Bad May Unemployment Report Just More of The Same

June 3, 2011

This morning’s unemployment report got about the same reaction as a cockroach in a punch bowl.  The addition of 54,000 jobs in May was a huge disappointment, since the consensus forecast was a gain of 190,000 jobs.  To make matters worse, the U3 unemployment rate rose to 9.1%, moving in the opposite direction of forecasts of a decline to 8.9%.  The news was bad – true – but when you examine the details of the report, you find that the news is nothing more than a continuation of a bad trend that’s been in place since the “end”  (little more than a leveling off)  of the recession that began in 2008.

Here’s my spreadsheet and charts:

Unemployment Calculation     Unemployment Chart     Labor Force & Employment Level     Unemployed Americans     Per Capita Employment

As you can see, the latest data is nothing more than the continuation of the “new normal” that has set into the American economy – steady unemployment of about 9%.  The reason this report is getting more attention is that it confirms what has slowly begun to dawn on everyone – that the economic recovery is stalled and in danger of backsliding into a double dip. 

One of my favorite pieces of data used in calculating unemployment is the “employment level.”  If this number isn’t going up, no jobs are being created.  Examining the data, we find that this number has risen just slightly less than 2 million jobs since bottoming out in December of ’09.  While that may sound impressive, it has barely kept pace with the growth in the labor force, which has risen by the same amount.  Worse, nearly all of that increase took place from January through April of last year, when it rose by nearly 1.7 million jobs.  Since, then, in the past 13 months, it has risen by only 0.3 million jobs, far below the rate needed to absorb growth in the labor force.  Yet, during that period, the official U3 unemployment rate fell from 9.9% to 9.1%.  The numbers don’t add up, a situation explained away by the administration with the claim that a million workers have given up looking for work, while another million new workers haven’t even begun trying.

Per capita employment, the employment level divided by the U.S. population, slipped slightly for the 2nd month in a row and, at 44.88%, remains very, very close to the worst level of the recession – 44.68% in December, 2009 (a figure that was matched in November, 2010). 

Make no mistake, a double-dip is on the way – a new recession that may well be worse than the last since both the federal government and the Federal Reserve have virtually exhausted their gimmicks for creating the illusion of a recovery.  There is no appetite for any more stimulus, not by lawmakers and not by the credit markets.  If anything, spending is going to be cut drastically, exacerbating job losses among federal, state and local government workers.  (See below.)  The Federal Reserve has little appetite for another round of quantitative easing, seeing that the last round merely stoked inflation and market bubbles while doing little to boost the economy.  The Obama administration is left with only two options:  reform trade policy and restore a balance of trade while simultaneously reining in the importation of more foreign workers, or stand idly by and watch the economy sink into an even worse recession while unemployment resumes its climb above 10%.  I’ve never in my life seen the economy so boxed in on all sides.  Yet, I have my doubts that Obama will do the right thing. 

* * * * *

The anemic addition of 54,000 jobs breaks down as follows:

  • Professional and business services:  + 44,000
    • accounting & bookkeeping:  + 18,000
    • computer systems design, etc.:  + 8,000
  • Health care:  +17,000
  • Mining:  +7,000
  • Construction:  unchanged
  • Retail:  unchanged
  • Transportation & warehousing:  unchanged
  • Leisure & hospitality:  unchanged
  • Manufacturing:  – 5,000
  • Local governments:  -28,000

I know what you’re thinking:  these numbers don’t add up to 54,000.  I can’t explain it.  Makes you wonder if the real picture is even worse, doesn’t it?

This was the first decline in manufacturing employment in six months, a bad sign since manufacturing has been one of the few bright spots in the economy and the sector upon which the Obama administration was pinning all its hopes, with its plan to double exports in five years. 

The Beginning of “The Great Regression?”

February 8, 2011

I found the above-linked opinion piece that appeared on Reuters this morning interesting in that it forecasts a “great regression” to follow what’s been dubbed the “great recession.”  (It’s also interesting how quickly it was pushed off the front page of Reuters.)  I found it interesting because it’s forecasting the very phenomenum (albeit for more superficial reasons) that I forecast in Five Short Blasts – that rising unemployment and poverty and a decline in living standards would be the inescapable consequences of allowing population growth to drift ever higher while ignoring the relationship between population density and per capita consumption.

The author of this piece, a Europe-based Reuters associate editor, sees the dramatic cuts in government spending in European countries leading inevitably to declining living standards there.

Wages, pensions, unemployment insurance, welfare benefits and collective bargaining are under attack in many areas as governments struggle to reduce debts swollen partly by the cost of rescuing banks during the global financial crisis.

