A Huge Day in the Fight Against Illegal Immigration

April 27, 2012

http://www.reuters.com/article/2012/04/25/us-usa-immigration-arizona-idUSBRE83O09N20120425

I only have a couple of minutes, but just wanted to note and celebrate what seems to be a huge blow struck against illegal immigration on Wednesday, when the Arizona law intended to root illegal immigrants out of that state finally got its hearing before the supreme court.  Though the court won’t rule until June, there appeared to be a lot of support for the Arizona law among the justices and outright disdain for the administration’s opposition to that law.  One justice remarked to the Obama administration’s prosecutor, “it doesn’t seem that you even want to know who may be here illegally or not.”  Another questioned how a sovereign state is to maintain its sovereignty if not allowed to identify and expel those who are there illegally.  Even justice Sonia Sotomayor commented, in response to a line of argument that the law would lead to racial profiling, “you can see that that argument isn’t playing well here.”  “Why don’t you move on and try to come up with something else?”

Several other similar state laws have been in limbo, awaiting the outcome of this case.  Clearly, come June, a veritable army of state and local law enforcement officers are going to be unleashed on illegal immigrants.  This may be the biggest victory in the fight against illegal immigration that I’ve ever seen.

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Surprising Facts About 2011 U.S. Trade Data!

April 21, 2012

I haven’t posted much lately because I’ve been working hard on analyzing the 2011 trade data, which was released by the BEA (Bureau of Economic Analysis) in late February.  My focus, of course, is on manufactured products, since that’s where the jobs are.  Separating the trade in manufactured goods from total trade for each nation is no small undertaking, since nowhere does the BEA report on “manufactured products” as a separate category.  It has to be done nation-by-nation, combing through hundreds of product end-use codes for each.  I’m now ready to begin reporting on what I’ve found, beginning with some interesting, surprising facts.  (More posts will follow.)

For those of you new to this web site and the concepts presented here, my goal is to create an understanding of the forces that drive global trade imbalances, especially America’s very large trade deficit in manufactured products with the rest of the world.  Why manufactured goods?  There are two kinds of “goods”:  natural resources and the products into which those resources are transformed through manufacturing. 

The reason for trade imbalances in natural resources is no mystery.  Nations deficient in a particular natural resource, as is the case with the U.S. and oil, will experience a trade deficit in that resource.  Nations with a surplus of such resources will have a trade surplus.  It’s as simple as that.  But there are also very large imbalances in the trade of manufactured products that aren’t so easily explained.  Economists blame many factors including low wages, currency manipulation, trade barriers and lax labor and environmental standards.  Yet, in spite of decades of efforts to address these issues, imbalances have only grown worse. 

In Five Short Blasts, I presented an entirely new explanation for trade imbalances:  the role of population density.  And, since publication of that book, I’ve also presented on this blog data that debunks the role of the traditional scapegoats – low wages and currency exchange rates.  Now we have a fresh batch of data for 2011.  Let’s examine whether population density still holds up as an explanation and whether wages and exchange rates have played any role at all. 

First, some explanation of my methodology is in order.  In my research prior to publishing Five Short Blasts in 2007, I discovered that the inclusion of tiny island nations and city-states in the data tends to obscure the relationship between population density and trade imbalances.  Almost without exception, tiny island nations have unique economies that are totally dependent on tourism.  Because such nations use tourist dollars to purchase manufactured products, the U.S. has a surplus of trade in manufactured goods with virtually every one of them, regardless of their population density.  And the trade with all of these nations taken together is so minuscule that it has no measurable effect on America’s balance of trade.  For those reasons, those nations are omitted from the study. 

Also, tiny city-states are somewhat similar in that they tend to have economies skewed by their imbalance between urban and rural settings and their nearly total lack of resources.  For this reason, I have rolled the data for such city-states into the data of their much larger, surrounding (or neighboring) nations.  (These city-states are Andorra, Gibraltar, Hong Kong, Macao, San Marino, Vatican City, Liechtenstein, Luxembourg, Monaco and Singapore.)  What’s left is a total of 165 nations. 

With all of that background, let’s begin with some basic facts about America’s balance of trade in 2011:

  • In 2011, the U.S. balance of trade worsened by almost $60 billion, with the trade deficit increasing to $560.0 billion – a 12% increase.  Of this increase in the trade deficit, $46.3 billion was due to an increase in the deficit in manufactured products. 
  • The U.S. had a trade deficit of $423.4 billion in manufactured products in 2011, compared to $377 billion in 2010.
  • It’s natural to expect, then, that our balance of trade worsened (trade deficits grew larger or surpluses grew smaller) with the majority of nations.  But that’s not what happened.  Of the 165 nations examined, our balance of trade in manufactured products worsened with only 76 nations (46%).  It actually improved with 88 nations (54%).  (South Sudan is new to the study and did not exist in 2010.) 

