Coyote Blog

Let me try something out on readers.  It strikes me that we are in the midst of what we may look back on as one of the great global economic booms of all time.  Here's my logic:  In the US, let's say that on average our labor is operating with a management and technology factor of "10." As management practices advance, and manufacturing and support technologies are developed, we might move this up to "11" [insert Spinal Tap joke].  We then enjoy the productivity upgrade of going from 10 to 11.  However, as the world invests in places like China and India, we see labor that has plugged along at "1" get brought up quickly towards "10."  What a huge change!  Two billion people with exponentially rising labor productivity -- what an enormous increase in wealth!

I think too many people look at the growth of China through the lens of low labor costs, and assume that as the wages in China begin to rise, the boom will be over.  But the source of wealth creation in China is not taking advantage of low wages, it is raising productivity.  The boom will continue as long as productivity increases by leaps and bounds; rising wages are just a sign that Chinese workers are getting a share of this productivity increase.

From today's WSJ ($) online:

Turning aside growing congressional anger over low everyday prices, President George W. Bush's
administration today will reject demands that it formally accuse
Beijing of subsidizing lower prices for U.S. consumers.

With U.S. lawmakers gearing up to punish China for using Chinese funds to subsidize low U.S. consumer prices, Treasury
Secretary Henry Paulson is expected to use a semiannual currency
report, to be released today, to reinforce his calls for Beijing to
allow prices in the U.S. to rise faster....

OK, I confess I fibbed a bit.  The actual article reads:

Turning aside growing congressional anger over the
U.S. trade deficit with China, President George W. Bush's
administration today will reject demands that it formally accuse
Beijing of "manipulating" its currency to give Chinese companies an
edge over American businesses.

With U.S. lawmakers gearing up to punish China for
keeping the yuan artificially weak against the dollar, Treasury
Secretary Henry Paulson is expected to use a semiannual currency
report, to be released today, to reinforce his calls for Beijing to
allow the yuan to rise faster. But Mr. Paulson won't brand China a
currency manipulator despite congressional demands that he do so.

But it means the same thing as my version.  Thanks to Congress for looking after us consumers.  Our Chinese sister publication Panda Blog addressed these issues from the Chinese perspective a while back.  In short, the Chinese are wondering what we are complaining about:

Our Chinese government continues to pursue a policy
of export promotion, patting itself on the back for its trade surplus
in manufactured goods with the United States.  The Chinese government
does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
• Selling exports below cost and well below domestic prices (what
  the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these
government interventions subsidizes US citizens and consumers at the
expense of Chinese citizens and consumers.  A low yuan makes Chinese
products cheap for Americans but makes imports relatively dear for
Chinese.  So-called "dumping" represents an even clearer direct subsidy
of American consumers over their Chinese counterparts.  And limiting
foreign exchange re-investments to low-yield government bonds has acted
as a direct subsidy of American taxpayers and the American government,
saddling China with extraordinarily low yields on our nearly $1
trillion in foreign exchange.   Every single step China takes to
promote exports is in effect a subsidy of American consumers by Chinese
citizens.

This policy of raping the domestic market in pursuit of exports
and trade surpluses was one that Japan followed in the seventies and
eighties.  It sacrificed its own consumers, protecting local producers
in the domestic market while subsidizing exports.  Japanese consumers
had to live with some of the highest prices in the world, so that
Americans could get some of the lowest prices on those same goods.
Japanese customers endured limited product choices and a horrendously
outdated retail sector that were all protected by government
regulation, all in the name of creating trade surpluses.  And surpluses
they did create.  Japan achieved massive trade surpluses with the US,
and built the largest accumulation of foreign exchange (mostly dollars)
in the world.  And what did this get them?  Fifteen years of recession,
from which the country is only now emerging, while the US economy
happily continued to grow and create wealth in astonishing proportions,
seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government
to continue to chase the chimera of ever-growing foreign exchange and
trade surpluses.  These achieved nothing lasting for Japan and they
will achieve nothing for China.  In fact, the only thing that amazes us
more than China's subsidize-Americans strategy is that the Americans
seem to complain about it so much.  They complain about their trade
deficits, which are nothing more than a reflection of their incredible
wealth.  They complain about the yuan exchange rate, which is set today
to give discounts to Americans and price premiums to Chinese.  They
complain about China buying their government bonds, which does nothing
more than reduce the costs of their Congress's insane deficit
spending.  They even complain about dumping, which is nothing more than
a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run
a security risk with their current trade deficit with China!  This
claim is so crazy, we at Panda Blog have come to the conclusion that it
must be the result of a misdirection campaign by CIA-controlled
American media.  After all, the fact that China exports more to the US
than the US does to China means that by definition, more of China's
economic production is dependent on the well-being of the American
economy than vice-versa.  And, with nearly a trillion dollars in
foreign exchange invested heavily in US government bonds, it is China
that has the most riding on the continued stability of the American
government, rather than the reverse.  American commentators invent
scenarios where the Chinese could hurt the American economy, which we
could, but only at the cost of hurting ourselves worse.  Mutual Assured
Destruction is alive and well, but today it is not just a feature of
nuclear strategy but a fact of the global economy.

