Solar Panel Tariffs Highlight Obama Trade Policy Timidity

March 21, 2012

In what can only be described as a slap in the face for American manufacturers, the Obama administration has imposed tiny, token tariffs on Chinese solar panels in response to American manufacturers’ complaints of huge Chinese subsidies and dumping.  (See above link to the Reuters story.)  The Obama administration imposed duties ranging from 2.9% to 4.7%.  Industry analysts had been expecting tariffs of 20-30%. 

For all of his complaints that Republicans have stymied his efforts to change the direction of America, trade policy is one area where he has absolute power to act.  Yet, nowhere else is his failure more evident.  Regardless of whether it was his trade negotiating team, his Treasury Secretary or him personally (as happened with his trip to Mexico early in his administration), every trade policy negotiator during his administration has been sent home with his tail between his legs.  Consequently, the trade deficit has exploded on his watch. 

Remember Obama’s emphasis on “green” jobs, claiming that such jobs would remain in America?  Remember his announcement earlier this year of a task force tasked with investigating and responding to unfair Chinese trade practices?  It’s all just rhetoric, designed to appease voters, just like his campaign promises to counter unfair trade practices, re-write NAFTA and, in general, fix American trade policy.

Obama has proven to be yet another in a long line of care-taker presidents, keeping the seat warm in the west wing while doing nothing to correct economic blunders of the past and address our long-term challenges.  Another opportunity lost.  He seems more concerned with maintaining a congenial atmosphere around the punch bowl at G20 meetings than with putting Americans back to work.  I made the mistake of believing him once.  I won’t make that same mistake this fall. 



Deficit Spending Powers Economic Recovery

March 13, 2012

I thought I’d share with you some data that, I believe, explains the rebound in the economy that’s been gathering momentum in recent months.  The following is a chart that tracks the growth in the national debt vs. the cumulative trade deficit (expressed in current dollars) since 1976, the first year following our last trade surplus in 1975.  Highlighted in yellow are recessions. 

My theory is that, if you draw a line around the economy, periods of expansion occur when the money flow into the economy exceeds the money flow out, and recessions will occur when the inflow falls below that level.  Deficit spending by the federal government is the most significant flow of money in.  The trade deficit has steadily grown into the dominant outflow of money. 

Here’s the chart (use your browser “back” button to return to this post):  Cumulative Trade Deficit vs Growth in National Debt

Beginning with the first trade deficit in 1976 that followed our last surplus, the trade deficit began to gather steam until, for the first time in 1979, the cumulative trade deficit surpassed the growth in the national debt.  (In other words, at that point, there was a net outflow of money from the economy.)  A double-dip recession soon followed, lasting from January, 1980 until November of 1982. 

Ronald Reagan took office in January of 1981 and cut taxes, which then propelled federal deficit spending that again overtook the trade deficit, and the U.S. enjoyed about 7-1/2 years of expansion.  However, the trade deficit continued to worsen and the rate of deficit spending was slowed by President Bush’s increase in social security taxes.  By the late ’80s, the trade deficit threatened to overtake federal spending once again.  By July of 1990 we were back in recession.

Deficit spending took off again but, by this time, it was too late to salvage Bush’s presidency.  Bill Clinton was swept into office in 1991, thanks primarily to voter anger over the state of the economy.  Fate, and an explosion in deficit spending, were  kind to President Clinton.  The ’90s were marked by the rise of the  high tech industry – cell phones, personal computers and the dot-com boom all helped drive down the trade deficit and create a new flow of foreign money into the stock market, supplementing the flow of deficit spending.  The result was the longest period of uninterupted expansion in U.S. history. 

But Republicans made serious political inroads on growing concern over the explosion in the national debt, so President Clinton worked with Republicans to eliminate deficit spending, bringing the growth in the national debt to a halt in 2000.  In that same year, China was granted “most favored nation” status and was admitted to the World Trade Organization.  Immediately, our trade deficit began to explode in a way that had never been seen before.  And, at the same time, the dot-com bubble burst. 

