Trump’s “Faulty Trade Math?” Accuser’s math is faulty.

April 29, 2017

http://www.reuters.com/article/us-usa-trump-trade-analysis-idUSKBN17U2SL

This is rich!  In this above-linked op-ed piece (which isn’t identified as such but, rather, is presented as a factual report), the author takes Trump to task for “faulty math” regarding trade policy.  But it’s the author of this article whose math is “faulty” at best, or deliberately misleading at worst.  First, let’s consider some of the statements leading up to his “math.”

In the case of Mexico, the American companies that exported a quarter of a trillion dollars of goods and services to that country last year would be out a customer, and likely cut jobs.

Those American companies that tried to replace the $323 billion in Mexican imports would likely do so at a higher cost — assuming they are in the United States to begin with.

They would be in the United States if similar policies are applied to other countries, which would only make sense.  Then, yes, the domestic manufacturers would likely replace those Mexican imports at a higher cost.  But the author conveniently ignores the fact that the increased demand for labor in the U.S. would drive wages up even faster.

“Americans seem to really like guacamole,” Noland said, “but the idea that we are going to have giant greenhouses and lots of avocados and limes – the fact that we are purchasing them from the Mexicans rather than producing them at home tells you producing them at home is more expensive. We can stop trading with the Mexicans, and have $60 billion less in consumption.”

Seriously?  This is the argument for not bringing a million manufacturing jobs back from Mexico?  Avocados and guacamole?  If they cost 20% more, people won’t buy them?  They’ll just consume less?  They won’t serve onion dip at their parties instead?  Come on!  How much of your disposable income do you spend on avocados and guacamole?  How much more income would you have to spend on them if your wages went up?

By the statistics most widely accepted among economists, the U.S. position with the rest of the world has been steadily improving as investment flows into the country from abroad and supports millions of jobs.

This is an outright lie.  The flow of capital investment has been negative for decades.  While some investment dollars do come into the U.S., far more have left, making net investment a big drag on jobs.

OK, now for the “faulty math:”

Even if Trump achieved his wildest success, and eliminated the United States’ $500 billion trade deficit solely through increased exports that boosted gross domestic product on a dollar-for-dollar basis, it would do little to dent the estimated $7 trillion in government deficits his tax plan is projected to generate over the next decade.

Alan Cole, an economist at the Tax Foundation, said that every dollar of gross domestic product generates about 17.6 cents in federal government revenue, meaning the $500 billion trade shortfall would translate into just $88 billion in new taxes.

That part is true but, as free trade advocates tend to do, he’s presented only one half of the equation.  That annual trade deficit of $500 billion (actually $800 billion if talking about manufactured products) is a drain on the economy.  If every dollar of that deficit isn’t re-injected into the economy in some way, the result is a permanent recession.  Since we’ve already noted that capital investment is also a net outflow, the only way left to re-inject that money into the economy is through federal deficit spending, in all its forms.  Grants for education, for police and fire, for infrastructure. safety net programs like welfare and medicaid, health care premium support under the Affordable Care Act, student loans … the list goes on and on.  All of this federal spending is made necessary by the trade deficit drain of money from the economy.

So, not only would restoring a balance of trade produce an additional $88 billion in new federal revenue (nothing to sneeze at and it would likely be more than that), but it would also cut federal spending by $500 billion.  That’s a net impact of nearly $600 billion per year – enough for the federal government to balance its budget.  And it would likely pave the way for cuts to personal income tax rates, saving all of us a bundle.

The case for free trade made by its advocates often reminds me of the commercials we all see on TV for the local casinos.  Everyone gathered around the blackjack table or the crap table pumps their fists and high-fives their friends as they celebrate another win and rake in their money.  Everyone’s winning and having a great time!  “Casinos are a big boost for the local economy,” we’re always told when some development group wants to build a new one in your community.  The casino owners and a few surrounding hotels and restaurants are winners.  You’re not.  If you’re someone who frequents one of these places, you’re a loser.  You may not want to admit it, but you are – you’re a loser.  Don’t feel bad.  Everyone who goes there is a loser.  Everyone who owns a business where you’d spend your money if you hadn’t lost it at the casino is also a loser.  Casinos are a net drag on the broader community, siphoning away money that people need for other things.

