“Five Short Blasts” Theory Explained: Part 5B

August 3, 2008
This post is the last in a series of articles that explains the new economic theory I proposed in Five Short Blasts. If you haven’t read the previous articles yet, just go to “The Theory Explained” category of this web site. This series of articles will be archived there in reverse chronological order. Just scroll down to find the beginning of the series. 

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Let’s move on to the rapidly worsening problem of overpopulation right here in America. If you doubt that we have such a problem, remember what I said in Part 5A about a persistent, large trade deficit in natural resources. That’s exactly what the United States has. In 2006 we ran a trade deficit in every category of natural resources: oil, gas, metals, minerals, lumber and even food. If you believe that all of our problems can be solved by somehow increasing the domestic supplies of these resources, then you’re either in denial or you’re a victim of the propaganda being served up by special interest groups who benefit from population growth and care nothing about the future of the nation.

Our population growth is due to two factors: 1) immigration, both legal and illegal, accounting for about half of the growth and 2) a birth rate that exceeds the death rate. Let’s begin by eliminating immigration as a factor by balancing immigration against emigration. We currently import approximately 1.1 million people per year through legal immigration, while only about 200,000 per year choose to leave the U.S. for foreign countries. (Of this 200,000, only about 50,000 are native-born Americans.) So, in order to balance immigration with emigration, we need to cut the rate of legal immigration by over 80% at first, and then continue to cut it to 50,000 per year as the percentage of the foreign-born population steadily shrinks. It’s the temporary visa program that fills the pipeline providing most of our permanent immigrants, and the vast majority of these are students and temporary workers. Therefore, it’s in these two areas that most of the cuts must be made. Oh, by the way, did I mention that illegal immigration must be completely halted? There’s been a lot of talk about making a “guest worker” program an integral part of “immigration reform.” This is a terrible idea. We don’t need any more temporary “guest workers.” In fact, we need to dramatically cut the number of foreign workers admitted if we are to have any hope of stabilizing our population. Cutting foreign workers would have huge benefits for American workers, creating up to 1.7 million jobs. And cutting the number of foreign students would free up hundreds of thousands of openings in universities, driving down tuition increases.

That leaves the matter of cutting the birth rate to match the death rate – no small task. (Ultimately, in order to reduce our population, as we must, the birth rate needs to fall below the death rate.  For a good discussion of birth rate and death rate, see the comment by “Evasta” below, followed by my response.)  And, by the way, this is another reason we need to cut immigration. It isn’t fair to ask American families to have fewer children so that we can make room for more immigrants. It’s easiest to think of the birth rate (the number of births per 1,000 people) in terms of the fertility rate – the number of births per female. You’d think that this figure needs to be 2.0, the number needed to replace each generation with the next. But you’d be wrong. That won’t achieve population stability because life expectancy keeps rising. Each generation is living longer than the previous one. The fertility rate actually needs to fall from its present level of about 2.1 to about 1.79.

Reducing the birth rate conjures up all sorts of repugnant images of practices employed in places like China, with their one child per family policy. Specifically, the practice of abortion is so controversial that it immediately stops any discussion of population stabilization before it even begins. For that reason, I eliminate it from consideration. Besides, it isn’t even necessary to achieve a reduced birth rate. It can easily be done without abortion. All that’s required is education and a system of economic incentives designed to encourage couples to choose smaller families.

Such an economic incentive program would consist primarily of tax incentives, such as:

Eliminating the current system of tax credits for dependents and replacing it with a lower base rate, accompanied by tax penalties for each child, or for each child above two. The “penalty” would have to be income-neutral so that the wealthy would have just as much incentive as the poor to choose smaller families. The penalty should apply for life, not just while the children are dependents.

Revise the way property taxes are calculated to factor in the number of children. Since a large percentage of property taxes are used to fund the local school system, it only makes sense that the number of children one has added to the school system burden should be a factor. I’m not saying it should be proportional, as that would negate the concept of a public school system. But, again, it should be a factor and it should apply for life, since those children will also be permanently adding to the school system burden with their descendants.

All costs for contraceptive devices and procedures should be reimbursed by the government through tax credits.

These are just some ideas. I’m sure that others could come up with additional incentives, perhaps better ones. The goal is not to collect additional revenue, but to collect revenue in a way that encourages smaller families. Oh, by the way, in the above incentives, abortions should be counted as live births to avoid creating an incentive for having abortions, as China has done with their one child policy. All of this would require some method of tracking pregnancies and births, creating some concern about privacy and government intrusion into people’s private lives. So any such programs would have to be sensitive to those concerns.

