Economic Decline Impacting U.S. Fertility Rate

July 29, 2012

Here’s a piece of news from late last week that I certainly can’t let pass without comment.  As reported in the above-linked article, the U.S. fertility rate has declined from 2.12 in 2007 to 1.87 today, and is projected to decline further to 1.86 next year.  The reason for the decline, according to Demographic Intelligence, the company that gathered the data, is the economy.  Student loan debt and job insecurity makes it impractical for twenty-somethings to consider having children.

It’s an interesting observation.  Prior to the renaissance and the industrial revolution, poverty held the world’s population in check.  In recent centuries, economic development drove down death rates much more quickly than birth rates, fueling a population explosion.  Economic development and population growth became synonymous in the minds of economists.  But they are not synonymous.  They were cause and effect, up to a point – the point where overcrowding becomes an impediment to per capita consumption.  Now, the cause and effect have reversed.  Population growth has strangled economic development, driving up unemployment and poverty.  And now, poverty is resuming its role as the mechanism that will hold the population in check.  Not only is poverty driving up the death rate but, as this article makes clear, it’s reining in the birth rate as well.

A fertility rate of 1.86 is very close to the rate of 1.79 that I calculated as necessary to achieve a stable population.  (See page 178 of Five Short Blasts.)  A rate of 2.0 is what’s considered a “replacement rate,” the rate necessary to replace each previous generation with one of the same size.  But as long as life expectancy increases, then a rate less than 2.0 is required to achieve a stable population.

A declining fertility rate – finally approaching the rate needed to achieve a stable population – is great news.  But what happens now?  Will hand-wringing economists convince policy-makers that a stable population is a threat to macro-economic growth and that we need to flood the country with even more immigrants?  What a mistake that would be.


America’s 20 Best Trade Partners

July 26, 2012

Back in June, I published a list of America’s 20 Worst Trade Partners.  We saw that the list was heavily dominated by nations more densely populated (most were far more densely populated) than the U.S.  Which begs the question:  who are America’s best trading partners and what role, if any, does population density play in that list?  So, using the per capita balance of trade in manufactured goods as our criteria once again, here’s the list:  Top 20 Surpluses, 2011

Here are the key take-aways from this list:

  • The list is dominated by two groups of nations:
    • Net oil exporters.  Regardless of their population density, net oil exporters are flush with U.S. dollars to spend on U.S. goods.  Net oil exporters tend to be large nations with small populations, leaving them with a surplus of oil.  But the list includes four very unique countries, all very tiny and with relatively large populations for their size, but literally afloat on seas of oil:  United Arab Emirates, Qatar, Kuwait and Brunei. 
    • Low population density countries.  Aside from the four net oil exporters mentioned above, only three of the remaining 16 nations are more densely populated than the U.S.:  Belgium, the Netherlands and Panama.  Panama is the least  densely populated of the three, and enjoys a unique situation.  They are flush with U.S. dollars, like net oil exporters, but their dollars are derived from operation of the Panama Canal. 
  • While the average population density of America’s 20 worst trade partners was 491 people per square mile, the average population density of America’s 20 best trade partners is only 191 per square mile.  But here’s a piece of data that really drives home the difference between the two groups:  the total population density of America’s 20 worst trade partners (their total population divided by their total area) is 350 people per square mile.  The total population density of America’s 20  best trade partners is 22 people per square mile.  America’s 20 worst trade partners are 17 times more densely populated than America’s 20 best trade partners.
  • In terms of wealth, the average Purchasing Power Parity (PPP) of America’s 20 best trade partners is $32,630, nearly identical to the average PPP of America’s 20 worst trade partners ($33,770) – further evidence that wages (as measured by wealth) play no role in determining global trade imbalances.
  • Canada is second only to United Arab Emirates on the list of our best trade partners.  Canada has two things going for them:  they’re both a net oil exporter (in fact, America’s biggest source of imported oil) and they enjoy a very low population density.  By contrast, Mexico, our other NAFTA trade partner, is America’s 14th worst trade partner.  They too are net oil exporters, but they’re 15 times more densely populated than Canada. 
  • Five South American nations appear on the list.  Not a single South American nation appears on the list of America’s 20 worst trade partners.  Why?  Not a single South American nation is more densely populated than the U.S.