The European Union, which long trumpeted a European social model with a generous welfare state, social partnership between unions and employers and a work-life balance featuring limited working hours and long paid holidays, has lost its swagger.

At first, you may think to yourself, “Good!”  “It’s about time that those Europeans had to experience some of the same things that Americans have been going through for decades.”  But not so fast.  In spite of the fact that American workers have always been far more productive than their European counterparts with their 35-hour work weeks and weeks-long vacations, the U.S. has a big trade deficit in manufactured goods with Europe.  Do we really want them to get more competitive?

The problem is that it’s inevitable there, just as it’s inevitable here.  For quite some time, government spending (which includes “spending” in the form of tax cuts) has been used to mask falling wages and cuts in benefits by the private sector.  In spite of all the talk of the need to cut taxes, the truth is that taxation in the U.S. is at historically low levels, having been used time and again to breathe life into a flagging economy.  There was a time when private sector wage increases outpaced inflation, while tax rates were simply shrugged off as a fact of life.  But no more.  And there was a time when every company provided generous health insurance and pension plans because the demand for labor was so great that if you didn’t, your competitor would end up with all the talent.  But no more.

Why pay high wages or provide such benefits now?  Good workers are a dime a dozen.  Announce a job opening and you’ll get a hundred or more applications.  Corporate America eventually figured out that annual merit increases and generous benefit packages were a waste of money when labor was so plentiful.  The only way to prevent declines in take-home pay that would surely result in a recession or worse was to cut tax rates and bolster social safety net programs.

But the government spending can’t be sustained.  The debt crisis may appear to be the problem on the surface, but dig deeper and you’ll find that the problem is really rooted in an ever-worsening imbalance between the supply of and demand for labor.

Greek Prime Minister George Papandreou, one of Europe’s few remaining socialist government chiefs, lamented in Davos that the global crisis had speeded a race to the bottom in labor standards and social protection in the developed world.

Emerging countries such as China and India had achieved competitiveness through low wages, no collective bargaining, little or no healthcare and social insurance and disregard for the environment in exploiting resources and production.

These factors are not what makes a nation competitive.  These factors are the result of a gross over-supply of labor.  It’s the over-abundance of labor that makes them competitive.  And if these factors cited above are the consequences of such badly bloated labor forces, then it begs the question:  why should we want to emulate them?  Why should we “compete” with them at all?  What do we gain?  Wouldn’t we be far better off if we stopped sharing access to each other’s markets?  Of course we would.

But back to the great regression.  With the “great recession” put to bed by the explosion in government spending, now we can tackle the deficit issue, or so the thinking goes.  That is, until someone figures out that cutting wages, pensions, social programs and government spending in general is a recipe for economic disaster, just as the spending itself is a recipe for the same thing.  Such “regression” will manifest itself in the macro-economy in a familiar way – as a recession, or worse.  What will be the approach for dealing with a double-dip recession?  More spending and tax cuts.  Bank on it.

Without addressing the conditions that are driving the ever-worsening imbalance in the supply of labor relative to demand, there is no escape from this conundrum.  “Creating jobs” may sound appealing, but jobs cannot be created from thin air.  Every job depends upon consumption of some product or service.  Per capita consumption in the developed world is in decline as over-crowding there worsens, and manufacturing for export to even more badly overpopulated, already-export-dependent, low per capita consumption nations of the developing world is a logic-defying pipe dream.

December Unemployment Falls To 11.9% From 12.0%

January 11, 2011

On Friday the Bureau of Labor Statistics (BLS) released it’s “Employment Situation Summary” for the month of December.  (Link provided above.)   The headline was that 103,000 jobs were created in December, and unemployment plummeted to 9.4% from 9.8% a month earlier. 

The plunge in unemployment fooled no one.  Three quarters of that decline was due to another 317,000 workers mysteriously vanishing from the labor force – people counted as “no longer seeking employment.”  Since the beginning of the recession in late ’07, the official “civilian labor force” has actually contracted by almost 100,000 workers at the same time that the population has grown by over 8 million people.  That’s just not plausible.  No one believes it, aside from the folks at the BLS and the president’s administration. 

Employing a more accurate method of calculating unemployment, U3 unemployment actually fell by only 0.1%, from 12.0% in November to 11.9% in December.  The broader measure, U6, which includes discouraged and marginally employed workers, fell to 21.0% from 21.3% a month earlier.  Here’s the data and a chart of the various measures of unemployment:

Unemployment Calculation     Unemployment Chart

To be fair, part of the decline in unemployment, about 0.1%, was due to a jump of over 300,000 in the employment level.  That’s good news, but we need to see this happening consistently, on a month-by-month basis, before we conclude that the labor market is improving.  This is only the third improvement in the employment level in the last eight months and the first improvement in the last three months. 

