income disparities has devolved into the usual squabble over taxes – the left claiming that the rich are taxed too little and the right complaining that all are taxed too much (especially the wealthy), choking off the job-creating business explosion that would supposedly take place if taxes were just a few points lower. 

The author also points out that the liberal media doesn’t want to embarass the president over his horrible record on trade, and so is perfectly happy to have the attention diverted to the tax squabble where he’s able to make a better case for re-election.  They’re more interested in assuring that a Democrat is re-elected instead of addressing real root cause issues.  In that regard, they’re his partners in crime.

Here’s the problem:  like everyone else, the “occupy” movement and the liberal media can’t make a coherent argument against free trade.  If they blame the problem on currency manipulation, the administration can simply reply, “we’re working on that.”  “The exchange rate is improving.  Just be patient.”  Or if they blame cheating, the administration can reply, “We’re working on that; be patient.”  Or if they blame low wages, the administration can reply, “Wages are rising fast in China; be patient.”  But these are the same replies we’ve heard from the last several administrations.  Imagine if the media asked about the inverse relationship between population density and per capita consumption.  They’d be greeted with blank stares and a lot of hemming and hawing.  Unless they are implementing tariffs, no one could say, “We’re working on that.” 

It’s not going to happen.  Economists of the left are just as bought into free trade as economists on the right.  Until some economist grows a backbone, has the courage to risk the wrath of his/her peers and actually begins to ponder the most dominant force at work in the economy today – population growth – nothing is going to change.   We’ll continue to be the victims of blind economic policy and irrelevant tinkering at the margins with taxes and spending.


GDP Up, But Don’t Look Too Deep

January 27, 2012

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

As reported by the Bureau of Economic Analysis this morning, 4th quarter GDP (gross domestic product) accelerated to an annual rate of increase of 2.8% from the 3rd quarter’s pace of 1.8%.  The stock market fell in response.  Why?  Because contrary to the rosy economic news that we got during the 4th quarter – driven by booming holiday sales, this GDP report paints a different picture.  Of that 2.8% increase, most of it – 1.9% – was due to nothing more than increases in inventories, and rising inventories are never a good sign for the economy.  Strip that away and the real increase in GDP falls to a measley 0.8%.  Or, worse, if the increase in inventories results in slowdowns in production driven by inventory control, we could actually see a slowdown in the 1st quarter of this year.

Expressed in per capita terms, the news is even worse, of course.  Take away inventory growth and the per capita rise in GDP falls to zero.  In other words, there’s a very real possibility (or even a likelihood) that the economy has stalled.  Worse yet, federal spending under the American Recovery Act (the “stimulus” plan) is nearly finished.  And now the pentagon is in the process of slashing costs.  Additionally, the cut in payroll taxes is due to expire in a month, and it’s no sure thing that it will be extended; and it’s very unlikely to be extended without corresponding cuts in spending that will pull as much out of the economy as the tax break puts in.  All of this taken together spells big trouble for the economy.  It’s no wonder that the Federal Reserve vowed to keep interest rates at zero for another three years.

For all of these reasons, I stand behind my prediction that 2012 is going to be a bad year for the economy.  The tactic of using debt to mask the effects of the trade deficit has been exhausted and the trade deficit is steadily getting worse.  

The following is a chart of GDP per capita:  Real Per Capita GDP.  Note the convergence of the two lines -GDP per capita with and without stimulus spending – now that the stimulus spending has been virtually exhausted.


My Take on the State of the Union Address

January 27, 2012

Now that I’ve had a couple of days to digest the president’s State of the Union address on Tuesday night, I’d like to share some thoughts.

The constitution requires that the president shall “… from time to time give to Congress information of the State of the Union…”  So, first of all, what is the current state of the union?  There was virtually nothing in the president’s speech that addressed it.  One could argue that the president failed in his constitutional duties in that regard.  It was much more of a campaign speech. 

Our homeowner’s association begins its annual meeting with a treasurer’s report.  Perhaps the president should do the same, or should have the Treasury Secretary lead off with such a report.  What were our revenues vs. spending?  How much did the national debt increase during the past year?  What was our current account deficit (or trade deficit) during the year?  How much did our population grow?  What is the current unemployment rate compared to last year?  What is our labor force participation rate compared to last year? 