Finally, it’s worth noting here how the countries of these two lists would be impacted by the population density-indexed tariff structure I proposed in Five Short Blasts to restore a balance of trade in manufactured goods.  Of our 20 worst trade partners, all but two – Sweden and Estonia – would have been subjected to such a tariff.  Not a single nation on the list of our 20 best trade partners would be subjected to a tariff – either because of their low population density or because they are already net importers of American manufactured goods.  This would also leave our largest sources of imported oil free of tariffs.  The point is that the U.S. would have nothing to fear in terms of retaliatory tariffs. 

Now, having examined these two lists of our best and worst trade partners, and the obvious role that population density plays in determining those lists, how much sense does it make to ignore it and apply the same free trade policy to both groups of nations?

Economists Guilty of “Intellectual Laziness” and Censorship

July 19, 2012

I’ll begin with an article that appeared on Reuters about two weeks ago:  Special Report:  Crisis forces “dismal science” to get real.  The authors note that:

An increasing number of teachers argue that the textbooks, some by experts who didn’t see the crisis coming, are divorced from reality, inconsistent, dull, and, in a crisis that has gripped the globe for more than four years, even dangerous.

But the following section of the article is what I found most interesting and encouraging:

The drive for change is also evident in Germany, where Professor Peter Bofinger is passionate about the shortcomings of the main texts. Bofinger is head of monetary policy and international economics at the University of Wuerzburg and one of five “wise men” who formally advise Chancellor Angela Merkel.

He also thinks most text books are dangerous.

The author of a textbook himself, he didn’t bother to read the modern texts, he said. But last year, he did a systematic analysis, and what he found shocked him.

“To me the most astonishing thing was that all these textbooks do not find an analytical explanation of unemployment,” he said. “I was really amazed.”

I sent an E-mail to Dr. Bofinger and briefly introduced the inverse relationship between population density and per capita consumption, and its role in driving up unemployment.  No reply so far.

I was actually going to comment further on this article until a new editorial appeared on Reuters this morning:  Sloth and the Big Honest State, by Edward Hadas.  In this piece, Hadas speaks of the “Big Honest State” (BHS) as being a benevolent government (regardless of the nation in question) that works toward the best interests of the common good, something that a vibrant economy depends upon.  He then warns of “spiritual sloth,” a term used by philosophers, creeping into monetary policy and undermining the role of the BHS in providing a healthy environment for the economy.  Hadas warns of four threats:

  1. “The first is fiscal laxity. Politicians around the world have become blasé about deficits.”
  2. “The second danger is monetary incompetence. Again, the economic effects of years of zero policy interest rates and haphazard bank subsidies are basically unknown.”
  3. “The third risk is only regional, but the region in question holds great practical and symbolic importance. The euro zone has the world’s second largest GDP, only 15 percent smaller than that of the United States, and it is the spiritual home of the BHS. If the politicians and central bankers there fail to keep the single currency together, global economic chaos would be hard to avoid.”
  4. “Finally, the BHS model could be undermined by poor management of international economic relations. Trade imbalances are still large enough to create political tension, through shifts of employment, financial havoc, and the foolish investment of the funds created by surpluses.”

As I read the piece through the first three threats, I was already pondering the comment I’d submit in response, taking Hadas to task for failing to recognize the threat of trade imbalances.  So his 4th threat above came as quite a pleasant surprise.  An even more pleasant surprise was Hadas’ suggestion for economists regarding trade:

How dangerous are these interlocking threats to the BHS model? A collection of “should” statements supports an optimistic judgement. …. With a little less intellectual laziness about the virtues of free trade, it should be possible to manage cross-border economic in a more responsible way.

