Why Population Density Drives America’s Trade Imbalance

November 21, 2019

The Problem:

In my last few posts, we’ve seen a powerful correlation between America’s trade imbalances and the population density of its trading partners.  But how does that work?  It seems odd – something that seems highly unlikely to be a factor.  And you’ve likely never heard of it before.  What you have heard about are a host of other “factors,” things like low wages, trade barriers, intellectual property theft, lax labor and environmental standards, just to name a few.  All of them seem like more plausible explanations for trade imbalances than something like “population density.”

The reason population density has such a powerful effect on trade is what it does to the per capita consumption of products.  Beyond a certain critical population density, over-crowding begins to rapidly erode people’s need for and ability to use (or “consume”) virtually every product you can think of, with the exception of food.  At first glance, you might think that’s a good thing.  Everyone lives more efficiently, reducing their environmental footprint and their demand for natural resources.  However, the real problem is that per capita employment is tied directly to per capita consumption.  Every product not bought is another worker that is out of work.  As population density continues to grow beyond that critical level, an economy is rapidly transformed from one that is self-sufficient and enjoys full employment to one with a labor force that is bloated out of proportion to its market, making it dependent on other nations to sop up its excess labor or, put another way, making it dependent on manufacturing products for export to rescue it from what would otherwise be an unemployment crisis.

Let’s consider an example.  The dwelling space of the average citizen of Japan, a nation ten times as densely populated as the U.S., is less than one third that of the average American.  It’s not hard to imagine why.  In such crowded conditions, it’s only natural that people will find it impractical to live in single-family homes in the suburbs and will instead opt for smaller apartments.  Now think of all the products that go into the construction of dwellings – lumber, concrete, steel, drywall, wiring, plumbing, carpeting – literally thousands of products.  And think of furnishings and appliances.  A person living in a dwelling that is less than one third the size of another consumes less than a third of all of those products compared to someone living in less crowded conditions.  And what about the products used to maintain the lawns and gardens of single-family homes?  Consumption of those products doesn’t just reduce – it vanishes altogether.

Consequently, per capita employment in those industries involved in building, furnishing and maintaining dwellings in Japan is less than a third of that in America.  So what are all of those unemployed Japanese to do?  Will they be put to work building cars for domestic consumption?  Hardly.  As you can imagine, the per capita consumption of vehicles by people living in such crowded conditions is impacted dramatically as most opt for mass transit.  So emaciated is the Japanese auto market that even Japanese automakers have trouble selling cars there.  So now add to the workers who aren’t employed in the home industry those workers who also aren’t employed building cars for their domestic market.

And so it goes with virtually every product you can think of.  Japan is an island nation surrounded by water.  Yet their per capita consumption of products for the boating industry is virtually zero compared to other nations, simply because it’s so crowded.  There’s only so much marina space to go around.  Put a town of 100 families next to a marina with 100 slips and it’s likely that every single family will own a boat with a motor and fishing gear.  Put a city of a million families next to that same marina and, though the marina is still full, on a “per capita” basis boat ownership has effectively fallen to zero.

Japan’s only hope for employing its badly under-utilized labor force is to use them to manufacture products for export.  This is exactly why America’s second largest trade deficit in manufactured goods is with Japan.  It’s not so much that we buy too much stuff from Japan.  The problem is that Japan buys so little from us in return.  It’s not that they don’t want to.  They can’t.  Their market is so emaciated by over-crowding that they can’t even consume their own domestic production.  Why would they buy more from us?  The same is true of nearly every major U.S. trading “partner” that is badly over-crowded.  Attempting to trade freely – without tariffs or other barriers – is tantamount to economic suicide.  It’s virtually certain to yield a huge trade deficit.

Why have I never heard of this before?

Few, aside from those who follow this blog or have read my book, have ever heard of this before.  Even if you have a degree in economics, you’ve never heard of it.  In fact, you were likely taught the opposite.  If you studied economics, at some point you were surely introduced to the late-18th century economist Malthus, and were warned to never give any credence to any theories that revolved around over-population, lest you be derided as a “Malthusian,” which would surely doom your career as an economist.