Don Boudreaux has a post I would call "How I stopped worrying and learned to love foreign ownership of US assets."  He's the economist, so I refer you to him for the real arguments.  I just want to offer this thought experiment.  Consider two countries.  In the first country, call it Venezuela, US individuals and companies have billions of dollars of investments in Venezuelan assets, with little Venezuelan capital invested reciprocally in the US.  In the other country, call it China, the Chinese government and other private groups hold billions, perhaps trillions of US dollar denominated securities and US domestic hard assets. 

Which country has more power over us?  Is it China, who could suddenly try to sell our assets back to us at cut rate prices, thereby, uh, taking a huge financial loss for themselves to temporarily roil our markets.  Or is it Venezuela, who can (and has) simply seized all the assets in their country owned by Americans and repudiated its debts?

Not clear enough?  OK, lets go back to the cold war.  Let's say the USSR had lent our government a trillion dollars or so, thereby holding lots of dollar denominated US government debt.  Let's say they also made massive investments in US land and buildings.  Would we have said, "boy, they have us now?"  No.  I mean, hell no!  We'd have their money, they'd just hold our paper.  If the Russki's got adventurous in Afghanistan, we could just say, sorry, we are going to stop paying on all those bonds you hold until you get out.  This situation is so clear that in fact it was the USSR's strategy to do just the opposite, ie to borrow as much as possible from the west, taking western money to fund their economy while creating a threat of loan default they could use strategically.  American hawks argued that it was insane to lend to the USSR, because this gave them leverage over us. 

The notion that China holding billions of American government and corporate paper gives them a substantial power imbalance over us is just silly.  Granted it makes conflict expensive for both us and the Chinese, just as all trade and global private interaction does.  Which is a good thing.

Don Boudreaux argues that we should not retaliate vs. countries who subsidize exports to the US.

I know of no cases in which a country was impoverished, or even

measurably damaged, by its refusal to "retaliate" against alleged

instances of foreign subsidies. This fact, combined with the ease of

abusing the ability to accuse foreign rivals of being subsidized,

counsels strongly in favor of our own government turning a deaf ear to

such accusations.

I have never, ever, ever understood how the average person in the US could actually get mad that a foreign government taxes its people for the sole purpose of subsidizing lower prices in the US.  I have the same reaction to "dumping" accusations, where folks get upset that some foreign company is allegedly selling its products in the US below cost.   Instead of complaining, I think we should just say "thanks."  And maybe "cha-ching!"  Nothing like getter over on the taxpayers of China or Japan. 

From our American point of view, we usually think of the attack by the Japanese at Pearl Harbor fifty-five 65 years ago as the main Japanese objective at the time.  In fact, the attack on Pearl Harbor was merely a screening move, an attempt by the Japanese to limit the US's ability to respond to its main objective -- seizure of resource-rich targets in Indonesia and Southeast Asia. 

The Japanese in 1941 shared many of the beliefs that are disturbingly common today.   They believed that their country had to be "self-sufficient" in key industries and resources.  And, they had a huge distrust of foreigners and international trade.  Lou Dobbs would have been very comfortable with them.  The end result of believing in self-sufficiency was that Japan eschewed peaceful trade as a way to gain resources in favor of colonialism and military intervention.  To some extent, the European colonialism of the 19th and early 20th centuries stemmed from the same beliefs.

As an island nation, Japan had developed a rich and complex social
structure. It resisted westernization by sealing itself off from
contact with the outside world, particularly Europe and the United
States. By the early twentieth century, though, Japan's efforts to
achieve self-sufficiency were failing, for the nation lacked its own
raw materials and other resources. Some members of the ruling class
argued that Japan could grow and prosper only by modernizing and
adopting Western technology. Japanese nationalists, though, advocated a
different path: the establishment of an empire that would not only
elevate Japan's stature in the eyes of the world but also guarantee
access to the resources the nation needed. Moreover, many members of
the nation's traditional warrior class"”the Samurai"”were embittered by
the aftermath of World War I. Japan had backed the victorious Allies,
but the Samurai believed that in the peace negotiations following the
war the United States and Great Britain had treated Japan as a
second-class nation. They, too, longed to assert Japan's place in world
affairs.   [answers.com]

After WWII, the Japanese gave up colonialism and military intervention in favor of arms-length trade.  And, as a result, grew through peaceful exchange into being the wealthy world power that militarism and "self-sufficiency" could never achieve.

Postscript: Some might argue that the Japanese were forced to give up on trade in favor of militarism by the US embargoes.  This is a particularly popular explanation among the "America-is-the-source-of-all-evil" academics, that the Japanese would have peacefully traded for all their needs if only we had let them.  This viewpoint is silly, and completely ignorant of the goals and philosophies of those running Japan.

The Japanese desire to be resource self-sufficient is always there, and the embargoes were a result of previous military adventures by the Japanese to gain colonies by force in Korea and China, as well as Japanese threats to invade southeast Asia.  Japanese militarism to achieve "imperial self-sufficiency" predated western embargoes by many, many years.  The western embargoes may have forced the Japanese hand to move quicker than they might have, but their moves into resource-rich Indonesia were probably coming soon anyway, just as similar moves in Korea and China had been going on for a decade.

