America’s Best Trading Partners

Earlier this month, we examined the list of America’s twenty worst trading partners – those with whom the U.S. has the largest trade deficits in manufactured goods on a per capita basis.  We saw that the list was dominated by nations with very high population densities.  Eighteen of the twenty were more densely populated than the U.S.  The average population density of the group was five times that of the U.S.  And they were wealthy nations, with an average purchasing power parity of $35,000 per person, debunking the myth that trade deficits are due to low wages.

What about the other end of the scale?  Who are America’s best trading partners – those with whom the U.S. has the largest trade surpluses in manufactured goods on a per capita basis?  Here’s the list:  Top 20 Surpluses, 2012.  This list looks very different.  Thirteen of these twenty nations are less densely populated than the U.S.  Of the remaining seven who are more densely populated, there is a very simple explanation why four of them – United Arab Emirates, Qatar, Kuwait and Brunei – are big buyers of American manufactured exports:  they are tiny nations literally afloat on large seas of oil.  They are flush with American petro-dollars which, ultimately, can only be used for purchase of American goods, services and investments.

Of the remaining three that are more densely populated than the U.S. – Panama, the Netherlands and Belgium – Panama is only a bit more densely populated than the U.S.  But Belgium and the Netherlands are each more than ten times as densely populated, seeming to defy the population density theory for trade deficits.  But both are very small nations, and both are the only nations on the European continent with deep water ports on the Atlantic coast.  Perhaps they are merely distributors of American products to other European countries.  If rolled into the Euro zone, the U.S. still has a large trade deficit with the Euro zone.

In contrast to the list of our twenty worst trade partners, whose average population density was almost 500 people per square mile, the average population density of America’s twenty best trade partners is only 188 per square mile.  But that’s a figure that’s skewed by a few very tiny but very densely populated nations.  If we divide the total population of these twenty nations by their total land area, the population density is only 19 people per square mile.  (This figure is 344 people per square mile for our twenty worst trade partners.)

It’s also interesting to note that the average purchasing power parity (a good measure of the wages paid in those nations) for our twenty best trading partners is almost exactly the same as our twenty worst trading partners – about $35,000 per person.  Clearly, wages have absolutely no role in determining trade imbalances.

The data is clear.  This is absolute, undeniable proof that population density plays a dominant role in determining whether free trade with any given nation will yield a trade deficit or surplus.  It’s irresponsible to apply free trade in a manner that’s blind to this reality.  When trading with badly overpopulated nations, tariffs must be employed to maintain a balance of trade, to offset those nations’ inability to provide us with access to a market that’s equivalent to ours in terms of its citizens’ ability to utilize products.

 

 

We are ruled by economists.

http://blogs.reuters.com/anatole-kaletsky/2014/04/19/time-to-stop-following-defunct-economic-policies/#comment-1696

I’ve been gone for two weeks and have a lot of catching-up to do, but thought I’d begin with something most recent.  You’ve heard me claim that there are no political solutions to our slow-motion economic demise because our political leaders simply hand over economic policy to some economist who, invariably, regardless of whether they subscribe to the philosophies of Keynes or Hayek, are pro-growth and lean heavily on population growth to achieve it.  Only by opening the eyes of economists can there be any hope for real change.

So I’m especially fond of any writings that take the field of economics to task.  The above-linked editorial appeared on Reuters a couple of days ago.  (And I especially love the opportunity to be the first to comment!)  In this piece, the author, Anatole Kaletsky, calls for “… new thinking about politics and not just economics.”  He begins with a quote from economist John Maynard Keynes:

The ideas of economists, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.

I couldn’t have said it any better.  The world is ruled not by politicial leaders but by economists.  It’s a scary thought when you realize that economics isn’t a real science at all, but something more akin to philosophy, mixed with a little psychology and some mathematical expressions of theories to lend it credibility – theories virtually devoid of facts and data to support them.  Real sciences are rooted in data, and real scientists go unafraid wherever the data takes them.  That’s why technology advances at breakneck speed while our economy limps along the edge of a precipice.  Scientists examine all possibilities.  Economists bury their heads in the sand, cowering in the face of criticism and unwilling to ponder where their single-minded devotion to growth may lead.