“Intellectual laziness about the virtues of free trade!”  I couldn’t have said it better myself.  If there’s any criticism of academic economists that should sting the most, it would be accusations of “intellectual laziness.”  How could they not be accused of such?  Economists’ slow response to the near-financial collapse of 2007 and the subsequent Great Recession may be more forgiveable since, after all, it’s “only” been less than five years.  But an unwillingness to question the real world results of free trade, where the U.S. has now been burdened with an enormous trade deficit (now exceeding a cumulative $11 trillion) for 37 consecutive years is absolutely unforgiveable.  It’s “intellectual laziness” at its worst. 

Actually, it’s worse than that.  By snuffing out, in general, any train of thought that may challenge conventional economic wisdom and, in particular, may question the effects of never-ending population growth, the field of economics has been guilty of intellectual censorship that would make Nazis and communists proud. 

Economists should be ashamed.  Students of economics should be emboldened to challenge their professors and textbooks, open their minds and question everything, including the taboo subject of overpopulation.  This is where the only real hope for a prosperous, sustainable future lies.

Workers at Bain-Owned Plant Beg Romney to Save Their Jobs

July 18, 2012

Ouch.  Romney really didn’t need this at a time when his background at Bain Capital – something he hoped would be an asset in his presidential run – is steadily becoming a liability.  It seems that workers at a Bain-owned plant that manufactures sensors for the automotive industry in Illinois have signed a petition asking Romney to use his influence at Bain to stop the plant from being moved to China.  (Bain owns a controlling share of Sensata, the company that owns the plant.)

In all fairness to Romney, he had no role in these moves, which all took place after he left Bain.  The problem is that this is exactly how capitalism, lacking any trade boundaries, works.  Romney can’t deny that any more than he can deny that that’s how it worked while he was at Bain.  As much as Romney would like to deny it, the fact is that venture capitalists have been net job destroyers in America for a long time. 

That’s how trade between two nations grossly disparate in population density work.  When American companies, disgruntled with their mature market of 300 million consumers at home, were suddenly presented with a virgin, untapped market of 1.2 billion consumers in China, they rushed in to build plants there to supply that market.  But, once there, while that market was still in its infancy, they needed to immediately start selling those products.  What better market to dump them on than the one with the hungriest consumers – America?  Now their American plants – already operating on thin margins and dependent on maintaining their high sales volume, were faced with a massive increase in competition.  They were almost instantly forced to close.  In a free trade world lacking boundaries to prevent the inescapable trade imbalances driven by population density disparities, that’s how capitalism works.   It’s painfully obvious to most Americans.  As much as Romney may want to deny it, such denials are coming across as disingenuous at best. 

Some of the specifics here are interesting. 

Sensata was created in 2006 when Bain bought Texas Instruments Inc.’s sensors and controls business. The company now employs 11,400 people worldwide. Almost all of its products are manufactured outside the United States, in countries such as Mexico, China, Bulgaria and Malaysia.

Mexico, China, Bulgaria and Malaysia.  What do you think is the per capita consumption of Texas Instruments products in those countries compared to the U.S.?  A very small fraction.  And what is the population density of those countries compared to the U.S.?  2X, 4X, 2X and 3X the density in the U.S. respectively.  Combined, their population density is close to 4X since the other three are dwarfed in size by China.  They come to the trade table with vast, idle labor forces, looking for jobs, but with virtually no market to offer in return.  Is it any wonder that manufacturing jobs are disappearing? 

If there’s any benefit to be derived from this election campaign, it will be the erosion of economic myths – the shining of light into the dark room where we’ve all been treated like mushrooms – kept in the dark and fed a bunch of B.S.


Americans Growing Poorer

July 17, 2012

On June 11, the Federal Reserve released its triennial “Survey of Consumer Finances.”  OK, so this news is a little stale, but if the Federal Reserve can take 18 months to release the data, I can be forgiven for taking a month to comment. 

