Trans-Pacific Partnership: A Grand Name for More Really Dumb Trade Policy

September 16, 2013

Although I promised an article on this topic back in the spring, another very intensive project has diverted my attention since then.  My apologies. 

The “Trans-Pacific Partnership” (TPP) began life in 2005 as a small agreement between three countries:  Chile, New Zealand and Singapore.  The tiny country of Brunei soon joined the pact.  Never wanting to miss out on any trade deal, the U.S. joined in 2008, followed by Australia, Vietnam, Peru, Malaysia, Canada, Mexico and, most recently, Japan. 

Of course, the United States already trades vigorously with all of these nations, following the precepts of the World Trade Organization.  The TPP aims to liberalize trade among these nations even further. 

The problem with the TPP is that, like all free trade agreements, it’s based on the assumption of early-19th century trade theory that, rather than being a zero-sum game in which one nation wins and the other loses, free trade promotes efficiency and stimulates further economic growth and more trade.  However, the theory assumes that all people of all nations are equal in their capacity to consume products because, even to this day, economists don’t recogize the inverse relationship between population density and per capita consummption, and the role of that relationship in driving huge trade imbalances.

The TPP is further evidence of the folly of applying free trade theory blindly across the board with all nations.  In 2012, the United States suffered a trade deficit in manufactured goods with TPP nations of $59 billion.  But, when broken down by the population density of each nation, the results are starkly different.  With the five nations less densely populated than the U.S. – Australia, Canada, Chile, New Zealand and Peru – we enjoyed a trade surplus with each of them in manufactured goods totaling $100.4 billion. 

However, it’s a very different story for the six nations that are more densely populated than the U.S. – Brunei, Japan, Malaysia, Mexico, Singapore and Vietnam.  With that group of nations, the U.S. suffered an enormous trade deficit in manufactured goods in 2012 of $159.4 billion.  Among this group of nations, the U.S. did have a trade surplus with two of them – by far the tiniest – Brunei and Singapore.  Singapore is a tiny city-state – slightly larger than Chicago, but with twice as many people.  The effect of population density upon trade imbalances doesn’t apply in such cases because such city-states manufacture virtually nothing.  (They tend to be hubs of services, like financial services, which they trade for manufactured goods.)  Brunei is also tiny – about the size of Anchorage, Alaska, and is one of those rare examples of a tiny nation virtually afloat on a sea of oil and gas, which it trades for manufactured goods – similar in that regard to only a handful of other tiny nations like Kuwait and the United Arab Emirates.  Together – Singapore and Brunei accounted for a U.S. trade surplus in 2012 of only $4.8 billion. 

The five nations less densely populated than the U.S. comprise an area of 7.4 million square miles.  The six nations more densely populated comprise an area of only 1.2 million square miles.  So, the nations of TPP that account for only 14% of the land surface area not only completely wipe out the surplus we enjoy with the other 86%, but they account for an additional loss of $59 billion. 

You might argue, as economists would, that it’s actually low wages or perhaps currency manipulation that cause the trade deficits among those more densely populated nations.  You’d be wrong.  Expressed in per capita terms, our largest trade deficit by far is with Japan, a nation whose wages are on a par with other wealthy nations among the PPP.  And, in spite of Japan’s currency gaining 36% in value since 2001, our trade deficit with them actually worsened by 13%.  It’s actually Japan’s population density – ten times more densely populated than the U.S. – that drives our trade deficit with them. 

The reasons for the disparity in trade results with the TPP nations are clear – at least to me and to anyone willing to invest the time to study the effect of population density on per capita consumption.  Extremely densely populated nations come to the trading table with nothing to offer but badly bloated labor forces and markets that are stunted by severe over-crowding.  They’re hungry for work,  unable to consume their own productive capacity.  In effect, they’re looking for someone to relieve them of their inevitably high unemployment by taking it upon themselves.  Free trade with such nations is, in fact, closer to a zero sum game where their gain is our loss, and is tantamount to economic suicide. 

Wouldn’t it be much smarter trade policy to liberalize trade with the less densely populated nations and utilize tariffs to assure a balance of trade with the others?  Oh no, economists would respond, that would be “protectionist,” as though protecting oneself from parasites (what else can it be called when one feeds on another’s market to sustain themselves?) is somehow a bad thing.  Better to not rock the boat, so that the president can enjoy pleasant conversations around the punch bowl at G20 and TPP meetings.  Who cares if it results in a few million Americans losing their jobs?