 

Evidence of The Role of Population Density in Trade Imbalances

Now, let’s break this down by population density – or, more precisely, by population density relative to that of the U.S. – to see if some relationship emerges.  Of these 165 nations, 111 are more densely populated than the U.S.; 54 are less densely populated.  If population density is not a factor in trade imbalances, then the number of nations with whom the U.S. experienced a worsening in its trade balance – 76 nations – should be distributed proportionately among these two groups – 51 nations among the more densely populated nations and 25 among the less densely populated nations.  But here’s what actually happened:

  • Of the 76 nations with whom our balance of trade worsened, 62 were nations more densely populated than the U.S.; only 14 were among the less densely populated nations.
  • Although only 33% of nations are less densely populated than the U.S., of the 88 nations with whom our balance of trade improved, 44% (39) were among that group. 
  • Of the 54 nations less densely populated than the U.S., the balance of trade improved with 39. 

That data on the change in our trade imbalance from 2010 to 2011 seems to show a relationship with population density.  But that’s just the change in the imbalance.  What about the imbalances themselves?  Of the 165 nations included in the study, the U.S. had a trade deficit in manufactured products with only 51 of them.  Since 67% of these nations are more densely populated than the U.S., we should find 34 of these trade deficits among the more densely populated nations and 17 of them among the less densely populated ones.  But here’s what actually happened in 2011:

  • Of the 111 nations that are more densely populated than the U.S., the U.S. had a trade deficit with 47.
  • Of the 54 nations less densely populated than the U.S., the U.S. had a trade deficit in manufactured goods with only 4. 
  • Of the 51 nations with whom the U.S. had a trade deficit in manufactured goods, 47 (or 92.2%) were with nations more densely populated than the U.S.  The four less densely populated nations with whom we had a trade deficit in manufactured goods were Estonia, Laos, Sweden and Finland.

That is powerful evidence of a a strong relationship between population density and trade imbalances in manufactured goods. 

 

What about Low Wages as a Cause for Trade Deficits?

Unfortunately, it’s not possible to evaluate the role of wages directly.  This would require knowing the unit labor costs for every product imported and exported, and doing a complicated calculation to determine the average unit labor costs for the sum total of imports and exports.  However, we do know the “purchasing power parity” (“PPP,” roughly the nation’s gross domestic product divided by its population) for each nation, and PPP gives us a pretty good way to compare relative wage rates of one nation vs. another. 

In terms of PPP, the U.S. is one of the wealthiest nations in the world and, therefore, its workers are among the best-paid.  With a PPP of $48,100, the U.S. ranks fifth among the 165 nations included in the study.  Only Qatar, the Falkland Islands, Norway and United Arab Emirates have higher PPP.  So 161 of the 165 nations included in the study have lower-paid workers than the U.S.  But, since we have a trade deficit with only 51 nations, this immediately casts doubt on the claim that low wages cause trade deficits.  If lower wages cause trade deficits, then we should be experiencing trade deficits with 161 nations – not a mere 51. 

OK, maybe much lower wages are required.  So let’s divide these nations around the median PPP of $8,000 – 82 nations above the median and 83 nations below.  Surely we will find our 51 trade deficits concentrated among the low PPP nations.  Right?  That’s the theory.  Now here’s the facts:

  • Of the 82 nations above the median PPP, the U.S. had a trade deficit in manufactured goods with 32. 
  • Of the 83 nations below the median, the U.S. had a trade deficit in manufactured goods with only 19. 

Not only does this data not support the claim that low wages cause trade deficits, it seems to be solid evidence that either exactly the opposite is true or, more likely, that the cause and effect are reversed.  It may be that a large trade deficit with a nation tends to boost wages in that nation by driving up the demand for labor to fill manufacturing jobs.  As an example, consider Germany and Japan – two relatively high wage nations.  When put in per capita terms (thus adjusting for the relative size of a nation), our trade deficit with each is far larger than our trade deficit with lower-wage China.  Why?  Because their high wages are the result of a prolonged, strong demand for manufacturing labor created by our demand for their exports.  Wages in China, much newer to the stage of world trade, are rising fast.  If something besides low wages is the cause of a trade deficit (like population density?), then it’s logical to expect that high wages in the surplus country will follow, as happened in Germany and Japan and as is happening now in China.