Solid Gains in Part-Time, Low Wage Jobs in March

Yesterday’s employment report  provided solid evidence of improvement in the jobs market.  While the establishment survey found that 192,000 jobs were added in March, the “employment level” in the household survey rose by an even more impressive 476,000.  But before you conclude that the good times are beginning to roll again, you need to look a little deeper. 

Of those 192,ooo jobs that were added, 29,000 were temp jobs in “business and professional services” and 30,000 were in food and drinking establishments – mostly low wage jobs.  19,000 health care jobs were added, but these too were in the low wage areas of that field.  Manufacturing actually lost 1,000 jobs. 

And, of the 476,000 increase in the employment level in the household survey, 365,000 were part-time jobs. 

There’s another point that needs to be made regarding the employment level.  It’s now at the same level as June 2008, which means all of the jobs lost during the recession from that point have now been recovered.  The problem is that the population has grown by 13.4 million since then.  Since approximately 50% of the population is part of the labor force, that means that 6.7 million workers are now unemployed as a direct consequence of population growth.

A high unemployment rate holds down wages and benefits.  Why give you a raise when there are over 15 million people out there (those 6.7 million plus another 8 million or so who are still unemployed) who are probably willing to do your job for even less?  So, contrary to what economists are telling us – that we need to increase immigration to get the economy going again – it’s clear that immigration and population growth are a net drag on household incomes.  It fattens corporate bottom lines, of course, but doesn’t help your bottom line one bit. 

And, let’s not forget that while the employment level is near pre-recession levels, we now have 6.7% unemployment vs. 4.7% in November of 2007 when Lehman Bros. collapsed and the Great Recession began.  Truth be told, were it not for the new post-recession phenomenon of the “mysteriously vanishing labor force” (people who the government would have us believe have chosen to drop out of the labor force, apparently no longer needing a source of income), unemployment would actually be 9.7% (or 17.3%, if you include part-time workers who really need full-time work). 

Prior to the recession, per capita employment was at 48.4% with a much higher percentage of full-time workers.  At the depth of the recession, per capita employment fell to 44.9%.  By March it has risen only 0.9% to 45.8%, and a much higher percentage are now working part-time.  Now the jobs picture doesn’t seem as bright as the headline numbers would have you believe. 

 

Manufactured Exports Fall in February, Lag President’s Goal by Record Margin

http://www.bea.gov/newsreleases/international/trade/2014/pdf/trad0214.pdf

As announced by the Bureau of Economic Analysis (BEA) this morning, the nation’s trade deficit rose in February to $42.3 billion.  Not mentioned in the report (because the BEA doesn’t even track it, but can be derived through some simple math) is the fact that a $0.7 billion decline in manufactured exports contributed to the rise in the deficit. 

Exports of manufactured goods, at $108.7 billion in February,  have not risen in two years, actually falling by $0.1 billion from February, 2012.  In January, 2010 the president set a goal of doubling exports in five years, the implication being that the growth would occur in manufactured goods as a cornerstone of his economic “plan” to grow manufacturing jobs.  February’s exports lagged the president’s goal by $42.6 billion – a record margin which, once again, exceeds the entire trade deficit.  Here’s a chart of the balance of trade in manufactured goods, followed by a chart of the deficit in manufactured goods:  Manf’d exports vs. goal      Manf’d Goods Balance of Trade.

The point is that the president’s failure was inevitable because neither he nor anyone in the U.S. has any control whatsoever over exports, which are determined solely by foreign demand for U.S. goods.  Cajoling our trade partners into buying more U.S. goods has been a strategy tried and failed by presidents for decades.  Federal programs designed to help manufacturers improve efficiency and to fund research don’t work either, since foreign manufacturers are working just as hard to improve efficiency. 

And it’s equally predictable that the trade deficit isn’t just magically curing itself as other nations develop into more western-style consumers, as economists have long predicted.  Global trade imbalances have nothing to do with any of these things.  They are driven almost entirely by differences in population density, as badly overpopulated nations, crippled by endemic low per capita consumption, rely ever more heavily on manufacturing for export to employ their bloated labor forces.  And American workers pay the price for their overpopulation – a problem they had no role in causing and are powerless to remedy. 