Per capita employment remains very close to the lowest level since the recession began.  Here’s the chart:

Per Capita Employment

The number of unemployed Americans remains near its worst level, just shy of 19 million:

Unemployed Americans

And here’s a chart of the labor force and employment level:

Labor Force & Employment Level

The 103,000 jobs added in December (which comes from the BLS’s “establishment survey”) break down as follows:

  • Leisure and hospitality:  + 47,000
  • Health care:  + 36,000
  • Professional & business services (temp help):  + 16,000
  • Retail:  + 12,000
  • Manufacturing:  + 10,000
  • Mining:  + 5,000
  • Construction:  – 16,000

The gain in manufacturing jobs is the first improvement in five months.  Including that gain, manufacturing jobs have actually declined by 37,000 during that five-month period. 

The December employment report, rather than offering hope of an improving jobs picture, merely reinforces the fact that the economy has settled into a “new normal” of 9-10% unemployment.  What’s scary is that the economy has flat-lined at this level in spite of over $2 trillion in stimulus by the Fed and another $800 billion in government stimulus spending.  And that doesn’t even include the $900 billion in stimulus provided by extension of the Bush tax cuts.  All of this stimulus has to end soon.  Something has to give, and soon.

Study Reveals Unexpected Relationship Between Wages and Trade

December 20, 2010

Low wages in other countries, especially China, is one of the factors often cited as the cause our enormous trade deficit.  If you’ve followed this blog, you’ve heard me often counter that, in fact, low wages have virtually nothing to do with the balance of trade.  After all, if low wages are to blame, how does one explain even larger trade deficits (in per capita terms) with high-income nations like Japan and Germany?

But I was going by gut feel more than anything else.  For some time now, I’ve been promising a complete study on the subject to find out what the truth might really be.  I’ve completed that study and can report to you that both I and the economic experts are wrong about the relationship between wages and balance of trade.  There is, in fact, a relationship, but one you’d not expect.

Methodology: First, some explanation of my methodology is in order.  It’s simply not possible to compare actual wages from one nation to the next for the full range of manufactured products, so I did the next best thing and utilized per capita “Purchasing Power Parity” (or “PPP”) for each nation.  Per capita PPP is roughly the gross domestic product (or GDP) of a given nation divided by its population, and it tends to track pretty closely with average income.  For example, U.S. GDP of about $14 trillion, divided by a population of 300 million, yields a figure of about $46,700 per capita – pretty close to the average family income.

On the trade side, I tabulated by SIC code the imports from and exports to each of 163 U.S. trading partner nations.  I then identified each manufactured product by SIC code and totaled them to arrive at a balance of trade in manufactured products.  By dividing that figure by the population of that nation, I arrived at a per capita balance of trade in manufactured products.  It’s important to track only manufactured products, since that’s where jobs are concentrated.

I then constructed “scatter charts” of the data, looking for any relationship that might be evident.  By having the computer generate an equation that describes the relationship (if any), along with a coefficient of correlation, it became easier to determine the existence of any relationship.  A scatter chart that yields a shotgun-like pattern shows that no relationship exists, while a scatter chart that has the data points more or less organized along a line does show a relationship.  It’s important to note that a relationship isn’t necessarily evidence of cause and effect.  For example, just because your alarm clark happens to coincide more or less with the rising of the sun doesn’t mean that the sunrise causes your alarm clock to go off or vice versa.

Summary: When all 163 nations are taken as a whole, there is a relationship between PPP and the U.S. balance of trade.  As PPP increases from a very low level (near zero), the U.S. balance of trade in manufactured products tends toward a surplus that grows larger as the PPP of its trading partners rises.  Lower PPP tends to drive the balance of trade toward zero.

On the one hand, this intuitively seems to be correct.  Higher PPP nations produce more and consume more, creating greater opportunities for trade and thus the potential for greater imbalances.  Lower PPP nations produce and consume little.  Thus, there’s little opportunity for trade, and little chance of running a large surplus or deficit.

However, the fact that higher PPP tends to drive the balance of trade toward a surplus seems counter-intuitive.  How can this be, when the U.S. actually has an enormous trade deficit?  Closer examination of the data points reveals that 116 of the 163 data points fall on the trade surplus side of the chart, while only 47 fall on the trade deficit side.  Regardless of whether one looks at only the trade surplus nations or the trade deficit nations, PPP has the same effect – it tends to amplify an imbalance in trade.  Among the trade surplus nations, the surplus tends to grow with rising PPP.  The same is true among the trade deficit nations.  The deficit tends to grow larger with rising PPP.

