U.S. Trade Deficit with Denmark

Who cares about the U.S. trade deficit with a tiny country like Denmark?  You should, as should anyone concerned about our much larger trade deficit with China and our even larger overall trade deficit.  Because, though Denmark is a tiny country, it’s a perfect example of what’s wrong with our trade policy.  It’s a perfect example of the inverse relationship between population density and per capita consumption at work driving global trade imbalances.  Here’s a chart of U.S. trade with Denmark:

Denmark Trade

Our trade deficit with Denmark – almost all of which is in manufactured goods – climbed to a new record in 2011, just as our trade deficit with China did.  What do Denmark and China have in common?  Their population densities are nearly identical, with each more than four times as densely populated as the U.S.

In per capita terms, our trade deficit with Denmark in manufactured products is three times worse than our deficit with China.  And that’s in spite of the fact that Denmark is a very wealthy nation.  In 2011, Denmark’s GDP per capita rose by roughly 10% to over $40,000 per person – close to that of the U.S.  It’s one more bit of proof that what economists say about low wages causing trade deficits is flat wrong.  The opposite is true:  that wages in densely populated nations rise as their trade surpluses with the U.S. grow –  just as we also see happening in China. 

You may wonder what Denmark exports in order to have such a large trade surplus with the U.S.  Their major manufactured exports are machinery and instruments, pharmaceuticals, furniture and wind generators. 

Trade with Denmark is a microcosm of what’s wrong with American trade policy.  Free trade with densely populated nations, big or little, rich or poor,  is a consistent, sure-fire loser.

Trade Deficit with China Hits Record in 2011 in Spite of Rising Yuan and Chinese Incomes

Our economists and political leaders say that the weak Chinese yuan, held at an artificially low level by China, is to blame for our trade deficit with China.  They also say that trade deficits are caused by low wages. 

The yuan ended 2011 at 6.45 to the dollar, rising 5% in 2011 and 22% since 2005.  And incomes in China have risen by 115% since 2001 to $8,400 per person.  That’s not high relative to American incomes, but it’s high enough to place China in the top 50% of nations ranked according to income. 

So in 2011 we should have seen some decline in our trade deficit with China, or at least signs that it was beginning to level off.  Right?  Well, not only did it not decline, there is no sign of it leveling off, either.  In fact, our trade deficit with China grew to a new record of $295.5 billion in 2011, blowing past the previous record set just last year by another $22 billion.  And the trade deficit in manufactured products soared to almost $322 billion.  Here’s a chart of our balance of trade with China since 2001:

China Trade

As you can see, there has been no slow-down in the growth of our trade deficit with China whatsoever.  (There was only a tiny dip in 2009 when all global trade slowed dramatically during the recession.)  How can this be?  If economists are right, with the Chinese yuan on the rise and with Chinese incomes growing dramatically, we should at least see some effect.  But there is absolutely none.

That’s because currency exchange rates have absolutely nothing to do with trade imbalances.  The only thing a rising yuan will do is make the Chinese cut costs and become more productive in order to hang onto their market share.  A leaner, more productive Chinese work force is the last thing we need to help cut our trade deficit with them. 

And while there is a relationship between incomes and balance of trade, it’s exactly the opposite of what economists have maintained, which they’d soon discover if they put a little effort into gathering actual data.  In trade with nations much more densely populated than the U.S., low incomes correlate to small imbalances of trade (including surpluses!), while high incomes correlate with high U.S. trade deficits.  That’s because it’s through exports to the U.S. that the people of badly overpopulated nations are able to raise their incomes.  It’s the very reason that, in per capita terms, our trade deficits with wealthy nations like Japan and Germany are far worse than our trade deficit with China.  Take away free trade and their huge trade surpluses with the U.S. and their incomes would decline and their unemployment would rise precipitously. 