To be fair, today's self-sufficiency advocates are passive and xenophobic rather than aggressive and xenophobic, as the Japanese were.  This is at least a small improvement, and means that they prefer to quietly sink into squalor rather than going out with a bang (two bangs?) as the Japanese did.

Update:  Memories of the Pearl Harbor attack.  And the Arizona Republic comes through with a good series on the death of the USS Arizona.

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).

I was wondering this morning if I could turn public opinion against penicillin.   After all, hundreds of people die every year from taking penicillin.  If I ran a newspaper, every day I could feature another heart-rending story about a small child or a single mother with four kids dieing from a penicillin allergy.  Sure, some heartless fools who don't understand these poor people's suffering will say that penicillin is a net benefit.  But that will be easy to counter - I'd ask them to show me who was saved.  Sure, lots of people take it, but how can you prove they would have been worse off without it?  How can you prove how many people would have died without it?  I would have an easy time, because the victims of penicillin are specific and very visible, and the beneficiaries are dispersed.

I thought of this analogy while I was reading Jon Talton's column on the front page of the Arizona Republic business section celebrating the Democratic victory in Congress because we may finally be able to get rid of this awful free trade stuff.  As an aside, Talton has always been an interesting choice as the primary business columnist int he Republic, given that he doesn't really feel bound by the teachings of economics and he really does not like business.   His socialist-progressive formulations may be appropriate somewhere in the paper, but seem an odd choice for lead business columnist, sort of like finding a fundamentalist evolution denier, who still accepts Archbishop Usher's age of the earth, as lead science columnist.

I would fisk Talton's column in depth, but he doesn't really say anything except throwing together a hodge-podge of progressive rants against globalization (CEO pay, China, decimation of manufacturing -- he's got everything in there).   Like most progressives, he extrapolates flatness (not even declines, but flatness!) from 2001-2004 and declares that the world economy has changed and he has seen a major macro-economic trend (no mention of how the business cycle and recession we had in the same period might have affected things).

I will just take on one piece, where he says:

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.

Economists, what grade does Mr. Talton get?  F!  Because he demonstrates that he does not understand the economic argument for trade.  Because the argument does not actually require that foreign countries buy our exports for us to be better off with trade.   Comparative advantage says that even imports alone help our economy, allowing us to purchase inputs more inexpensively and refocus our domestic labor on tasks which we do comparatively better. 

The second fallacy with his statement is that export numbers grossly understate the amount of goods and services that foreigners buy from us.  Exports are only the goods they buy from us and take back to their country.  But foreigners buy many goods from us and use them in the US (say to build a factory or as an investment or financial instrument) and these foreign purchases of American goods don't show up as exports.  As long as the US is the safest and most stable country in the world, we will probably always run a trade deficit, as foreigners will continue to want to keep the goods and financial instruments they buy from us in the US where these assets are safer.  I wrote a lot more about this topic, and the recycling of dollars from China, here.

Finally, implicit in this anti-globalization view of trade is an assumption that the economy is zero-sum -- ie, there is sort of a global fixed pool of jobs, and if China gains steel market share and employment, the US net loses employment.  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.

The problem with trade is very like the one in the penicillin analogy -- it is all-to-easy to identify the few short term losers, who lost their job in American industries that can't compete with foreigners, but all-too-hard to find the huge dispersed benefits from lower prices and the continuing creative destruction that comes with strong competition.  This doesn't mean that individuals lives aren't disrupted, but it does mean that it's short-sighted to the point of being a Neanderthal to use these disruptions as an excuse to throttle free trade, just as it would be short-sided to ban penicillin because some people have allergic reactions.

It will be interesting to see if the Lou Dobbs populists rule the day on this issue.  If so, they it will be ironic that it is the Democrats, not the Republicans, who take the first major steps to dismantling the work of Bill Clinton  (because it sure as heck hasn't been GWB supporting free trade).

My prior posts on why you should stop worrying and learn to love the trade deficit are here and here and here and here.  I also looked at trade with China from the other side, and found it is China that should be mad about their government's trade policies and currency manipulation, not us:

It is important to note that each and every one of these
government interventions subsidizes US citizens and consumers at the
expense of Chinese citizens and consumers.  A low yuan makes Chinese
products cheap for Americans but makes imports relatively dear for
Chinese.  So-called "dumping" represents an even clearer direct subsidy
of American consumers over their Chinese counterparts.  And limiting
foreign exchange re-investments to low-yield government bonds has acted
as a direct subsidy of American taxpayers and the American government,
saddling China with extraordinarily low yields on our nearly $1
trillion in foreign exchange.   Every single step China takes to
promote exports is in effect a subsidy of American consumers by Chinese
citizens.

