An Export By Any Other Name
I have been thinking about this previous post on trade and wanted to improve my answer to Jon Talton, our free-markets-hating business columnist in the Arizona Republic. In his recent column advocating that we finally give up on all this free trade stuff, he said:
Americans were assured that new trade accords and China's membership in
the World Trade Organization would mean better living standards for
American workers. That's because China and other countries supposedly
would buy American exports.
I thought my answer was OK, but I want to take another shot at it, because I hear the argument all the time that "trade only benefits the US if other countries buy our exports." This is wrong, but this misconception drives many people's thinking on trade.
If we are importing more from other countries but they are not "buying more of our exports," such that we have a large trade deficit, there are two possibilities to explain this:
- The definition of exports is too narrow
- Someone is throwing away value by building up a big pile of US dollars
The first is the most likely explanation. A dollar is valueless in China, and the UK, and France except to the extent someone thinks they can eventually use it to buy something in the US. Dollars that aren't or can't be used to buy dollar-denominated assets of some sort have no value. The money a Chinese exporter accepts from Wal-mart is only valuable if they can recycle it and buy something in the US with it (or trade the dollars to someone else in China who wants to buy something in the US).
So the dollars we send overseas for imports are going to come back. But the reason our trade accounts are out of balance is that the trade deficit numbers they quote on TV define our exports narrowly. In short, "exports" as commonly measured don't include all the things we sell to foreigners for dollars.
One example of this is if a Chinese company takes the $10 million dollars it earns from exporting to the US and then invests $10 million in US materials to build a factory in the US. That sounds OK, right? That seems to be in balance. But in the way we calculate the trade deficit, that would show as a $10 million trade deficit, because goods (and services) that foreigners buy in the US and consume in the US (rather than back in their home countries) are not considered an "export." In fact, I would consider this "better" than an export, since both the dollars and the goods stay in the US. But to trade deficit hawks, this is worse, mainly because their measurement is flawed.
A second example is if a Chinese company take the $10 million dollars it earns from exporting to the US and invests the money in US mortgage bonds. Again, this would show as a trade deficit, but the US economy benefits from lower interest rates. In this case, we are again selling foreigners a product, in this case wealth protection, which the US is very good at since we have a more stable economy and stronger rule of law than any other country in the world. And again, the way we measure "export" does not encompass this product, since our trade measurement has a strong manufacturing bias that does not match the more diverse nature of our economy today. (For those that lament forefingers helping to fund the enormous government debt, I share your pain, but that is a government spending problem and not a trade problem).
But what if the foreigners are totally perverse. What if they ignore their own best interests and refuse to buy our exports and just sit on the dollars they get from trade without recycling them in any way to the US? What if they do this even if by doing so, they would be throwing away billions, even trillions of dollars in value? As absurd as this sounds, this is exactly the concern Talton and other trade-skeptics raise.
Well, the US in this case would STILL be better off. First, the US would be getting whatever goods we are buying overseas cheaper or better (or else people would not be buying them). This would reduce the costs of inputs to other products, and increase money consumers have to spend on other things. The labor that would have gone into making these products domestically would be redeployed to making other things, increasing our net wealth.
By the way, it is this last sentence I think Talton and his peers would not accept. They tend to view employment as zero-sum, ie there are a fixed number of jobs in the world, and if we import, that creates jobs overseas which must reduce jobs in the US. But labor markets have never worked that way. As I wrote before:
I have taken on this zero-sum mentality before,
but it is particularly wrong-headed in this case. Historically, the
argument makes no sense. For example, the automation of the farm
sector wiped out 80 or 90% of the farm jobs in the US over the last
century. By the zero-summers logic, we should be impoverished.
Instead, these people were redeployed to manufacturing and service jobs
that create far more wealth than the old 19th century farm employment.
But while people can sort of accept this historically, they can never
accept this in real-time. But the fact is that when we lose, say, a
textile job to foreign competition, we not only gain because everyone
pays less for textiles and thus has more money to spend on other
things, but that worker gets redeployed over time to higher-value
functions. Look at the old textile belt in North Carolina - what's
there now? Electronics and Bio-tech.
By the way, the other thing that would occur if foreigners just buried dollars in the sand without recycling them is that the value of the dollar would rise to levels higher than it would be at if these countries recycled their dollars, thus further lowering the price of inputs for the US. Talton laments this very effect:
Now, the populists will get a chance to make their arguments,
especially over what the American response should be to Chinese
currency manipulation, tariffs and subsidized exports.