But, aside from a very brief recession caused by the events of 9/11, real economic recession was held at bay by a new flow of foreign money into the housing market.  Upon the collapse of the stock market in March of 2000, investors promptly concluded that real estate was the safest place to be.  Foreign investors’ money poured into real estate and mortgage-backed securites, feeding a completely irrational housing boom.  Thanks to this new flow of foreign money, filling the void created by the slowdown in federal spending, the economic expansion continued, although it was hailed as a “jobless recovery.”  Virtually all of the recovery was concentrated among the top few percent of incomes while, truth be told, the rest of the economy was probably stuck in a mild recession. 

By 2006, the growth in the national debt once again fell behind the cumulative trade deficit.  That, coupled with the bursting of the housing bubble that dried up that flow of money into the economy, lead to the worst recession since the Great Depression, beginning in December, 2007.  President George W. Bush responded with an unprecedented explosion in deficit spending, a program continued by his successor, President Obama, to this day.  The growth in the national debt is now further ahead of the cumulative trade deficit than at any point in history.  The result is that the economy is slowly beginning to expand once again.

Look again at the chart.  Each time that deficit spending has begun to slow relative to the trade deficit, a recession has soon followed.  Each time, the government has responded with greater deficit spending, often in the form of tax cuts, leading to recovery.  Now look at the tail end of the chart.  The rate at which growth in the national debt outpaces the trade deficit has never been greater. 

This is a great strategy for an incumbent president in an election year.  But it’s not sustainable.  Both parties will tell you so.  Neither party will act on it.  Both parties use deficit spending to sustain an illusion of prosperity.  Democrats place the emphasis on taxing the rich to fund spending programs to curry favor with low and middle income workers.  Republicans favor cutting spending and cutting taxes for the wealthy to curry favor with upper income workers and those aspiring to an upper income.  The end result is the same – a growing national debt.  Until someone has the courage to address the real driving force behind deficit spending – the trade deficit – our national debt will continue its march skyward.

Trade Deficit Worsens to New Obama-Era Record

March 10, 2012

A big spike in imports swamped a smaller rise in exports in January, resulting in the worst U.S. trade deficit of the Obama presidency.  Since January of 2010, when the president set a goal of doubling exports in five years, the trade deficit has worsened by 40%.  This from a president swept into power on a promise to reduce unemployment by fixing our broken trade policy.

The trade deficit rose to $52.6 billion, easily surpassing the upwardly-revised December reading of $50.4 billion.  Exports rose enough to recover some ground in the goal to double exports, but not much.  Exports still lag the president’s goal by nearly $9 billion per month.  In the more important category of manufactured exports (more important because that’s where the jobs lie), exports are lagging the goal by $11 billion per month.

Here’s the charts (use your browser’s “back” button to return to this post after viewing each chart):  Balance of Trade     Obamas Goal to Double Exports     Manf’d Goods Balance

So how has the economy been recovering through this?  Credit an explosion in the federal budget deficit, gushing far more money into the economy than the trade deficit is sucking away – a situation that is completely unsustainable, even for a short period of time.  More on this in my next post.

February Employment Report Paints Picture of An “Economy” on The Mend

March 9, 2012

According to the Bureau of Labor Statistics, the economy added 227,000 jobs in February, building on prior months’ gains, and painting a picture of a rebounding “economy.”  I enclose “economy” in quotation marks because it’s a valid picture as long as you take a short-term view and apply a narrow definition.  More on that later.  But first, let’s take a closer look at the data. 

Here’s the report:  According to the establishment survey, 227,000 jobs were added in February.  That’s a good amount, more than the 125-150,000 needed to absorb the growth in the labor force due to growth in the population.  And last month’s figure was increased dramatically to 284,000 from the previous estmate of 243,000.  It should be noted that while the February jobs figure is a good one, it’s a decline of 20% from the previous month.  While other economic data have supported the view of a reviving economy since roughly November, more recent data calls into question whether the momentum has been lost. 