There is only one possible explanation for the seeming contradiction between the fact that the U.S. has a trade surplus with 71% of nations but overall has an enormous trade deficit in manufactured goods:  the latter category of nations represents a far higher proportion of the world’s population.  Those 47 trade deficit nations, while representing only 20% of the earth’s populated land surface area (Antarctica is excluded), represent 65% of the world’s population.  The average population density of the 116 nations with whom the U.S. has a surplus of trade in manufactured goods is 58 people per square mile.  The average population density of the 47 nations with whom the U.S. has a trade deficit is almost eight times greater at 440 people per square mile.

Analysis: The following scatter chart plots the PPP for each of 163 nations vs. the per capita U.S. balance of trade in manufactured goods (the balance of trade divided by the population of each nation).  Tiny island nations were excluded from the analysis for the sake of simplicity and because their economies are almost universally based upon tourism.  Tiny city-states like Singapore, Luxembourg, Vatican City, Monaco, etc. are also excluded.

Total Chart

As you can see, the data points hug the zero point at the low end of the PPP scale, but steadily fan out as PPP increases.  There is a very strong correlation coefficient (0.57) with the trend line equation describing the relationship.  (“0” is no correlation while 1.0 is perfect correlation.)  And, as you can see, the trend line lies on the surplus side of the chart.  That’s because there are more data points (116 vs. 47) that fall on that side of the chart.  But aside from the number of points, the trade deficit side of the chart is virtually a mirror image of the surplus side.  Trade deficits tend to increase with rising PPP, just as trade surpluses tend to do.

I then split the data into two groups – trade surplus nations and trade deficit nations – to try to understand this dichotomy.  The following is a scatter chart for the trade deficit nations:

Trade Deficit Chart

For those nations with whom the U.S. runs a trade deficit, there is a definite relationship between PPP and the size of the trade deficit, but it’s exactly the opposite of what you’d expect.  The trade deficit in per capita terms tends to grow with rising PPP, and trends toward zero as PPP declines.  This flies in the face of what is said by those who blame our trade deficit on low wages.  Consider China.  In per capita terms, our trade deficit with China is relatively low, falling right in line with other trade deficit nations with similar PPP.  But the overall deficit with China is large, not because of low wages but because it’s such an enormous country.  Take Thailand as another example.  Their PPP is very similar to that of China’s, as is our per capita trade deficit in manufactured products with Thailand.  If Thailand were twenty times larger (like China), our trade deficit with them would be the same.  Yet no one cares about Thailand.  In per capita terms, our trade deficit with wealthy, high-wage countries like Japan, Germany, Switzerland and others is significantly worse than our deficit with China.

On all of these charts, I had to turn off the data labels to make them more legible.  But I’ve identified a few of the more notable data points on this chart – nations that are significant trade partners with the U.S.  As I scanned down the list of 47 nations that appear on this trade deficit side of the scatter chart, one common characteristic quickly stood out:  these are very densely populated nations.  In fact, of the 47 trade deficit nations, only four are less densely populated than the U.S.:  Armenia, Laos, Finland and Sweden.  In addition to those data points I’ve identified on the chart, also included in this group are Bangladesh, El Salvador, Hungary, India, Italy, Malaysia, Mexico, Pakistan, the Philippines, South Korea, Taiwan, the U.K. and Vietnam among others – all far more densely populated than the U.S.  This group of 47 nations represents 65% of the world’s population, but only 20% of its land surface area (uninhabited Antarctica excluded from the calculation).  The population density of this group of nations as a whole is 440 people per square mile.

Now let’s take a look at the trade surplus nations and see what common characteristics they might share.  The following is a scatter chart of those 116 nations with whom the U.S. had a surplus of trade in manufactured goods in 2009.

Trade Surplus Chart

Once again, we see that as PPP increases, the trade surplus tends to grow.  The surplus trends toward zero as PPP declines.  The correlation to a linear, upward-trending equation is very strong at 0.61.

I’ve identified some of the more significant trading partners in this group – some very large countries like Canada, Australia and Brazil.  This group of 116 nations represents 80% of the world’s land surface area, but only 35% of its population.  The population density of these 116 nations taken as a whole is only 58 people per square mile.


Low wages do not cause large trade deficits.  Low wages tend to result in small trade imbalances when expressed in per capita terms.  High wages tend to result in large trade imbalances – both surpluses and deficits.  China is no exception.  With a relatively low per capita PPP, the trade deficit with China expressed in per capita terms is relatively low – exactly as the chart would predict.  Our trade deficit with China is large because of its sheer size.  If China were a cluster of many small nations, our deficit with each would be relatively small.

Population density is clearly the overriding factor in determining whether the U.S. will experience a surplus or deficit in trade with any particular nation.