The data is clear that trade imbalances are caused by disparities in population density which cause disparities in per capita consumption.  We have trade deficits with badly overpopulated nations not because of currency exchange rates, low incomes or a lack of competitiveness.  We have trade deficits because they consume too little while being just as productive as we are.  The only way to restore a balance of trade with such badly overpopulated nations is through the use of tariffs. 

In all likelihood, our trade deficit with China will level off in the next few years, not because of a rising yuan or rising Chinese incomes, and certainly not because of any intelligent U.S. trade policy moves, but because there’s little manufacturing left in the U.S. to cannibalize.

Want Less Federal Government Intrusion? Focus on Trade Policy.

One of the biggest rallying cries of the right these days is ever-greater intrusion by the federal government into our lives.  They have a point, and the health care reform enacted in President Obama’s first year in office is a case in point.  It’s instructive to examine that case to gain insight into just why the federal government plays an ever-larger role in our lives.

Why was health care  reform enacted?  Well, the fact that Democrats held both branches of Congress and the White House certainly played a part; there’s no denying that.  But public sentiment also played a big part.  Employers had been jacking up premiums for health care insurance for years until they were no longer affordable.  More recently, in the wake of the near-depression, more employers were simply canceling such benefits altogether.  More people were faced with the only option left – buying individual policies on the open market – a real eye-opener for people who’d been used to paying group rates. 

People had had enough.  They wanted something done.  Something was.  And the mandates necessary to make it work – especially the mandate for everyone to obtain insurance – especially the young and healthy – came as a bitter pill to swallow.  (Of course, no one complained when they were mandated by their employers to participate in the plan.) 

So, in this case, this “intrusion” by the federal government into our lives was precipitated by slow but steady growth in the imbalance in the supply and demand for labor that made it possible for employers to cut benefits without fear of losing employees.  And the same is true for many federal spending programs.  As state and local budgets force cuts in education, in police and fire protection, in infrastructure spending, etc., the federal government steps in with grants and stimulus spending to make up the difference.  Otherwise our society would slowly collapse.  And, as is the case with all money, federal money comes with strings attached. 

Ultimately, it is the trade deficit that lies at the root of ever-more pervasive federal intrusion into our lives.  To better understand this, you need to understand the international flow of dollars caused by trade.  This won’t be anything new to those of you who have read Five Short Blasts. (See Figure 8-1 on page 143.)  For the benefit of others, that understanding begins with the simple fact that every dollar that is shipped overseas to purchase imported goods must eventually return to the U.S. – one way or another – since the U.S. is the only place where U.S. dollars can be spent.

“Not so,” you might say.  “Oil is priced in dollars.  China can use their dollars to buy oil.”  Very true.  However, that leaves oil exporters like Saudi Arabia with a growing mountain of dollars that still can only find a home in the U.S. 

Dollars come back to the U.S. in various ways:

1. For the purchase of American exports
2. For direct investment in the U.S., as in the case of a foreign automaker building a plant in the U.S.
3. Indirect private investment, such as the purchase of corporate stocks and bonds.
4. Indirect public investment, such as the purchase of government bonds. 

Regarding item no. 1, only a little over half of the dollars spent on imports come back in the form of export purchases.  Regarding no. 2, net direct investment in the U.S. is actually negative.  More dollars are invested overseas than in the U.S., making the challenge of attracting dollars back to the U.S. that much greater.  Regarding no. 3, we already have heavy foreign ownership of American companies.  To continue to pour money into their stocks and bonds would simply create a market bubble that would soon collapse, as the stock market did in March of 2000.  (And, by the way, it was precisely this kind of foreign investment in mortgage-backed securities that led to the collapse of the housing market and financial institutions in 2008.) 

That leaves one option – no. 4 – the purchase of government issued debt, or Treasury bonds.  As long as we continue to run a trade deficit, it’s absolutely vital to the economy that the government issue debt to draw those dollars back into the U.S.  But that’s not enough.  The mere purchase of bonds does nothing to offset the harm done to the economy by imports.  The only way to actually plow those dollars back into the economy is through federal spending. 