Aren’t these some of the very basics that should be covered at the outset so that proposals regarding revenues and spending, trade and job creation can have some context?  Add this to my list of deficiencies in the constitution – that this requirement for a “State of the Union” address needs to be much more specific.  It seems that, as in the case of Congress, the president also can’t be trusted to perform his duties.  That’s not a knock on President Obama alone.  Every president has been guilty of the same thing.

Secondly, I give the president credit for recognizing that restoring our manufacturing base is absolutely critical to any economic revival.  For how long have we listened to our economists and political leaders dismiss manufacturing with talk of “the new economy,” or “a services-based economy” or a “high tech economy?”  It’s been decades and, all the while, our economy has steadily worsened.  Now the pendulum seems to be finally swinging back.  But talking and wishing won’t make it happen.  Nor will simple tax measures designed to lure manufacturing jobs back home.  Foreign nations will simply counter with tax breaks of their own.  We’re still a long way from an understanding that it’s trade policy that has to change. 

I also detected a change in the president’s approach to manufacturing.  Two years ago, he set a goal of doubling exports in five years.  That was going to lead the manufacturing renaissance.  However, although he made mention of that export goal in the address on Tuesday night, there was a much heavier emphasis on bringing jobs home and making products for Americans right here in America.  Perhaps the president and his economic team are recognizing that attempting to export our way out of our manufacturing decline isn’t going to work, as evidenced by the fact that exports have begun to lag the president’s goal.

Then there was the pandering to the Hispanic vote with his pitch for “comprehensive immigration reform” which is nothing more than another round of amnesty.  The president expressed sympathy for foreign students who return home instead of being offered work here, and sympathy for foreigner eager to find work.  Not a word of sympathy for the American workers that they displace. 

Finally, there are a few specifics that I can’t let pass without comment:

Let’s remember how we got here.  Long before the recession, jobs and manufacturing began leaving our shores.

Yes, indeed, let’s remember exactly how we got here and exactly why jobs and manufacturing left our shores!  And let’s not kid ourselves about it either.  It was the shift in trade policy to the blind, across-the-board application of free trade, abandoning 150 years of successfully using the full range of trade policy available to us, including tariffs, to assure that we maintained a surplus.  But I suspect that this isn’t what the president wants us all to remember.

Then there was this: 

Those are the facts.  But so are these:  In the last 22 months, businesses have created more than 3 million jobs.  (Applause.)

Maybe so, but that has just barely kept pace with the growth in the labor force.  Truth be told, unemployment has barely budged from its worst level of the recession.  It’s only thanks to the labor department’s claim that millions have left the work force that official unemployment has fallen from 9.8% to 8.5% during that time frame.  The fact is that just as many people remain jobless today as they did 22 months ago. 

On the day I took office, our auto industry was on the verge of collapse.  Some even said we should let it die.  With a million jobs at stake, I refused to let that happen.  In exchange for help, we demanded responsibility.  We got workers and automakers to settle their differences.  We got the industry to retool and restructure.  Today, General Motors is back on top as the world’s number-one automaker.  (Applause.)  Chrysler has grown faster in the U.S. than any major car company.  Ford is investing billions in U.S. plants and factories.  And together, the entire industry added nearly 160,000 jobs.

We bet on American workers.  We bet on American ingenuity.  And tonight, the American auto industry is back.  (Applause.)

Give the president credit for this one.  He’s exactly right.  In fact, virtually all increase in manufacturing employment in the past 22 months has been tied to the resurgence of GM, Ford and Chrysler.  But also give credit to American consumers.  There’s been a measurable uptick in the percentage of people who favor buying American.  And a car is one product they can still find that’s made in the U.S.  But let’s also give a lot of credit to the UAW.  As part of the bankruptcy settlements, the UAW became a partial owner of GM.  As part of the deal, the UAW insisted that certain manufacturing operations be returned to the U.S.  It’s the very reason that the highly successful Chevy Cruze and the new Chevy Sonic is made in the U.S. today.  Otherwise, the Sonic would be imported from South Korea, as was the Aveo that it replaced. 

I will go anywhere in the world to open new markets for American products.  And I will not stand by when our competitors don’t play by the rules.  We’ve brought trade cases against China at nearly twice the rate as the last administration –- and it’s made a difference.  (Applause.)  Over a thousand Americans are working today because we stopped a surge in Chinese tires.  But we need to do more. 