The reason for the relationship between PPP and balance of trade being similar (but opposite) for surplus vs. deficit nations is a matter of speculation.  It is my belief that, among the surplus nations, higher PPP tends to produce a greater surplus of trade for the U.S. because these nations are wealthy in natural resources and they trade those resources for manufactured products.  Thus, their wealth is the cause of the U.S. trade surplus.  Conversely, among the deficit nations, higher PPP produces a larger trade deficit for the U.S. because these nations use manufacturing for export to generate their wealth.  Thus, their wealth is the result of the U.S. trade deficit and a surplus with the rest of the world as well.

Further discussion of the evolution of the trade deficit with China and the implications for U.S. trade policy will be covered in subsequent posts.

Cumulative U.S. Trade Deficit Surpasses $10 Trillion

September 14, 2010
Today, September 15th, 2010, America’s economy has reached a very sad milestone.  Our cumulative trade deficit, since our last trade surplus in 1975, expressed in current dollars, has now eclipsed $10 trillion.

America experienced its last surplus of trade in 1975. Since then, through July, the most recent month for which trade data has been released by the U.S. Bureau of Economic Analysis, when adjusted for inflation using the Consumer Price Index published by the Bureau of Labor Statistics, the cumulative trade deficit was $9.93 trillion. Assuming a continuing monthly trade deficit of $45 billion (the current 3-month moving average), it is estimated that the trade deficit has now reached $10 trillion as of September 15th.

The U.S. is on track for its 35th consecutive annual trade deficit in 2010 since its last trade surplus in 1975. The U.S. trade deficit of $759 billion set a record in 2006. With the onset of the global recession in 2007, it fell steadily to $375 billion in 2009, but is expected to rise again to over $500 billion in 2010.  Almost half of all Americans alive today have never known an America with a trade surplus.

Through July, 2010, America’s largest trade deficit is with China, at $145.3 billion. The trade deficit with Mexico is second at $38.4 billion. The trade deficit with Japan is third at $31.6 billion. The trade deficit with Germany is fourth at $18.7 billion.

America is $10 trillion poorer today as a result of bone-headed trade policy based on failed 18th century economic theories.  That’s $32,250 for every man, woman and child in America – almost $130,000 for every family of four.  It’s enough money to solve virtually every financial challenge facing America, including putting the social security fund back on sound footing.  It’s enough money to nearly wipe out our national debt.

In 1947, when America signed the Global Agreement on Tariffs and Trade, it was so easy for our leaders to come together and hold hands with the rest of the world, like the old “I’d like to teach the world to sing in perfect harmony” Coke commercial.  Now we see what their sappy good intentions and simple-minded economists have wrought – an America in serious decline and a global economy collapsed by enormous trade imbalances.  Nowhere is a leader to be found with the courage to undo what our 1947 predecessors stumbled into so blindly.  If our founding fathers ever thought it conceivable that our trade policy would be abandoned to a global trade organization bent on pillaging America, they would surely have included in the constitution a requirement for a balance of trade that also made it illegal to join such a global organization.

Never has America been so threatened by neglect of its economy and by a complete failure of leadership.  Never has it so badly needed an amendment to its constitution to mandate the inclusion of common sense in its trade policy.  (See )

2nd Qtr. GDP Hints at Slow-Motion Depression

August 28, 2010

The Commerce Department released it’s latest revision to 2nd quarter GDP yesterday, cutting it from an annual growth rate of 2.4% to just 1.6%.  So I’ve revised my figures for real per capita GDP, both with and without stimulus spending.  (It’s important to track the latter as an indication of what’s happening in the underlying economy, and what will happen when the stimulus spending ends.)  Here’s the updated chart:

Real Per Capita GDP

Strip away the stimulus spending, and real per capita GDP (GDP adjusted for population growth) fell at an annual rate of 3.8%.  This is faster than the rate of decline during any quarter of the financial melt-down that took place from the 1st quarter of 2008 through the 3rd quarter of 2009.  Real per capita GDP, with stimulus spending factored out, is now down by 8.7% from its peak in the 4th quarter of 2007.  Over the last five years, dating back to the 3rd quarter of 2005, real per capita GDP with stimulus spending removed has risen in only five quarters out of twenty. 

GDP declines during the Great Depression were much worse:

  • 1930:  – 8.6%
  • 1931:  – 6.4%
  • 1932:  – 13%
  • 1933:  – 1.3%

A decline of 3.8% (with stimulus spending factored out) doesn’t rise to these levels.  But a decline of 8.7% from its peak 2-1/2 years ago does, although it’s happening at a slower pace.  So it begs the question:  is the U.S. trapped in a slow-motion version of the 1930s Great Depression?  As the stimulus spending winds down by the end of this year, we’ll have a better idea.  But given the huge decline in the housing market following the expiration of the tax credits, the soaring trade deficit, the slow-down in manufacturing and rising first-time jobless claims, it’s not looking good.