Now, suppose that you’re a state – say California.  The citizens of California spend their money on imports – a net outflow of cash.  Like virtually every state, it is required by its constitution to balance its budget.  As it attempts to do so, imports steadily drain money from the state.  So each year, state revenues which are a fixed percentage of the state economy, continue to decline.  The state must cut more spending:  cut funding for schools, lay off police and firemen, cut pensions for state workers, etc. 

There is only one way to keep the economy of California (and every other state) from decline, and that’s for the federal government to inject money back into the economy.  To make a long story short, Californians’ money goes to China, Germany, Japan and others.  Those countries then use the money to purchase treasuries from the federal government.  The federal government then plows that money back into California in the form of federal grants to repair school district budgets, rehire police and firemen, pay unemployment benefits and, yes, to pay for new health programs to offset the cuts of those benefits in the private sector.  And the biggest program for injecting money back into the economy is tax cuts, offsetting the downward pressure on wages wrought by the imbalance in the supply of labor.

It’s a vicious circle, and there’s only one way to break it – by restoring a balance of trade.  No trade deficit – no need to issue federal debt.  No federal debt – no money to plow back into the economy.  No federal money (with strings attached) coming back into the economy – no more intrusion by the federal government in our lives.

What’s going on in Greece today is a perfect example of what would happen without this mechanism to plow federal dollars back into the economy.  Just like the U.S., Greece has a huge trade deficit.  It too relied upon debt to offset the negative consequences.  However, once it became a member of the European Union, it lost its ability to grow its debt further.  It became like a U.S. state.  But, in the case of the EU, its members don’t get money plowed back into the economy throught the issuance of EU debt.  The EU is loaning money to Greece, but demands that it be repaid.  The EU hasn’t yet figured out that this is an unsustainable recipe for depression for its members with trade deficits. 

Yes, it’s unsustainable for the U.S. to continue to grow its debt forever, too, but as long as the U.S. continues to run a trade deficit, it’s absolutely vital to keep the economy afloat.  The president recently proposed a budget for 2013 with a deficit of $900 billion.  Given that the trade deficit in 2011 was $737 billion and is growing fast, it’s very likely that the trade deficit will be about $900 billion in 2013.  It’s no coincidence that those two numbers match. 

The longer we run a trade deficit, it’s unavoidable that the federal government will play a bigger role in our lives.  Those who complain about such intrusion by the federal government into our lives are wasting their breath.  Unless we all turn our focus to the trade deficit, we’d just better learn to accept the strings that come attached to the federal money that keeps us all afloat.

Thoughts on President Obama’s Contraception Quagmire with the Catholic Church

http://content.usatoday.com/communities/Religion/index

I’ve started to write on this topic a couple of times in the past week or so, but have gotten hung up each time on trying to keep it brief.  It’s just not a subject that lends itself to brevity.  But, together with the fact that my book’s main theme is the need to stabilize and even reduce our population, the events of this morning have me fired up enough to just wade in with my two cents’ worth.  First, while attending mass this morning, some guy felt it his duty to interrupt the service and educate the rest of us with a rant about “Obamacare” and the contraception mandate.  Later, after returning home and switching on the TV, George Stephanopolous’s round table discussion on this topic on “This Week” on ABC pushed me over the edge. 

So the following are some random thoughts on the subject.  First of all, there certainly is a valid concern about treading on the 1st amendment’s guarantee of religious freedom by mandating things that violate a religion’s beliefs.  That said, it seems to me that there’s a lot of political opportunism here.  The president was wrong to mandate that the Catholic Church pay for the cost of insurance coverage that includes contraception.  But that concern was laid to rest when he shifted the burden to insurance companies and mandated that they offer it for free to anyone who wants it.  The Church doesn’t pay for it, and no one takes advantage of it unless they want to.  But that’s not good enough for them.  Now it seems that the Church is over-reaching and is just as eager to trample people’s rights to make their own decisions about the use of contraception as they were eager to complain about their own rights being violated.  Republicans need to be careful here.  If the Church is perceived to be worried less about religious freedom and begins turning this into a fight over contraception, that’s a battle Obama would love to have, because it’s one he can’t lose. 