This policy of raping the domestic market in pursuit of exports
and trade surpluses was one that Japan followed in the seventies and
eighties.  It sacrificed its own consumers, protecting local producers
in the domestic market while subsidizing exports.  Japanese consumers
had to live with some of the highest prices in the world, so that
Americans could get some of the lowest prices on those same goods.
Japanese customers endured limited product choices and a horrendously
outdated retail sector that were all protected by government
regulation, all in the name of creating trade surpluses.  And surpluses
they did create.  Japan achieved massive trade surpluses with the US,
and built the largest accumulation of foreign exchange (mostly dollars)
in the world.  And what did this get them?  Fifteen years of recession,
from which the country is only now emerging, while the US economy
happily continued to grow and create wealth in astonishing proportions,
seemingly unaware that is was supposed to have been "defeated" by Japan.

From Kevin Drum, it's good when progressives make it clear to everyone what they want:  Control!

[emphasis added]  It's just that, left to their own devices, both humans and corporations
tend to act solely in their own self-interest. That's why we have laws
to control human behavior, and it's why we need laws and regulations to
control corporate behavior. I prefer a society in which people don't
gun each other down in the streets, and I also prefer a society in
which middle class workers prosper when the economy grows. I support
laws that encourage both.

Woah!  Can't let all those damn individuals do whatever they please of
their own voluntary self-interest.  Don't they know they are supposed
to do what we intellectuals think best for them?  I want to repeat
this line:

That's why we have laws
to control human behavior

Actually, in governments with a strong grounding in individual rights,
we have laws to prevent people from acting using force or fraud on
other individuals.  So yes, we do have laws to stop people from
shooting each other, but these laws are philosophically a long step away from
laws that tell people what wage they can and cannot legally accept.   Preventing someone from using force against another is waaaaaaay different than using government force to prevent one or more individuals from acting voluntarily in their own self-interest.  The whole point of government in a free society is to prevent people
from trying to control each other by force, not, as Drum wants, for the
government to be the very agent of this control and coersion. 

People who root for more government control need to learn their lesson.  Both parties tend to set up mechanisms of control as if their own guys are going to run this machinery forever, only to freak out when the opposition party takes over and uses this machinery of control for its own purposes.  Thus Democrats lament that the machinery they built to control the drug market gets taken over by Republicans to ban the morning after pill, and that the public education system Democrats so love is co-opted by ID curriculum.  As I wrote here:

Again we hear the lament that the game was great until these
conservative yahoos took over.  No, it wasn't.  It was unjust to scheme
to control other people's lives, and just plain stupid to expect that
the machinery of control you created would never fall into your
political enemy's hands.

Drum makes these statements in the context of arguing that moderate Democrats should be irate about Wal-Mart and should be seeking to have the government sit on Wal-Mart in some way:

And one of the things that's changed is that Wal-Mart has gotten a lot
bigger, unions have continued shrinking, working class wages have
stagnated, and corporate power has grown tremendously. It's perfectly
rational for even moderate, pro-business Dems to look at the record of
the past couple of decades and conclude that things have gotten pretty
far out of whack and that Wal-Mart is a good symbol of this imbalance

One problem with this meme beyond the others I have pointed out in the past is that Wal-Mart is generally not supplanting (with one exception) unionized retailers.  In fact, the implication that Wal-Mart is somehow setting back unionization is actually a complete reversal of how Wal-Mart used to be hammered by critics.  Traditionally, Wal-Mart has been blamed for replacing small stores and family businesses which certainly aren't unionized, usually don't have health plans, and often pay lower wage scales than Wal-Mart does.  Now they are trying to reverse history, and claim instead that Wal-Mart has somehow been supplanting high-paid union jobs.  The only place where this could be argued to occur is in the supermarket business, where strong unions have dominated.  But these old-line unionized supermarkets were falling to competition from other supermarkets even before Wal-Mart came along.  And as to all those Chinese imports, well, I would LOVE to see a liberal try to twist themselves into a pretzel to make a progressive argument for why an impoverished person in China counts for less than a middle class person in the US.

The only real change in employee's fortunes is that employees who work for Wal-Mart are now more visible than they were when they worked for thousands of tiny local retailers, but are they really worse off and more powerless, or just a better target for populist rhetoric?  In fact, even if pay and benefits are the same as in a small store (and I think Wal-marts are probably better), Wal-Mart also offers opportunities for advancement and training far, far beyond the ma and pa store.

By the way, you know its election time when you hear this:

The American economy has changed for the worse over the past couple of decades if you're part of the working or middle class

Ahh, it reminds me of those heady days when Clinton was able to portray a modestly growing economy under Bush 1 the "worst economy since the great Depression."   Election rule to remember:  Republicans try to get elected by running down the morality of Americans, Democrats do so by running down their economic success.

Postscript:  I will admit there is one group who sometimes must accept wages that are not the result of pure voluntary agreement with an employer: Illegal immigrants.  Those who read this blog a lot will know I am very pro-immigration, and would like to see full, open immigration and there be no such thing as an "illegal" immigrant, except in narrow cases of convicted criminals, etc.  Illegal immigrants in many ways have the same problem as prostitutes, in that they have only limited legal redress when they are victims of force or fraud in their work.  Making currently illegal immigrants legal would do more to help disenfranchised workers than any slate of goofy government legislation to try to reinvigorate unions.

Update:  My past response to charges of widening income distribution was:  So what?  Also alot more links here.