It’s exactly the same with a trade deficit.  Global corporations are winners.  The rest of us are losers.  But they want you to think that free trade benefits you in ways that are just too difficult to understand or quantify.  Remember Enron, the huge “energy trading company” that was such a darling of Wall Street back in the ’90s?  No one could figure out exactly how they made money.  Enron executives condescendingly sneered that their business was just too sophisticated and complicated for most investors to understand.  And lots of otherwise-intelligent people were sucked in.  Eventually, the whole thing collapsed spectacularly and was exposed as a giant scam.  Investors had been played for fools.  That’s exactly the same scam free traders are running when they tell you that it’s not just a matter of money in versus money out.

If trade deficits don’t matter, why is it that countries like Mexico, China, Germany, Japan, South Korea and others are so adamantly opposed to taking their turn at it?  It’s because they know the real math.


Student Visas

February 24, 2017

The subject of student visas aggravates me as much as illegal immigration (although we’re finally getting some great news on that front).

Why?  “What’s the problem with student visas?” you might ask.  For most, the topic probably conjures up images of foreign exchange students coming to the U.S. to experience life here and return home to spread the news about what a great place the U.S. is and to help spread our value system around the world.  Or maybe you envision students coming here for an education that can be put to work back home in some underdeveloped country, helping to raise living standards there.  But the reality of the situation is nothing like this.  The student visa program boils down to money.  It’s a system designed to suck trade dollars back into the U.S. economy and to prop up inflated tuitions.

Let’s begin with some data.  Here are the statistics for non-immigrant visas issued from 2011 through 2015.  (The data for 2016 is not yet available.)  Student visas are primarily “F” visas.  “M” visas are for vocational students.  Taken together, they totaled nearly 700,000 in 2015.  These are “non-immigrant” visas, but don’t be fooled.  A large percentage of these students receive immigrant visas (leading to permanent status) almost automatically upon graduation.

Where do these students come from?  About 280,000 came from mainland China.  75,000 came from India.  28,000 came from Saudi Arabia.  27,000 came from South Korea.  17,600 came from Vietnam.  An equal number came from Mexico.  17,000 came from Japan.  The rest are spread across the remaining nations of the world.  The significance of this list will be discussed later.

To get an idea of what the student visa program is really about, take a look at this web site, which provides information for foreign students for how to apply:

https://www.studyusa.com/en/a/33/how-to-get-your-u-s-student-visa

What it boils down to is this:  you have to explain why you want to study in the U.S. and, more importantly, you have to prove that you can pay for it.  There’s no student loan program here, at least not through U.S. agencies.  If you can get scholarship money from your native country, fine, but regardless of how you get the cash, you have to be able to pay your way.  You must also declare your intent to return to your home country when you’re finished with your studies.  But that’s a formality, one easily skirted when you actually get your degree.

In 2015, over 677,000 “F” visas were issued.  223,000 applicants were refused.  In other words, about three quarters of all applicants are accepted.

Now, let’s take a look at some interesting findings about the student visa program published in a study by the Brookings Institution in 2012.  Here’s the link:

https://www.brookings.edu/interactives/the-geography-of-foreign-students-in-u-s-higher-education-origins-and-destinations/#/M10420

“From 2008 to 2012, 85 percent of foreign students pursuing a bachelor’s degree or above attended colleges and universities in 118 metro areas that collectively accounted for 73 percent of U.S. higher education students. They contributed approximately $21.8 billion in tuition and $12.8 billion in other spending—representing a major services export—to those metropolitan economies over the five-year period.”

Got that?  They paid full tuition and living expenses, bringing over $33 billion into the economy.  And that was through 2012.  In 2015, when 25% more visas were issued than in 2012, that figure rises to over $42 billion.

Two-thirds of foreign students pursuing a bachelor’s or higher degree are in science, technology, engineering, mathematics (STEM) or business, management and marketing fields, versus 48 percent of students in the United States.

Remember how tech companies claim that they depend heavily on immigrants to provide the advanced skills that they need?

Forty-five (45) percent of foreign student graduates extend their visas to work in the same metropolitan area as their college or university.

In other words, these students then go on to become the H1-B visa workers that the tech industry (and many others) claim that they need.  So the “non-immigrant” nature of student visas, and the declaration of intent to return to their home country, is truly a joke.  Here’s further evidence that student visas are used as the pipeline for H1-B visas:

http://www.h1base.com/content/f1visa

These companies who claim that they’re dependent on immigrants for the skills they need are trying to pull the wool over your eyes.  What they need are STEM graduates and they get them from American universities.  They like the fact that foreign students contribute to a glut of labor that helps to keep their payroll costs suppressed.  When Apple claims that, if immigrants aren’t allowed to travel freely to work in the U.S., then they might need to relocate to where they can have easier access to immigrant labor, that’s a “crock” and they know it.  Go ahead, Apple, move to Yemen or  Iran or Libya or one of those other countries, and let’s see how successful you can be there.  What you really need are the STEM graduates of American universities.  You won’t find them in those other places.  But what you will find are poverty, illiteracy and oppressive governments.  But you say you can do better there.  So prove it.  Just leave.  Go ahead.  Go.