Ultimately, a constitutional amendment may be necessary, an amendment that would require Congress to establish a target population, a target upon which immigration and tax policy would be based to make progress toward that target, whether the target be a larger population (a very bad idea) or a smaller population. I’m not saying what the target should be. But at least this would force a national discussion of the issue. If the target were set at double the current level, where will we obtain the resources to support 300 million more people? Where will they be located? How will we provide them with water? How will this affect our dependency on foreign oil? How will we cut total carbon emissions in half at the same time that we double the population? Every one of these issues is critical today but not a single one of them gets the least bit of consideration because politicians want to pretend that the population problem doesn’t exist. A constitutional amendment would force it into the open. Why didn’t our founding fathers think of it? At the time, they didn’t even know how far west our boundaries extended. How could they have even contemplated a state of overpopulation? Now we can. Let’s pull our heads out of the sand and start managing this nation with some common sense.

Once you understand the theory I’ve presented in Five Short Blasts, you understand the enormous economic benefits that would be realized by stabilizing the population of the U.S. and by stopping the importation of the negative effects of overpopulation through free trade with overpopulated nations. We would experience an economic boom the likes of which hasn’t been seen since the end of WWII. We’d once again become self-sufficient in natural resources. Our greenhouse gas emissions would be cut dramatically. There’s almost no end to the improvements in the quality of life we’d enjoy.

And it’s easy to predict what failure to enact these measures would mean for America – steadily worsening unemployment and poverty and everything that goes with them: rising crime rates, health care out of the reach of a growing percentage of the population, rising death rates, crumbling infrastructure, growing homelessness, civil strife. That’s where our economists and national leaders are taking us. Do we want to follow? Is that the future we want for our grandchildren? It doesn’t have to be that way. There are reasons for our economic demise. All we have to do is open our eyes and our minds to the possibility that economists may be missing something – the relationship between population density and per capita consumption and what overpopulation, imported and home-grown, is doing to us.

I’m sounding five short blasts!

 

 

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“Five Short Blasts” Theory Explained: Part 5A

July 28, 2008

This post is the fifth in a series of articles that explains the new economic theory I proposed in Five Short Blasts. If you haven’t read the previous articles yet, just go to “The Theory Explained” category of this web site. This series of articles will be archived there in reverse chronological order. Just scroll down to find the beginning of the series.

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In Part 4, we learned how the U.S. economy is feeling the effects of overpopulation, the effects predicted by the theory presented in Five Short Blasts – rising unemployment and poverty. We saw how these effects are accelerated by free trade with overpopulated nations, effectively importing their unemployment and poverty and exporting our jobs and financial assets. In essence, we are participating in a “misery-sharing” program, relieving overpopulated nations of their unemployment and poverty and taking it upon ourselves.

At the end of Part 4, I said that Part 5 would be the last in the series. Well, I soon realized that it would take much too long an article to do this final subject justice, so I will split it into Parts 5A and 5B. In these parts, we’ll examine policies that would reverse the damage done to our economy by our own overpopulation and by the imported effects of overpopulation, and we’ll begin with the latter – the trade deficit. Although the damage that’s been done is staggering and has brought our economy to the brink of total collapse, this damage could easily be unraveled in less than ten years.

How? Well, let’s begin by listing the actions that have proven to be failures over the past thirty-three years since our last trade surplus in 1975.

  1. Negotiating with our trade partners and relying upon their promises to consume more American goods.
  2. Filing complaints with the World Trade Organization about unfair trade practices and waiting for enforcement action, affording the offending trade “partner” time to come up with a new scheme for maintaining their trade surplus.
  3. Cajoling trade partners to stop manipulating currency exchange rates. Even if and when they do, nothing changes because the currency exchange rate isn’t the root cause of the trade deficit.
  4. Placing blind faith in economists who assure us that trade will return to a balance once our trade partners have become wealthy enough and begin to consume at the same rate as Americans. Decades of experience has proven them wrong.
  5. Fiddling with interest rates to stimulate the economy or to squelch the purchase of imports.
  6. Tax breaks to encourage corporations to invest in domestic production.
  7. Improving productivity, cutting costs, working smarter and all of the things that consultants come up with to make us more “competitive.” The American worker is working him/herself to death to be more competitive and it hasn’t made one iota of difference. Our trade deficit just gets worse.
  8. Job training programs. American workers have been trained and retrained more than circus chimps, but to no effect because the programs lack one essential ingredient – jobs that are going unfilled due to a lack of trained workers. Despite what some special interest groups may say, groups interested in importing more workers to keep the labor supply and demand balance in their favor, there are no such jobs. The end result is that the glut of labor is moved from one sector of the economy to the next, eroding wages in each as it goes.

Every one of these approaches has been tried repeatedly for decades, and matters have only gotten worse. None of these things have worked because none address the fundamental problem or address it in a way that puts control of the outcome in our hands instead of relying on our trade partners to solve our problem for us.

