Gone Fishing

May 17, 2013

I won’t be posting much for the next two weeks.  There are fish to catch.

In the meantime, I’ve already begun working on a post about our trade results with the 10 nations who make up what’s known as the “Trans-Pacific Partnership,” with whom President Obama is pushing a another trade deal.  There’s an interesting mix of nations there, and the results are a microcosm of what’s wrong with American trade policy.

Time to shove off.

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U.S. Trade with The E.U.

May 13, 2013

In his State of the Union address in February, President Obama called for a new free trade deal between the U.S. and the European Union, or EU.  (See this article for more information:  http://www.nytimes.com/2012/11/26/business/global/trade-deal-between-us-europe-may-pick-up-steam.html?pagewanted=all&_r=0.)

It’d be a huge deal, no doubt.  But would it be a good deal for the U.S.?  Since the signing of the Global Agreement on Tariffs and Trade in 1947 and since the inception in 1995 of its offspring, the World Trade Organization, the U.S. has been steadily moving toward freer trade with the rest of the world, including the 27 member states of the Euroean Union.  It only makes sense to examine the results of free trade with the EU thus far before deciding whether or not a further move toward freer trade would be a good deal for the U.S.

But first, a few facts about the EU are in order.  The European Union was established in 1993 and includes 27 members:  Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.  In other words, most of Europe, with a couple of noteworthy exceptions:  Norway and Switzerland. 

If the EU were a nation, it would be the 7th largest in the world in terms of suface area with over 1.6 million square miles and would be the 3rd most populous, with just over a half billion people, exceeded only by China and India. 

So how have we fared in trade with the EU, particularly in the all-important, job-creating category of manufactured goods?  Here’s a chart of our balance of trade with the EU since 2001:  EU.  As you can see, the U.S. suffers a large trade deficit with the EU.  Though it began to shrink beginning in 2006 – a process helped along no doubt by the overall decline in global trade that accompanied the onset of the “Great Recession” in late 2007, it began to deteriorate rapidly again in 2010.  In only three years since 2009, our trade deficit with the EU in manufactured goods has more than doubled. 

Now, let’s consider the factors involved:

Population Density:

With 503 million people, the population density of the EU, at 309 people per square mile, is only slightly less than that of China (359 per square mile).  It is approximately 3.6 times as densely populated as the U.S. (85 per square mile).  In per capita terms, our trade deficit with the EU in manufactured goods is $223, remarkably similar to our per capita trade deficit with China ($210).  Once again, we see that population density is a consistent predictor of whether we will have a surplus or deficit with any particular country and what the size of that imbalance might be expected to be. 

Currency Exchange Rate:

Economists are fond of blaming trade deficits on exchange rates that are kept artificially low by “currency manipulation,” accomplished by tactics such as currency printing by central banks.  The theory is that a currency that is kept artificially low makes that nation’s exports cheaper for American consumers while making American exports more expensive for that nation’s consumers. 

In 2012, the Euro weakened against the U.S. dollar by 14.3%.  And, in fact, as economists would predict, our trade imbalance with the EU worsened by 14%.  But that’s just one year in which the Euro took an uncharacteristic dip.  Since 2001, the Euro has risen by 31% against the dollar.  But, instead of improving, our trade imbalance with the EU worsened by 104%. 

Wealth:

Economists also blame trade deficits on low wages in other nations.  We have no data on average or median wages, but what’s known as purchasing power parity (“PPP”) – roughly a nation’s GDP (gross domestic product) per capita – is pretty analogous.  By that measure, the EU has a PPP of $34,500 and, if it were a nation, would rank in the top 20% of the world’s 229 nations.  The EU is not poor and wages are not low.  Since 2001, of the 26 EU member nations, 14 have experienced a PPP that has grown faster than the U.S.; that is, they have grown wealthier vs. the U.S.  In spite of that, our trade imbalance has actually worsened with 10 of these 14 nations. 

That leaves twelve EU nations whose wealth deterioriated vs. the U.S.  since 2001.  Of these 12 nations, our trade imbalance worsened with 9 of them. 

So, of these 26 member nations, our trade imbalance responded as economists would predict (based on the “low wage” theory) in 13 cases – exactly half.  In other words, there’s no relationship between low wages (or wealth) and trade imbalance whatsoever.   Falling wealth and wages are no more likely to worsen our trade imbalance than they are to improve it. 

Exports to the EU:

Well, OK, maybe our trade imbalance with the EU has worsened because we’ve imported more from the EU.  Maybe a new trade deal can make that up by boosting our exports to them, right?  Not likely.  In the past year, exports of manufactured goods to the EU actually declined by 1%.  This is in spite of President Obama’s goal of doubling exports within five years.  If the EU had any capacity for absorbing more American exports, shouldn’t we have seen some evidence of that in 2012 in light of the president’s push? 