There’s a mind-numbing amount of information in these links.  Let’s boil it all down:

  • Immigrants currently fill 1.2 million of the seats available in American universities.  That’s a significant percentage of the seats available.
  • Approximately three quarters of foreign students who apply are accepted.  Compare that to the acceptance rate for American students at most prominent universities, where only 10% or fewer attain admission.
  • Why the preference for foreign students?  Because they pay full tuition, propping up the ridiculous rate of tuition increases.
  • Foreign students are given preference over American students because of their ability to pay.  This effectively shuts American students out, especially from STEM curricula.
  • The influx of foreign students actually counts as an export of services.  Can you believe that?  It’s one of the tricks used by the government to draw trade dollars back into the U.S. economy and to keep our trade data from looking even worse than it does.
  • University sports teams have also gotten in on the act, now recruiting foreign students through the “student” visa program, denying athletic scholarships to deserving American athletes.  When it comes time for the Olympics, those athletes, trained in America, compete for their home countries, leaving the American teams thin.
  • Almost half of foreign students then go on to work in America, shutting American students out of those jobs as well.
  • The student visa program feeds into the H1-B visa program, which then begins to feed many of the other immigrant categories such as immediate relatives and family-sponsored preferences.

OK, remember the above list of countries that send the most students?  Did you notice anything about that list?  Did you notice that it includes the countries with whom America has the biggest trade deficits?  That should give you a clue as to where these foreign students are getting the money they need for tuition.  Their parents are getting rich on manufacturing for export to the United States.  What this means is that, in addition to taking your job, they then use your money to pay for their kids to come over here and take your kids’ jobs too!  Can this scheme possibly get any more outrageous?

If you’re an American student who hasn’t been able to get accepted into the school or program of your choice, the student visa program is probably the main reason.  If you’re a recent graduate and find yourself now saddled with crushing student loan debt, you can blame the student visa program for propping up ridiculous tuition rates.  And if you now find yourself struggling to find a job, you can once again blame the student visa program.

The student visa program is an outrage perpetrated on unsuspecting parents and students, depriving them of opportunities to help America out of its trade-created cash crisis, to help greedy universities prop up inflated tuition rates and to help corporations suppress wages with a labor glut.  It has to stop.  No foreign student should be admitted until every last American kid who wants a college education has gotten a seat in a university.  President Trump … please … take a close look at the student visa program and rein it in.


America’s Worst Trading Partners

January 12, 2016

I have finally finished tabulating the trade data for each country for 2014.  (2015 data won’t be released by the Bureau of Economic Analysis until sometime in March.)  What took me so long?  This is no small task.  Since the BEA doesn’t track “manufactured products” as a category, I have to take the data for hundreds of product codes for each of 165 nations and subtract out the categories of raw materials in order to arrive at a figure for manufactured products.  I maintain a massive spreadsheet for each nation and then compile the results for all on an even bigger spreadsheet.

Anyway, the results are in and over the next couple of weeks or so, beginning with this post, we’ll break down and analyze the results.  I like to begin by listing America’s 20 worst per capita trade deficits in manufactured goods.  In essence, this is a list of America’s 20 worst trade partners.  These trade deficits are expressed in per capita terms in order to put the citizens of all nations on an equal footing.  For example, our trade deficit with China, when expressed in dollars, dwarfs that of every other nation because they represent one fifth of the world’s entire population.  But when it comes to trade, borders are meaningless and China could just as easily be 100 smaller nations instead of one.  It would have no effect on our total trade deficit whether we draw a line on a map around 1.3 billion people, or draw 100 lines around clusters of 13 million people each.  Expressing the deficits in per capita terms eliminates the sheer size of nations as a factor.