The currency manipulation and subsidized exports have one thing in common: They are both ways that the Chinese destroy value for their own citizens in order to lower prices for American consumers. And Talton claims that the populist argument should be to end these practices? Why? I think its great that the Chinese want to hold billions in dollars just to keep the dollar high and prices low in the US. I think its great that their taxpayers want to subsidize lower prices in the US. I can understand why a Chinese citizen might want this to stop, but why should we, who are the beneficiaries?
Update: By the way, another common misconception is that a trade deficit implies someone is building up a debt. This is not (not not not) at all true. We can run a trade deficit indefinitely without building up a debt. Yes, foreigners are currently investing some of their trade profits in US government bonds necessitated by the federal government's deficit spending, but the two are only weakly related - a trade deficit does not cause government debt. A great way to see if a columnist has any idea what they are talking about is to see if they confuse the federal budget deficit with the trade deficit. It is almost funny how often I see this confusion appears in print. Anyway, this confusion is why people like Talton call the trade deficit "unsustainable". See my posts on why the trade deficit is not a debt (and here).
Dan:
Thanks for that. It's amazing how blissfully logical economics can be when properly explained.
November 16, 2006, 12:50 pmJohn Konop:
Bush Administration, Dying at the Border
This is from “Skeptical Economistâ€. This is the one of the best articles I have ever read on economics and illegal immigration.
It is no secret that the Bush administration is failing and failing badly. The woes of the administration are legion, Iraq, immigration, the economy, Katrina, health care, gasoline prices, etc. The impact on public opinion is profound. Bush is well on his way to being one of the least popular presidents in U.S. history. His current popularity rating of 31% may be a high water mark. The twenties and perhaps teens are not that far off. Increasingly he has lost, not just liberals and mainstream Americans, but conservatives as well. The key question is why? Why has this once promising administration gone downhill so far and so fast? Is it just bad luck or is their a deeper force at work? In my view, the ideology and practice of Open Borders has condemned this president to complete failure. Could the Bush administration turn itself around by changing its stance on immigration? Yes, but it is exceedingly unlikely to happen. Bush is doomed and may not finish his term in office.
It is clear that the immigration polices of this administration are deeply unpopular and contrary to what the public wants. Clearly, immigration is contributing mightily to the low standing of this president. However, immigration is also directly responsible for the economic failings of this president and is (one step removed) also responsible for the debacle in Iraq. Immigration is also partially responsible for all of the other problems (Kartrina, gasoline prices, health care, Dubai ports, etc.). The links between immigration and what ails Bush (and America) are explained in more detail below. What should be clear by the end, is that immigration is either directly or partially for everything (and there is a lot) that is weighing down this president.
The immigration failures of this administration are obvious. The border is totally out of control and Bush completely refuses to even try to control it. Ordinary Americans are demanding immigration control and Bush has abandoned even the pretense of enforcing our laws (by some measures enforcement has declined by 95% at least, but other measures 100%). Ordinary Americans fiercely resent illegal aliens taking over their neighborhoods, jobs, and schools. Bush actually proposed legislation to replace every American worked with a foreigner who would do the same job for less (the “willing worker†program).
To call the administration out of touch on immigration would be an injustice to the language. Polls show strong support for greatly intensified enforcement. Bush is still trying to have the Kennedy Amnesty bill passed. Why the administration is so committed to policies that the American people regard as toxic is another matter. However, the reality of a president at war with his own people on this issue, should not be in doubt. Astoundingly, Zogby finds that only 17% of Americans approve of Bush’s immigration policies (7). On border security, Bush gets a 16% approval rating.
Immigration is also responsible for Bush’s economic woes. Superficially the economy should be a source of considerable strength for Bush. The high level numbers are actually rather good. Unemployment is down to 4.6% from a peak of 6.3% in June of 2003. GDP growth in Q1 2006 was 4.8%. The economy grew by 2.7% in 2003, 4.2% in 2004, and 3.5% in 2005. The Dow Jones Industrial Average has rallied from a low of 7286 on October 9th, 2002 to a recent high of 11,643 on May 10, 2006. That a gain of 59.8% in less than four years. The S&P is up 57.25% in the same period. Definitely a lot for investors to cheer about, particularly in the aftermath of the Tech Bubble and corporate scandals (Enron, Tyco, Health South, etc.).
The zooming stock market has reflected fast rising corporate profits. Pretax profits bottomed out at $714 billion (annual rate) in 3Q2001 and have since risen to $1,293 billion in 3Q2005 (not adjusted for inflation) (11). As a percent of GDP profits have grown from 7.0% of GDP (3Q2001) to a peak of 10.9% of GDP in 2Q2005 (down to 10.3% in 3Q2005). At 10.9% of GDP, corporate profits were higher than any year since 1968.