Applied in appropriate situations, like between reasonably populated nations, free trade works just fine.  But U.S. trade policy fails to account for the limitations of free trade, and applies it blindly to situations where it’s guaranteed to fail.  In the final analysis, globalization and free trade, as they are currently applied, constitute nothing more than a poverty-sharing program, conceived in the wake of World War II as a means of heading off the kind of social unrest that arises from high unemployment in overpopulated nations like Germany and Japan.

America’s Worst Trading “Partners”

The word “trade” implies a mutually beneficial exchange of goods and services.  I buy stuff from you and, in return, you buy stuff from me.  A good trading partner is a nation that buys (imports) as much as it sells (exports).  A bad trade relationship is one in which a nation sells (or exports) while buying little in return.  Such a relationship isn’t mutually beneficial.  In such a relationship, one nation creates jobs at the other’s expense and drains funds away from the other’s economy.

America’s free trade policy has resulted in both good and bad trade relationships.  On balance, its many beneficial trade relationships have been more than offset by a minority of really bad ones.  But what’s the best way to judge?  Some differences in trade imbalances are due to a huge disparity in the size of nations.  Is a big nation that maintains a large trade surplus with the U.S. any better than a tiny nation with a proportionately large imbalance?  The only way to judge such imbalances fairly is to express them in per capita terms.  That is, how much does each person in that nation buy from the U.S. vs. how much they manufacture and sell to us? 

When expressed in per capita terms, the results are surprising.  Here’s the list:  Top 20 Deficits, 2012.  The key take-aways from this list are as follows:

• Note the population density of the nations on this list.  By comparison, the population density of the U.S. is approximately 86 people per square mile.  Eighteen of these twenty nations are more densely populated than the U.S.  Eight are more than five times as densely populated.  In fact, the average population density of the nations on this list is 493 people per square mile – more than five times the density of the U.S.  Only two are less densely populated – Sweden and Finland.  When I first published this list in 2006 in Five Short Blasts, Sweden ranked number two.  By 2012, they have fallen to number eleven.  And their surplus with the U.S. has been reduced by half. 
• Note the “per capita purchasing power parity (PPP)” of the nations on this list.  By comparison, U.S. PPP is approximately $48,500.  Most of the nations on this list are relatively wealthy nations, debunking the myth that trade deficits are caused by low wages.  If low wages are to blame, how do you explain the presence of Ireland, Switzerland, Taiwan, Denmark, Germany, Japan and Austria (among others) in the top ten of this list?  Also, the PPP of this list has risen dramatically in the past six years.  (More on this topic in a later post.)
• Though China gets all of the attention for its massive trade deficit with the U.S., it barely makes the top 20 list, coming in at number 18.  It has risen only one place on this list since 2006.  In per capita terms, its trade imbalance with the U.S. is rather unremarkable relative to the other nations on this list.  In fact, when you understand the role that population density plays in driving trade imbalances, the huge trade deficit with China, given its sheer size and enormous population, is exactly what should have been expected. 

People who live in overcrowded conditions buy fewer products because they have no room to utilize them.  They buy or rent smaller homes because there is no room for larger homes.  They own fewer cars because their roads are choked with traffic and they choose mass transit instead.  Because their homes are smaller, they buy less furniture, far less lawn and gardening equipment and smaller appliances.  They buy less sporting equipment like boats, golf equipment, tennis equipment – you name it – simply because of the scarcity of resources for using such.

When two nations grossly disparate in population density atttempt to trade freely with each other, the work of manufacturing is spread evenly across the combined labor force, but the disparity in per capita consumption remains.  They buy less from us than we buy from them.  The result is inescapable – a trade deficit and loss of jobs for the less densely populated nation.  In effect, a host-parasite relationship is established in which the more densely populated nation feeds on the market of the other nation.  The less densely populated nation pays the price for the other nation’s overpopulation.  It hardly seems fair, does it?