Economist: “U.S.-China trade is almost a one-way street.”

February 15, 2013

In the face of persistent, enormous, destabilizing global trade imbalances that grow worse with each passing year, is it possible that economists are beginning to acknowledge what seems obvious to everyone else – that maybe free trade doesn’t necessarily benefit both parties?  That’s what Chrystia Freeland, Reuters editor, reports in the above-linked article. 

Ms. Freeland recounts her interview with David Autor, an MIT economist and reports on the work he has done with two colleagues:  David Dorn of Harvard and Gordon Hanson of the U. of  California.  The trio of economists comes right out and admits that trade with China has cost America manufacturing jobs – lots of them.  These economists evaluated the effects of two factors on the economy – technology and trade.  They found that while technology tends to push jobs to the upper and lower ends of the spectrum, it has no impact on overall employment.  However, they found a big impact from trade:

The big surprise, at least for believers (like me) in the classic liberal economic view that trade benefits both parties, is the strong and negative impact of globalization on U.S. workers — Autor estimates it accounts for 15 to 20 percent of jobs lost.

… What is striking, and frightening, is the extent to which, at least in the U.S.-China trade relationship, the knee-jerk, populist fears intellectuals tend to deride actually turned out to be true.

“U.S.-China trade is almost a one-way street. This trade relationship doesn’t clearly give you the benefit that you can sell a lot of stuff to your trade partner,” Dorn said. “If you talk to someone who is somehow involved in the promotion of free trade, they may say that maybe the headquarters of Apple (AAPL.O) benefits. That may be true. But the first-order effect is of job loss.”

In Five Short Blasts, I wrote of a divergence of interests that takes place once a “critical” population density is breached – that point at which overcrowding begins to erode per capita consumption.  It’s in the best interest of corporations to continue to benefit from the growth in total volume that accompanies population growth, while it’s not in the best interest of those suffering the effects of diminished ability to use (and thus manufacture) products.  These economists recognize this divergence of interests:

What is challenging about both of these trends, and what makes the hollowing out of the middle class a political problem as well as an economic one, is how different they look depending on whether you own a company or work for one.

Ms. Freeland concludes with this:

Capitalism and democracy are at cross-purposes, and no one yet has a clear plan for reconciling them.

Among the cracks developing in globalization, this is a big one – when the field of economics begins to doubt the basic premises upon which it was built.  I’ve been saying for a long time that there are no solutions to be found among politicians.  It makes absolutely no difference which party, Democrat or Republican, has their hand on the helm of the economy when both take their advice from economists who, while tilting slightly left or right, adhere to the same basic principles, especially when it comes to free trade.  Nothing will change until the field of economics changes.  Perhaps that’s beginning to happen.

U.S. Birth Rate Falls to Record Low

December 8, 2012

This story (link provided above) came out while I was traveling last week, so I’m just now getting around to it.  It’s far too important to let pass without comment.  As reported by the Pew Research Center, the birth rate among women of child-bearing years (ages 15-44) fell to 63.2 births per 1,000 women, half the rate of 1957 and the lowest since record-keeping began in 1920.  This is great news for the economy (as I explained in Five Short Blasts and as further explained on this web site), and it’s great news for anyone concerned about the other challenges that overpopulation presents – global warming, resource depletion and environmental degradation.  Of course, this good news can (and likely will) be undone by misguided legislators, following the advice of their economists, by compensating with increased immigration and legislation that encourages a higher birth rate. 

I won’t rehash in this post how a lower birth rate is good news for the economy.  But the story and some reaction to the story do merit comment.  First of all, the final sentence in the above-linked story summarizes well economists’ reaction to such news: 

The Post (The Washington Post) writes that “… A continuing decline would challenge long-held assumptions that births to immigrants will help maintain the U.S. population and provide the taxpaying workforce needed to support the aging Baby Boomer generation.”