If you’re new to this web site, you probably expect to see this list populated with poor nations.  You’d be wrong and, by the end of this post, you’ll understand why.  So let’s take a look at the list for 2014:  Top 20 Deficits, 2014.  Some observations are in order:

  1. The key take-away from this list is that 18 of these 20 nations are more densely populated than the U.S.  Most are much more densely populated.  The average population density of this list is 539 people per square mile.  This compares with the U.S. population density of about 87 people per square mile.  This average is up from the average population density of 504 people per square mile on the 2013 list.
  2. Instead of poor, low wage nations, this list is populated by rather wealthy, high wage nations.  The average purchasing power parity (PPP) of the nations on this list is $40,700 per person, up from $35,330 in 2013.  Only one nation on this list has a PPP of less than $10,000 – Vietnam, at $5700 per person.  Only three other nations have a PPP of less than $20,000 – Costa Rica, Mexico and China.  By comparison, U.S. PPP was $54,400 in 2014.
  3. Though our trade deficit with China has exploded since they were first granted “Most Favored Nation” status in 2000, their position on this list has barely budged since I published Five Short Blasts in 2007.  They were 19th on the list in 2006 and have risen only one point to 18th in 2014.  That’s because our trade deficit with nearly all of these nations has grown just as rapidly.  To illustrate this, I’ve included a column on the chart that shows the percent change in our balance of trade with each nation over the past ten years.  Our deficit with China has grown by 82%.  But the results with some other nations have been even worse.  In 2006, Costa Rica didn’t even appear on this list.  In fact, in 2005, we had a trade surplus with Costa Rica.  That has now reversed into a large trade deficit, big enough to move them to number 8 on this list.  The same is true for Vietnam.  In 2005 they were nowhere close to being on this list but, in the past ten years, our deficit with Vietnam has worsened by almost 500%.  Our deficit with Switzerland has worsened by over 200% in the last ten years, moving them to 2nd on the list.  It’s worth noting here that Switzerland is the one nation on the list that is even wealthier than the U.S.  But the one thing all of these nations have in common is a high population density.
  4. In case you’re tempted to conclude that Costa Rica, Vietnam, Mexico and China are on this list because of low wages (low PPP), consider this.  In the past ten years, their PPPs have risen by 41%, 136%, 50% and 184% respectively.  If wages are a factor in trade imbalances, then such rapidly rising wages should tend to slow or even reverse our trade deficit with these nations.  Instead, each is accelerating.
  5. It’s also worth noting here than one of the only two nations on the list less densely populated than the U.S. – Sweden – is slowly sliding off of this list.  Our trade deficit with Sweden has actually improved by 44% over the past ten years – the only such improvement on this list.  As a result, they’ve slid from no. 2 on the list in 2006 to no. 12 in 2014.
  6. Another nation that has slid noticeably on this list is Japan.  They were no. 4 on the list in 2006, sliding to no. 10 in 2014.  Why?  Other nations, most notably South Korea and Germany (who have each risen on the list), have cannibalized their auto exports.  This explains why Japan’s economy has been mired in recession for years.

In 2014, the U.S. suffered a total trade deficit in manufactured goods of $539.9 billion.  The trade deficit in manufactured goods with just the twenty nations on this list was $728.3 billion.  In other words, these twenty nations account for our entire trade deficit in manufactured goods, and then some.  It should be clear to anyone that it’s the large disparity in population density between the U.S. and these nations that drives our trade deficit.  It’s just as clear that low wages play no role whatsoever.  Any trade policy that fails to take into account the role of population density in driving trade imbalances is doomed to failure, just as U.S. trade policy has been for decades.

Those who blame trade imbalances on low wages either don’t understand trade or are simply lying.  So too are those who blame currency valuations – something we’ll examine later.  And those who tell you that we simply need to be more competitive are playing you for fools.  The only way to restore a balance of trade is by applying tariffs to counteract the effect of population density.

Not enough proof?  Stay tuned.  In my next post we’ll take a look at the opposite end of the spectrum – America’s twenty best trade partners – and see if population density is a factor there too.

 

 


Obama’s Trade Failure Grows Worse

October 9, 2015

http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm

A week ago, the Bureau of Labor Statistics released the jobs report for September – a report that was the worst in four years.  The same thing could be said for the trade report released earlier this week.  Manufactured exports, which the president had vowed to double – a cornerstone of his economic policy, fell to a level that was actually less than July, 2011.  The trade deficit in manufactured goods worsened to $60.6 billion, the second worst reading ever.  (The record was $63.7 billion, set only five months ago.)  Here’s the chart:  Manf’d Goods Balance of Trade.

In 2012, the president hailed a new trade deal with South Korea as a “big win for American workers.”  The trade deficit with South Korea, which was $13.2 billion in 2011, nearly doubled to $25.0 billion in 2014 and is on track to reach nearly $30 billion this year.