In 1798, Thomas Robert Malthus published his essay titled “Essay on Population” in which he warned that a growing population would outstrip our ability to meet the need for food, effectively dooming mankind to a fate of “misery and vice.”  This led to the field of economics being dubbed “the dismal science,” something that really rankled other economists.  Yet, the idea gained some traction until, that is, as years passed and improvements in farming productivity exceeded the requirements of a growing population.  The other sciences mocked the field of economics unmercifully, proclaiming that mankind is ingenious enough to overcome any and all obstacles to growth.  Economists acquiesced and vowed to never, ever again give any consideration to any concerns about overpopulation.

And so it is today that economists have a huge blind spot when it comes to the subject of population growth.  You can’t discover something that you’re not even willing to look at.  It’s not unlike the medieval Catholic Church labeling Galileo a heretic for theorizing that the earth revolved around the sun instead of vice versa.  Where would we be today if the study of astronomy ended at that point?  Where would we be if Newton was mocked for his theory of gravity and the field of physics ended at that point?  That’s what economists have done.  They’ve turned their backs on what is arguably the most dominant variable in economics.

What does this mean for trade policy?

In the wake of the Great Depression, soon followed by World War II, economists disingenuously laid blame for what had transpired on U.S. tariffs and, eager to put to the test the theory of free trade, promised that it would put an end to such wars and depressions.  So, in 1947, the U.S. signed the Global Agreement on Tariffs and Trade, taking the first step to implement the concept of free trade on a global basis.  Within three decades, the trade surplus the U.S. had enjoyed was wiped out.  In 2018, the U.S. ran its 44th consecutive annual trade deficit which, by the way, set a record in 2018 and continues to worsen.

The problem is that the concept of free trade doesn’t take into consideration the role of population density in making over-crowded nations absolutely dependent on running trade surpluses in manufactured goods, and simultaneously sapping the life from the manufacturing sector of other nations.  No amount of trade negotiations can correct this imbalance.  No nation that is dependent on manufacturing for export would ever agree to anything that would slow their exports and it’s impossible for them to increase their imports because, after all, it’s their emaciated market that has caused the trade imbalance in the first place.  The only way to restore a balance of trade is to force the issue through the use of either tariffs or import quotas.  Any trade policy that doesn’t employ those tactics when trading with badly over-crowded nations is doomed to failure and puts our overall economy at risk.

Since World War II, other presidents have tinkered with tariffs in those rare instances when the World Trade Organization has green-lighted their use to correct for some other nations’ trade transgressions.  But President Trump is the first president in seven decades to implement a significant tariff program aimed at reducing our trade imbalance with China.  But much, much more needs to be done.  There are many other nations whose trade imbalances on a per capita basis are much worse, nations like Germany, Japan, Mexico, Ireland, South Korea, Taiwan and a host of others.  While many are allies, none of them are “allies” when it comes to trade.  All are eager to sustain and even grow their trade imbalances at the expense of American workers and families.  All want the U.S. economy to bear the cost for their overpopulation.  None want to face their own problems.  The U.S. needs to put an end to pointless – even counterproductive – trade negotiations, and do the things that are within our power to force the restoration of a balance of trade.

 


“Embrace change,” corporate America!

September 3, 2019

I was there, working in manufacturing in the 1980s, when a cold wind swept across America.  I was there when our corporations, until then led by manufacturing and the engineers who rose up through its ranks, kicked manufacturing to the curb and replaced their leadership with marketing people, skilled in the art of B.S., and bean counters, focused on nothing but cutting costs.  I was there when the United Nations and the World Trade Organization embarked on their campaign of raising poor nations out of poverty through the systematic plundering of jobs from the U.S. – as many jobs as possible without tipping the balance of power in favor of bad actors who might threaten this new concept of “globalism” and the “New World Order” – the new regime of parasites dedicated to keeping its U.S. host alive just enough to keep the blood flowing.

I was there when they began scaling back manufacturing operations, laying off good workers and closing plants.  “Embrace change,” we were told constantly by business managers with an air of condescension, as though they were addressing fools too dumb to recognize good things and good opportunities when they see it.  We had made careers of embracing change – change for the better – changes that automated our factories, boosted production, cut emissions, improved quality and grew profits.  Now we were being insulted by con men whose only goal was the next promotion, which required laying off more people than the next guy.