Economists believe that each succeeding generation needs to be bigger than the one that preceded it in order to support the older generation in retirement without placing too much burden on the younger generation.  Never mind the fact that economists don’t understand what an overcrowded population does to harm the economy.  The folly of such an approach is obvious to any thinking person who understands that it’s impossible for the population to grow indefinitely and, when it does stop, we’ll be left with the same problem, but on a much larger scale. 

Secondly, the report notes that the decline in the birth rate is led by a sudden plunge among immigrant women – especially among Mexican women – with the onset of the recession a few years ago.  This proves that economics is a major factor for families in deciding how many children to have.  And it proves that the approach I advocated in Five Short Blasts for reducing the birth rate to a level consistent with a stable population – using tax policy to encourage a slightly lower birth rate – would likely work very well.  There’s no need to resort to the clumsy, authoritarian tactics employed in places like China and India.  Just make it a little more expensive to have large families and leave people free to decide for themselves how many children is the right number for them. 

Then there’s this reaction from Reuters columnist Chrystia Freeland.  It begins with the observation of some of the more ridiculous misconceptions about birth rates:

“… for a long time, the United States has watched declining birthrates in places like Western Europe, Russia and even China with an air of superiority. The United States, lusty and fertile, was bucking the demographic trends.”

How exactly is a high birth rate any indication of “superiority?”  Do unborn fetuses decide to migrate to the wombs of mothers in the U.S. because it will be a better place to live?  Not likely.  Equating a high birth rate with any sort of “superiority” flies in the face of the facts.  A high birth rate characterizes the worst hell-holes in the world.  The nations with the top five birth rates are Niger, Mali, Uganda, Burkina Faso and Zambia – among the poorest nations on earth. 

Nevertheless, this is a common attitude.  Every city points with pride to its population growth as some sort of evidence of its superiority to other cities – as evidence that it’s a better place to live.  No one ever notes that nearly every city is growing in population at the same rate and that, if they keep it up, none of them will be a good place to live.

Later in the article, Ms. Freeland notes another prominent attitude toward birth rates:

Kotkin (Joel Kotkin, author of a study of birth rates for the Civil Service College of Singapore), for example, sees the falling birthrate as the central feature of what he calls “post-familialism,” a new form of social organization that prizes liberation, personal happiness and perhaps even a “hip” urban aesthetic over the more traditional values of community and self-sacrifice.

So, somehow, a lower birth rate is associated with selfishness and a turn away from traditional values?  How did overpopulation ever become a “family value?”  Is it not possible for small, one and two-child families to embrace “traditional values” in the same way that they are embraced by larger families? 

Ms. Freeland concludes her piece by arguing in favor of women using their wombs and a lower birth rate as leverage women can use in their quest to become “full members of society.”  (I’m now banging my head on the desk.)

Failures of Economics

April 2, 2012

I found this Reuters op-ed piece by Chrystia Freeland interesting, not so much because of the reported championing of manufacturing by the director of the National Economic Council, but because it sheds light on some fundamental flaws in the field of economics.  The following sentence near the end of the piece sums it up well:

Unless you have a doctorate in economics, your intuition probably accords with Sperling’s point that building things is essential to a country’s economic well-being.

Economics is all about meeting wants and needs.  Vital economies are built around the processes of meeting those wants and needs.  It’s intuitively obvious that manufacturing plays a key role in that process.  But not to economists, for that doesn’t accord well with the real results of the practical application of their free trade theory.  How to explain away that failure?  They do it by mis-applying another theory – creative destruction.  It seems we are to believe that, through the process of creative destruction, new needs (apparently for services) will materialize out of thin air to fill the void created when the manufacturing sector of the economy was carved out and handed over to someone else.

That begs the question:  if such needs for services can materialize and result in an economy that was better than the one that relied on manufacturing, then why didn’t China (and Japan and Germany and others before them) build their economies around those needs for services, instead of plundering the manufacturing sector of our economy?  (See my comment on the op-ed piece – the 6th comment down – for more thoughts on the subject.)