Our trade deficit with China was $268 billion in 2008, the year the president was elected.  This year our deficit with China is on track to easily surpass $350 billion.

The president’s mistake on trade policy is the same mistake made for decades by the presidents who preceded him – putting blind faith in “free” trade, taking no account of the role of population density in driving trade imbalances.  He fails to understand that, when dealing with nations far more densely populated than our own, “free” trade is a worse policy than no trade at all.  That’s not to say that we shouldn’t trade with nations like China, Japan, Germany, South Korea and others who are totally dependent on manufacturing for export to sustain their bloated labor forces.  It simply means that some mechanism for assuring a balance of trade – tariffs, quotas or whatever – is essential to prevent a crippling of our own economy.

The Trans Pacific Partnership trade deal that Obama has recently concluded again blindly applies “free” trade policy to each nation regardless of their population density.  Based on the long track record we have with that approach, it’s easy to predict the results if Congress is foolish enough to enact it.

 

 


The Problem with TPP

June 14, 2015

On Friday, the House of Representatives dealt a major blow to what would have been a crown jewel in President Obama’s economic plan – the “Trans Pacific Partnership” (TPP) trade deal that he has worked for his entire presidency.  It’s a good thing.  Had he gotten the fast track trade authority he was seeking in order to steamroll this trade deal through Congress, it may well have sounded the death knell for the American auto industry, and perhaps even American manufacturing in general.

The problem with TPP can be summed up in two words – population density – and its failure to take this factor into account.  The TPP is a deal that has been negotiated between the U.S. and eleven other countries:  Australia, Brunei , Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.  Of these eleven nations, five are less densely populated than the U.S. – Australia, Canada, Chile, New Zealand and Peru.  The United States enjoys a surplus of trade in manufactured goods with every one of them – a surplus totaling almost $103 billion.

Of the remaining six nations, one – Brunei – is a net oil exporter.  The U.S. enjoys a surplus of trade in manufactured goods with all net oil exporters since oil is priced in dollars, and dollars can only be spent in the U.S.  Another – Singapore – is a tiny city-state and the U.S. enjoys a surplus of trade with nearly all such city-states.  Why?  Because manufacturing requires some serious real estate, something that city-states lack.  Their dense populations necessitate an economy built around services, like banking, for example.  That leaves four nations more densely populated than the U.S. – Japan, Malaysia, Mexico and Vietnam.  The U.S. suffers a trade deficit in manufactured goods with all four nations – a deficit totaling almost $155 billion.

A surplus with all five less densely populated nations of $103 billion vs. a deficit with all four more densely populated nations of $155 billion.  This is no coincidence.  It’s yet another demonstration of the power of population density in driving global trade imbalances.  It dwarfs all other factors in international trade.  Low wages, currency manipulation, lax labor and environmental standards – none of these things amount to a hill of beans in comparison to the effect of population density.  Compared to the citizens of less densely populated nations, those living in intensely crowded conditions such as you find in these four nations consume comparatively nothing, but are every bit as productive.  The result is that these nations come to the trade table with massive labor forces desperate for work, but offer nothing in return except puny markets emaciated by low per capita consumption.  Huge trade deficits with such nations are inescapable without the use of tariffs.

Many believe that globalization and free trade has already wiped out tariffs.  It has eliminated and reduced many, but consider this:  the American truck market, unlike the automobile market, is still protected by a 25% tariff.  Because of this, virtually every pickup truck and every larger truck, up to and including semis, are built in the U.S.  Take away that tariff, as TPP has vowed to do, and you can kiss the U.S. truck industry goodbye.  One might argue that that isn’t so – that the U.S. auto industry still thrives without the tariffs.  However, it thrives not because of tariffs but because of quotas, something else that will vanish under TPP.  If the American truck-building industry and what’s left of the auto industry vanishes, there’s a good possibility that a domino effect may very well lead to the collapse of virtually all of American manufacturing.

Trade policy that fails to account for the effect of population density has proven to be an unmitigated disaster for the U.S. economy for decades.  President Obama seems hell-bent to make matters worse, just as he did with the deal with South Korea that, in only a couple of years, has cost thousands of Americans their jobs.  Let’s pray that our congressmen will continue to stand fast against any further such hare-brained deals.


America’s Top 15 Trading Partners in 2013

February 20, 2015

Here’s a chart showing America’s top 15 trade partners (in terms of the percentage of total imports and exports) in 2013:  Top 15 Trading Partners in 2013.  First, some general observations are in order.