It’s time for the U.S. to take control and take actions that are assured to restore a balance of trade in manufactured goods. Notice that I have consistently qualified my discussion of the trade deficit to limit it to manufactured goods, and have consistently identified overpopulated nations as the source of the problem. Free trade in natural resources is indeed beneficial, as is free trade in manufactured goods between nations approximately equal in population density. A large, persistent trade deficit in natural resources, as in oil for the U.S., is not an indictment of free trade in natural resources. Rather, it’s a clear indication of a state of overpopulation. And a persistent trade deficit in manufactured goods with a nation of roughly equal population density isn’t an indictment of free trade, but a clear indication of being uncompetitive.

But when it comes to trade with overpopulated nations, it’s imperative that those nations compensate the U.S. for their overpopulation-induced inability to provide us with access to an equivalent market. The only way to accomplish this is with a return to the trade policies employed by the U.S. for the first 171 years of its history to build it into the world’s wealthiest and most envied nation – tariffs. It’s only through tariffs that the price of imports from overpopulated countries can be kept high enough to provide the profit potential motive for companies to manufacture products domestically, assuring a balance of trade. The best way to do this fairly is to implement a tariff structure that is indexed to nations’ population densities, assessing the highest percentage tariffs on products from the most densely populated nations. (This would also provide them with incentive to tackle their overpopulation problem.)

For example, we could structure a system of tariffs on manufactured goods that would tack on 5% for every increase in population density of 100 people per square mile. Every nation with a population density of 100 or less would be tariff free. (The U.S. is at 85 people per square mile.) Every nation with a population density between 100 and 200 people per square mile would be subject to a 5% tariff. Each with a density between 200 and 300 would be subject to a 10% tariff, and so on. Under such a tariff structure, China would be subject to a 15% tariff. Germany would be subject to a 25% tariff, Japan – 40%, Korea – 55% and so on. This tariff structure could be adjusted up or down based upon trade results. The goal, after all, is to achieve a trade balance, not a surplus and not to generate federal revenue. Isn’t it only fair to expect the rest of the world to buy as much from us as we buy from them? As long as a balance of trade is maintained, the tariffs could be steadily reduced, but immediately raised again if the balance begins to tilt back toward a deficit.

The beauty of such a system is that overpopulated nations are not prime sources of natural resources. So those nations who do supply us with natural resources would be mostly tariff free. There would be no tariffs on the natural resources and most would be free of tariffs on their manufactured goods as well. Consequently, they’d have no incentive to implement retaliatory tariffs. The only nations who would tend to retaliate would be those with whom we have large deficits and, in such a trade war, it is only the nation with the trade surplus who would come out the loser. We could simply match them tariff for tariff, effectively cutting off imports from that country. They may briefly attempt such a foolish move, but would soon realize that some exports to the U.S. are better than none at all.

Such a system would have to be implemented slowly, ratcheting up the tariffs a little at a time, affording domestic industry the time needed to recognize the new profit potential in manufacturing in the U.S. and implement plans to build new capacity here. For example, since we still have domestic auto manufacturing capacity, it could be ramped up very quickly to meet new demand. But it may take years to restore our capacity to manufacture electronics products. Also, it’s critically important to implement tariffs across the board, and not product by product. For example, early in the administration of President Bush, he imposed tariffs on steel to help the domestic steel industry survive. But soon, domestic auto manufacturers complained that they were being made uncompetitive by high steel prices. An across the board tariff system would have prevented this problem.

Ultimately, I believe this nation would be well-served by amending the constitution to forbid running a persistent trade deficit. Our founding fathers probably couldn’t envision that our nation’s leadership would ever be so stupid as to allow such a situation to persist. If they were here today, they’d probably have such an amendment drafted and ready to submit to the states for ratification by tomorrow.

That’s the solution to the trade deficit – the importation of unemployment and poverty from overpopulated nations. In Part 5B, we’ll tackle solutions to the problem of overpopulation right here at home.


“Five Short Blasts” Theory Explained: Part 4

July 25, 2008

This post is the fourth in a series of articles that explains the new economic theory I proposed in Five Short Blasts. If you haven’t read the previous articles yet, just go to “The Theory Explained” category of this web site. This series of articles will be archived there in reverse chronological order. Just scroll down to find the beginning of the series.

* * * * *

In Part 3, we visited a hypothetical world and learned how an expanding population density, beyond a certain point, actually begins to drive down per capita consumption. Coupled with rising productivity, the inevitable consequence is rising unemployment and poverty.

As we went through that hypothetical example, did the situation sound familiar? Let’s leave that hypothetical world and return to the real world of the 21st century on planet Earth. Consider the fact that the U.S. population has doubled in the last fifty years and continues to grow at a rate that adds a new Chicago to the U.S. population every year. Take a look around and take note of crowding at work. Apartment and condo buildings are displacing single family homes. More people give up their cars as roads become choked with traffic. There’s more crowding everywhere you look – schools, parks, beaches, shopping centers, golf courses, airports, marinas – everywhere.