I was there at a big division-wide meeting – one of those meetings whose purpose was ostensibly to gather input, but it was clear from the start that input was the last thing they wanted.  What they wanted was “buy in” for the new direction of the company.  In other words, you’d better accept what’s coming enthusiastically, with a big smile on your face, if you know what’s good for you.  The leader, the division manager, asked, “what are we going to need to succeed?”  I raised my hand and replied – perhaps naively or perhaps in a thinly-veiled attempt to stand up for what I and many others present had built our careers around.  “We’ll need excellence in manufacturing.”  I was stunned by his arrogant, dismissive reply.  “Why?  We don’t need that.  We can buy that!”  I thought to myself, “you dumbass, you can buy it if you want, but you still need it, and now you’re at the mercy of your supplier.”  But it would have been a pointless example of falling on your own sword to come right out and say it.  “Embrace change.”  Here it comes.

Our final days before closing the doors were spent writing operating procedures, documenting every detail of our operations, and then training workers brought over from foreign subsidiaries.  We were forced to facilitate the widespread technology transfer that played a critical role in ruining the American economy.

It’s decades later and the tables have turned.  As it always does, the pendulum swung too far.  The globalist corporations over-played their hand, planting the seeds of political change.  Americans are sick of working for minimum wages and being the world’s chumps.  America itself can no longer fund massive trade deficits.  The wind has shifted and now blows cold on globalist dreams of reaping big profits from a China transformed into western-style consumers and from plundering the American market with cheap products.  Those dreams never had a chance.  China will never be more than a sweat-shop labor pool with their gross over-population dooming any hope of a western-style, consumer-driven economy.

In the meantime, a lot of weeds sprouted in the devastated American economic landscape.  By “weeds,” I mean business models that bring so little value to the table that they are dependent on virtual slave labor wages.  Cheap junk of poor quality has perpetuated a throw-away mindset among consumers.  Cheap clothing made of thin, flimsy fabric.  Tools that break after one use.  Auto parts and appliances that break as soon as the warranty expires.  An economy dependent on consumers burning through their severance packages.  A retail economy that employed laid-off workers manning check-out lines until everyone had burned through their savings.  An economy totally dependent on consumers buying stuff that they had no hand in producing.  All the while the economy grew.  It didn’t matter if the growth was flowers or weeds, as long as the color was green – money pouring into corporate coffers.

In the wake of Trump’s tariffs on China, retailers are having a hissy-fit when their suppliers ask for a price increase to cover the cost of the tariffs.  Products with high perceived value needn’t fear.  They’ll always find a way to be marketed successfully even if their prices do rise a few percent.  Those with low value will bite the dust.  Good riddance.  And retailers who turn their backs on good products just because the supplier needs to raise prices to make a profit – whether to cover the cost of the tariffs or, better yet, to begin manufacturing domestically – will lose out to retailers who understand their value, and they too will fail and vanish.  Again, good riddance.  It’s not like there’s a shortage of retailers.

So, corporate America, the shoe’s now on the other foot.  EMBRACE CHANGE!  Think of the possibilities and opportunities – the opportunity to cut your shipping costs dramatically, to be in charge of your manufacturing again instead of being at the mercy of Chinese companies, to boost sales to American consumers with more buying power thanks to rising wages.  EMBRACE CHANGE!!  Maybe you can mitigate some of the increased cost by cutting fat at the top layers of your organizations – those con men who grew fat and rich by ruining the lives of the people who actually did the work.  EMBRACE CHANGE!!!  Maybe you’ll survive.  If not, good riddance and adios.  Don’t let the screen door hit you on the way out.  Your workers will be fine.  The winning companies will snap them right up.


“Slow-Turkey” Trade Policy

July 8, 2019

Like the animated “slow turkey” we’ve all seen on the TV ads for a quit-smoking medication, Trump’s trade policy is also taking the “slow turkey” approach.

As announced by the Commerce Department on Wednesday, the trade deficit jumped back up in May to $55.2 billion from $51.2 billion in April, but this was still below the peak of $60.8 billion in December.  (Here’s the full release from the Commerce Department:  https://www.bea.gov/system/files/2019-07/trad0519.pdf.)

More importantly, the deficit in manufactured goods also rebounded in May to $71.1 billion, up from $67.9 billion in April.  It too, however, was below the all-time record of $76.5 billion set in December.  Here’s a chart of the deficit in manufactured goods:  Manf’d Goods Balance of Trade.