The report was anxiously awaited, for it’s the first such snapshot of family finances since the onset of the Great Recession that began in late 2007.  As expected, it’s not a pretty picture.  As reported in the above-linked article, the median net worth of American families in 2010 fell to $77,300 from its peak of $126,400 in 2007.  Most of that decline was the result of fallling home values since, especially among the middle class, most of their net worth is tied up in the equity in their homes.  But “most” isn’t all.  Median incomes also fell, from $49,600 per year to $45,800 per year over the same period.  Most Americans grew way poorer in the three years from 2007 to 2010.  Only the top 10% of wage earners fared better over the same period.  Their median net worth rose to $1,194,300 in 2010 vs. $1,172,300 in 2007. 

OK, that was the aftermath of the Great Recession.  It’s no surprise that net worth declined.  This edition of the Federal Reserve’s survey only reports data back to 2001.  You’d have to do a lot of digging to see how this data fits into the longer range perspective.  Don’t bother.  I’ve done the digging for you and crunched the data to convert it to 2010 dollars to make it comparable to the new report.  Here’s a chart of the data (an update of Figure 1-14 on page 27 of Five Short Blasts):   

2010 family net worth 

Not only did the median net worth fall from its peak in 2007 (a peak fueled by a bubble in the housing market), it fell to a level one third less than the previous peak in 1976.  In fact, it fell to less than the median net worth in 1969. 

Since Americans’ median net worth peaked in 1976, it has enjoyed only two occasions when it has risen:  during the dot-com bubble of the 90s, culminating in 1998, and during the housing bubble leading up to the onset of the financial crash that began in late 2007.  Take away those two events – the “irrational exuberance” of the dot-com bubble in the stock market and the equally irrational exuberance in the housing market leading up to 2007 (fueled in large part by  government regulators turning a blind eye to outrageous lending practices) – and Americans’ net worth has been in steady decline for 36 years. 

It’s no mere coincidence that 1976, the year that Americans’ net worth peaked and then began its decline, also marked the beginning of a 36-year run of consecutive trade deficits.  Of course Americans are growing poorer.  Their jobs have been sent overseas through misguided faith in flawed trade policy that fails to account for the role of extreme population densities among some trade partners like China, Japan, Germany and others in driving huge trade imbalances.  The resulting glut in the labor force is driving down wages and benefits.

All of this is exactly what the inverse relationship between population density and per capita consumption would predict for our economy as our effective population density rises far beyond our actual density, through free trade, combining our economy with the economies of grossly overpopulated nations.  It’s also easy to predict that, failing to change trade policy and immigration policy, it’s going to get worse.  At the onset of the decline in housing prices, I told a realtor friend that it wouldn’t end until the median house price fell to a level affordable on the median income.  And the median income continues to decline.  So don’t look to a recovery in housing to boost your net worth. 

In fact, the bubble scenarios that could be used to mask the effects of population densities that have grown far beyond an optimal level have probably been exhausted.  It’s difficult to envision another dot-com style bubble in the stock market.  There is nothing on the horizon to drive it.  High tech?  Been there and done that.  Health care?  Impossible in today’s environment.  We’ve moved on from the stock market bubble to the real estate bubble and are now locked into a bond market bubble.  But no one’s getting rich from this one.  At current yields and rates of inflation, people are actually losing money in that market, figuring that at least they’re not losing as much as they could in other markets. 

Americans will continue to grow poorer until trade and immigration policy change.  Making that bet is a sure-fire winner.

No Improvement in June Employment Report

July 15, 2012

Still catching up from my three weeks in the north woods, I can’t let the June employment report (released a week ago) pass without comment.  The report can best be summarized by the word used over and over again in the report – “unchanged.”  The unemployment rate was unchanged at 8.2%.  Depending on which survey you believe – the establishment survey or the household survey – either the number of jobs created fell short of what’s needed to keep pace with growth in the labor force, or barely exceeded it.  Following a small spurt of job growth from August of last year through February of this year, the labor market has been completely flat.  The labor force participation rate (or per capita employment) is exactly the same as it was at the end of February – no improvement.