  • There are 229 nations on earth.  These fifteen nations alone account for nearly three quarters of all U.S. trade.
  • These fifteen nations represent approximately one half of the world’s population.
  • Those not well-versed in U.S. trade data are probably surprised to see Canada at the top of the list.  It’s not such a surprise when you learn that Canada is America’s largest supplier of oil and gas.  Canada’s share of U.S. trade rose in 2013 to 16.4% from 16.1% in 2012.
  • Second on the list is China – not such a surprise.  China’s share of U.S. trade also rose in 2013 to 14.6% from 14% in 2012.
  • Third is Mexico, with their share of U.S. trade rising to 13.2% from 12.9% a year earlier.
  • These three nations – Canada, China and Mexico – account for about 44.2% of all U.S. trade.
  • Japan, fourth on the list, saw its share of U.S. trade slip from 5.7% to 5.3% in 2013.
  • South Korea leapfrogged ahead of the United Kingdom on the list, rising to sixth place while the U.K. slipped to seventh.
  • France rose from 10th place in 2012 to eighth place in 2013, while Brazil and Saudi Arabia each slipped a notch.
  • Venezuela, 14th on the list in 2012, fell off the list in 2013 and was replaced by Switzerland.

The above list is based on total imports and exports of all goods and services.  But what really matters is manufactured products, since jobs are concentrated in that category.  Exports add jobs to an economy, and imports take them away.  A trade deficit in manufactured products represents a net loss of jobs.  So let’s turn our focus to that category of trade.  I should note here that, from this point on, trade imbalances will be expressed in per capita terms in order to factor out of the equation the sheer size of nations.  If the U.S. has a deficit of $1 billion with a nation of one million people and a deficit of $100 billion with a nation of 100 million people, it would be wrong to conclude that the people of the latter nation are a bigger drag on our balance of trade, since the people of both nations export $1,000 more to the U.S. than they import from us.

Of these fifteen nations, twelve are more densely populated than the U.S. and three are less densely populated.  With the three less densely populated nations, the U.S. enjoys a surplus of trade in manufactured products with all three – Canada ($1,988 per person), Brazil ($112 per person) and Saudi Arabia ($595 per person).

On the other hand, of the twelve nations more densely populated than the U.S., we suffer a trade deficit in manufactured goods with all but one of them – The Netherlands.  The Netherlands has an unusual economy.  As the only nation in Europe with a seaport on the Atlantic coast, it’s economy is heavily focused on trade, buying from the U.S. and then re-selling to other nations.  This is the reason that the U.S. enjoys a healthy surplus with The Netherlands.  Of the remaining eleven nations more densely populated than the U.S., our per capita trade deficits with them rank as follows:

  1. Switzerland:  -$1,859
  2. Germany:  -$822
  3. Taiwan:  -$706
  4. Japan:  -$696
  5. S. Korea:  -$496
  6. Mexico:  -$335
  7. Italy:  -$319
  8. China:  -$259
  9. France:  -$208
  10. U.K.:  -$30
  11. India:  -$11

Surprised?  If you’ve read Five Short Blasts, then you’re not surprised at all.  You understand how population density (and almost nothing else) drives trade imbalances.  When expressed in per capita terms, our enormous trade deficit with China (enormous because of its sheer size and population) seems rather mundane.  Others are much worse because they are much more densely populated than China.  In fact, if we plot our per capita trade deficit in manufactured goods versus population density, we find that the data follows a line that describes a logarithmic decay in our balance of trade as population density rises:  Per Capita Balance of Trade vs. Pop Density.

As you can see, trade with nations less densely populated than the U.S. (about 86 people per square mile) will almost surely be beneficial to the U.S. and produce a trade surplus.  Trade with more densely populated nations will result in a trade deficit and a drag on the U.S. economy.  The U.S. began trading freely with the other nations on this list long before we began trading freely with China in 2000.  For those who understand the role of population density in driving trade imbalances, it would have been easy to predict the results – a huge trade deficit.  In fact, the results of our trade policy with China fall very neatly along that line.

Some argue that trade deficits are caused by low wages in places like China.  Look again at the above list.  Low wages?  Not in Switzerland.  And not in most of the other nations on that list.  In fact, wages in China have risen dramatically and our deficit with them has only gotten worse.  To better understand the real relationship between wages and trade, take a look at this chart that plots PPP (purchasing power parity, analogous to average wages) vs. our balance of trade with our top fifteen trade partners:  Per Capita Balance of Trade vs. PPP.  The truth is that when trading with very poor nations (where wages are very low), we experience neither a large trade deficit or surplus.  As you can see, the relationship between trade imbalance and the wealth of nations forms an almost perfect “V”.  On the right side of the chart (which represents trade surpluses), the per capita surpluses grow larger as the wealth of our trading partner increases.  On the left side of the chart (representing trade deficits), the deficits with wealthy nations are larger than those with poor nations.