I almost gagged on that one.  No one has done more than the president to block Congress’s attempts at labeling China a currency manipulator.  “We need to do more.”  Do you think?!?  A thousand jobs?!?  It seems that we need to do about 10,000 times more than that if we want to bring home 10 million manufacturing jobs.   It may be safe to say that no president has ever done less to bring home American manufacturing jobs.

Tonight, I’m announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trading practices in countries like China.  (Applause.)  There will be more inspections to prevent counterfeit or unsafe goods from crossing our borders.  And this Congress should make sure that no foreign company has an advantage over American manufacturing when it comes to accessing financing or new markets like Russia.  Our workers are the most productive on Earth, and if the playing field is level, I promise you -– America will always win.  (Applause.)

We’ve heard all of that before for decades.  It’s the same old song. 

I also hear from many business leaders who want to hire in the United States but can’t find workers with the right skills.  Growing industries in science and technology have twice as many openings as we have workers who can do the job.  Think about that –- openings at a time when millions of Americans are looking for work.  It’s inexcusable.  And we know how to fix it.

Is the problem a lack of skilled workers, or a lack of workers willing to do the work at the wages they’re offering?  And how much of it is a function of employers’ unwillingness to spend a few bucks training workers who may need just a little training?  Oh wait, that’s the government’s job now:

Join me in a national commitment to train 2 million Americans with skills that will lead directly to a job.  (Applause.)

I could go on, but I’m just getting myself all worked up again, like I did Tuesday night.  It was all a rehash of the same old rhetoric.  Lower taxes.  (No mention of how to offset the revenue loss.)  Retraining workers.  (Never mind the fact that recent college graduates are one of the groups with the highest unemployment.)  Cut regulations.  Blah, blah, blah. 

Of course, if the President left the Democratic Party and ran against himself as a Republican, he’d fit right into the primary debates since, with a few minor exceptions, we hear all of the same rehashed rhetoric there as well.  And can we believe any of it from any of them?  Don’t be ridiculous.


Occupy Harvard

January 24, 2012

http://www.thecrimson.com/article/2012/1/24/occupy-harvard-protest-wall-street-theory/

Back in October, in a post titled “OWS:  Right Movement, Wrong Street,” I commented that:

… maybe there are other streets that need to be targeted as well.  Our political leaders don’t dream up economic policy.  They’re too busy with campaigning and schmoozing.  They take their economic policy advice from economists.  Some lean slightly left; some lean slightly right.  But there’s little difference among them, which is why nothing ever seems to really change regardless of which party is in power.  All favor free trade and all favor growing the population, because they refuse to open their eyes to the consequences. 

So maybe the movement should be renamed “Occupy Garden Street” for the street in Cambridge, Massachusetts where Harvard University is located.  Maybe they should be demanding that Harvard and all of our universities abolish their economics departments, since the economists they’ve produced have proven to be abject failures. 

It’s happening.  This morning I came across the above-linked article that appeared in the Harvard Crimson about the “Occupy Harvard” movement there.  Of particular interest to me was the following:

Indeed, Occupy Harvard has been a very effective protest. …  It sparked national discussion about how classical economics is taught in the college setting.

If you follow the “national discussion” link, you’ll find the following on the INET (Institute for New Economic Thinking) Blog:

The problem of the typical economics class lies in an excessively narrow conception of the scope of economics, and of the research methods appropriate to the subject. This narrowness is pervasive but, as the reaction of the students demonstrates, especially jarring at the introductory level.

Oops!  I guess it didn’t occur to the admissions department at Harvard that, if they admit students from middle and lower income families, those new students might arrive on campus with a dim view of the economy that Harvard’s economics department has had a major hand in creating.  This is where the real hope for change resides – not in Washington and in the dying, failed idealism of the political left and right – but in the minds of a new generation, willing to challenge conventional wisdowm, no matter how lofty the credentials of their teachers. 

As I watched the Republican debate from Florida last night, I was struck by the dearth of new ideas for dealing with economic challenges that have left our country at the breaking point.  “Lower taxes.”  “Get the government out of the way.”  We could have been watching a tape of a debate from 30 or 40 years ago.  There’s no hope to be found there, not that there’s any to be found among the ranks of Democrats either. 