Given the results of steadily liberalizing trade with the EU – results that were quite predictable given the relationship between population density and trade imbalances – further liberalization of trade with the EU makes absolutely no sense whatsoever.  It makes no more sense than liberalizing trade with China.  The result if the same.  It only makes sense to those vested in 19th century trade policy, economists too afraid of pondering the ramifications of population growth out of fear of being exposed as frauds.


Immigration Bill Would Help Social Security?

May 9, 2013

 

http://www.reuters.com/article/2013/05/08/us-immigration-usa-socialsecurity-idUSBRE94711T20130508

According to government actuaries, the proposed immigration bill which would legalize eleven million illegal immigrants would help put social security back on sound financial footing by collecting social security taxes from eleven million more people.  (See the above-linked Reuters article.)  Wow, what a great idea! 

Why is it that these actuaries don’t also point out that social security would already be on even more sound financial footing if only we hadn’t imported all those immigrants 40 years ago, immigrants who are now drawing benefits from social security? 

The point is this:  that attempting to avoid the temporary funding problems that a stabilizing population presents by growing the population further only exacerbates the problem in the future – a problem that must be dealt with at some point anyway since never-ending population growth is impossible.  If this immigration “reform” passes, then thirty or forty years from now we will have eleven million more people drawing out of social security than we would have otherwise.  And our social security funding problem will be that much worse.

But, no, “lazy economics” – the economics of procrastination – always holds sway because that’s more appealing to everyone.  Why face up to our problems when we can put them off onto future generations?  Let’s import more social security tax-payers.  Never mind that they will draw benefits tomorrow.  Tomorrow never comes.


America’s Worst Trade Partner

May 4, 2013

No, it’s not China.  Our largest trade deficit, by far, is with China, but China is also a very, very large country that accounts for one fifth of the world’s population.  And it’s not Japan or Germany, with whom we suffer our second and third largest trade deficits.  Obviously, I need to define my criteria for “worst trade partner.”  I’m putting this into per capita terms.  That is, man-for-man, citizen-for-citizen, which country sucks more trade dollars out of Americans’ pockets than any other?

The hands-down winner is Ireland.  In 2012, every man, woman and child in Ireland was $5,012 wealthier because of Ireland’s $24 billion per year trade surplus with the U.S.  And Ireland has fewer than five million people.  That’s over $20,000  per year for every family of four.  And every family in America is poorer because of it.  But that’s actually an improvement over 2011, when our per capita trade deficit with Ireland set a record of $6,244.  Here’s a chart of our balance of trade with Ireland since 2001:  Ireland Trade.  The improvement in our balance of trade with Ireland in 2012 was due entirely to a slowdown in imports of pharmaceuticals from Ireland.

To put the size of our per capita trade deficit with Ireland in perspective, it’s seven times worse than our per capita trade deficit with both Germany and Japan.  And it’s almost twenty times worse than our per capita deficit with China. 

Ireland is almost twice as densely populated as the U.S., which accounts for some of this trade imbalance.  (There is a strong correlation between the population density of our trading partners and our trade imbalance with them, both in terms of whether the imbalance is a surplus or deficit, and how large the imbalance tends to be.)  But that doesn’t explain such an enormous imbalance with such a small country.  Ireland offers huge tax incentives to foreign corporations to set up shop there.  Pharmaceutical manufacturers in particular have taken advantage of it.  Never mind the fact that this tax policy bankrupted Ireland and landed them on the list of EU “PIIGS” (Portugal, Ireland, Italy, Greece and Spain).  Like those other nations, they have the EU to bail them out.  This situation constitutes a blatant unfair trade practice.  But, as with all unfair trade practices, the U.S. simply turns a blind eye. 

So, the next time you’re sick and at least try to take a little comfort in thinking that your spending for pharmaceuticals may be helping some American workers and the American economy, think again.  Our trade policy with Ireland is a good part of the reason that all of us are becoming increasingly dependent on the federal government to provide us with health care.


Another “New Normal” Employment Report

May 3, 2013

This morning the stock market is soaring on news that the economy added 165,000 jobs in April (slightly more than expected) and unemployment fell to 7.5%.  These aren’t stellar numbers.  The jobs added barely exceeded the rate necessary to keep pace with population growth, and the unemployment rate’s “detachment from reality” index (more on this later), inched down only slightly from the record high set in March.

You have to wonder:  is Wall Street reacting so positively because the news is so good or because it isn’t?  What’s really been driving this bull run on Wall Street is the Federal Reserve’s quantitative easing policy, pumping trillions of dollars into the markets.  And the Fed has tied the end of that policy to an unemployment rate of 6.5%.  Is Wall Street cheering the fact that the official unemployment rate crept down by 0.1% in April, or that it didn’t drop more?