When you think about it, this makes sense.  Those nations on the right side (the surplus side) of the chart are less densely populated nations.  Their citizens are capable of consuming products and they are resource-rich, enabling them to produce products and have a self-sufficient economy.  Because they are wealthy, they are able to import products from America.  The right side of the chart, however, is populated with very densely populated nations where their citizens have insufficient space to consume at a high level, and they are resource-poor.  They are heavily dependent on manufacturing for export to sustain viable economies.  Poor people can’t buy and import products.  That’s why there are no big trade deficits (in per capita terms) with poor nations.  Once manufacturing is introduced into their economies, however, wages begin to rise and they are then able to begin importing some products.  That’s why the trade deficits are larger with wealthier nations – because our trade deficit has made them wealthier.  It should be noted, however, that the trade deficit we have with them is never reversed.  Regardless of how wealthy they become through manufacturing for export, it is still impossible for them to consume at a high level.

China is a good case in point.  Trade with China started at a low level.  Once it started, wages in China began to grow and they have the fastest-growing economy in the world.  But, as wages have risen in China, our trade deficit with them has actually accelerated instead of moderating, as the low-wage theory would predict.  It has accelerated because the Chinese are incapable of consuming at a high enough level to restore a balance of trade.  Contrast this with a poor, sparsely-populated country.  If manufacturing is introduced there, we will have a trade deficit with them for a brief period of time, but wages will quickly rise as their labor supply is quickly exhausted, and their wealth will quickly enable them to begin importing American goods.  A balance of trade is soon restored.

All of this illustrates just how foolish it is to apply free trade policy equally to both sparsely-populated and densely-populated countries and expect the same results.  Free trade with badly overpopulated nations is a sure-fire loser, guaranteed to produce large trade deficits and to devastate the manufacturing sector of the economy.  It has nothing to do with low wages; nor does it have anything to do with currency valuations, which I’ll cover in an upcoming post.  Our enormous trade deficit is driven almost entirely by attempting to apply free trade policy to nations that are severely overpopulated.

 


“The shadow of crisis has passed.” Or has it?

January 21, 2015

Last night, at the beginning of what can best be described as a victory lap, President Obama began his State of the Union message by declaring that “…the shadow of crisis has passed …”  The crisis he spoke of included lots of things, but foremost was the economy which, at the time he inherited it, was indeed in a full-blown crisis.  Perhaps two decent quarters of GDP (gross domestic product) growth are enough for him to declare “mission accomplished,” but has the crisis passed or has it merely been swept under the rug?

Three sentences later, he asked, “Will we accept an economy where only a few of us do spectacularly well?”  Yeah, that pretty accurately sums up the state of the economy.  But that’s not stuff worthy of a victory lap, so he then went on to make some claims that merit closer scrutiny.