Here’s the data, both the government’s official data and my own calculation (designated with an “a”), which uses the same data but holds the size of the labor force at a constant percentage of the population, which strips away the effect of the tactic employed by the government to hold down the unemployment rate – claiming that workers have dropped out of the labor force.

U3 unemployment = 8.2%

U3a unemployment = 10.7%

U6 unemployment =14.8%

U6a unemployment = 19.0%

Unemployed Americans = 17,008,000

Per capita employment = 45.4%

(U6 and U6a are broader measures that include workers forced to work part-time instead of full time, those who have given up looking for work, etc.)

The following are the charts of the data and my spreadsheet calculation of the figures:  Unemployment Chart     Labor Force & Employment Level     Unemployed Americans     Per Capita Employment     Unemployment Calculation

Just as disturbing to me as the weak numbers in this report is the lack of outrage in the media that follows.  Americans are getting numb to the employment situation.  It’s become the new normal.  It’s now been nearly five years since the onset of the “Great Recession.”  Now, a growing percentage of the labor force has never experienced anything other than these recession conditions.  Few left in the labor market have ever experienced a healthy market with low unemployment, rising wages and improving benefits.  Fewer and fewer are left to question what the hell is wrong.  They see nothing wrong.  To them, this is normal.

The Olympic Uniform Debate – No Shortage of Hypocrisy

July 13, 2012

Unless you’ve been living under a rock the past few days (or in the north woods, as I was for three weeks recently) you’ve heard all about the scandal of the uniforms of America’s Olympics team being made 100% in China.  Like others, I was angry at the Olympic committee when I first heard the news.  How dare they? 

But let’s take a step back, for this is just one small symptom of what’s really wrong with America.  Can we really blame the Olympic committee for accepting this donation from Ralph Lauren?  After all, America’s entire olympic effort is funded by donations.  What made-in-America clothing manufacturer is there to make such a donation?  Well, OK, I can actually think of one – Carhartt.  The last time I looked at Ace Hardware, a few (very few) of their items are still made in the U.S.  Now that I think about it, I’d actually prefer to see our Olympic team dressed in Carhartt gear instead of the made-in-China Ralph Lauren crap.  Although, if we limited the team to only made-in-America clothing, they may be practically naked with the exception of a Carhartt coat and perhaps a pair of pants.

But there’s no shortage of hypocrisy among those criticizing the olympic committee, myself included since I, too, have Ralph Lauren stuff hanging in the closet.  But the biggest hypocrite of all is Congress.  As Harry Reid stands before the camera saying that the olympic uniforms should be placed in a pile and burned, I wonder if he’d be willing to remove his clothing and show us the labels?  (Of course, like most senators, his clothing is probably tailor-made, but from imported fabric.) 

There’s no shortage of hypocrisy on the olympic committee either.  In defense of its donation from Ralph Lauren, USOC member Patrick Sandusky had this to say:

We’re proud of our partnership with Ralph Lauren, an iconic American company…

Give me a break.  An “iconic American company?”  Ralph Lauren is a global corporation that just happens to have been founded by an American.  The company’s only allegiance is to its shareholders, and has no more allegiance to America or Americans than any other global corporation that stocks its shelves with Chinese, Japanese, German or South Korean products. 

And why all the focus on the uniforms?  What about every other product that American olympians use in the course of their training?  Where are they made?  Can anyone identify a single product that was made in the U.S., aside from the food they consume? 

OK, Congress, now that you’re all indignant about the olympic uniforms (now that ABC reporters had the audacity to bring it to light and embarrass you), what are you going to do about what obviously lies at the root of the problem – our trade policy?  The problem isn’t that the olympic team was given made-in-China clothing to wear.  The problem is that it’s only natural when virtually nothing is made in this country any more, thanks to the trade policy you’ve continued to support for decades.  Will this be the impetus for a change, or will you just give us the usual – some bluster and some harumphs in hope that all of this will soon be forgotten, as it probably will. 

Kudos to ABC for continuing to press its “made-in-America” line of reporting. 