Now think beyond the U.S. Did you know that the population of the rest of the world is growing even faster than in the U.S.? It’s adding enough people to fill a large NFL stadium every eight hours – enough to fill a new Chicago every ten days – enough to fill another California every four months. There are many countries that are far more densely populated than the U.S. China is four times as densely populated. So is almost all of Europe. Japan is ten times. Korea is almost fifteen times. Taiwan is almost twenty times. Bangladesh is thirty times. Imagine what such extreme population densities have done to their per capita consumption. It’s very low.

I’ll share with you just one example from the book – an example of what happens to per capita consumption as population density rises. Figure 5-2 is a chart of dwelling floor space per person as a function of population density. Our dwellings are the largest, most important products that most of us will ever own. You only need to look at what’s happening in America’s economy today to get an appreciation for what a downturn in the housing industry can do to an economy.

figure-5-2

As you can see, the decline in the per capita consumption of housing is dramatic as population density rises. In Japan, a nation ten times as densely populated as the U.S., their per capita consumption of dwelling space (the size of their homes) has been cut by 70% from the level that we enjoy in the United States, due to nothing but overcrowding. The U.S. economy has been crippled by a decline in the housing industry of only a few percent. Imagine what would happen if it declined by 70%!

I found the same pattern with every product for which I was able to find data. The decline in per capita consumption was greatest for the largest products, the ones that would be most susceptible to elimination in overcrowded conditions. I could not find one product for which per capita consumption increased with a rising population density.

So my theory is this: that as population density rises beyond some optimum level – the level at which people are forced to begin crowding together – per capita consumption begins to decline. And when falling per capita consumption collides with rising productivity, the inevitable consequence is rising unemployment and poverty – a slow but steady erosion of the standard of living and quality of life. It is this collision that I warn of with Five Short Blasts. (Read the preface for an explanation of the book title.) This theory can be graphically represented as shown in Figure 7-7:

figure-7-7

However, if you try to analyze each country individually for the effect of this theory, you will soon come to the conclusion that it doesn’t work. For example, consider once again Japan. In spite of being ten times as densely populated as the United States, they enjoy even lower unemployment than we do.

The reason for this seeming failure of my theory lies in our definition of “country.” We tend to think of a country in geographic terms, a land defined by borders – lines on a map. But in economic terms, those borders are erased when nations engage in free trade with each other. It’s the reason that everyone in the United States enjoys the same standard of living, whether they live in a sparsely populated state like North Dakota or a densely populated state like New Jersey.

So economic borders and the effects of population density have been blurred by globalization. But we should be able to find those effects in our trade results. Let’s stick with our example of Japan. What would this theory predict about our trade results with Japan? Well consider what happens when we engage in free trade with a nation that is much more densely populated. Our economies combine, as do our labor forces. The work of manufacturing is spread evenly across this new labor force. But, while the labor force of Japan gets free access to our healthy market, where over-crowding has not yet taken much of a toll on per capita consumption, all American workers get in return is access to a market that is badly emaciated by overcrowding and low per capita consumption.

The net result is an automatic trade deficit and loss of jobs to the Japanese work force. Our trade deficit in manufactured goods with Japan is approximately $100 billion per year. It may be easier to comprehend if you consider the extreme. If per capita consumption of some product in Japan is zero because of their over-crowding, then when we engage in free trade with them, they will take a big share of our market while we get nothing in return.

So if we examine our trade results, we should find a strong relationship between a high population density and a trade deficit. In fact, using our trade results for 2006, we find that, of the top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations more densely populated than the U.S. Thirteen are with nations at least twice as densely populated. Seven are with nations at least five times as densely populated. And it doesn’t matter whether these nations are rich or poor. Some of our biggest per capita trade deficits in manufactured goods are with wealthy nations like Ireland, Japan, Taiwan, Switzerland, Malaysia, Germany, Korea, Italy and others.

Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Look back again at Figure 7-7. In the case of our trade with these overpopulated nations, the U.S. is represented by “Nation A.” A more overpopulated nation is represented by “Nation B.” When we engage in free trade with them, the standard of living gravitates toward a point represented by “C.” For us, our standard of living declines. For them, their standard of living is improved, in some cases dramatically. As we trade with more and more such countries, point “C” slides ever further down the curve.

This is precisely what is happening in the U.S. today. As we add each nation to the free trade gravy train, our per capita consumption is effectively lowered more and more, driving unemployment ever higher, and driving wages and benefits steadily downward. Some things become ever more unaffordable – the things that outpaced the average rate of inflation – things like health care, education, retirement and so on. The government tries vainly to compensate by cutting interest rates, spreading printed money like pixy dust and cutting lending standards. All of it is financed by a sell-off of American assets. And still our problems grow. Yes, our own problem of growing overpopulation is nibbling away at our economy in the same fashion, but the effects of rising unemployment and poverty have been shifted into “warp drive” by importing overpopulation through our misguided trade policies.