Based upon these figures, it’s difficult to see that Trump’s policy of using tariffs to bring manufacturing jobs back to the U.S. is having any effect.  Look more closely, though, and you’ll find that things are starting to happen.  The deficit with China rose again in May, but to “only” $30.2 billion, from $26.9 billion in April and $20.7 billion in March.  But this rise follows a seasonal pattern.  The fact is that the deficit with China has been down from the same month in 2018 every single month so far this year.  The year-to-date deficit with China is $137.1 billion through May, compared to $152.2 billion for the same period in 2018.  And let’s not forget that the U.S. is now collecting a lot of revenue from half of Chinese imports – approximately $5 billion in May – an annualized rate of $60 billion.  If and when Trump imposes a 25% tariff on the other half of Chinese imports, that revenue figure will double to $120 billion per year and will further cut our deficit with China.

Yes, China is retaliating with tariffs of their own, and exports to China have dropped slightly, but imports from China have fallen much more – the net result being a lower trade deficit, which is a boost to the U.S. economy.  What about the stories about how bad America’s farmers are being hurt by this trade war?  Baloney.  Look at page 19 of the report.  Exports of “foods, feeds, and beverages” year-to-date is running almost dead even with last year.  Exports of soybeans, which get so much attention, are running 7% ahead of last year.  And overall exports are up by $2 billion from last year.

Recently, Trump announced in the wake of his G20 meeting with Red China’s dictator Xi that he is holding off the implementation of the 25% tariff on the remainder of Chinese imports that he has threatened, pending a new round of trade negotiations with China.  We can see a pattern emerging in Trump’s style of trade policy.  He’s all warm and fuzzy when meeting with global leaders like Xi, then takes the tough action when the lower-level negotiations don’t measure up.  Maybe it’s a smart approach, effectively inoculating the business world against the Chicken Little, “the sky is falling” dire warnings of trade war consequences.  The unfounded fears dissipate when the trade war is rolled out slowly and nothing bad happens.  The free trade fear mongers are losing credibility.  Each new round of tariffs gets more of a ho-hum response.

Who’s been the biggest beneficiary of the tariffs on China so far?  Mexico.  While the trade deficit with others like Germany and Japan is either stagnant or declining (South Korea), the deficit with Mexico is growing rapidly as manufacturers who have been leaving China in droves (a few examples of which are reported here:  https://www.reuters.com/article/us-china-strategy-tech/hp-dell-other-tech-firms-plan-to-shift-production-out-of-china-nikkei-idUSKCN1TY14G) look for their next best (low cost) solution.  Some manufacturing is coming back to the U.S., but a lot is going to Mexico.

Under current NAFTA (North American Free Trade Agreement) rules, that may look like a smart move.  But that landscape is changing too – in “slow turkey” fashion.  A new agreement has been negotiated and is pending approval by Congress, and Trump has repeatedly threatened tariffs on Mexico imports, most recently in his effort to force Mexico to take a tougher stand against Central American immigrants.  Those companies moving to Mexico now may be throwing good money after bad and regret not facing the inevitable – that America’s tolerance of perpetual, huge trade imbalances has reached the end of the line.

This “slow turkey” approach to trade policy is frustrating for a “cold turkey” like me.  The “cold turkey” approach would already be yielding bigger benefits for American workers.  But I’ll concede that a “slow turkey” approach may be more sustainable in an environment where free trade globalists still command the attention of the media and are influential in what happens in global stock markets.  The benefits for workers may not be sustainable if investors are taking it on the chin.

It looks like the “slow turkey” approach is just beginning to show positive results.  The American economy, including the manufacturing sector, is doing well while others are faltering.  If this approach de-fangs the critics as their trade war hysteria falls flat, and the political climate becomes favorable for an 8-year “slow turkey” transformation of trade policy instead of a 4-year “cold turkey” that ultimately yields nothing more than a lame duck dead turkey, then I’m all for it.

 


A Trump Report Card

April 23, 2019

It’s been a while since I’ve posted anything, and thought it’d be a good time to give President Trump a sort of mid-term report card, albeit a little late.  I’ll grade him in two subjects only – immigration and trade policy – since these two areas address the economic effects of population growth, both actual growth the effect of growth imported through trade with overpopulated nations, the focus of this blog.  Beyond these, little else matters.  What about environmental policy?  Without a focus on stabilizing our population (and virtually all of America’s population growth is driven by immigration), all other environmental policies are doomed to failure.  What about foreign policy?  It’s impossible to project strength in the world if you’re weak on trade.