Manufactured Goods Deficit Rises to 2nd Worst Level of Obama’s Administration

July 12, 2012

On the surface, yesterday’s release of May trade data sounded like good news.  The trade deficit fell for the 2nd consecutive month to $48.6 billion after hitting $52.6 billion in March, preceded by the worst level of the Obama administration in January – $53.0 billion. 

Good news?  Not so fast.  Nearly all of the decline was due to a drop in oil prices.  That in itself is good news, but what would make oil more affordable for all of us is if jobs were plentiful and incomes were rising.  So what happened in May regarding the more important category of manufactured goods, where the jobs are to be found?  There, the news is grim.  The deficit in manufactured goods rose to the 2nd worst level of the Obama administration – $41.3 billion.  (That’s an annual rate of nearly $500 billion and represents a loss of about 7 million manufacturing jobs.)  And, for the 8th consecutive month, manufactured exports lagged the president’s goal (set in January of 2010) of doubling  in five years.  Here are  charts of the balance of trade in manufactured goods and a chart of manufactured imports and exports vs. President Obama’s goal:  Manf’d Goods Balance of Trade     Manf’d exports vs. goal

Overall exports, including all goods and services, failed to meet the president’s goal for the 10th consecutive month.  Here’s the chart:  Obamas Goal to Double Exports.  And here’s a chart of the total trade deficit since President Obama set that goal, the cornerstone of his economic policy, in January, 2010:  Balance of Trade.  As you can see, judging by total trade, May was merely a “one-step-forward” month in the “one-step-forward, two-steps-back” decline in manufacturing that has persisted not just for two years, but for decades. 

As I predicted, this “plan” to double exports in five years, the cornerstone of President Obama’s economic plan, is already proving to be an abysmal failure.  Merely saying that we will double exports in five years was no plan at all.  It was wishful thinking.  Assembling a team of CEO’s of “American” manufacturing companies to address the issue of exports wasn’t a strategy, it was a show.  There is nothing that anyone can do to boost exports, since exports are driven by foreign demand and no one in America has any control over that. 

“Nonsense,” you might counter.  “There’s a lot we can do to make ourselves more competitive.”  True, but there’s nothing you can do to stop foreign competition from working just as hard to remain competitive, as they surely do and will.  The end result is no change in our competitive position and no change in foreign demand for American-made products.  Imports, on the other hand, are totally within our control, which means that the ability to force a return to domestically manufacturing the products we consume is also totally within our control, if only we choose to exercise that power, through the use of tariffs, quotas and other import controls.

“We can’t do that; international law prohibits it” you might say.  Baloney.  There is no such thing as “international law.”  There are only obligations that go along with the terms of agreements, treaties and international organizations.  It is completely within our power to terminate agreements and withdraw from treaties and international organizations (like the World Trade Organization) any time we want.  Sure, it would result in some turmoil.  But when did Americans vote to cede their rights to international organizations in order to avoid a little turmoil?  The point is that there are plenty of actions the president can take to immediately have a major impact on jobs and the economy, even without the consent of Congress,  if only he had the intestinal fortitude.  He doesn’t.  He’s content to paper over our problems with more deficit spending designed to obscure the fact that, thanks to decades of idiotic trade policy, America is in decline and Americans are growing poorer. 

* * * * *

My charts on trade in manufactured goods contain a major revision this month.  I discovered that my data was understating the size of the deficit in manufactured goods by the amount of the surplus in services.  I had been subtracting from the total trade deficit the balance of trade in food, feeds and beverages and in petroleum products to arrive at a figure for manufactured goods, forgetting that services were included in the total balance of trade.  I should have been using the balance of trade for goods alone, a larger deficit than the total deficit because of the surplus in services. 

* * * * *

This post is my first since returning from a 3-week hiatus at my north woods retreat, where internet access is available only by taking a 13-mile drive to town, time that is better spent in my little fishing boat, jigging for walleye and bass.  I have a lot of catching up to do, so stay tuned.  Here it comes.