 

What about Currency Exchange Rates as a Cause of Trade Imbalances? 

Finally, let’s examine what role, if any, currency exchange rates play in driving trade imbalances.  Economists and political leaders have been blaming “currency manipulation” by China for their enormous trade surplus with the U.S.  By keeping the value of the Chinese yuan artificially low, they claim, China’s exports are cheaper while imports into China are more expensive to Chinese consumers.  On the surface, this argument seems to make sense.  But because it seems to make sense, perhaps too little effort has been made to validate that theory.  If that theory holds water, then an examination of changes in currency exchange rates for all 165 nations should find that our balance of trade has tended to improve with those nations whose currencies rose relative to the dollar, while worsening among those nations whose currencies declined.  Here’s what actually happened in 2011:

  • Of the 165 nations studied, 99 had a stronger currency in 2011 than in 2010.  19 experienced no change in exchange rate with the dollar.  Only 46 had weaker currencies. 

That fact alone already casts doubt on the currency theory since, as noted earlier, our overall balance of trade worsened in 2011.  Since the currencies of 99 nations (60%) – including China – rose in 2011 while only 46 nations (28%) saw a decline in their currencies, the U.S. should have experienced an overall improvement in its balance of trade.  It did not.  More facts: 

  • With the 99 nations who had stronger currencies, the U.S. experienced an improvement in the balance of trade in manufactured goods with 52 of them (52.5%). 
  • With the 19 nations with unchanged currency exchange rates, the U.S. experienced an improvement in the balance of trade with 12 of them.
  • With the 46 nations who had weaker currencies in 2011, the U.S. experienced an improvement in the balance of trade with 24 of them (52%). 

So an increase in a nation’s currency was just as likely to produce a worsening of our trade imbalance as an improvement, and vice versa.  In other words, there’s absolutely no relationship between currency valuation and trade imbalance evident here. 

I’ll be the first to admit that a one-year move in currency exchange rate may not be enough to change the momentum of trade imbalances.  However, I’ve previously conducted a similar study of the effect of 18-year changes in currency exchange rates and found exactly the same thing.  (See https://petemurphy.wordpress.com/2010/11/17/study-finds-no-relationship-between-currency-exchange-rate-and-trade-imbalance/.)

How can this be?  Perhaps looking at it from another angle will shed some light. 

  • Of the 51 nations with whom the U.S. had a trade deficit in manufactured goods in 2011, 40 nations’ currencies rose in value.  Two were unchanged.  Only 9 experienced a decline in their currency.
  • Of the 114 nations with whom the U.S. had a trade surpluse in manufactured goods in 2011, 37 experienced a decline in their currency. 

From this we can conclude that currencies rise relative to the dollar in response to trade surpluses with the U.S.  However, changing exchange rates have absolutely no effect in reversing trade imbalances.  Therefore, those who pin their hopes on a rising Chinese yuan to bring manufacturing jobs home from China are going to be sorely disappointed, just as they have been as the yuan has risen in value for years.  Our trade deficit with China has only grown worse, just as our trade deficit with Japan only grew worse as Japan’s yen rose by over 300% over the past three decades. 

Conclusion:

From the United States’ 2011 trade data we can conclude two things: 

  • it’s population density that drives our trade imbalances.
  • wages and currency exchange rates play absolutely no role in those imbalances. 

I’ll be presenting some even more fascinating facts from the 2011 trade data in upcoming posts.  Unfortunately, those posts will probably have to wait for a couple of weeks.  But stay tuned!  You won’t want to miss them.


February Exports Lag Obama’s Goal for 5th Consecutive Month

April 12, 2012

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

The Bureau of Economic Analysis (BEA) announced this morning that the February trade deficit fell $6.5 billion to $46.0 billion.  Most of the decline – $4.0 billion – was due to fewer imports of manufactured goods.  That’s the good news.  But this decline is little more that a step forward in the one-step-forward-two-steps-back U.S. trade deficit that has been steadily worsening for years.  Here’s the chart:  Balance of Trade

The bad news is that exports rose by only $0.2 billion in February.  In order to keep pace with President Obama’s goal of doubling exports in five years, they need to be rising by $2.2 billion a month at this point.  As a result, exports lagged the president’s goal for the fifth month in a row, and now lag the goal by $10.4 billion per month – the largest shortfall yet.  Here’s the chart:  Obamas Goal to Double Exports