I am trying to picture the discussion in the Colorado legislature.  Our public schools are struggling, what should we do?

A Jefferson County geography teacher was placed on paid administrative
on the second day of school for hanging several flags from other
countries in his classroom.

Eric Hamlin said the flags were part
of a world geography lesson plan at Carmody Middle School and refused
to take them down. The school's principal escorted Hamlin out of class
Wednesday morning after he refused to remove the flags of China and
Mexico.

The school district placed him on administrative leave
for insubordination, citing a Colorado law that makes it illegal to
display foreign flags permanently in schools.

"Under state law, foreign flags can only be in the classroom because
it's tied to the curriculum. And the principal looked at the
curriculum, talked to the teacher, and found that there was really no
curriculum coming up in the next few weeks that supported those flags
being in the classroom," said Jeffco Public Schools spokeswoman Lynn
Setzer.

It all reminds me of this guy.  Colorado has elected a number of strong nativists to their public offices, and they have taken the lead in many anti-immigrant efforts (that's the nativists whose ancestors immigrated from Europe over the last couple of centuries, not the nativists who were actually, you know, here first).  I think its helpful to see where following these idiots will take us.  Anyone still want to argue that strong immigration opponents aren't xenophobes?

Hat tip: Reasons Hit and Run

Michael strong has a great article in TCS Daily about Chinese citizens pulling themselves out of poverty:

Between 1990 and 2002 more than 174 million people escaped poverty in China,
about 1.2 million per month.

In part he credits America's newest great Satan, Wal-mart:

With an estimated $23 billion in Chinese exports in 2005 (out of a total of $713
billion in manufacturing exports),[2] Wal-Mart might well be single-handedly responsible for
bringing about 38,000 people out of poverty in China each month, about 460,000
per year.

There are estimates that 70 percent of Wal-Mart's products are made in
China.[3] One writer vividly
suggests that "One way to think of Wal-Mart is as a vast pipeline that gives
non-U.S. companies direct access to the American market." [4] Even without considering the $263 billion in
consumer savings that Wal-Mart provides for low-income Americans, or the
millions lifted out of poverty by Wal-Mart in other developing nations, it is
unlikely that there is any single organization on the planet that alleviates
poverty so effectively for so many people.[5] Moreover, insofar as China's rapid manufacturing growth
has been associated with a decline in its status as a global arms dealer,
Wal-Mart has also done more than its share in contributing to global peace.[6]

It is almost certain that abusive practices exist in some of Wal-mart's Chinese suppliers -- in particular, slavery and compelled work must end and be opposed by all of us.  But wages that are "too low" is not one of these abuses.  In fact, wages at these suppliers, that comfortable middle class Americans decry as too low from the safety of their Pottery Barn couch, are actually a victory for Chinese workers.  Strong provides the context that is always missing from attacks on Chinese wages:

If we care about alleviating global poverty we need to take this fact
seriously. Without Wal-Mart, about half a million of these people each year
would be stuck in rural poverty that is, for most of them, far worse than
sweatshop labor.

And he provides some context as well for the futility of charitable aid:

Other than economic growth, there is no way to double the salaries of a 100
million people (and growing). After the 2004 Asian Tsunami, more than one-third
of Americans gave more than $400 million in charitable aid, an extraordinary
outburst of giving by any standard. And yet there are more than 630 million
rural Chinese remaining, many of whom are living on less than a dollar per day.
While each would welcome a charitable dollar if we could get it to them, that
charitable dollar, representing one good day's worth of income, would not do
them nearly as much good as would a job in the city paying twice as much day in,
day out. Charity cannot take place on an adequate scale to solve global
poverty.

I made similar points in my post several years ago on why progressives hate capitalism:

Progressives do not like American factories appearing in third world
countries, paying locals wages progressives feel are too low, and
disrupting agrarian economies with which progressives were more
comfortable.  But these changes are all the sum of actions by
individuals, so it is illustrative to think about what is going on in
these countries at the individual level. 

One morning, a rice farmer in southeast Asia might faces a choice.
He can continue a life of brutal, back-breaking labor from dawn to dusk
for what is essentially subsistence earnings.  He can continue to see a
large number of his children die young from malnutrition and disease.
He can continue a lifestyle so static, so devoid of opportunity for
advancement, that it is nearly identical to the life led by his
ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but
certainly no longer than he worked in the field) for low pay (but
certainly more than he was making subsistence farming) and take a shot
at changing his life.  And you know what, many men (and women) in his
position choose the Nike factory.  And progressives hate this.  They
distrust this choice.  They distrust the change.  And, at its heart,
that is what the opposition to globalization is all about - a deep seated conservatism
that distrusts the decision-making of individuals and fears change,
change that ironically might finally pull people out of untold
generations of utter poverty.

From Don Boudreaux at Cafe Hayek:

In yesterday's Wall Street Journal, Lawrence Lindsey wrote
about the Chinese government's policy of not allowing the value of the
yuan to rise against that of the dollar:

America, however, benefits from this arrangement. The Chinese clearly
undervalue their exchange rate. This means American consumers are able
to buy goods at an artificially low price, making them winners. In
order to maintain this arrangement, the People's Bank of China must buy
excess dollars, and has accumulated nearly $1 trillion of reserves.
Since it has no domestic use for them, it turns around and lends them
back to America in our Treasury, corporate and housing loan markets.
This means that both Treasury borrowing costs and mortgage interest
rates are lower than they otherwise would be. American homeowners and
taxpayers are winners as a result.