Employment Level Falls by 301,000 in June

July 2, 2010


If I were Obama, I’d be ashamed to publish a report like the employment report published by BLS (Bureau of Labor Statistics) this morning.  The reported gain in private sector employment of over 80,000 jobs and the decline in the unemployment rate to 9.5% completely distorts the real employment picture. 

The following spreadsheet provides the BLS data, along with a more realistic picture of unemployment.

Unemployment Calculation

As you can see, the decline in the unemployment rate to 9.5% was made possible only by the government’s assumption that 652,000 workers exited the labor force in June, apparently no longer needing a source of income to put bread on the table.  This was the second month in a row that the labor force has declined, and was exceeded only slightly by the decline in December, ’09.  If the government was honest in their estimation of the labor force, they’d steadily be adding over 120,000 workers every month, thanks to population growth. 

Contrary to this morning’s report, here are the grim facts:

  • In June, the employment level fell by 301,000 workers, the third monthly decline in a row.  (See column E.)
  • Assuming the labor force to be a constant percentage of the population, unemployment rose in June to 11.5% from 11.2% in May.  (See column H.)
  • The number of unemployed Americans rose to over 18 million in June, the 2nd increase in a row. 
  • U6a (see column J), the broader measure of unemployment, spiked above 20% again, rising to 20.4% from 19.9% in May.

As the day wears on, expect analysts to see through the smoke and mirrors and come to the same conclusion:   this is just one more piece of data that supports the view that the economy is sliding back into recession.

Not surprising.  The president has done absolutely nothing to address the fundamental problems with the economy – the huge trade deficit in manufactured goods caused by trade policy that fails to take into account the role of population density disparities (in other words, his failure to act decisively with tariffs to restore a balance of trade), and his continuation of policies that pile more immigrant workers onto an already-glutted labor force.

In fact, he’s making matters worse.  At the conclusion of the G20 last week, he delivered a left jab to American workers by announcing his intention to push through a free trade deal with South Korea, the third most densely populated nation on earth (behind Bangladesh and the Palestinian Territory), 15 times more densely populated than the U.S. and heavily dependent on manufacturing surpluses to sustain their bloated labor force.  And yesterday he delivered a right cross to the jaw of American workers by pushing for amnesty for illegal aliens.  American workers are reeling, about to fall to the mat for the count. 

Obama is no friend to American workers and, despite his efforts to gloss over the employment situation, his policy chickens are coming home to roost.  Each new piece of economic data reinforces the picture of an economy slipping back into decline.  Then what?  Another huge stimulus?  That’s been my prediction all along.  But the markets have absolutely no appetite for any more deficit spending. 

Patience is running short.  I think that soon, in the coming months, we’re going to see the economic you-know-what hit the fan. 


By the way, the following are charts of the data presented in spreadsheet above:

Labor Force & Employment Level     Unemployed Americans     Unemployment Chart

China’s Trade Surplus with U.S. is Secure

April 5, 2010

The above-linked USAToday article reports on the Obama administration’s decision to delay labeling China a “currency manipulator” which, under World Trade Organization rules, would leave the U.S. free to impose tariffs on Chinese imports.

China has nothing to fear from the Obama administration.  Its trade surplus with the U.S. is secure and likely to grow.  Obama has, time and again, in spite of his campaign promises to enforce trade deals and bring manufacturing jobs back home, proven himself unwilling to take action on trade policy.  He still has done nothing in response to large and wide-ranging tariffs raised by Mexico early in his administration.  He has never uttered a peep of protest about blatant dumping by Japanese automakers.  And, while his administration has done some timid peeping about Chinese currency manipulation, he has once again proven unwilling to act. 

Besides, even on the outside chance that he did slap the “currency manipulator” label on China, it would lead to nothing but years of more talk.  And even on the outside chance that China did agree to let its currency float and be determined by market forces, it would have no impact on the balance of trade.  

Still, Geithner said in a statement that China should adopt “a more market-oriented exchange rate” to balance the U.S. trade deficit with China, which totaled $226.8 billion last year — the largest imbalance with any country. U.S. manufacturers say China’s yuan is undervalued by as much as 40% and is a big reason for the massive trade deficit.

Wrong.  Currency valuations have nothing to do with this trade deficit with China nor with any trade deficit.   Trade imbalances are driven by imbalances in labor capacity.  Excess labor capacity in densely populated nations is driven by their low per capita consumption, eroded by overcrowding.  Thus, it is ultimately a disparity in population density that drives global trade imbalances. 