But while our economies combine as described above, they remain very much economically divided along geographic boundaries in another way – the way in the trade imbalance is financed. Our trade deficit is all financed by a sell-off of American assets – treasury bills and corporate stocks and bonds. Everything in America is for sale, steadily shifting control of all of our public and private institutions into the hands of foreign owners and just as steadily draining away all of our assets. In the meantime, foreign countries are building a mountain wealth. They get all of the benefit. We get all of the debt.

Many look to the falling dollar to reverse this trade imbalance. It won’t work because the trade deficit has nothing to do with currency valuation. Exporting countries won’t cede their share of the U.S. market just because of falling profits. They simply get aggressive about cutting costs and margins to maintain their share. Rather, the trade deficit is rooted in this discrepancy in population density and per capita consumption between the U.S. and so many of our grossly overpopulated trading “partners.”

So what’s to be done? That’ll be the focus of Part 5, the last in this series of articles.


“Five Short Blasts” Theory Explained: Part 3

July 22, 2008

This post is the third in a series of articles that explains the new economic theory I proposed in Five Short Blasts. If you haven’t read the previous articles yet, just go to “The Theory Explained” category of this web site. This series of articles will be archived there in reverse chronological order. Just scroll down to find the beginning of the series.

* * * * *

In Part 2, we debunked the myth that improvements in productivity drive incomes higher. Instead, we found that it is only a growing demand for labor (growing faster than the supply) that will drive incomes higher. What’s critical is that per capita consumption keep pace with productivity (which is per capita output). Otherwise, wages will begin to decline and unemployment and poverty will rise, resulting in a declining standard of living. I closed Part 2 by claiming that there is something at work in the economy that is doing just that – driving down per capita consumption.

Actually, there are three constraints on per capita consumption:

1. First of all, income is obviously a constraint. You can’t consume more than you can afford to buy. Well, not for long, at least. You can borrow money and consume beyond your income, but that’ll catch up with you at some point. Anything that tends to reduce incomes or creates the perception of having less money to spend will tend to drive down per capita consumption.

It’s this constraint that gets all of economists’ attention. They use macroeconomic measures to determine our overall ability to consume – measurements like store sales, total consumer spending and so on. If these start to lag, the Federal Reserve will lower interest rates to boost your perception of how much money you have to spend.

2. A second constraint is resources. We’re beginning to see this with oil. The world is starting to run short; prices are rising and people are forced to cut back on their driving, reducing the per capita consumption of oil in the U.S. Economists recognize this constraint but pay it no mind. They shrug it off with the assertion that market forces will drive higher efficiency, recycling and substitution to off-set the shortage. Why are they so glib about resource shortages? Because an economist named Malthus raised alarm about this very issue over 200 years ago. But when crop yield grew even faster than the population, he was mocked as a sort of “Chicken Little,” and his theory led others to dub economics “the dismal science.” In spite of the fact that Malthus was not wrong, but merely ahead of his time, anyone who dares to suggest that resource shortages could become a problem is immediately branded a “Malthusian” and dismissed by economists.

3. There is a third constraint which no one recognizes, and it is this constraint which is at the heart of the theory I’ve presented in Five Short Blasts. That constraint is space – the finite, inhabitable land space available, whether in a country, a continent or the earth as a whole. You’re probably wondering how that could possibly be a constraint on per capita consumption. The best way to illustrate this may be to use a hypothetical example.

Picture in your mind one relatively large island in a world that is otherwise covered by sea. And let’s say that half of this island is available for housing for its citizens. The other half is used for farm land, mining, parks, infrastructure and so on. When this island is relatively sparsely inhabited, each family, on average, lives in a 2,000 square foot single-story house on a 1/4-acre lot. On average, each homeowner has a two-car garage and his/her family owns two cars. Each has an assortment of gardening tools for maintaining their lawns, shrubs and gardens. Some have larger, houses, more cars and bigger lots. Some smaller and less. But, on average – in other words, in per capita terms (the number of things owned per person) – this is the way it works out. Also, on average, each family consists of four people and one of them is a worker, providing the family’s income.

Over the course of many years, the population of this island rises to the point where the land available for housing, 50% of the island, is now fully occupied. But still the population grows. No problem. The average lot size, at 1/4 acre, is relatively large. Developers find that they can build the same size houses on smaller lots. The smaller lot sizes actually make the homes more affordable. But what happens to the consumption of gardening tools? Some people have started buying less, because they don’t need as much for their small lots. So, although total sales still grow, in per capita terms a slow decline has begun.

As population growth continues further, even the smaller lot approach becomes unsustainable. Another developer comes up with a brilliant solution – stack the houses vertically! Everyone can still have 2,000 square foot homes, but now some live in apartment buildings. Although the apartment owners are only allotted one parking spot each, the elimination of yard work altogether is a counter-balancing selling feature.