The Chinese are holding on to a Trillion dollars in US currency, with the main effect of subsidizing lower prices and interest rates for US consumers.  What a deal!  (I took a more tongue-in-cheek approach to the same issue here)  I know most commentators instead want to focus on the threat of China suddenly dumping those dollars, disrupting US markets.  People need to understand that the cost of doing the latter is enormous for China, not only in lost value of their dollar-denominated assets but in lost exports as the value of the Yuan would spike.  To test the hypothesis of holding dollars as a strategic weapon, would you feel more secure in the US if the government held a trillion dollars of yuan?  Why?  I would in fact feel more vulnerable to China, dependent on the health of their economy.  I personally am a big believer that Chinese investments in the US are great, and will act as a stabilizing influence in the future. 

By the way, while the above refers the Chinese government holdings of US financial assets, Cafe Hayek also points to an article by John Makin of the AEI who observes that the trade deficit is a misnomer, as the US is providing services that are not counted, specifically wealth-protection services:

In summary, Makin argues that one of the reasons foreigners sell so
many goods and services to Americans and then consistently refrain from
buying an equivalent amount (in value terms) of goods and services from
Americans is that foreigners have a high demand for "wealth-storage"
services supplied by dollar-denominated assets.

The fact that global savers accommodate U.S.
consumers by keeping U.S. interest rates lower than they otherwise
would be and the dollar stronger than it otherwise would be is simply a
manifestation of America's comparative advantage at supplying wealth
storage facilities.

In
other words, there's no real imbalance.  If the services supplied by
"wealth-storage facilities" were counted in international commercial
accounts as "services," then the U.S. current-account would not be in
deficit.

I have written before about why we should not fear the trade deficit with China, and why the word "deficit" is itself a misnomer, here and here.

For years I have argued against economic boycotts against nations such as Cuba and China, arguing instead for business interaction and engagement.  In China, for example, I think Pandora's box is open, and there's no reversing the effects of China's engagement with the US, no matter how much the Chinese government may think they can control the tide of modernity. 

Jacob Weisberg has similar thoughts in Slate, and argues further that sanctions merely play into the hands of dictators:

America's sanctions policy is largely consistent, and in a certain sense,
admirable. By applying economic restraints, we label the most oppressive and
dangerous governments in the world pariahs. We wash our hands of evil, declining
to help despots finance their depredations, even at a cost to ourselves of some
economic growth. We wincingly accept the collateral damage that falls on
civilian populations in the nations we target. But as the above list of
countries suggests, sanctions have one serious drawback. They don't work. Though
there are some debatable exceptions, sanctions rarely play a significant role in
dislodging or constraining the behavior of despicable regimes.

Beyond the propaganda value Weisberg discusses, sanctions also create scarcity which is useful to the most brutal dictators, as they can use their powers of allocating resources to reward supporters and starve out opponents.  My guess is that Saddam Hussein used his oil for food resources in this way.

I would be interested in a historical analysis of the effect of sanctions in the South African decision to end apartheid.  Was this more due to sanctions or engagement, since a mix were employed.

This week, the US took a step to normalize relations with Libya:

The United States restored
full diplomatic ties with Libya on Monday, rewarding the
longtime pariah nation for scrapping its weapons of mass
destruction programs and signaling incentives for Iran and
North Korea if they do the same

The logic was that Libya still is a sucky dictatorship, but it has taken some important steps forward into the light which we want to reward.  Perhaps more importantly, the administration acknowledges that increasing intercourse with the western democracies tends to have liberalizing effects in countries in this world of open communications (see: China).  Its a difficult trade-off, but I am fine with this.  Certainly we are no virgin in terms of having diplomatic relations with bad governments.

My question is:  Why doesn't this same logic apply to Cuba?  I think it is pretty clear that embargo and shunning over the past 40+ years have had as much effect as they are going to have.  Why not try engagement?  I think this particularly makes sense well before the chaos that may ensue after Castro's death.  If anything, just by reading the behavior of Cuban expats, Cubans remind be of the Chinese in terms of their entrepreneurship, and I certainly think engagement has worked better than shunning in China. 

Of course I already know the answer to my question:  Because Cuban expats make up a large voting block in the most critical presidential election swing state and no candidate wants to be soft on Castro.  But this seems to make it even more of an opportunity for a second-term president who doesn't have to contest Florida again.

Update:  Yes, I did indeed spell it "Lybia" at first.  Seems vaguely Feudian.  Excuse 1:  Blogging is a real time function.  Excuse 2:  Its just a hobby.  Excuse 3:  I was a mechanical engineer in school

The following is from our Chinese sister publication called Panda Blog:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
• Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

Panda Blog goes on to ask that their government end these distorting policies, for the sake of China's future.  I for one kindof hope that they keep subsidizing the stuff I buy over at Wal-mart...