If “currency manipulation” is the cause of the U.S. trade deficit with China, then how does one explain an even larger U.S. trade deficit (in per capita terms) with the Euro zone, a region almost as densely populated as China?  How does one explain the far larger trade deficit with Japan (in per capita terms), a nation  ten times as densely populated as the U.S.?  And how does one explain the fact that, in spite of the dollar falling by over 300% vs. the yen in the past four decades, our trade deficit with Japan, instead of falling, actually exploded?  The reason is because currency valuations, if allowed to be determined by market forces, actually stabilize at a level where unemployment is evenly distributed, and not at a level where trade is balanced. 

A stronger yuan versus the dollar would make U.S. products less expensive in China, while making Chinese goods more expensive for American consumers.

Sure, but that doesn’t mean it will have any effect on trade.  China will maintain their market share by taking less profit and by finding other ways to subsidize their manufacturers, just as Japan and Europe have done for decades.   

The administration is hoping that China will again allow its currency to rise in value against the dollar as a way of narrowing the trade gap — as it did until mid-2008 when the global recession began to cut sharply into China’s exports abroad.

 And what was the result of China allowing the yuan to appreciate by 20% during that time frame?  The U.S. trade deficit with China worsened. 

The article goes on to present the pros and cons of tough trade action on China, weighing help for American workers against Chinese cooperation on the Iran nuclear issue, and so on.  It’s clear that there will always be a reason for the U.S. to be the world’s doormat when it comes to trade policy.  American jobs are always the first concession made for international cooperation on one thing or another. 

No, China has nothing to fear.

Time to Label China a Currency Manipulator

March 16, 2010

The U.S. Treasury Department is due to report to Congress by April 15th on whether or not it considers China to be a “currency manipulator.”  (See the above-linked Reuters article.)  Such a determination could be tantamount to an economic declaration of war.  Under World Trade Organization rules, a nation who determines that another is manipulating the exchange rate is then free to impose tariffs to rectify the situation.  Such a move by the U.S. to restore a balance of trade would threaten China with economic collapse. 

Nevertheless, the time has come.  With its policy of pegging the yuan to the dollar instead of allowing market forces to determine the exchange rate, China clearly is a currency manipulator.  Of course, so too is virtually every other nation, including Japan and the Euro zone.  The only difference is that they’re much more subtle about it, leaving their exchange rate to the whims of market forces, but then manipulating those market forces.  It’s not as effective as China’s policy, but they’re able to compensate for any erosion in exchange rate by using other tactics to maintain their trade surpluses with the U.S.  So the end result is the same with one exception.  It strips the U.S. of the ability to label them as currency manipulators. 

Will the Obama administration make such a move?  I doubt it.  They’ve yet to show any real backbone in international trade, failing to respond to huge, new Mexican tariffs on American exports or to blatant dumping by Japanese auto manufacturers.  However, as the economic stimulus plan winds down and as the Federal Reserve ends its programs to pump trillions of dollars into the economy, Obama faces the reality that it simply hasn’t worked.  Though they’ve been trumpeting the growth in GDP, they know very well that the effect is temporary and that the economy is likely to sink back into recession as the stimulus spending is exhausted.  And there’s no appetite for more deficit spending.  With credit dried up and without phony economic bubbles (the housing bubble being the most recent example) to create the illusion of prosperity, Obama knows that real improvement in the economy depends on a rebound in the manufacturing sector, which has had the life sucked out of it by the trade deficit. 

The jobs temporarily salvaged by the stimulus plan have only carried him so far, and its effects are waning.  So with a 2nd term now hinging on a restoration of private sector manufacturing jobs, we may yet see the administration grow a spine in international trade.  Why not label China a currency manipulator?  There’s really nothing to fear.  Will China dump its U.S. treasury holdings, which some fear may drive interest rates sky-high in the U.S.?  Perhaps, but the threat of higher interest rates is way over-blown.

  First of all, the rest of the world will see any move by the U.S. to restore a balance of trade as a huge boost to the U.S. economy, driving strong demand by other countries for U.S. treasuries.  Those sold by the Chinese will be quickly snapped up.  If anything, interest rates may even fall.  Secondly, in the past year, the Federal Reserve has purchased more U.S. treasuries than the total of Chinese holdings.  Whatever slack there might be in demand for the U.S. treasuries sold off by China can easily be made up by the Federal Reserve.   And finally, since China will still be dependent on exports to the U.S. to prop up their economy, they will still be left with a lot of dollars looking for a home.  What else can they do except use them to purchase treasuries?  I suppose they could also use them to buy oil, but then the oil exporters will have to purchase treasuries.  In the final analysis, the demand for U.S. treasuries will remain strong regardless of what China does. 