The Recession Goes on for 95% of Americans

September 12, 2013

Two weeks ago, the Bureau of Economic Analysis released it’s 1st revision of 2nd quarter GDP, boosting its estimate to 2.5% growth from the previously-reported figure of 1.7%.  Economists hailed this as further evidence of an economy that is gaining momentum. 

But is the recovery gaining momentum?  Or is the recovery even real?  Two days before the BEA’s release of GDP, this article appeared on CNBC:  The article reports on a study by Charles Hugh Smith, author and blogger, in which he analyzes such things as full-time employment as a percentage of the population, real personal income and its distribution and the percentage of people qualifying for non-subsidized mortgages.  Smith points out that median household income is still below the level it was at when the recession began in 2008 and has barely risen at all during the “recovery.”  And the top 0.1% of wage earners now account for over 10% of all income in the U.S.  The top 1% account for nearly 20% and the top 10% account for nearly half of all income. 

And Smith questions metrics that aren’t being tracked at all (lest they cast even more doubt on claims of a “recovery”), like the percentage of student loans that are being taken out not to pay for higher education, but simply to have something to live on.  He ends with the question, “Is an economy of people obtaining student loans they have no way to service as the only available means to keep themselves off the street a healthy economy?”

OK, Smith is just an author and blogger, not carrying much weight in the world of economics.  But he must have caught someone’s attention because, just yesterday, this following story was widely reported:  The article reports on a study by three prominent universities that corroborate Smith’s findings.  And it adds this piece of data:

But since the recession officially ended in June 2009, the top 1 percent have enjoyed the benefits of rising corporate profits and stock prices: 95 percent of the income gains reported since 2009 have gone to the top 1 percent.

To put that into perspective, and returning to the GDP data with which I began this post, this means that of the $64.8 billion annual rate of increase in GDP that occurred in the 2nd quarter, the share of that increase realized by 99% of American households comes to a grand total of $32.40 per year.  Thirty-two dollars and forty cents.  Take away the top 10% of earners and the rest are left with nothing.  And for the majority of Americans, their share of GDP is shrinking. 

This isn’t a picture of a recovery.  It’s a recession that, if anything, is deepening – exactly the way it feels to most Americans who can’t believe their ears when they hear all this talk of recovery.  It’s an illusion of a recovery created by a narrow set of macroeconomic metrics – GDP and stock market indices.  Carried to its extreme, even if all wealth were concentrated in the hands of one American – Donald Trump, let’s say – our economy would be deemed healthy as long as Trump continued to grow his wealth and as long as his stock holdings increased in value, regardless of the fact that all 316 million other Americans lived in abject poverty. 

This is precisely the situation you’d expect when the interests of those who benefit from population growth diverge from the interests of average Americans, just as I warned of in “Five Short Blasts.”  A select few will continue to benefit from macroeconomic growth as the fortunes of everyone else decline along with falling per capita consumption. 

I know that sometimes I seem to be actually rooting for an economic downturn.  In a way, I am, because it’s only then – when the 1% fall into recession – that they begin to question what might be at the root of our ailing economy.  The remaining 99% – those living in the real world – are already wondering what the hell is going on.

Employment Level Falls by 115,000 in August, Unemployment Rises to 10.3%

September 7, 2013

The Bureau of Labor Statistics released the August employment report yesterday, and the less-than rosy headline numbers – 169,000 jobs added (less than expected) and a supposed drop in the unemployment rate to 7.3%, masked a pretty ugly assessment of employment in America and cast further doubt on the strength of the recovery.

The report consists of two surveys – the establishment survey, from which the report draws its figure for the number of jobs created, and the household survey, used to calculate the unemployment rate.  It’s the latter suvey that paints a bleak picture.  The “employment level” (the number of Americans working) actually fell by 115,000 to 144.2 million people – 2.4 million less than were working in November of 2007 when the recession began.  To put into perspective just how bad that number is, the U.S. population has increased by 14 million people during that time, and not only have none of them been put to work, but an additional 2.4 million have lost their jobs.  That’s a recovery?