After spending gobs of electrons on this post about the US trade deficit explaining why it is not a debt, and is not even necessarily bad, I got a depressing number of comments and emails like this one:

The trade deficit is a debt. We cannot get the dollars back we have
spendt unless we export to get them back. It is called an external debt
for a reason. It is called a current account debto for a reason.

Aaaaargh.  It is depressing that we can get such economic ignorance, particularly in a self-righteous way.  The crappy media coverage of these issues has people convinced that it just has to be this big old debt out there someone is going to have to repay someday. 

OK, I will try again.  But in response to this specific post, it is only called "external debt" or "current account debt" rather than "deficit" by really, really sloppy media people who have no idea what they are talking about (unfortunately, there are a lot of these).  And a deficit is not a debt, though it can sometimes create a debt.

I try to be very respectful of my readers.  I never delete a comment, unless it is spam/bot stuff or in a few cases where commenters have asked me to.  So it is only with the deepest respect that I say the following:  Please do not bother to comment on this post if a) you do not understand the difference between the federal government deficit and the trade deficit and/or b) you do not understand the difference between an account deficit and a debt.  Seriously.  Just take my word for it that you need to educate yourself a bit first, and then feel free to leap into the debate.  (Update:  This was a poor tone to adopt, see here).

First, A Thought Experiment

This is not meant to constitute proof, but for those who are concerned that the trade deficit is potentially disastrous for our economy, I can only ask, When?  Because we have been running a substantial trade deficit as a nation for over a quarter of a century, and by all accounts, over that same time period, we have had just about the strongest economy in the world.  In fact, I would propose that the causation is more likely just the reverse.  Because we have had a strong economy, with extraordinary wealth creation, we have taken some of that wealth and spent it on goods from other nations.  And because we have the safest nation in the world in which to invest, demand for our local investments tends to shift exchange rates in a way that increase the trade deficit.

In the late 80's and early 90's, everyone was in a panic about Japan.  We were running a massive trade imbalance with Japan.  They were going to buy all of our real estate.  Their government was tipping the scales in their own favor.  They were purposefully depressing the yen to encourage exports.  Blah, blah, etc, etc.  And you know what happened?  They subsequently went into a decade and a half long recession they are only just now climbing out of, and we had one of the strongest economies in history. 

How do the Dollars Get Back?

With a couple of exceptions that don't really change our conclusions, dollars do follow a closed loop.  In other words, if we send them to China or India, they generally eventually come back.   The question is how.  To understand this, it is first important to understand that the balance of trade deficit only measures some monetary flows.  In particular, it looks at the balance between manufactured goods traveling between two countries.  If the US has a $20 billion trade deficit with China, it means that they shipped $20 billion more of manufactured goods to us than we shipped back to them.  It includes some but not all services.  It does not include goods or securities or investments purchased by foreigners that remain on US soil.

To understand how the dollars come back from China in a closed loop is to, in a sense, ask the question of what monetary flows are not included in the trade deficit.  If we have a trade deficit with China, there are a number of things it can do with its extra dollars:

1. It can do nothing with them - just hold them in a big pile
2. It can lend the money to people buying their products
3. It can buy certain US services
4. It can buy US goods, but not take them out of the US
5. It can buy US public and private securities and real estate

Lets look at each in turn

1.  China can do nothing with them - just hold them in a big pile

Two words:  In-Sane.  By just holding them, they would effectively be sticking them in a mattress and foregoing any interest or investment income.  It's just not going to happen.  And don't say, well they could just put the dollars in a Chinese bank.  Fine, but the only way the Chinese bank is going to pay interest on dollars in the bank is if they turn around and invest the dollars in dollar-denominated investments.  One way or the other, the money, if it does not buy anything else, will get invested, which we will deal with in point 5.

I know there are paranoiacs that worry that the Chinese, despite the financial disincentives, will hold these dollars anyway in a big vault or something out of spite.  Gee, hurt me, hurt me.  Holding our dollars in a big mattress in Peking does nothing to hurt us.  And dumping them all on the market simultaneously may sound scary to conspiracy theorists, but in practice it would hurt them worse than it would hurt us, and the pain would be relatively short-lived  (just ask the Hunt brothers about this strategy).

2.  China can lend the money to people buying their products

I suppose that for those who don't get the federal deficit and the trade deficit mixed up, this is what they assume is happening, that Americans are borrowing from the Chinese to finance manufactured goods purchases.  The only problem is that it is not happening, at least to a greater extent than any normal purchase-financing arrangements.  Take corporations such as Wal-mart, a huge buyer of Chinese stuff.  Is Wal-Mart going into debt to buy Chinese stuff?  No, and certainly not to the Chinese. 

Well, are individual Americans going into debt to buy Chinese.  Maybe, but the key point is that they are not going into debt because what they are buying is Chinese.  They are going into debt because Americans, for whatever reason good or bad, are saving less and choosing to buy more on credit.  This would be happening if what they were buying was Chinese or American made.  In other words, American consumers may have debt, but that debt would exist even if we had no trade deficit with China.  It is a personal choice people are making that has no relation to the source of goods.