The federal government has no right to require religious groups to violate their beliefs.  It has every right – and a responsibility – to pass laws that dictate how business is to be conducted.  The problem arises when religious organizations branch out from attending to the spiritual needs of its members and begin operating businesses, like hospitals.  It’s not as though something like this hasn’t occurred before.  Where was all of this indignation when these businesses (like Catholic hospitals) were required to comply with equal opportunity laws that forbid discrimination on the basis of sexual orientation?  Where is the indignation about complying with living wills and other end-of-life directives regarding the termination of life-support for terminally ill patients?  Where is the indignation about religious organizations being required to provide health insurance of any kind if they have more than a certain number of employees?  (I’m thinking here of Christian Science, who doesn’t believe in health care of any kind.)

What happened to all of the indignation about the plight of people who were unable to afford health coverage of any kind prior to the passage of health care reform?  Didn’t the council of American bishops of the Catholic Church eagerly support health care reform?  Where is the indignation with American businesses who have been eagerly slashing health care coverage from their benefits?   

And isn’t it hypocritical for the world’s biggest champion of never-ending population growth to then decry the unemployment and poverty that follows in its wake – to demand that the government do something to provide care for all these people and then piss and moan about the details?  Has it instead volunteered to care for all the poor who can’t afford health coverage?  Oh, sure, they’ll toss them a few crumbs – feed them and provide shelters.  But I’m talking about expensive, life-saving medical care.  Are they willing to provide that? 

That’s why I say that there seems to be just a little opportunism going on here by those anxious to fabricate another reason (something beyond the notion of excessive government intrusion into our lives) to rally opposition against “Obamacare.”  (By the way, I’ll be writing more about the whole issue of “government intrusion into our lives” in another post.) 

Finally, I’ll simply say that the president is right in his philosophy of making contraception free to anyone who wants it.  As anyone who reads this blog knows, I haven’t been a big fan of President Obama lately, but he’s right on this one.  And the Catholic Church is wrong to try to make opposition to contraception (as distinguished from “birth control,” a term which includes abortion) a matter of doctrine.  Just as the president has waded into a quagmire with some clumsy handling of this issue, the Catholic Church just can’t seem to resist wading into every quagmire it encounters.   Deeper and deeper it goes, parsing every issue into every conceivable situation, assigning mortal or venial sin status to every conceivable outcome, until the federal tax code pales in comparison to the book of Catholic doctrine.   Never mind that Christ Himself had nothing to say on the topic of family planning and contraception (since he’d have been greeted with blank stares at a time when the birth rate barely kept pace with the death rate), the Church can always draw upon some Old Testament verse of dubious relevance.   Whatever happened to the main mission of spreading the gospel of love and salvation?

The fact is this:  the vast majority of Catholics practice contraception.  The only reason that the Church continues to oppose contraception is because it has painted itself into a corner.  To now approve the practice would be an admission that prior popes were wrong, calling into question the issue of papal infallibility. 

Looking around the church this morning, there were few young people to be seen.  No wonder.  The longer the Church continues to intrude where it doesn’t belong and drag its feet on admitting to past mistakes, the more its membership and influence will decline.  A pity.

U.S. Trade Deficit Rises Again in December

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

Trade figures released by the Bureau of Economic Analysis this morning (link provided above) reveal that the nation’s trade deficit rose again in December, to $48.8 billion, from $47.1 billion in November.  The rise was primarily driven by a $2.7 billion increase in the deficit in manufactured products.  A $0.6 billion increase in exports of manufactured products was swamped by a $3.3 billion increase in imports of manufactured products.  The monthly trade deficit continues it’s downward spiral.  Here’s the chart:  Balance of Trade.