According to the household survey, unemployment held steady at 8.3%.  Though the “employment level” jumped by 398,000, the civilian labor force grew by 476,000.  (That’s if you can believe the whole process by which the BLS makes workers disappear as unemployment is worsening, only to reappear later when the economy is adding jobs.)  My own calculation of unemployment – “U3a” – has unemployment declining by 0.1% to 10.7%.  (That’s because my calculation never dropped workers out of the labor force to begin with, so the growth in the employment level is enough to bring down real unemployment.)  Here’s my calculation, followed a chart of the data:  Unemployment Calculation     Unemployment Chart

The number of unemployed American workers has now fallen for seven straight months to just under 17 million workers (from a  high of 18.98 million workers in July of ’11), and the percentage of Americans working has also risen seven straight months.  Here’s the charts:  Unemployed Americans     Per Capita Employment

These are real improvements, but there’s still a very long way to go to put everyone back to work.

The fact that, at least superficially, the “economy” seems to be on the mend isn’t terribly surprising.  The continued high rate of deficit spending, projected to be about $900 billion this year, is pumping money into the economy faster than the trade deficit is sucking it out – currently at a rate of about $750 billion per year.  The payroll tax cut was extended, along with the Bush-era tax cuts.  So too was unemployment insurance.  And, I have a sneaking suspicion that, with the start of a new fiscal year in November for the federal government, procurement for federal programs has been accelerated, pulling forward government purchases and the economic stimulus that goes with it.  Finally, consumers are doing their part by foolishly taking on more debt once again.  The old pre-recession “let the good times roll” mentality is back.

The problem is that, if you expand your view of the economy to include the nation’s balance sheet, you quickly realize that what we’re witnessing is yet another debt-fueled sugar high.  Take away this extreme level of deficit spending and the party’s over real fast.  No one’s thinking about that now but it’s lurking right over the horizon.  Any number of things can bring it back to the forefront:  the next debt ceiling vote, the next downgrade of U.S. debt by Standard & Poor’s, the next bad treasury auction – anything.  It’s just  matter of time.  Then, if the deficit is cut without addressing the rapidly escalating trade deficit (see my next post), we’ll be back in a recession as bad as before.

U.S. Trade Deficit with Ireland Soars to Another Record in 2011

March 8, 2012

In 2011, the U.S. trade deficit with Ireland soared to $31.6 billion, blowing away last year’s record of $26.6 billion.  The trade deficit with Ireland has grown by 277% since 2001.  Here’s a chart of that growth:

Ireland Trade

By comparison, our trade deficit with Ireland is small potatoes compared to China – about one tenth as large.  However, China is a vastly larger country.  Expressed in per capita terms, our trade deficit with Ireland, at $6,695 per person, the highest in the world, is 30 times worse than our per capita trade deficit with China. 

The point here is not that we need to do something about Ireland, any more than we need to do something about China or any other one nation.  The point is that, although China draws all the fire for our trade deficit and loss of manufacturing jobs, our trade results with China are really no different than our trade results with other densely populated nations – Ireland included.  In nearly every case, our trade deficit with densely populated nations worsened in 2011.  The problem isn’t China, or their low wages or currency manipulation or unfair trade practices.  The problem is U.S. trade policy that attempts to apply free trade in situations where it simply isn’t applicable – where it has absolutely no chance of doing anything other than draining our economy of its jobs and wealth.

Analysis of Trade Data Exposes Flaw in U.S. Trade Policy

March 5, 2012

No nation on earth is more devoted to the concept of “free trade” than the United States.  And no nation on earth pays more dearly for that misguided policy.  America’s trade deficit is the worst in the world – six times worse than the 2nd ranked nation – India.  Because of that trade deficit and the need to draw dollars back into the economy through the issuance of debt, its external debt is also the worst in the world – 50% worse than the next most indebted country – the U.K.