And speaking of “creative destruction” – the process by which each product and service is eventually replaced by one that is more efficient and requires less labor to create and utilize – what will people do for a living, ultimately, when every product and service can be made available without any labor input at all?  It’s like other axioms of economics – that economic growth can go on indefinitely in a finite world, that mankind is clever enough to overcome every obstacle to further population growth, and so on.  Every one of them fails when tested at its limits.

How do economists respond to such challenges?  By changing the subject.  They’ve moved on from such matters to new distractions, like “game theory” and “behavioral economics.”   They can’t be bothered with the shortcomings and failures of classical and neo-classical economics.  Those issues are so “yesterday.” 

So our political leaders are stuck with failed economic axioms to guide economic policy.  Although it was obviously failed trade theory that decimated the manufacturing sector of our economy, we dare not admit to such and alter trade policy, for that would constitute an admission of failure and a case for rethinking trade theory altogether, something economists simply aren’t willing to do.  Better to tinker at the margins, boosting tax breaks for R&D and manufacturing, as though our entire manufacturing sector fled the U.S. because their insignificant tax breaks were infinitesimally too small. 

It never ceases to astonish me that, in the 21st century, the field of economics still gets a free pass on its obvious and numerous failures. 

* * * * *

Another commenter on Freeland’s piece provided an interesting link that will be the subject of my next post. 

Another Crack in Globalization

April 19, 2011

For me, this is exciting news!  (Though many may conclude that I’m too easily excited.)  In the above-linked editorial, Reuters writer Chrystia Freeland tells us of a just-released report that concludes that global capitalism hasn’t worked for middle-class America.  That may not sound like an earth-shaking conclusion since it seems so obvious to so many of us.  But what’s newsworthy is the source of the report.  It’s not from some left or right-leaning think tank or someone whose interests are served by reporting such a conclusion.  It comes from a Nobel prize-winning economist who would never have expected such a result.  Ms. Freeland says it best in her opening paragraph:

Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations.

Ms. Freeland continues:

The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.

I have further news for Ms. Freeland.  Not only is the middle class struggling in America, so is the lower class and so is much of the lower ranks of the upper class.  Virtually everyone is finding things tougher, with the exception of the richest of the rich. 

For someone from the field of economics, so heavily invested in promoting and praising the process of globalization, to come to this conclusion is truly significant.  And, what’s even more satisfying to me can be found near the end of this article.  It seems that Michael Spence, one of the authors of this report, is at a loss to explain the results.  Most gratifying of all is the final paragraph:

Spence is honest enough to admit that he has no easy answers. But he has posed the right question. American politicians in both parties are focused on a budget debate that is superficial, premature and ultimately about something pretty easy to figure out. Instead, we should all be working on the much bigger problem of how to make capitalism work for the American middle class.

Just as important as the fact that a prominent economist has now published a study that debunks the promised benefits of globalization is the fact that a journalist like Ms. Freeland doesn’t challenge the conclusions of the report and rush to the defense of globalization.  Instead, she acknowledges the truth and suggests that it’s time to do something to make capitalism our servant again instead of our master.

Is this not what I’ve been saying all along?  On page 245 of Five Short Blasts, while envisioning a more enlightened future, I spoke of the establishment of new boundaries on capitalism to preclude the use of trade deficits and population growth to pump up sales volumes and stock valuations.  (Thus, the 28th and 29th amendments I’ve proposed on this blog.)

And I’ve been steadfast in maintaining that all other issues pale in comparison to the need to deal with our trade and population (primarily immigration) issues.  It was only earlier this month that I said exactly what Ms. Freeland said – that the budget and debt battles pale in comparison to the need to address this more fundamental issue.   

While I see no evidence of any understanding about the role of population density in eroding per capita consumption and driving up unemployment and how it factors into trade, the world is indeed inching closer to the realization that, for whatever reasons that it can’t yet understand, the process of globalization, rooted in free trade theory, is fundamentally flawed.  World leaders correctly recognized the role of global trade imbalances in collapsing the global economy.  To the chagrin of export dependent nations, the G20 is now focused on ways to eliminate those imbalances.  The World Trade Organization’s process of expanding its trade regime has ground to a complete halt.  And now prominent economists are admitting that, contrary to their claims that freer trade would benefit all, it doesn’t.  The tide is turning, ever so slowly, against the trade policies and their underlying economic theories that have brought America to near-ruin. 