The productivity numbers have also been very, very good. Nonfarm productivity has risen by 17% or more since 2001. What the BLS calls multifactor productivity is up almost 8% since 2000. Per-worker/GDP is perhaps the broadest measure of productivity growth. In chained 2000 dollars, per-worker GDP is up by 8.73%. CPI-U adjusted, per-worker GDP has grown by 7.95%. The strong growth in productivity has almost completely offset nominal wage growth. Unit labor costs have only risen by 4.3% since 2001 (9).
Of course, Americans haven’t been shy about spending under Bush. Indeed, it’s been party time for several years as anyone who travels or frequents upscale restaurants can attest. The number tell the same happy story. Personal Consumption Expenditures (PCE) rose by 15.64% from 1Q2001 to 4Q2005. Not bad given that GDP only rose by 13.9% in the same five years (13).
As you can see it is easy to come up with a whole panoply of good economic news. But still… The American people just don’t agree. Poll after poll give gloomy views on the economy. Indeed 59% of Americans rate the economy as only “fair†or “poor†(8). Is the public wrong? Deluded? Confused by liberals? Where it only so. The sad truth is that the economic boom has passed the American people by. Indeed, they are suffering more from the backwash of inflated prices than enjoying any of the fruits. Why? As is all too frequently the case, Open Borders is killing the American Dream by making sure that only immigrants (legal and illegal) and the elites get richer while ordinary Americans get poorer.
This is not some liberal/left-wing fantasy. Indeed the left goes to great pains to avoid using the “I†word when they are talking about jobs/wages/incomes. The sad reality is that from the standpoint of ordinary working Americans, the economy is weak, at best. Some of the facts are downright scary. For example, only 9% of the new jobs created from 2000 to 2005 when to the American people even though Americans accounted for 61% of adult population growth (1). Worse, labor force participation has been falling since Bush took office (10). In January of 2001, it was 67.2%. Now it is 66.1%. You have to go back to the first days of the Clinton administration to find numbers this low (actually 66.2% in January of 1993). Labor force participation does not normally fall in an expanding economy… (12). Indeed, this appears to be the first recovery with declining labor force participation.
Sadly, the minority data is worse. Black male labor force participation has fallen from 69.4% in January of 2001 to 67.7% in May of 2006. Black female labor force participation declined from 60.1% to 59.1% in the same time period. Hispanic labor force participation (both sexes) has also declined, from 69.9% in January of 2001 to 68.7% in May of 2005.
The jobs growth numbers all point in the same direction. This is, by far, the worst recovery in modern history for employment. The last recession ended in November of 2001. Since then (actually the next 48 months) employment has grown by 4.7%. The worst prior recovery enjoyed jobs growth of 6.2%. The average recovery since the 1960s has produced 9.5% growth in jobs. Sadly, the payroll employment data is much worse (14) showing only 2.6% growth over 4 years.
Average weekly earnings peaked back in November of 2003 and have since declined. Amazingly, weekly wages are now back where they were in 1959 and 17% below the high in 1972. Forty six years without a raise. Something to be proud of. Not surprisingly the poverty rate has risen steadily since Bush took office. Back in 2000 the poverty rate was 11.3%. By 2004 it reach 12.7%. The poverty rate always rises in recessions. This may be the first boom with rising poverty (3).
Median household income tells the same tale of woe. Median incomes have declined every year Bush has been in office and are now 3.8% ($1740) below the 1999 level (4). Quite an accomplishment for a president who thinks tax cuts for the wealthy will make us rich.
The superficially nice consumption numbers (15.64% growth in five years) start looking rather dodgy once you look under the covers. Cleary GDP didn’t grow nearly fast enough to pay the piper. Nor did compensation keep pace. Indeed, compensation of employees rose by only 8.3% in the same period. Something had to give. Indeed, the savings rate fell from 2.4% of disposable income in 1Q2001 to -0.5% in 4Q2005 and -1.3% in 1Q2006. Where is the money coming from? Greenspan found the home equity extraction reached $600 billion in 2004 (15)(16) an immodest 7% of disposable income. Are folks using their homes as ATM machines really thrilled with the economy? Does ever rising debt pave the road to heaven? Or would that be hell?