So the per capita consumption of gardening equipment declines further. And now the per capita consumption of cars has begun to decline as well. And consider this: although the square footage of homes remains unchanged, what has happened to the per capita consumption of building materials required to construct them? For example, with several homes now under one roof, the per capita consumption of roofing materials has gone into decline. So too has the per capita consumption of concrete and rebar used in the foundation. And, eventually, as the population grows more, the apartment sizes are getting smaller. Now the per capita consumption of everything used to build and furnish housing is in decline.

And think beyond the homes and cars. As this island became more densely populated, the per capita consumption of infrastructure like roads, pipelines, transmission lines and power lines also declined. So too has the per capita consumption of playground equipment and fencing in the parks. And once all of the boat slips in the marinas were filled, the per capita consumption of boats declined too.

At the same time that per capita consumption is declining across the board on this island, the per capita contribution to the labor force remains the same – one out of four people. The productivity of the workers on this island has remained the same or improved. That, coupled with declining per capita consumption, means that the demand for labor is falling. This falling per capita consumption, in the face of steady or rising productivity, is rapidly driving up unemployment and poverty. Voters’ approval rating of the government of this island is slipping.

Now, let’s step back and look at the situation on this island from two different perspectives: as seen through the eyes of the CEO of the company that builds cars on this island, and as seen through the eyes of one of his auto workers. The CEO sees that, as the population grew, car sales rose proportionately. At some point, though, the growth in sales slowed – continuing to rise, but not at the same rate. Nevertheless, sales are still rising and the CEO is quite pleased.

What the auto worker sees is that, thanks to rising productivity, employment in the car company held steady while sales volume continued to rise. In spite of this productivity improvement, the company began cutting wages and benefits. Why? Because, for some strange reason, unemployment was on the rise and, with surplus workers in the labor market, the competition for jobs at the car company was growing more intense. With unemployed workers willing to take jobs at the car company for less pay (some pay is better than none, after all), this is putting downward pressure on wages.

Finally, let’s view this situation from the perspective of an economist working for the government. What you see is that, despite total growth in GDP on this island, unemployment is one the rise. You consult with the CEOs of various companies, including the car company, and all tell you the same thing: “We need more growth!” Remember, as an economist, you don’t measure or study per capita consumption and have no reason to think that it might be declining. Your training tells you that, to stimulate growth, you need to pump more liquidity into the economy. You need to lower interest rates and make more money available for lending. And a little more population growth would help too. And, in fact, this may actually work for a while. But the problem keeps coming back. So you lower interest rates further and get more creative with lending standards. And the government offers job retraining programs to unemployed workers.

This all sounds quite familiar, doesn’t it? In Part 4, we’ll leave behind this once-idyllic hypothetical world, return to the 21st century on planet Earth, and see how this same situation may be playing out here.


“Five Short Blasts” Theory Explained: Part 2

July 20, 2008

This post is the second in a series of articles that explains the new economic theory I proposed in Five Short Blasts. If you haven’t read Part 1 yet, just go to “The Theory Explained” category of this web site. This series of articles will be archived there in reverse chronological order. Just scroll down to find the beginning of the series.

* * * * *

In Part 1, we boiled down GDP, economists’ favorite measurement of economic growth, and found that every bit of the growth in per capita chained GDP is accounted for by gains in productivity. Only if those gains are accompanied by real increases in income (adjusted for inflation), as politicians, business leaders and economists say they are, will our standard of living rise. But I ended Part 1 by claiming that this is not true. There is no correlation between productivity improvement and wages. It’s something else that drives increases in income. In this article, I’ll explain.

The U.S. Department of Labor’s Bureau of Labor Statistics in 1987 began publishing compensation data for hundreds of categories of labor involved in a wide range of industrial activities like manufacturing, wholesaling and retailing, among others. They report on compensation, productivity, hours worked, and so on. I plotted the data for compensation vs. productivity as shown in Figure 1-5.

Figure 1-5

I was quite surprised at what I found. There was no correlation whatsoever. None. The chart looked like a shotgun pattern. Increases in productivity were no more likely to produce a gain in income than a decrease, and vice versa. In fact, the biggest gain in productivity since 1987, in NAICS code 3341, the manufacturing of computer equipment, a productivity gain of 3,800%, actually yielded a 24% decline in compensation.

It makes sense when you think about it. If productivity is improved and a product can be made with less labor, what is the employer’s motivation to pay his workers more? His need for labor just went down. He just tossed some workers back into the labor pool, increasing the competition for jobs. He can now get away with paying them less, not more.

Does that mean that productivity improvement is a bad thing? Not at all. It’s human nature to find ways to accomplish work more efficiently. It’s productivity improvement that keeps companies competitive with each other, and it keeps our nation competitive with others in global trade. It allows for an improved standard of living by freeing up labor to work on unmet needs and challenges. But, clearly, it’s not what drives incomes higher.  There must be something else. 

But as I compiled the data for Figure 1-5, I noticed what seemed to be a better correlation between compensation and another variable – total hours worked. So I decided to try a plot of compensation vs. percent change in total hours worked. The result is Figure 1-6.