Our only hope lies in fresh young minds who see the world as it is and who react with incredulity when exposed to the nonsensical axioms of never-ending growth that has brought the world to such a state.  Perhaps my optimism springs eternal, but change for the better may be taking root among the new generation on our campuses.  We can only hope.


Dean of Business at GWU Calls for Reconsideration of Economic Theory

January 20, 2012

http://www.forbes.com/sites/dougguthrie/2012/01/17/the-need-for-a-radical-reconsideration-of-neoclassical-economic-theory/

This morning I came across the above-linked opinion piece that appeared on the Forbes web site a couple of days ago.  Dr. Doug Guthrie, dean of the business school at George Washington University, proposes that recent failures of capitalism are rooted in the failures of economic theory taught at our universities.  He observes:

There remains an unconscionable chasm between economic theory and reality.

… Americans and their leaders are ready for a deeper conversation about the role of economics in society—a dialogue that is not dominated by economists or marked by abstruse debates about the core assumptions underpinning theoretical mathematical models.

… We need a field of economics that thinks in broad social scientific terms and is engaged in real world problems rather than entrenched in dogma and theory.

Hallelujah!  This is what I’ve been saying all along, that the solutions to our problems won’t be found in the political arena, since politicians merely follow the advice of their economists.  There are no solutions that don’t begin with some soul-searching by the field of economics itself; that don’t begin with some economist brave enough to challenge the ridiculous claim that man is clever enough to beat down any challenge to growing our population indefinitely. 

That’s not specifically what dean Guthrie is proposing, but it’s certainly a step in that direction.  Perhaps economists will overcome their reluctance to consider population growth when they grow even more uncomfortable with the growing derision of their academic peers (like dean Guthrie) that now seems to be taking root. 

I submitted a comment to Forbes which is repeated below for your convenience:

The problem with neoclassical economic theory – indeed, with the entire field of economics – is that it has turned a blind eye to the most powerful force at work in our economy today: population growth. Following the beating endured by economists in the wake of the seeming failure of Malthus’ theory, economists steadfastly refuse to ever again give credence to concerns about overpopulation. Man, economists say, is clever enough to overcome any challenge that population growth may present.

While mankind may be able to push back technological boundaries, there are other economic consequences against which we are powerless. While population growth stokes macroeconomic growth, total consumption and total sales volume, it also spawns overcrowding that is steadily eroding per capita consumption. And, since per capita consumption and per capita employment are inextricably linked, worsening unemployment, falling incomes and poverty are inescapable. The inverse relationship between population density and per capita consumption is irrefutable. The data is there for all to see.

The ramifications are enormous. Huge disparities in population density from nation to nation result in huge disparities in consumption, driving global trade imbalances. Badly overpopulated nations are desperately dependent on manufacturing for export to employ their bloated labor forces, and equally dependent on the resultant trade imbalances that threaten our financial system. And with each passing day, the supply of labor grows more out of balance with demand, making nations more dependent on deficit spending to maintain an illusion of prosperity. Unsustainable debt loads now threaten our financial system with collapse.

There is much more reason for concern about overpopulation that mere stress on resources and strain on the environment. Until the field of economics overcomes its cowardly refusal to even consider the subject of population growth and its full range of implications, matters will only grow worse.

Pete Murphy
Author, “Five Short Blasts


Brazilian Company Awarded U.S. Defense Contract

January 17, 2012

http://www.reuters.com/article/2011/12/31/us-embraer-brazil-usdefense-idUSTRE7BU03Y20111231

As reported in the above-linked article on Reuters this morning, Brazilian aircraft manufacturer Embraer has been awarded a $355 million contract to provide small turbo-prop aircraft to the U.S. military. 

I’m using this report to illustrate how such trade deals would work under the trade policy I proposed in Five Short Blasts.  Those of you not familiar with that policy might assume that I, a real hawk on restoring a balance of trade, would be opposed to such a deal.  After all, here we have the federal government, led by a President who speaks incessantly about the need to create jobs, awarding a contract to a foreign company.  How can this be?  We should all be outraged!