So, with that said, let’s begin with the good news:

Immigration Policy:  A+

Trump has done a fantastic job on both illegal and legal immigration, each of which had been contributing a million people per year to America’s population growth.  Thanks both to Trump’s zero tolerance policy for illegal immigration and dramatic cuts in legal immigration, the Census Bureau reduced its estimate of the U.S. population by 1.3 million people at the end of 2018.  He spent a lot of political capital in his efforts to get funding for a border wall and, when Congress wouldn’t agree, had the guts to declare a national emergency to obtain the funds.  “What emergency?” the media cried at first, but not for long, when their own reporters in the field began reporting on the humanitarian crisis at the border that resulted from the adminstration’s efforts to enforce the law instead of turning a blind eye to illegal immigration as previous administrations have done.  Now there’s virtually no complaints about Trump’s enforcement efforts or his emergency declaration.  His policies are likely responsible for the fact that increases at the low end of the wage scale are outpacing higher income increases.  Recently, during a trip to the southern border, Trump declared that “Our nation is full.”  Truer words were never spoken.  Ultimately, this is the biggest reason that immigration needs to be reduced.  Trump has done an absolutely fantastic job of reining in out-of-control immigration.

That’s the good news.  Now for the not-so-good:

Trade Policy:  D

Such a low grade may seem surprising and harsh, especially in light of the tariffs on metals and his seemingly tough position with China, including a 25% tariff on some items and a 10% tariff on half of all Chinese imports.  However, it’s those very actions that elevate his score to a “D” from an “F”, the score I’d give to every previous president going as far back as Franklin Roosevelt.  They’ve been a nice start, but fall far short of what we were led to expect from him in the way of trade policy.  Like all previous presidents of the modern era, Trump has been sucked into endless trade negotiations, a ploy that nations with large trade surpluses have used successfully for decades to forestall meaningful action by the U.S. – namely, tariffs.  We were promised that the North American Free Trade Agreement (NAFTA) would be torn up or promptly replaced.  Trump’s administration did negotiate a new agreement, but one that reportedly does little to shrink the enormous deficit with Mexico and it may never even be enacted, if Congress has its way.

Action on China is stalled.  Tariffs on auto and parts imports now appear to be idle threats.  Beyond China, there’s been no action on reducing the trade imbalance with other nations like Germany, Japan, South Korea, Taiwan, Vietnam and a host of others.  The trade deficit in manufactured goods has continued to explode to new record levels under Trump.  Employment in manufacturing has stalled once again.  Trump sees trade as a venue for demonstrating his deal-making prowess, and he sees tariffs as leverage to use in trade negotiations.  He doesn’t understand that favorable “deals” with overpopulated nations are impossible and a waste of time, and that tariffs are the only way to restore a balance of trade with those nations.  Regarding the ongoing trade negotiations with China, he recently declared that the U.S. will win, whether a deal is reached or not.  He’s wrong.  The Chinese have already won by sucking him into time-wasting talks that, at best, will yield a deal that the Chinese will use to continue to grow their trade surplus with the U.S.  He had them on the ropes with the tariffs and then caved in, letting them off the hook.

In summary, Trump’s trade policy is stalled and our trade deficit is getting worse, not better.  This has been a major disappointment.  He’s wasted valuable time.  As I’ve said many times, a tariff program will produce some pain in the short term as prices rise and companies are slow to build manufacturing capacity in the U.S., but will ultimately yield incredible economic growth once that capacity is in place.  Had Trump been more aggressive with tariffs, the short term pain would have given way to some major economic gains by the time of the 2020 election.  Now, that’s probably not possible and, instead, his economic program is at risk of stumbling into the election.

He’s done a terrific job on immigration but all may be lost if he doesn’t get his trade policy off dead-center.


How did unemployment fall in February?

March 13, 2019

On Friday, the Labor Department reported that the economy added only 20,000 jobs in February.  In spite of that number being significantly lower than what’s needed to keep pace with growth in the labor force, unemployment fell – not by just 0.1%, but by 0.2% – to 3.8%.  How can that happen?