For the year as a whole, the news is worse.  The trade deficit soared by almost 12% to over $558 billion in 2011.  Exclude services and narrow it down to the far more important category of goods, and the news is even worse.  In 2011, the goods trade deficit grew by 14% to $737 billion.  That’s almost 50% higher than 2009’s total of $506 billion.  Not coincidentally, the federal budget deficit is projected to be $1 trillion this year – just enough to offset the goods trade deficit, which is also likely to grow further this year. 

In January of 2010, vowing to revitalize the manufacturing sector of the economy,  the president set a goal of doubling exports within five years.  Now exactly two years into this goal, let’s take a look at how we’re doing.  Here’s the chart:  Obamas Goal to Double Exports.  Exports lagged the goal for the fifth consecutive month, and by the widest margin in December, by $8.5 billion – almost 5%. 

But what good has it done for American workers if that export goal is met by opening the spigot a little further on oil exports, or by throwing a few more bushels of grain into the holds of a cargo ship?  (Believe it or not, American oil exports soared to a new record of $10.64 billion in December.)  The real goal is to double exports of manufactured goods.  That’s where the jobs are.  And, in this category, the lag behind the president’s goal is even worse.  Here’s the chart:  Manf’d Goods Balance.  Exports of manufactured goods lagged the goal for the 8th consecutive month, and by the widest margin in December – $12 billion or 7%. 

None of this is any surprise, because the president’s focus on doubling exports in order to restore a balance of trade is completely misplaced.  We have no control over exports.  Exports are driven by foreign demand.  We can’t change that demand by competing harder.  Our foreign competition works just as hard to improve their competitiveness.  You can’t compete your way out of a trade deficit that is driven not by a lack of competitiveness (after all, we’re already the most productive nation on earth) but by the inverse relationship between population density and per capita consumption.  The only way to restore a balance of trade, returning jobs for manufacturing products for domestic consumption, is by focusing on imports, and the only way to control imports is through tariffs. 

Denial of this economic reality and attempting to gimmick our way out of it only dooms our economy to another recession as deficit spending will be unable to keep pace with the worsening trade deficit.  This is the main reason I remain pessimistic about the prospects for the economy this year.

American Economy: Rebuilding a House of Cards

For decades, since our trade deficit began eating away at our economy, the slow erosion in Americans’ purchasing power has been masked by building a mountain of debt – both at the federal and individual levels.  It was a house of cards, doomed to collapse, as it did in the fall of 2008, plunging us into the worst recession since the Great Depression. 

But, beginning in the fall of last year, an economic rebound began to take shape.  Had the economy been fundamentally reformed?  Was the president’s emphasis on manufacturing and exports beginning to take root?  Were incomes beginning to rise, rebuilding Americans’ balance sheets?  Sadly, no.  The house of cards is simply being rebuilt.

A couple of days ago, the Federal Reserve released its monthly report of consumer credit.  From this report, it’s no mystery what lies behind the sudden change in the economy.  Americans have fallen back into bad habits, perhaps lured by record-low interest rates.  The following chart, taken from the Federal Reserve’s web site, shows the monthly percentage change in total consumer credit through December:  Percent change in total consumer credit.  In November of 2009, total consumer credit fell at the fastest rate since May of 1980.  It began to pick up but, once again, in August of 2011, perhaps in reaction to the near-default of the U.S., fell to nearly as low a level.  Since then, it’s recovered dramatically.  Note the last four data points on the chart.  In November, the gain in total consumer credit was the largest since November of 2001.  In December, it was only slightly off that pace.

The Federal Reserve breaks that down into both revolving and non-revolving credit, revolving credit being credit card debt and non-revolving credit being loans for autos, boats, mobile homes, etc.  It seems that the decline in credit card debt has come to a halt and non-revolving credit is climbing again at a pre-recession pace.  Here’s a chart of these two types of credit:  Revolving vs non-revolving credit. 

With the government’s encouragement for banks to boost lending and for consumers to resume borrowing, Americans are falling back into some very bad habits.  With real unemployment somewhere in the range of 20%, Americans’ capacity for servicing debt isn’t nearly what it was a few years ago, before the recession, when unemployment was about a third of that level.  It’s not likely that this new house of cards will last long.