* * * * *

Buried amongst the many comments on the piece, you’ll find one that I wrote.  The following was my response:

 Globalization is a fancy name for the process of implementing free trade that began in 1947 with the signing of the Global Agreement on Tariffs and Trade (GATT), forerunner of today’s World Trade Organization. At that time, free trade advocates got the upper hand of trade policy and convinced world leaders that we’d all be better off if each nation put aside trade policies based on their own self-interest and put to the test on a global scale the unproven “principle of comparative advantage,” a free trade theory developed by British economist David Ricardo in 1812.

 Basically, Ricardo said that each nation benefitted if it concentrated on what it did best and traded that product for others made best by other nations. A key stipulation was that each nation had to maintain full employment, and that workers displaced from inefficient industries would find employment in others.

 What Ricardo failed to incorporate into his theory was the effect that extreme population densities could have on eroding per capita consumption, driving up unemployment to such an extent that a nation could become completely dependent on exports to sustain its bloated labor force. Ricardo could be forgiven for that, since no one could envision such a situation in 1812. But today’s economists cannot.

 Today’s economists choose to remain ignorant of the full ramifications of never-ending population growth because none dare to risk being labeled a “Malthusian,” a derogatory term arising from the theory of another British economist named Malthus who, in 1798, theorized that mankind’s population would forever be held in check by food shortages. The theory led to the field of economics being mocked as “the dismal science,” and to this day economists steadfastly refuse to ever again consider the possibility of overpopulation.

 That’s a pity because if economists considered the full implications of population growth – not just the strain on resources and stress on environment, but other economic ramifications too – they might recognize the effect that population density has on per capita consumption.

 What does that have to do with trade? Free trade between two nations – one less densely populated like the U.S. and another more densely populated like China, Germany or Japan (4X, 7X and 10X as densely populated as the U.S., respectively) – results in the spreading of manufacturing work evenly across the combined labor force. But consumption patterns between the two nations are badly skewed by the extreme population density and low per capita consumption in the more densely populated nation. The result is an automatic trade deficit and loss of manufacturing jobs for the less densely populated nation.

 It is a fact that the U.S. consistently runs trade deficits in manufactured goods with more densely populated nations like China, Japan, South Korea, Germany and a whole host of other nations, many of them very wealthy nations with high incomes (thus debunking the myth that trade deficits are caused by low wages). At the same time, the U.S. consistently runs trade supluses in manufactured goods with less densely populated nations like Canada, Australia, every single South American nation, Russia, and so on.

 In fact, if the nations of the world are divided evenly around the mean population density, in 2009 the U.S. had a trade surplus of $102 billion in manufactured goods with the less densely populated nations. With those more densely populated (same number of nations), the U.S. had a trade deficit in manufactured goods of $422 billion!

 The data is there for all to see and the correlation between population density and balance of trade in manufactured products is absolutely undeniable. This is the reason that, since our last trade surplus in 1975, our cumulative trade deficit is approaching $11 trillion and is rapidly getting worse. Yet not a single economist has the courage to even consider the subject.

 Global capitalism has failed America because of this missing ingredient – the role of population density in eroding per capita consumption and the role of disparities in population density driving global trade imbalances. Capitalism should be our servant, not our master. Boundaries need to be applied to make that happen. In the early 20th century we learned that a boundary was needed to protect against the abuse of labor. In the latter half of the 20th century we had to set boundaries regarding abuse of the environment. Two boundaries remain to be discovered and implemented. First, measures must be taken (regardless of whether they are tariffs or import quotas or whatever) to prevent trade imbalances that will surely persist otherwise. And, secondly, capitalism cannot be allowed to rely upon population growth as an engine for economic growth, as rising unemployment and poverty will be the inescapable result, which is precisely where we’re headed.