It happened in large part because of some really good news – a piece of data that isn’t even a part of the unemployment report.  The official explanation is that the labor force actually shrank a little in February, while the employment level, as measured by the household survey portion of the report, actually grew by 253,000 workers.

But you have to look beyond the employment report to find the really good news that made this happen.  The employment report depends a great deal on the population estimate determined by the Census Bureau.  And in December, the Census Bureau adjusted it’s estimate downward by nearly 1.2 million people – an unusually large adjustment.  Why?  A combination of factors that include the birth rate, death rate and, probably most importantly, the growth in the immigrant population, whether through legal or illegal immigration.  It’s evidence that Trump’s crackdown on both categories of immigration is beginning to have an effect.

As a result, per capita employment has now grown for six consecutive months – something that has happened only  three times in at least the past twelve years.  (The longest such streak was July, 2011 through March, 2012 which occurred as the U.S. emerged from the “Great Recession” of 2008.)  Here’s a chart of per capita employment since November, 2007:  Per Capita Employment.

In addition, the Labor Department reported that hourly wages rose by an annual rate of 3.4%, the fastest pace of increase in quite a long time.

The point of all of this is that, in spite of the rate of growth in the U.S. population slowing and contrary to assertions by economists that population growth is vital to economic growth, there’s been absolutely no negative impact on workers or on the economy.  Per capita employment is rising, along with wages.  It’s evidence that the scheme of using high rates of immigration to suppress wages is beginning to unravel.


Trade Deficit in Manufactured Products Explodes in December

March 6, 2019

http://www.bea.gov/system/files/2019-03/trad1218.pdf

The Commerce Department announced this morning that the U.S. trade deficit grew to $59.8 billion in December, the worst reading in ten years.  But that doesn’t begin to tell the story.  The deficit in manufactured goods exploded in December to $77.3 billion, obliterating the previous record set only two months earlier.  Look at this chart:  Manf’d Goods Balance of Trade.  Exports rose by $6.1 billion to $189.2 billion – a new record – while exports fell $1.8 billion to $111.9 billion – virtually the same reading as in March, 2012.

On an annualized basis, the December deficit in manufactured goods is $927 billion.  It’s entirely possible that the deficit in manufactured goods will exceed one trillion dollars in 2019.  The U.S. economy is headed for a train wreck if something isn’t done.  The federal government can’t sustain the level of deficit spending needed to offset the trade deficit’s drain on the economy.

President Trump has got to get serious about halting the flood of imports that’s wrecking the manufacturing sector of our economy. The token tariffs he’s enacted so far are much too small and too narrowly focused to do anything other than take a small bite out of exporters’ profits.  Trade deals don’t work.  The rest of the world isn’t going to deal away their one trillion dollar surplus.  The negotiations with China are a waste of time.  He needs to raise the tariffs on all Chinese imports to at least 25%.  He needs to put 25% tariffs on all auto, truck and parts imports.

So far Trump’s pledge to “Make America Great Again” has boiled down to nothing more than a tax cut sugar high that has boosted the economy only slightly.  Americans who voted for Trump expected more.


Economy’s Good, Not Great. Tariffs Not Yet a Factor.

October 20, 2018

I’m back from my annual fall fishing trip up north.  Much has happened and it’s time to get caught up.

The economy’s doing quite well.  In September, the unemployment rate fell yet again to 3.7%.  Economists are wringing their hands over the tight labor market.  Every month, the Federal Reserve proclaims the economy to be at “full employment,” a condition likely to yield rising labor costs, fueling unwelcome inflation.  Yet, every month the economy adds more jobs and somehow manages to find workers to fill them.  Now we’re really at full employment, says the Fed.  Another month.  More jobs added.  “Now we’re really, really at full employment.”  And on it goes.  This supposedly tight labor market is the Fed’s chief justification for raising interest rates.