There is the possibility of an unintended consequence.  A move by the U.S. to restore a balance of trade with China may be perceived as such a positive for the U.S. economy and such a negative for China’s that, once unpegged from the dollar, the yuan may actually rise very little  or could even fall against the dollar.  Imagine the laughter and gloating that would be coming from China then!

I do find it a little awkward supporting the branding of China as a currency manipulator because exchange rates really aren’t the problem.  Currency exchange rates tend to stabilize not at a level that restores a balance of trade but at a level where unemployment equalizes, leaving a permanent trade imbalance between nations grossly disparate in population density.  When has a change in exchange rate ever reversed a trade imbalance?  Never.  Since the 1970s, the dollar has fallen by over 300% vs. the Japanese yen.  Yet, during that time, our trade deficit with Japan has actually exploded.  More recently, when the yuan was allowed by the Chinese to rise by 20% a couple of years ago, our trade deficit with China only grew worse.  And, as the dollar has fallen in the past year vs. the yen and euro, the prices for imports from those regions at the retail level have actually declined.  Japanese automakers have aggressively cut prices in spite of the falling dollar. 

The problem is that badly overpopuated nations will never let something so trivial as currency exchange rates erode their share of the U.S. market.  They know very well that their economies are utterly dependent on manufacturing for export and that subsidizing their manufacturers in order to maintain U.S. market share is a very, very small price to pay.

So, while there’s no hope that an end to the blatant currency manipulation by China can reverse our trade deficit, labeling China as a currency manipulator will place into our hands the one weapon that can – tariffs.  And, once successfully employed against China, resulting in an economic renaissance in the U.S., the advocates of unfettered free trade and protectionism bashers will be exposed as liars and fools.  And it will beg the question:  if it’s successful with China, why not Japan and Germany and Mexico and others?  How much sense would it make to remain a member of the World Trade Organization at all? 

So, in the end, we may owe a big thanks to China for their clumsiness with the currency issue if it turns out to be the first crack in America’s golden idol of free trade.  Perhaps this will be the first nudge in a turn away from the far left end and back toward a more centrist trade policy that makes sensible use of both free trade and protectionism as necessary to maintain a balance of trade.  I’m skeptical, but we’ll soon see.

Enforcing Flawed Trade Deals

February 4, 2010

No sooner do I announce plans to scale back on posting articles when along comes something I can’t resist.  The above-linked Reuters article reports on an announcement by Commerce Secretary Gary Locke of plans to boost enforcement of trade deals in an effort to achieve Obama’s promised doubling of exports in five years.   There are a couple of key points that need to be made here. 

First of all, I have spent virtually my whole adult life listening to presidents, Commerce secretaries and U.S. Trade Representatives vowing to get tough on trade deal enforcement.  This effort will turn out no differently.  If anything, exporting nations are relieved to have the focus drawn away from the import side of the equation.

Secondly, the following passage from the article can’t pass without comment:

“While the U.S. is a major exporter, we are underperforming,” Locke said in the excerpts given to reporters. “U.S. exports as a percentage of GDP are still well below nearly all of our major economic competitors.”

The competitors Locke speaks of are primarily China, Japan and Germany.  Back in early November, Obama challenged his economic team with the question, “If Germany can build an economy on exports, why can’t we?”  (See Obama on Trade: “If Germany can do it, why can’t we?”.)  America is not “underperforming.”  It’s not about “competing.”  The problem is that the field of economics doesn’t yet recognize or understand the role of population density disparities in driving global trade imbalances.  Boosting our exports means that nations like China, Japan and Germany have to boost their imports – their domestic consumption.  If they were capable of such domestic consumption, they wouldn’t have the need to export so much in the first place, nor would they have the excess production capacity to do so. 

I don’t doubt the president’s sincerity.  Every president for the past 30 years has understood the need to restore a balance of trade.  But Obama is the first post-global economic collapse president and, as such, the first to have an added sense of urgency brought on by a realization of the ultimate consequences of sustained trade imbalances.  Unfortunately, he’s fallen back on the same worn out approach of enforcing trade deals when it’s the deals themselves, lacking population density-leveling mechanicsms,  that are the problem. 

But this time, time is not on his side.  The era of sweeping trade imbalances and their consequences under the rug has ended.  The U.S. is economically boxed in on all sides by high unemployment, global demands to rein in our budget deficit and a Federal Reserve with an empty tool box.  So the only question is how soon the president will run out of patience with the export-focused approach and turn his attention to imports.