Of course, none of this had to be true. Productivity has risen strongly in recent years (see above). Soaring productivity could have brought large wage and salary gains to ordinary Americans. Productivity alone should have increased incomes by 8% since 2000. No one likes paying $3 for gasoline. However, not too many people would be complaining with fast rising wages. This is not a fantasy. In the 1950s and 60s, wages and median incomes rose right along with the economy. Then we abandoned our borders…
There are other dismal numbers as well (after all economics is the “Dismal Scienceâ€). Household inequality has increased under Bush (5). Inequality also went up under Clinton (â€no interior enforcementâ€). Back when we took our borders seriously it declined, from 1947 to 1968. Inequality only started to soar when mass immigration resumed in the 1970s. Predictably, male median earnings fell from 2002 to 2004 and are now lower than they were back in 1973. The percentage of Americans without health insurance has risen from 14.2% in 2000 to 15.7% in 2004. Employment based health insurance fell from 63.6% in 2000 to 59.8% in 2004 (6). Why bother proving benefits when you have illegals?
If the economic statistics weren’t bad enough for Bush, we have the Iraq debacle. Is Open Borders really responsible for Iraq? At least indirectly, the answer is clearly yes. No we aren’t fighting illegal aliens in Ramadi or Sadr city. However, the connection to Open Borders is far from trivial. The easiest linkage is simply the cast of characters. Almost without exception, the cheerleaders for the Iraq war were Open Borders fanatics. Of course, the WSJ and Senor Bush fall into this category. However, you will also find the likes of Fred Barnes (The Weekly Standard), William Kristol (The Weekly Standard), Ben Wattenberg (AEI), and Michael Barone (US News & World Report) in this group.
By contrast, the strongest advocates of immigration reform were generally skeptical of the Iraq war or overtly opposed (Michelle Malkin being a rare exception). What is the connection? Both the Iraq war and Open Borders were/are based on a panglossian view of human nature. If you think America can tolerate massive legal/illegal third world immigration, then the idea that Iraq could be transformed into a model Middle Eastern nation with human rights, free elections, a free-market economy, peace with Israel, and U.S. bases might make sense. Saner voices recognized both ideas as deeply crazy. Crushing Saddam’s murderous and ultimately dangerous (sanctions were fading) regime might have made sense. Pouring American blood into the desolate soils of the Middle East to nurture “democracy†was, and is, folly.
Is immigration responsible for the other problems weighing on the Bush administration? In many cases, the answer is yes, at least to some extent. Only a president deeply wedded to Open Borders would have threatened his very first veto over the Dubai ports deal. A saner administration would have quashed the deal upfront or authorized it only after deep and credible scrutiny. Gasoline prices? The population of the U.S. has risen by 82 million since the mid-1970s when we built our last oil refinery. Most of the growth has been do to immigration. Runaway population growth doesn’t work with highly limited energy development. Something has to give, prices it would seem. A different president would make these choices clear or simply tell the American people that immigration must be stopped until we have a consensus in favor new pipelines, power plants, refineries, offshore drilling, etc. Hard choices in the Pollyanna world of Senor Bush? They don’t exist.
The immigration sickness infecting U.S. health care has already been mentioned. Of course, as the uninsured population explodes the costs fall on taxpayers and those with private insurance. These burdens make insurance even less affordable, pushing more and more folks into the ranks of those without. Why so-called conservatives would demand an immigration policy than can only end with socialized medicine boggles the mind. Perhaps non compos mentis explains it all.
Did Open Borders bring Katrina to the Big Easy? Actually, No. Even the most ardent restrictionists don’t suggest an enforceable ban on category 5 hurricanes. However, in a normal economy the reconstruction work would be providing well paid job opportunities for poor and working class Americans. Such a thing will never happen with Bush in office.
The Bush administration is clearly infected with some kind of “End of History†globalist worldview where mass migration is both inevitable and desirable. In this wonderful future fantasy, borders will disappear and all of mankind will embrace capitalism, free markets, free trade, democracy, etc. Sadly, this Pollyannaish view of the human condition has led to tragedy abroad, and economic failure at home. What should be clear is that the ideology of Open Borders is directly and indirectly responsible for the woes of the Bush administration. As of this late date there is little they can do about it. After 9-11, Bush had a perfect moment in time, to change course and save his presidency and his country. With malice and forethought he threw it away.
November 16, 2006, 5:46 pmMatt:
An awful lot of people are freaked about the Chinese holding so much US Government debt. And indeed, the fact that the government is that deeply in debt is a subject worthy of freakitude. But that's a concern about fiscal policy, not trade...if the Chinese didn't buy those debt instruments, they'd still be issued...only the government would have to sell them domestically, and they wouldn't be marketable at current interest rates. Which means we'd have to raise taxes to pay the interest.