The only reason that the BLS’s unemployment rate fell by a tenth to 7.3% is that, supposedly, yet another 312,000 people have vanished from the labor force.  It’s blatantly obvious that the BLS manipulates the data to make the unemployment rate show continuous improvement. 

It gets worse.  Buried at the end of the report are revisions to the June and July data.  The June figure was cut from 188,000 jobs to 172,000, and the July figure was cut from 162,000 jobs to 104,000 — a recessionary figure. 

And it gets still worse.  U6 unemployment, the figure that includes those who need full-time jobs but have had to settle for part-time work, fell by three tenths of a percent – three times the drop in the headline U3 unemployment rate.  What that means is that not only are the jobs created in August predominantly part-time jobs, but many more full time jobs have been replaced by part-time jobs. 

All of this adds up to a deteriorating employment picture for American workers.  The truth is that, although the top 5% are doing better, the recession never ended for 95% of Americans and has, in fact, gotten worse.  (More on this in a separate post.) 

More bad news from the report:

  1. The number of unemployed Americans rose by 225,000 in August and is little-changed from January of 2012.  Here’s the chart:  Unemployed Americans.
  2. Per capita employment is also little-changed since January, 2012:  Here’s the chart:  Per Capita Employment.
  3. The “detachment from reality index” – the difference between an honest gauge of unemployment and the BLS’s figure which has been held artificially low by claiming that workers have left the work force – hit a new record in August of 3.1%.  (10.34% unemployment vs. the BLS figure of 7.28%.)  In other words, the lie about the U.S. employment picture keeps getting bigger.  Here’s the chart:  Detachment from Reality Index.
  4. Of the 169,000 jobs supposedly added in August (pending future revisions lower), almost all were low-wage jobs.  Employment in auto manufacturing rose by 19,000 as plants retooled for model changeover were restarted – offsetting a drop of 10,000 in July but, otherwise, all other manufacturing employment fell by 5,000.

It seems that every month, economists are surprised by the weakness of the employment data.  But it comes as no surprise to anyone who understands the damage done by misguided trade policy and by the foolish effort to stoke economic growth with cancerous population growth that erodes the economy through reduced per capita consumption.

Manufactured Exports Fall, Lag Obama’s Goal by Record Margin

September 5, 2013

The Bureau of Economic Analysis reported this morning that the trade deficit widened in July to $39.2 billion, thanks to a $3.5 billion jump in imports and a $1.1 billion decline in exports.  Here’s a chart of our overall balance of trade:   Balance of Trade.

While our overall balance of trade has been improving, thanks to falling oil imports and rising oil and gas exports, it’s an entirely different story for the category of manufactured goods.  The decline in exports was led by a $3.6 billion drop in manufactured exports.  Manufactured exports have been flat since March, 2012 and now lag the president’s goal of doubling them by $29.9 billion – a new record.  (In January of 2010, the president set a goal of doubling exports within the next five years.)  In July, the trade deficit in manufactured goods was $40.7 billion – exceeding the total trade deficit.  Here are charts of the balance of trade in manufactured goods and a chart of exports (and imports) vs. the president’s goal of doubling exports:  Manf’d Goods Balance of Trade, Manf’d exports vs. goal

Overall exports now lag the president’s goal by $43.8 billion per month (over a half-trillion dollars per year) – also a record amount. 

The trade deficit with China soared to $30.1 billion in July – a new record.  And our trade deficit with S. Korea for 2013, through July, is now running 44.4% ahead of 2012.  Remember when, upon signing his trade deal with S. Korea in early 2012, President Obama hailed it as a “big win for America’s workers?”  Instead, as is always the case with free trade deals with badly overpopulated nations, it’s killing American manufacturing jobs by the droves. 

I’ve said it every month and I’ll say it again – none of this comes as any surprise.  The president’s focus on increasing exports to restore a balance of trade is misplaced because the U.S. has absolutely no control over exports, which are determined solely by foreign demand.  We do have complete control over imports, but the president lacks the courage to use those controls, contrary to his election promise to do so.  His goal of turning the U.S. into a Germany-like, export-driven economy was doomed from the outset because there is no other United States out there to sop up our exports as we do for Germany.