But, as I’ve stated before, the real goal is to double the exports of manufactured goods in five years, since that’s where the jobs are.  And exports of manufactured goods have now lagged the president’s goal for ten consecutive months.  Here’s the chart of the balance of trade in manufactured goods:  Manf’d Goods Balance

President Obama’s strategy was to rev up manufacturing by turning our economy into an export-driven economy, like that of Germany.  His strategy is fatally flawed in two critical ways: 

  1. Germany has the U.S. to rely upon to absorb its exports.  There is no other United States out there willing or capable of doing the same for us.
  2. The U.S. – like every other nation – has absolutely no control over exports.  Exports are driven by outside demand.  The best way to help manufacturing is by cutting imports, over which the U.S. has total control if only it chooses to exercise that control. 

So 18 million unemployed Americans suffer on, thanks to a lack of leadership courageous enough to reclaim the right to manage trade in our own best self-interest.


Economy Sheds 31,000 Jobs in March

April 6, 2012

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

Contrary to expectations for 200,000 jobs created during the month of March, the announcement of actual job creation by the Bureau of Labor Statistics fell far short this morning, coming in at 120,000 jobs.  Look into the details and the news gets even worse.  The employment level – one of the factors in calculating the unemployment rate – actually fell by 31,000 jobs.  Thanks only to the oft-used tactic of claiming that Americans are mysteriously vanishing from the labor force, the official U3 unemployment rate actually fell by a tenth to 8.2%. 

But let’s talk reality here.  The decline in the unemployment level combined with immigration-fueled population growth to produce a rise in unemployment by a tenth to 10.75%.  (See my “U3a” calculation in the following spreadsheet.)  And the broader measure of unemployment, including discouraged workers and those forced to take part-time jobs when they really need full-time work, rose two tenths to 19.2% (as opposed to the ridiculous claim by the BLS that it fell by four tenths to 14.5%).  Here’s the spreadsheet:

Unemployment Calculation

Much ado has been made in the last few months about the supposed economic recovery.  Look at the following chart, paying particular attention to the realistic measures of unemployment – U3a and U6a.  You can see that what little progress has been made is miniscule.  We have miles to go to return to a healthy employment level. 

Unemployment Chart

It’s probably a good thing that the stock market was closed today.  This hugely disappointing jobs report confirms what other economic data has been telling us for the last month – the flash-in-the-pan recovery that began late last year (probably fueled by an orgy of spending by federal agencies with the start of the new fiscal year in October) is running out of steam.  Combined with this morning’s downgrade of U.S. debt and negative outlook by Egan-Jones, these factors make for a cold slap in the face for investors. 

* * * * *

The supposed increase of 120,000 jobs in March, taken from the establishment survey portion of the employment situation summary, break down as follows:

  • Manufacturing:  + 37,000
  •  Food services and drinking places:  + 37,000
  • Professional & business services:  + 31,000
  • Health care:  + 26,000
  • Financial activities:  + 15,000
  • Mining:  no change
  • Construction:  no change
  • Transportation & warehousing:  no change
  • Information:  no change
  • Retail trade:  – 34,000

Notably absent from the report is any mention of government employment, which has been in steady decline – especially at the state and local levels.  I have a sneaking suspicion that it was intentionally omitted to avoid making an already-bad report even worse.

It’s also worth noting that the BLS reported that the average workweek declined by o.1 hours while the average manufacturing workweek declined a steep 0.3 hours – a bad harbinger for future manufacturing employment. 


History of U.S. Tariffs

April 3, 2012

http://en.wikipedia.org/wiki/Tariff

The above-linked Wikipedia article on tariffs includes a table of U.S. Historical Tariffs, from 1792 through 2010.  It’s interesting to see how the steady decline in tariffs, especially beginning with the signing of the Global Agreement on Tariffs and Trade (GATT) in 1947, tracks closely with the steady demise of American manufacturing and our overall economy in general.  Don’t pay much attention to the accompanying text, since it merely repeats many of the misconceptions about tariffs that are perpetuated by free trade-cheerleading economists.  For example, there’s this:

The next peak in tariffs was due to the Smoot–Hawley Tariff Act of 1930 at the start of the Great Depression. It is generally believed this act with its high tariff rates prolonged the Great Depression under President Franklin D. Roosevelt of 1929-1939.