Figure 1-6

Again I was surprised, not so much that there was a correlation but at how strong that correlation was. It’s rare to see such a powerful relationship. But when you think about it, it makes sense. The percent change in total hours worked is simply a measure of the demand for labor. If it’s rising, then employers must compete for those workers and offer them higher wages to attract and keep them. If the demand for labor is falling, then there will be an overabundance of those workers and employers can pay them less. It’s the old law of “supply and demand” at work, the most basic precept of economics.

Speaking of “supply and demand,” we can’t forget about the “supply” side of that equation. I need to modify my above conclusion. If the demand for labor is growing faster than the supply, only then will an increase in compensation be the result. If the demand for labor grows, but not as fast as the supply, then we will actually see compensation slowly decline.

Now the question becomes, “what is it that drives the demand for labor?” It’s people who consume workers’ production. If they want more of that particular product, then the demand for labor to produce that product will go up. If we double the number of people who use that product, then the demand for labor to produce that product will also double.

Or will it? We have to remember that workers and consumers all come from the same pool of people. If we double the population, then not only have we doubled the number of consumers but we’ve also doubled the number of laborers too, more or less. What happens if the ratio doesn’t stay the same? What if consumption, for some reason, doesn’t keep pace with the growth in the number of workers? Then the demand for labor needed to produce that particular product will decline. If there isn’t a corresponding increase in the demand for workers to make some other product, then the overall demand for labor across the total spectrum of products will decline, which will begin to drive down wages for everyone. That would be a very bad thing with lots of bad consequences – rising unemployment and poverty, and all of the other side effects that accompany them, things like increased social spending by government (funded by higher taxes), a rising crime rate, and so on.

The only meaningful way to gauge how we’re doing in the “supply vs. demand” equation for labor is to look at everything in per capita terms; that is, we need to compare how the average person’s consumption of products stacks up against his average contribution to the labor force. If that ratio begins to decline, we’ve got a problem. If, on average, people begin to consume less while their per capita output (another way of saying “productivity”) rises, then we have an economically unsustainable situation.

Let’s consider an example. Suppose we have a population of 1,000 people and, on average, each person consumes one widget per year. Five hundred of these people are workers, while the other five hundred stay at home for various reasons. The productivity of these workers is such that each worker is able to produce two widgets per year. Supply and demand are in perfect balance. 1,000 widgets produced. 1,000 widgets consumed.

Now, suppose that we add another 1,000 people to the population, including the addition of 500 more workers but, for whatever reason, these added people are only able to consume one half of a widget per person on average. What will happen? Well, total widget demand will rise to 1,500 widgets. If you’re the CEO of The Widget Company, you’re very pleased with this huge increase in sales. But what if you’re one of the workers? The potential output of the workers has risen to 2,000 widgets, while the demand has risen to only 1,500. What will happen is that 25% of these workers will be out of a job. Again, the CEO of The Widget Company likes this situation. The oversupply of labor means he can pay less and make more profit on each widget he sells.

In this example, the per capita consumption of widgets fell from 1.0 to 0.75, while the per capita output (or productivity) held steady at 1.0 (2.0 per worker, which is 1.0 “per capita”). Per capita consumption declined while productivity remained unchanged. The result was rising unemployment.

This is why it’s important to track everything in per capita terms, both per capita consumption and the per capita demand for labor. It’s this balance that sustains our standard of living. If it gets out of balance either way, it can raise or reduce our standard of living. Now, throughout nearly all of human history, if productivity improvement freed up workers in one field, there was another product need that was going unmet due to a lack of workers. When cave men pooled their resources and became more efficient at hunting and gathering, someone was freed up to begin inventing the wheel. When they became more efficient at making wheels, then someone was freed up to begin making copper tools, and so on.

But what would happen if that reached a limit? What if per capita consumption couldn’t keep pace with the rise in productivity? Worse still, what if per capita consumption actually began to decline for some reason? We already know what would happen – rising unemployment and poverty, and everything that goes along with it. I think we can all agree that, from an economic perspective, anything that would drive down overall per capita consumption would be a bad thing, something to be avoided, something to be corrected if it took hold.

There is something that is doing exactly that, driving down per capita consumption, slowly but surely and dramatically, here in the United States and across the globe. In Part 3 we’ll find out what that is.


“Five Short Blasts” Theory Explained: Part 1

July 19, 2008

This post is the first in a series of articles that will explain the new economic theory I proposed in Five Short Blasts. With readership of this blog expanding dramatically, I want everyone to have the opportunity to understand this important new theory. Do I like selling books? Sure, but that wasn’t my motivation for writing it. My primary interest is in spreading the word about this new theory and its ramifications for public policy issues that are scarcely being addressed, if at all. Nothing less than the “American way of life” is at stake. If you’re someone interested in globalization, trade, overpopulation or immigration, I think you’ll find this series most interesting. The connection may not be apparent at first, but stick with me. With that said, let’s get started!