Speaking of the unemployment rate – what’s known as “U3” – it’s a calculation of the “employment level” divided by the “civilian labor force,” factors determined by the monthly household survey conducted by the Bureau of Labor Statistics.  It’s a simple matter to make the unemployment rate look lower than it really is by claiming that workers have dropped out of the labor force and given up looking for work.  Of course, that’s nonsense.  Whether they’re looking for work and not finding it, or have given up looking because there’s none to be found, they’re just as unemployed.  A more accurate gauge of unemployment – what I call “U3a” – holds the work force at a constant percentage of the population.  After all, everyone needs a source of income. 

Over the past two months, the “civilian labor force” has declined by 290,000 while, at the same time, the population has grown by 350,000.  This kind of creative accounting has resulted in an unemployment rate that is ever more detached from reality.  Here’s a chart of these unemployment rates:  Unemployment Chart.  And to drive home the widening gap between U3 and U3a, this month I’m introducing a new chart, what I call the unemployment “detachment from reality index” – the difference between U3 and U3a.  Here’s the chart:  Detachment from Reality Index.  As you can see, it’s barely off from the record set last month.  Instead of 7.5% unemployment, a more realistic figure is 10.5%. 

The economy isn’t getting better.  If anything, it may be getting worse, as all of the other economic indicators have been telling us.  Only an hour-and-a-half after this unemployment report was published, the monthly report of factory orders fell by 4%, corroborating other reports that show a slowing manufacturing sector. 

Even this supposedly rosy employment report had some bad news.  No jobs were added in either manufacturing or construction in April.  And the average workweek slipped by 0.2 hours. 

Don’t buy all the economic hype.  Unemployment isn’t getting better.  Our trade policy is as broken as ever and rampant immigration is aggravating overcrowding and declining per capita consumption.  I doubt that this illusion can be maintained much longer.


Big Plunge in Consumer Goods from China Drives Down Trade Deficit

May 2, 2013

A big drop in imports of consumer goods, especially from China, led to a significant decline in the March trade deficit.  (Here’s a link to the full report from the Bureau of Economic Analysis:  http://www.bea.gov/newsreleases/international/trade/2013/pdf/trad0313.pdf.)

This would be good news if it were driven by a shift to domestic manufacturing of these products.  But it’s not.  All other economic indicators have been pointing to a manufacturing sector that has slowed, or is even declining.  (For example, yesterday’s ADP employment report showed a loss of 10,000 manufacturing jobs in April.)

Most categories of imported goods slowed in March, led by a decline in consumer goods of  7.5%, or by $3.4 billion, accounting for most of the decline in the trade deficit.  And imports from China plunged by $5.5 billion from February, accounting for all of the decline in the trade deficit and then some. 

The overall trade deficit fell by $4.8 billion in March to $38.83 billion.  Here’s a chart of the overall balance of trade since January, 2010, when President Obama set a goal of doubling exports in five years:  Balance of Trade.  As you can see, the trade deficit has been on a declining trend since January of last year.  There are basically only three reasons why a trade deficit declines:  1)  the economy is shifting to domestic production, or 2) exports are rising faster than imports, or 3) the economy itself is in decline. 

We’ve already ruled out reason number 1.  Aside from a slight shift toward domestic auto production, there is no other shift toward domestic manufacturing.  And exports are definitely not increasing.  In fact, overall exports fell in March and are even lower than they were in March of 2012.  Overall exports have now lagged the president’s goal for 20 consecutive months, and now lag that goal by $38.5 billion – the largest shortfall yet.  In fact, if exports had grown at the rate required to keep pace with the president’s goal, our trade deficit would have been only $0.3 billion in March.  Here’s the chart:  Obamas Goal to Double Exports.

Of course, the real goal is to double exports of manufactured goods in five years, since that’s where the jobs lie.  And this is also where the biggest failure to grow exports lies.  Exports of manufactured goods have been flat for the past year and have now lagged the president’s goal for 18 consecutive months and by their biggest margin in March – $22.7 billion.  Here’s the chart:  Manf’d exports vs. goal.  And here’s a chart of the balance of trade in manufactured goods:  Manf’d Goods Balance of Trade.

So, there’s been no corresponding shift to domestic manufacturing to explain the declining trade deficit, and no pick-up in exports.  That leaves only one explanation – the overall economy is slipping into recession.  We’ve seen it before – during the Great Depression and the more recent “Great Recession.”  Overall trade declines (and with it, the balance of trade) as consumers world-wide stop buying.  That’s exactly what’s happening as unemployment around the globe is getting worse.  Just this week it was announced that unemployment in the Euro zone hit a record.  And, if the federal government were honest about unemployment and stopped claiming that more and more workers are dropping out of the labor force, unemployment in the U.S. would also be near a post-depression record level. 

While the headline number for the March trade deficit may hint at an improving economy, the truth is anything but.