It’s almost as though there’s a conspiracy to stir up hysteria about an over-heating economy.  On Tuesday, the Fed released its “JOLTS” report of the number of job openings, noting that the number of job listings exceeded the number of people reported to be actively seeking employment.  What they don’t tell you is that that’s perfectly normal.  “Job seekers” is a figure taken from the unemployment report.  But if you’re simply changing jobs and never filed for unemployment, you’re not counted.  Many job opening listings are simply positions opened up by people who have left for other jobs, often because they have decided to simply relocate from one place to another.  It’s a weak measure of the health of the economy.  Nevertheless, ECONODAY had this to say about the report:  “Jerome Powell (head of the Federal Reserve) concedes that it’s a mystery why wages haven’t been going up very much as demand for labor grows and the supply of labor declines. Yet sooner or later, the law of supply and demand is bound to assert itself, at least this is the risk that the Fed is guarding against in its rate-hike regime.”

Yesterday, commenting about the weak report of existing home sales, ECONODAY had this to say: “The lack of wage gains, however, is a negative for home buyers not to mention a great mystery of the 2018 economy given the increasing scarcity of available labor. And another great mystery of this year’s economy is the lack of interest in home ownership.”

Is it a lack of interest in home ownership, or a lack of the wherewithal to buy a home in the face of rising interest rates (driven by the Fed) combined with the “great mystery” of a “lack of wage gains?”  People don’t just lose interest in owning a home.  Everybody wants a place they can call their own.  The problem is that not everyone can afford it.

There’s really no mystery here.  Anyone who has followed this blog or has cast a cynical eye on the employment statistics ever since the “Great Recession” knows that the unemployment rate is completely bogus, driven down artificially by the Labor Department claiming that people have dropped out of the labor force.  During the Obama administration, 6.4 million workers mysteriously vanished.  Since Trump took office, that figure has shrunk by over a million workers, but an honest tally of the unemployed still stands at 11 million workers (including those who were unemployed before the “Great Recession”) and unemployment is actually at 6.6% instead of 3.7% – a rate nowhere near low enough to begin driving wages higher.  Per capita employment remains exactly 1% below the level it was at before the onset of the “Great Recession” – a figure that was already depressed.

So the economy is doing well – better than it has done in the past ten years – but that’s not saying a lot.  The tax cut that went into effect this year gets the credit, but that will only carry the economy so far.  To keep it going – to accelerate the economy even further – we need progress toward cutting the trade deficit, especially the deficit in manufactured goods.  The Trump administration has made a lot of moves in that direction, imposing 10% tariffs on steel and aluminum, tariffs on $25 billion of Chinese imports, followed by 25% tariffs on an additional $225 billion of their imports, the renegotiation of the North American Free Trade Agreement (NAFTA) and threats to impose tariffs on all auto imports.

But there’s no evidence of any improvement in our trade situation, at least not yet.  The most recent trade data show that the rapid erosion of American manufacturing continues, yielding a trade deficit of $70 billion in manufactured goods in August – a new record – with new record trade deficits with China and Mexico.

That’s not an indication that Trump’s tariffs are a failure.  Aside from the small tariffs on aluminum and steel, none of the above-mentioned initiatives have taken effect yet.  The biggest chunk of the tariffs on China went into effect in September, so the effect on trade with China won’t show up until new trade data is released next month.  The “USMCA” agreement – the replacement for NAFTA – hasn’t been enacted yet.  And the trade deficit with China was artificially swollen by a rush to beat the tariffs.

It’s going to take a lot of patience to realize the real benefits of Trump’s trade policy.  The purpose of tariffs is to provide an incentive to manufacture products domestically.  The immediate effect will be to raise prices for American consumers, just as economists have warned.  Longer term,  companies will begin to realize that they can improve profits by manufacturing in the U.S., thus avoiding the tariffs.  It’s going to take time for that realization to sink in, and time for companies to implement plans to build factory capacity in the U.S.  Ultimately, when that capacity comes on line, we’ll see a real boom in the demand for labor and a corresponding rise in wages, more than offsetting any increase in prices.

Hopefully, the Federal Reserve won’t torpedo the economy in the meantime.  It can’t have any impact on price increases driven by tariffs, so it would be pointless to even try.  All they can do is drive the economy into recession with their high interest rates, raising doubts about the president’s economic policies, and increasing the chances that America will shrink back into its role as host in the global host-parasite trade relationship.  That would be a disaster.

Again, it’s going to take time and patience.  It took seven decades of globalism (beginning with the signing of the Global Agreement on Tariffs and Trade – GATT – in 1947) to get us into the fix we’re in.  It’s going to take more than a year or two to get us out.