* * * * *

Out of necessity, our nation’s economic leaders, including our top economists, put all of their focus on macroeconomic measurements. They can’t be that concerned with “microeconomics” – the economies of individual citizens – because there are over 300 million of us. You and I would be dead long before they got around to paying us any attention! So they put all of their faith into the precept that if the overall economy is growing then, on average, our citizens will prosper too. On the surface, it seems to make sense. It’s held true throughout most of human history. Notice that I said “most.” Is it possible that there could come a time when macroeconomic growth – growth of the total economy – could actually become harmful to individual citizens’ standard of living? That seems counter-intuitive, doesn’t it? Economists would sneer at such a suggestion.

But I’m already getting ahead of myself. Let’s get back to measurements of economic growth and begin with a look at economists’ favorite measurement, Gross Domestic Product, or GDP. It’s the measure of all of a nation’s economic activity. It doesn’t matter if it’s beneficial or harmful activity. The cost of educating a student gets added to GDP. So does the cost of incarcerating a criminal. The cost of building a new car is added to GDP. So too is the cost of junking it.

So how has America been doing as measured by GDP? Great! Since 1962, our economy has grown at an annual rate of 7.3%, expanding from less than $600 billion per year in 1962 to $13.25 trillion in 2006. Wow! That means that Americans are twenty-two times as wealthy as they were in 1962, right? Uh, no.

A big part of this “economic growth” is nothing more than inflation, which helps no one. Since 1962, the Consumer Price Index, or “CPI,” has risen by a factor of 6.7. Take inflation out of the equation, and we find that “chained GDP,” GDP adjusted for inflation, is about four times what it was in 1962. By the way, I should point out that CPI is a price index, not a measure of the cost of living, which it actually understates. “But still,” you’re probably thinking at this point, “that’s pretty phenomenal economic growth.” “We’re still four times richer than people were in 1962! Right?” No.

We haven’t yet taken population growth into consideration. Population growth isn’t true economic growth. It’s contributes to the size of the overall “economy” but, beyond a certain optimum level (a concept we’ll explore in more detail later), does nothing to raise individuals’ standard of living. That is, if I apply the same economy to a population that is double the size, I still have the same economy from an individual point of view. The economy will be twice as big, and it will double the sales volume and profits for corporations, but for individuals it will have no effect on their incomes. From 1962 to 2006, our population grew from 186 million people to 299 million, a 60% increase. Factor this out of “chained GDP” and we arrive at a figure known as “per capita chained GDP” which, since 1962, has actually increased by 161%, an annual growth rate that is now down to 2.2% from the original “GDP” figure of 7.3%.

Well, OK, but we’re still 161% wealthier than folks in 1962. That’s not as exciting as being 2200% wealthier, like the raw “GDP” data would have suggested, but it’s still a decent increase, right? I mean, we’ve adjusted GDP for inflation and population growth. What else could there be?

Productivity. Every bit of this 161% increase in per capita chained GDP is due to productivity improvement – the amount of economic output per person. Finally, some good news here! We all know that increases in productivity lead to higher wages. At least that’s what everyone says – our politicians, our business leaders and especially economists.

Really? Are you that much wealthier than someone who did the same job as you back in 1962? Well, if you’re a top corporate executive, almost certainly. The rest of us? Probably not. Are you any wealthier at all? Maybe. Maybe not.

That is what everyone says – that productivity leads to higher wages. But it’s not true. There is absolutely no correlation between productivity improvement and higher wages. Productivity improvement does nothing to drive wages higher. If anything, it tends to drive wages down. Something else drives wages higher. Something that we’ll explore in Part 2. Stay tuned!


“Five Short Blasts” Theory Explained

July 18, 2008

I’ve had an almost a single-minded focus on our trade deficit lately, and for good reason.  It’s impossible to overstate its role in ruining the U.S. economy.  But I think it’s time to shift gears.  Readership of this blog has been growing nicely since I moved the site to WordPress and I’m sure that a lot of readers haven’t read my book, Five Short Blasts.  I think this may be a good time to back up and explain the theory.  This is going to require a series of posts which I plan to write over the next couple of weeks.

It’s going to be fun.  This will involve debunking a lot of economic myths that have been spread by economists who refuse to give consideration to what may be the most important economic parameter.  It will necessarily be a very abridged version of the explanation given in the book but I think that I can do it justice in a series of articles.  So stay tuned!  If you haven’t read the book, you won’t want to miss this series!  Just subscribe to the RSS feed if you want to be alerted each time a new article appears.  And if you have questions about any of it, just put your question into a “comment” at the end of the article.  I’ll answer each and every one.  There are no stupid questions.  This is a brand new economic theory.  You won’t find it any place but here. 

The first article will be posted very soon.