November 16, 2006, 8:32 pmTim Fowler:
You linked to a previous blog post you made
https://coyoteblog.com/coyote_blog/2005/07/physics_wealth_.html
So I read it. Overall its a very good post but - "Even in the US, regulation and the inherent conservatism of the bureaucracy slow our potential improvement. Republicans block stem cell research..." - Isn't true. Republicans don't block research in stem cells. Some Republicans block federal funding of some stem cell research. Blocking federal funding of most embryonic stem cell research isn't blocking federal funding of any stem cell research (non embyronic stem cell research is federally funded as is a very limited amount of embryonic stem cells). More importantly blocking federal funding for something isn't the same as blocking something. Are the feds blocking me from getting a new car because they won't pay for one? Embyonic stem cell reseach is perfectly legal and there is no serious effort underway to change that fact.
I woulnd't have posted the reply here, but comments on the original post are closed, and I didn't find any contact link.
November 17, 2006, 12:21 pmBill:
Interesting post, but I think that there is some cause for concern about the Trade Defecit, and that it can't be entirely seperated from the budget defecit. Bottom line is that China is lending us money to run a deficit, which means that they are paying us all as taxpayers for the government services we are using. This means that at the same time they are loaning us money, we are buying stuff from them. We can't continue to be paid by them and buy from them for all that much longer. Yes, by subsidizing their exports and keeping there exports low, they are also paying us to buy their exports, which seems somewhat weird and also unsustainable.
I don't think that the amount provided to us in subsidies is to the amount that they are lending us money. Also, their keeping prices low maybe attracted a lot of capital investment that might have otherwise stayed in the U.S. or gone to a different country. Although trade isn't a zero sum game, in the short run, you could make an argument that whether China or Vietnam gets the next big factory, or whether is stays in the U.S. is pretty close to a zero sum game. (At least in the very short run to a significant number of people).
So, to the extent that the current situation is not sustainable, that maybe China benefitted by attracting sunk-cost heavy investment in capital, infrastructure and expertise by engaging in what could be viewed as anti-competitive behavior, then in some ways, yes, the Trade Deficit is a cause for concern. This is not to say it is a conspiracy, or that it may be on balance worse for China than us when it suddenly or eventually evens out.
However, I think it is at least possible that the correction of such an imbalance is pretty unpredicatable as we don't know how or when it will happen, and it could be bad for both countries.
As for the argument that by emulating Japan, China is setting itself up for a huge recession, that might be an arguably worthwile price to pay if in so doing China is able to establish really quality companies which produce information-heavy stuff like giant cranes and mass produced quality cars. This could conceivably come at the expense of American industry. Again, not a reason to isolate ourselves, not a forecast that doom will reign to the next 100 years, but a 5 to ten year recession, or whatever possible negative outcome which may result, is nothing to look forward to. Given Japan's overall performance, while they did fall far, it was in part because they were so high up after starting so low.
November 20, 2006, 12:14 pmBill:
I now realized I said a recession would be bad, and then said recessions might not be so bad in the next paragraph. Still, I would stand by that statement as it relates to a country like China, which may want to go "all out" because they are so far behind starting out, and then worry about the longer run consequnces later. I'm not one who thinks China is in position to somehow "beat" us, but rather, that we could both be blundering into a significant mess if we keep selling them our future money while they are buying our current money with goods made more enticing by subsidies curtesy of their taxpayers. Again, I would be surprised to see, but not deaf or blind to, evidence that their subsidy of our current consumption cancels out our future debt to them.
November 20, 2006, 12:37 pmM1EK:
This post rests on the questionable assumption that industries can quickly be restarted at will in the US. That's the short version. Here's the hypothetical anectdote:
CPU manufacturers are now essentially all offshore. (Designers here; fabs there). Almost all computer parts are offshore. China decides tomorrow to stop subsidizing low interest rates by screwing with their currency. Value of the dollar plummets against the yuan. Goods become dramatically more expensive (including those computer parts).
So now that it's much more expensive to import Chinese chips, can Intel turn around tomorrow and open up a fab (or can some US company build one for them)? Sure. How many years you got? Oh, and don't forget all the ancillary industries you need in order to support chip fabs. Those are mostly offshore now too. Oops.
Essentially, China could well be engaged in a national version of the old monopoly tactic - take losses for a while to drive your competitors out of the market, and then enjoy the fruits later on, knowing that it's not feasible to rebuild all the infrastructure necessary to resume competition.
I fear that in 20 years, the Western Europeans are going to look like the smart ones for having subsidized their agriculture and manufacturing sectors all this time.
November 20, 2006, 5:47 pmMesaEconoGuy:
John Talton is an uneducated liberal buffoon who has no formal economics training. He also doesn’t understand comparative advantage, deficit accounting, and most other economic concepts.
November 25, 2006, 4:49 pm