Those who know me better know differently.  Under the trade policy I’ve proposed – one in which tariffs on manufactured products are indexed to population denisty, but one in which all other trade is essentially “free trade” – there would be no problem with this deal (assuming that there were no bidding irregularities).  With a relatively sparse population, and being rich in natural resources, Brazil is a perfect example of the kind of country we should engage in free trade.  And, in fact, Brazil is one of our best trade partners.  In 2010, our trade surplus in manufactured goods with Brazil soared to over $20 billion, shattering the record of $17 billion set in 2008. 

As one commenter to the Reuters article pointed out, these aircraft may actually be assembled at Embraer’s new plant in Melbourne, Florida.  But it’s likely that many, if not most parts, will be imported from Brazil and other countries.  But all of that is beside the point.  The point is that Brazil isn’t the problem when it comes to our trade deficit.  Neither is any other sparsely populated country. 

The real problem is attempting to trade freely with the likes of Japan, Germany, China, Mexico and other densely populated nations, desperate to find work for their badly bloated labor forces.  In November, the latest month for which trade data is available, we had a trade deficit of $20.9 billion.  Our trade deficit with China alone was far larger  – $26.9 billion.  Throw in Japan, Germany and Mexico and those three alone account for another $16.4 billion trade deficit.  Restore a balance of trade with those four nations and we swing to a $22.4 billion trade surplus.  That’s a swing of $43.3 billion per month, or $520 billion per year.  Assuming that 2/3 of that is labor, and assuming an average wage of about $50,000 per year, that’s 7 million high-paying manufacturing jobs.  And here I’ve limited this analysis to only four densely-populated countries in the interest of brevity.  I could have included two dozen more on the list and the numbers become even more staggering. 

As tempting as it is to malign free trade in general and to be critical of all trade deals like the one illustrated in this report, that would make no more sense than the blind application of free trade to every situation like we have now.  We don’t need to eliminate trade.  We need to apply trade policy that is aligned with economic realities, especially the inverse relationship between population density and per capita consumption, and its role in driving global trade imbalances.  We need to make smart use of tariffs where it makes sense and apply free trade principles where those make sense.

Current trade policy – confining ourselves to the extreme free trade end of the trade policy spectrum – makes no sense at all, and the results bear that out.


Trade Deficit Rises to Worst Level Since June

January 13, 2012

The Bureau of Economic Analysis announced this morning that the November trade deficit rose to -$47.8 billion, its worst level since June, as imports rose by nearly $3 billion and exports fell by $1.5 billion.  (Click here for the report.)

The trade deficit with Germany rose to just below the record level set in October of 2005.  The 2o11 trade deficit with China is only $1 billion below the record set in 2010, and that’s with a full month to go in 2011.  The only question is whether the trade deficit with China will top $300 billion. 

The U.S. trade deficit continued its slow but steady worsening since President Obama, in January of 2005, set a goal of doubling exports in five years.   Here’s the chart:  Balance of Trade

Exports failed to meet the president’s goal for the fourth straight month although, until November, exports tracked very closely to the president’s goal.  But, in November, exports lagged the president’s goal by over $7 billion, by far the worst lag since the goal was set.  Here’s the chart:  Obamas Goal to Double Exports

But the real goal, of course, is to double exports of manufactured products, since that’s where the real opportunities for job creation lie.  Here the news is even worse.  Exports of manufactured products lagged the president’s goal for the seventh consecutive month, by more than $10 billion.  Here’s the chart:  Manf’d Goods Balance.  As you can see, exports of manufactured products have fallen completely off the track for attaining the president’s goal. 

No surprise.  The president has done absolutely nothing to stem the tide of imports and bring American manufacturing jobs home.  Contrary to his promise to rewrite NAFTA to correct the trade problems with Mexico, he’s done absolutely nothing except turn tail and run as soon as Mexico was angered by the suggestion.  Contrary to his promise to get tough with China, he’s resisted efforts by Congress to label that nation a currency manipulator, which would open the door to punitive tariffs.  He’s done nothing but talk and put on shows like his forum this week for insourcing American jobs. 

Romney has promised to slap China with the “currency manipulator” label on day one of his administration.  Do I believe it would be anything more than a symbolic gesture, or that he would then actually follow through with tariffs?  No.  But Obama proved himself a liar when he made a similar pledge, and I’m fed up with Obama’s timidity on the trade issue.  I’m thinking the time is here to give Romney a chance.