January Employment Report: a Home Run or a Foul Ball?

http://www.bls.gov/news.release/empsit.nr0.htm

The January employment report, released by the Bureau of Labor Statistics this morning, blew past all expectations in every way imaginable.  According to the establishment survey, 243,000 jobs were added in January, far exceeding expectations for 150,000 new jobs.  And, even more impressively, the household survey claimed that the employment level grew by 827,000, and the unemployment rate fell to 8.3%.  It would have fallen even more except for the fact that 508,000 workers re-entered the labor force.  By any measure, this report looks like a real home run for President Obama!

That ball is going … going … going …. Uh,oh.  Did it hit the foul pole?  Was it really a home run or a foul ball?  The report looks pretty rosy until you read the fine print which, apparently, none of the analysts did today.  Near the bottom of the report (link provided above) you’ll find the following note about the establishment survey:

Revisions to Establishment Survey Data

In accordance with annual practice, the establishment survey data released today have been revised to reflect comprehensive counts of payroll jobs, or benchmarks. These counts are derived principally from unemployment insurance tax records for March 2011. In addition, the data were updated to the 2012 North American Industry Classification System (NAICS) from the 2007 NAICS. This update resulted in minor changes to several detailed industries. The benchmark process resulted in revisions to not seasonally adjusted data from April 2010 forward and to seasonally adjusted data from January 2007 forward. Some historical data predating the normal benchmark revision period also were revised due to the implementation of NAICS 2012 and other minor changes related to rounding and the recalculation of aggregate series.

In other words, the baselines for the establishment survey have been changed.  How much?  Who knows?  Nobody.  This was the perfect opportunity to inflate the number of jobs created by monkeying with the baseline. 

And what about the household survey?  What explains the huge leap in the employment level?  Look a little further down on the report and you’ll find the following:

Adjustments to Population Estimates for the Household Survey

Effective with data for January 2012, updated population estimates which reflect the results of Census 2010 have been used in the household survey. Population estimates for the household survey are developed by the U.S. Census Bureau. Each year, the Census Bureau updates the estimates to reflect new information and assumptions about the growth of the population during the decade. The change in population reflected in the new estimates results from the introduction of the Census 2010 count as the new population base, adjustments for net international migration, updated vital statistics and other information, and some methodological changes in the estimation process. The vast majority of the population change, however, is due to the change in base population from Census 2000 to Census 2010.

Once again, with the baselines changed, who knows what the real numbers are?  You could make the numbers say practically anything you want.  If you were Secretary of Labor, appointed by President Obama and, assuming you’d like to hang onto your job for another four years, wouldn’t this be a perfect opportunity to buff up the president’s image with some good news on the jobs front? 

The problem is that this jobs data isn’t corroborated by other economic data.  4th quarter GDP growth was virtually all due to inventory-building.  Retail sales data has been weak in January, following a strong holiday season.  The housing sector is continuing to decline.  The trade deficit is as bad as ever.  The Federal Reserve is so concerned about the weak state of the economy that it recently vowed to keep interest rates at zero for three more years.  Consumer confidence is falling again and the percentage of people saying that jobs are hard to get is rising.  This isn’t a picture of an economy that’s adding 243,000 jobs per month.  Something doesn’t add up.  Looks to me like that ball went foul. 

Nevertheless, here’s my calculation and charts for unemployment:

Unemployment Calculation     Unemployment Chart     Labor Force & Employment Level     Unemployed Americans     Per Capita Employment

* * * * *

If you can believe the data, the 243,000 added jobs break down as follows:

• Professional & business services:  + 70,000
• Manufacturing:  + 50,000
• Leisure & hospitality:  + 44,000
• Health care:  + 31,000
• Construction:  + 21,000
• Wholesale trade:  + 14,000
• Mining:  + 10,000
• Retail trade:  + 5,000
• Government:  no change