Look at the table again.  The average tariff rate in 1930 was 19.2%.  In 1918, just prior to the economic boom of the “roaring ’20s,” it was 31.2%.  The average tariff rate from 1792 through 1928 was 20.4%.  And we’re to believe that a tariff rate of 19.2% in 1930 “prolonged the Great Depression?”  Such a claim is completely illogical.  It doesn’t stand up to the most basic scrutiny. 

Also, take a look at the “budget % tariff” column.  Until the Civil War, when federal spending exploded to finance the war, tariff revenue accounted for nearly all of federal revenues.  It fell to less than 50% during the Civil War but recovered to 57% of the federal budget by 1890.  Following ratification of the 16th amendment in 1913, authorizing the federal income tax, tariff revenue as a percentage of the federal budget steadily declined, reaching a record low of 0.9% in 1944, where it has remained (approximately) since. 

In 1948, the year following the signing of GATT, tariff rates fell by 30% to about 5.5%, where they remained until 1975, when they were cut in half.  Not coincidentally, the U.S. has run an ever-growing trade deficit ever since that year. 

Near the bottom of the Wikipedia article, in a discussion of the neoclassical model of trade and tariffs, comes this frank admission:

In the real world, as more imports replace domestic goods, they consume a larger fraction of available domestic wages, moving the graph towards this view of the model (where consumers are also producers and their purchasing power comes from wages earned in production). If new forms of production are not found in time, the nation will go bankrupt, and internal political pressures will lead to debt default, extreme tariffs, or worse.

Sound familiar?  Our national debt is rising at a rate of $1 trillion per year.  Last summer we came as close to defaulting on our debt as the nation has ever come.  Is “extreme political pressures” for “extreme tariffs” next?  One could only hope.  Otherwise, the “or worse” will soon follow. 

 

 


Failures of Economics

April 2, 2012

http://blogs.reuters.com/chrystia-freeland/2012/03/29/manufacturing-redux/?pending=1&cp=0#comment-2884

I found this Reuters op-ed piece by Chrystia Freeland interesting, not so much because of the reported championing of manufacturing by the director of the National Economic Council, but because it sheds light on some fundamental flaws in the field of economics.  The following sentence near the end of the piece sums it up well:

Unless you have a doctorate in economics, your intuition probably accords with Sperling’s point that building things is essential to a country’s economic well-being.

Economics is all about meeting wants and needs.  Vital economies are built around the processes of meeting those wants and needs.  It’s intuitively obvious that manufacturing plays a key role in that process.  But not to economists, for that doesn’t accord well with the real results of the practical application of their free trade theory.  How to explain away that failure?  They do it by mis-applying another theory – creative destruction.  It seems we are to believe that, through the process of creative destruction, new needs (apparently for services) will materialize out of thin air to fill the void created when the manufacturing sector of the economy was carved out and handed over to someone else.

That begs the question:  if such needs for services can materialize and result in an economy that was better than the one that relied on manufacturing, then why didn’t China (and Japan and Germany and others before them) build their economies around those needs for services, instead of plundering the manufacturing sector of our economy?  (See my comment on the op-ed piece – the 6th comment down – for more thoughts on the subject.)

And speaking of “creative destruction” – the process by which each product and service is eventually replaced by one that is more efficient and requires less labor to create and utilize – what will people do for a living, ultimately, when every product and service can be made available without any labor input at all?  It’s like other axioms of economics – that economic growth can go on indefinitely in a finite world, that mankind is clever enough to overcome every obstacle to further population growth, and so on.  Every one of them fails when tested at its limits.

How do economists respond to such challenges?  By changing the subject.  They’ve moved on from such matters to new distractions, like “game theory” and “behavioral economics.”   They can’t be bothered with the shortcomings and failures of classical and neo-classical economics.  Those issues are so “yesterday.” 

So our political leaders are stuck with failed economic axioms to guide economic policy.  Although it was obviously failed trade theory that decimated the manufacturing sector of our economy, we dare not admit to such and alter trade policy, for that would constitute an admission of failure and a case for rethinking trade theory altogether, something economists simply aren’t willing to do.  Better to tinker at the margins, boosting tax breaks for R&D and manufacturing, as though our entire manufacturing sector fled the U.S. because their insignificant tax breaks were infinitesimally too small. 

It never ceases to astonish me that, in the 21st century, the field of economics still gets a free pass on its obvious and numerous failures. 

* * * * *

Another commenter on Freeland’s piece provided an interesting link that will be the subject of my next post.