  • “We believed we could reverse the tide of outsourcing, and draw new jobs to our shores. And over the past five years, our businesses have created more than 11 million new jobs.”  The implication here is that we did, in fact reverse the tide of outsourcing and bring eleven million jobs home.  If only it were so.  The fact is that, while the economy has grown by 15% in real (inflation-adjusted) terms in the last five years, the trade deficit in manufactured goods has widened by 72%.  The only explanation for that is that the “tide of outsourcing” has actually gotten worse.  That’s no surprise when you look at Obama’s record on trade, especially the terrible deal he signed with South Korea.  And “eleven million new jobs?”  According to the household survey, the employment level has grown by only 9 million.  And, during those five years, the population has grown by 11.4 million.  In other words, almost all of the growth in the employment level is due purely to population growth, and not a matter of putting people back to work.  In fact, during those five years, of the 18.3 million Americans who were out of work in January, 2010, only 3.2 million have been put back to work.
  • “More Americans finish college than ever before.”  That’s because we have more Americans than ever before.
  • “… we’ve seen the fastest economic growth in over a decade … a stock market that has doubled and health care inflation at its lowest rate in 50 years.”  We have had two good quarter of GDP growth, preceded by a really bad quarter at the beginning of 2014, but the president didn’t mention that.  The best in the past decade?  That’s not saying much when you look at the past decade.  The stock market has doubled thanks to the Federal Reserve pumping $4 trillion into the bond market, crowding investors out of that market, leaving the stock market as the only place to invest.  And health care inflation is at its lowest rate in 50 years because overall inflation is also down that much.  Relative to everthing else, especially stagnant wages, the inflation in health care is still pretty bad.
  • “Wages are finally starting to rise again. We know that more small-business owners plan to raise their employees’ pay than at any time since 2007.”  Wages are rising – barely – until expressed in real (inflation-adjusted) terms. In those terms, they’re stagnant.  And planning to raise wages isn’t the same thing as actually raising them.
  • “We set up worker protections, Social Security, Medicare, Medicaid to protect ourselves from the harshest adversity. We gave our citizens schools and colleges, infrastructure and the Internet, tools they needed to go as far as their efforts and their dreams will take them.  That’s what middle-class economics is: the idea that this country does best when everyone gets their fair shot, everyone does their fair share, everyone plays by the same set of rules.”  True, we did all that.  Then we signed the Global Agreement on Tariffs and Trade, initiating a trade regime that completely undermined all of the aforementioned programs, deprived American workers of their “fair shot” and gave away millions and millions of our best jobs.  Is that “middle-class economics?”
  • “Of course, nothing helps families make ends meet like higher wages. That’s why this Congress still needs to pass a law that makes sure a woman is paid the same as a man for doing the same work.”  While I agree that women should be paid the same as men, this would do nothing to raise wages.  No company is going to raise its overall cost of labor.  If forced to equalize the pay between men and women, companies will simply lower the wages for men.  The only thing that can drive wages higher is a higher demand for labor, like we’d have if we really did turn the tide on outsourcing.
  • “… to make sure folks keep earning higher wages down the road, we have to do more to help Americans upgrade their skills.”  Here we go again.  Job training as a solution to unemployment.  No one ever takes note of the fact that we lost our manufacturing jobs to people who were uneducated and practically devoid of job skills.
  • “…  we still live in a country where too many bright, striving Americans are priced out of the education they need.”  That’s because far too many of the seats in our college classrooms are filled with foreign students.
  • “… 21st century businesses, including small businesses, need to sell more American products overseas. Today, our businesses export more than ever, and exporters tend to pay their workers higher wages.”  We don’t sell more American products overseas because so many countries are so badly overpopulated that they can’t even consume their own productive capacity.  Yes, we export more than ever, but not much more.  In the meantime, imports have exploded, draining our economy of those manufacturing jobs that the president admits pay more.  In the past five years, manufactured exports have grown by $27 billion per month.  But imports have grown by $47 billion – all thanks the president taking the chicken’s way out on trade and deluding himself into thinking that exports can be grown by just wishing it so.
  • “I’m asking both parties to give me trade promotion authority to protect American workers with strong new trade deals from Asia to Europe that aren’t just free but are also fair.”  Following this assertion, the president admitted that trade deals have gone badly for American workers.  And now he wants to double down on that trade policy.  (Mr. President, if it doesn’t make any sense to continue the same policy with Cuba that has been a proven failure for 50 years, why does it make sense to continue pursuing trade deals that have been proven a failure for just as long?)  There is no “free” trade.  There is no “fair” trade.  There is only trade, and trade with overpopulated nations is a sure-fire loser.  But bend over America.  Here comes more of it!
  • “… 95 percent of the world’s customers live outside our borders. We can’t close ourselves off from those opportunities.”  This is the very heart of our trade problem – the pursuit of more customers – customers capable of producing more than they consume.  That’s good for companies who couldn’t care less where their products are manufactured, as long as they sell more products.  But it’s an absolute disaster for American workers and the American economy.
  • “More than half of manufacturing executives have said they’re actively looking to bring jobs back from China.”  We’ve heard this for years, but how many of them actually do it?  Very, very few.
  • “I want Americans to win the race for the kinds of discoveries that unleash new jobs: converting sunlight into liquid fuel; creating revolutionary prosthetics, so that a veteran who gave his arms for his country can play catch with his kids again.”  We do win those races, but every time we do, the manufacturing of those new products very quickly ends up in some badly overpopulated country.

No, the crisis hasn’t passed.  Nothing has been done to fix the problems that caused it in the first place – our trade deficit and our use of population growth as a crutch for economic growth.  In fact, these issues have gotten worse.  The crisis has been swept under the rug and will slither back out sooner than most people – especially the president – think.