China accounts for the lion’s share of the U.S. trade deficit.  Economists and political leaders would like you to believe that our deficit with China is the result of low wages, currency manipulation and unfair trade practices because, if you believe this, then you believe that a “level playing field” can be achieved with China by addressing those issues, thus restoring a balance of trade and bringing manufacturing jobs back to the U.S.  What they don’t want you to believe is that the entire concept of “free trade,” at least in many situations, may be fatally flawed. 

For those of you who are new to this site and who haven’t read my book, the data that I present below will come as a surprise, for no economist has ever made the linkage between balance of trade and population density.  For those of you familiar with this site, the chart below is a new, concise way of presenting an analysis of U.S. trade data that exposes the real flaw in our trade policy.

I’ve just completed an analysis of our trade results with America’s top 15 trade partners, breaking down the balance of trade in goods into several categories of natural resources and manufactured products.  The following chart tracks the balance of trade in manufactured products for those 15 nations, from 2001 through 2011.  But the trade data is presented in per capita terms instead of in raw dollars in order to factor out the sheer size of nations like China.  Of course China dominates our balance of trade.  They account for one fifth of the entire world’s population.  Would the results be any different if China was actually a cluster of smaller nations?  Probably not.  So how can we tell whether our trade policy with China is any less effective than the same policy applied to a much smaller nation?  The way to do it is by dividing the balance of trade by the population of that nation and expressing it in per capita terms.

On this chart you’ll find each nation identified on the right axis, next to its 2011 data point.  Below each nation, you’ll see two numbers.  The first number is the ratio of that nation’s population density compared to the U.S.  For example, the top nation on the chart – Canada – is 0.11 times as densely populated as the U.S.  The second number is that nation’s “purchasing power parity,” a figure that approximates each nation’s GDP (gross domestic product), divided by its population.  It’s a good measure of the wealth of each nation and a good indication of wages paid there. 

The list of America’s top 15 trade partners was taken directly from the Census Bureau’s “Foreign Trade” web site.  They are determined by the total of both imports from and exports to each country and account for 96% of all U.S. trade.  Those top 15 trading partners are:

  1. Canada
  2. China
  3. Mexico
  4. Japan
  5. Germany
  6. U.K.
  7. South Korea
  8. Brazil
  9. France
  10. Taiwan
  11. Netherlands
  12. Saudi Arabia
  13. India
  14. Venezuela
  15. Singapore

With that explanation, here’s the chart:  Trade in Manfd Goods with Top 15 Partners

Some observations are in order:

  • Of these 15 nations, the U.S. has a trade deficit in manufactured goods with eight of them:  India, France, China, Mexico, South Korea, Germany, Japan and Taiwan.  Every one of these eight nations is more densely populated than the U.S.  Mexico is almost twice as densely populated.  France is more than 3 times as densely populated.  China is more than four times as densely populated.  The rest are much more so.
  • In per capita terms, our trade deficit with China is rather unremarkable.  In 2011, the deficit with Taiwan was four times worse.  The deficits with Germany and Japan were three times worse. 
  • These deficits are not one-year anomalies.  In every case, they have been consistent or worsening over this 11-year span. 
  • The worst per capita trade deficits are with wealthy nations.  Among our four worst per capita trade deficits, all of those nations rank among the top 20% of the world’s wealthiest nations.  This debunks the myth that large trade deficits are caused by low wages.  As I’ve reported before, the cause and effect is exactly the opposite of what economists claim.  High wages among these trade partners are the result of their trade surplus with the U.S. Wages in China are rising fast as their trade surplus with the U.S. expands.  The trade deficits are caused by the disparity in population density.  Wages are the result of the trade imbalance, not the cause.
  • It’s often said that a lack of competitiveness is also a cause of our trade deficit.  Yet, in per capita terms, we have a trade deficit with France, arguably the least competitive nation in the developed world, that’s nearly as large as our per capita deficit with China.  It has nothing to do with competitiveness.  It has everything to do with population density.
  • Our deficit with India, in per capita terms, is very small; yet, they’re nearly three times more densely populated than China.  Why?  It’s difficult to explain.  There was never the rush of manufacturers into India like we saw with China.  Perhaps India’s hyper-population density and accompanying poverty made corporations skeptical of India’s ability to develop into western style consumers.  Perhaps there’s a limit to the conditions that wealthy corporate executives are willing to endure in their quest to grow profits.  And now that China has cannibalized virtually all of the world’s manufacturing capacity, especially America’s, there’s little left for India. 
  • Now, turning our attention to the positive, surplus side of the chart, we find that of these seven nations – Canada, Singapore, the Netherlands, Saudi Arabia, Venezuela, Brazil and the U.K. – four are less densely populated than the U.S.:  Canada, Saudi Arabia, Venezuela and Brazil. 
  • Of the three more densely populated nations that appear on the surplus side of the chart, the one with whom we have the highest per capita surplus is also the tiniest:  Singapore.  Singapore is actually a city state, with a population of about 5 million people – smaller than some U.S. cities and metropolitan areas.  Such tiny city states represent only a thin slice of what constitutes a real economy.  In such cases, the relationship between population density and trade imbalances isn’t valid.  However, if the trade results with Singapore were rolled into the surrounding nations of Malaysia and Indonesia, the U.S. would still have a large trade deficit with those nations, just as the population density relationship would predict.
  • The Netherlands is a similar situation – a tiny state consisting of two large cities:  Amsterdam and Rotterdam.  However, with the only seaport on the Atlantic coast of Europe, the Netherlands has develped their economy around trade and financial services and enjoys a unique trade surplus in spite of their extreme population density.  Singapore and the Netherlands combined account for only 0.3% of the world’s population.
  • That leaves the U.K. as the only densely populated country of any significant size with whom the U.S. has a very slight surplus of trade in manufactured goods.  The U.K. has one of the most unique economies in the world in that they are the only nation of any significant size (in terms of population) that still manages to be a net oil exporter.  Most nations with large populations are unable to meet their oil needs from domestic sources.  This oil income, combined with the powerful financial sector of their economy, provides them with a stream of income that can be spent on imports, including imports from the U.S. – primarily civilian aircraft and pharmaceuticals. 

While these 15 nations account for the bulk of U.S. trade, the U.S. engages in robust trade with nearly every nation, and if we expand this analysis to include them, the same pattern is evident.  With most densely populated nations – including most of Asia and Europe – the U.S. suffers trade deficits in manufactured goods.  With most more sparsely populated nations – including all of South America and most nations of Africa – the U.S. enjoys a surplus of trade in manufactured goods.  With poor nations, our trade imbalance (whether a deficit or surplus) tends to be very small.  With wealthy nations, the imbalance (again, whether surplus or deficit) tends to be large.  Whether a nation is poor or wealthy has no effect in determining whether the balance will be a surplus or deficit. 

If you’re new to this site and this concept, I encourage you to read further to learn more about how population density supresses per capita consumption and, consequently, drives global trade imbalances.

U.S. Trade Deficit with Germany in Manufactured Goods Soars to New Record in 2011

March 3, 2012

In 2011, America’s trade deficit with Germany in manufactured goods soared to a new record of $48.9 billion – a 42% increase over 2010 and surpassing the previous record of $47.2 billion in 2005.  Here’s a chart of trade with Germany since 2001:

Germany Trade

In per capita terms, the trade deficit with Germany is $596 for every man, woman and child in Germany.  That’s 2.7 times worse than our trade deficit with China in 2011.  So, if large trade deficits are caused by low wages or by currency manipulation, as most economists claim, then how does one explain away such a large deficit with one of the wealthiest nations on earth – whose currency is the Euro? 

Germany is nearly twice as densely populated as China.  This is just further evidence that large trade deficits are caused by large disparities in population density.  We have a trade deficit with Germany not because their wages are low or because they out-compete us or because they manipulate their currency.  We have a large trade deficit with Germany because their consumption is stunted by gross over-crowding, just like in China, Japan and many other densely populated countries.