3.  China can buy certain US services

Note that many US services are not included in the trade deficit calculations.  If Chinese companies engage McKinsey & Co. consultants in the US to figure out how to sell more stuff to Wal-mart, those payments for services are probably bringing dollars back to the US from China, but aren't included in the trade calculations.  This really is just a subset of point four:

4.  China can buy US goods, but not take them out of the US

Many, many of the dollars the Chinese end up with come back to us in this way.  As did many of the dollars the Japanese had in the eighties.  If a Chinese company uses dollars not to buy US goods and take them back to China, but buy them and consume them in the US, then this does not show up in the trade numbers.  Chinese and Japanese companies bring their US dollars to the US to build factories and infrastructure.  This is sometimes why it is said that the trade deficit is not a measure of differences in cash flows, but of a difference in where goods are consumed. 

If you flip the equation around, the Chinese have a wicked balance of stuff deficit.  They are sending a lot more manufactured goods to the US than they get back.  I could argue that Chinese workers are getting hosed, since they only get to enjoy a fraction of the goods they produce for themselves, since a large portion of the product of their labor is sent overseas for others to enjoy.  Hmmm, doesn't sound so bad that way.

5.  China can buy US public and private securities and real estate

Of course, what happens with a lot of the US dollars the Chinese find themselves with is that these dollars get invested in US investment vehicles, from real estate to government bonds to private equities.  There are several points that need to be made here:

a.  Just Because Chinese invest in US Government Bonds does not make them or the balance of trade responsible for this debt

As I intimated above, a lot of people get the US federal budget deficit confused with the trade deficit.  Making this confusion worse, the Chinese use a lot of the dollars they earn in trade to buy US Government Bonds that help finance the federal budget deficit.  Now, by buying a lot of government bonds, one might argue that the Chinese lower interest rates and make government borrowing easier, thus making the federal budget deficit worse since there is a ready source of debt financing. 

While there may be a link here, it is tenuous at best.  If the government was a private company, then its borrowing level might rationally fluctuate up and down based on interest rates and capital availability.  But the US Government is not this rational.  It runs a budget deficit primarily because legislators and bureaucrats alike have the incentive to spend other people's money to protect their jobs and power base.  This happens equally at 3% interest rates and 9% interest rates.  It happens equally if guys from Peking or Omaha are buying government bonds.  In fact, one could argue that Chinese reinvestment of their trade dollars in US securities actually marginally reduces the government debt by reducing interest costs.

This same argument holds equally true for Chinese investments in private debt.  Chinese dollars may increase borrowing slightly, but only because the influx of their cash reduces borrowing costs.

b.  Chinese Ownership of US Assets is GOOD

In the Japanese scare of the 1980's, everyone was freaked out that the Japanese were buying up American assets and real estate.  During that time, while I almost never play the race card, it was almost impossible not to come to the conclusion that some racism had to be involved in this fear.  America had welcomed, in fact, had prospered, via foreign investment for years.  For a century, the US has been the safest place for foreigners to put their money,something we should be proud of  -- A sign of strength, not weakness.

But suddenly, everything was different because the new buyers were Japanese.  Note the following:

Despite the notoriety of
Japanese investors, the British have the largest U.S. direct investment
holding"”with the Dutch not far behind"”as has been the case since
colonial times. In 1990 the United Kingdom held about 27 percent of
foreign direct investment in the United States, significantly greater
than Japan's 21 percent. The European Economic Community (EC)
collectively holds about 57 percent. Moreover, according to research by
Eric Rosengren, between 1978 and 1987, Japanese investors acquired only
94 U.S. companies, putting them fifth behind the British (640),
Canadians (435), Germans (150), and French (113).

But no one was complaining about the British, Canadians, Germans, or French.  Only the Japanese.  I have to come to the conclusion that there was some racism involved, with the same primal fears at work that caused us to ship US citizens of Japanese decent off to concentration camps in WWII but we did not do the same of citizens of German or Italian decent.  And in this case, it could not have been security concerns.  Since 1945, Japan is one of the most pacifistic nations in the world- we probably face a bigger security threat from Belgium than we do from Japan.

I get the same feeling today with the China panic that I did twenty years ago with Japan.  Its a race and a culture we don't understand well, so we get xenophobic.  People lament that China is a real security threat, and that certainly is true to an extent.  But ask yourself this - Is China more or less of a threat to hurt us if their economy, their financial prosperity, and most of their assets are tied to the US?  Is China more or less stable now that their people are not starving and they are rapidly developing the largest middle class in the world?

Conclusion

If you are still having trouble understanding, the problem may be that you insist on thinking of economics as zero-sum.  This is the fallacy of 18th century mercantilists, who saw the economy as a big fixed tank, and if more flowed overseas than flowed back, the tank level would fall until the country was bankrupt.  There are at least two key fallacies here:

1. Wealth is not zero-sum.  It is created.  It is expanded.  Some can even be spent frivolously on big ass plasma TV's from China and we are still wealthier than we were decades ago.
2. Trading has value in both directions.  As mentioned above, looking at only the currency side of trading misses a lot.  By definition, in a free trade, both sides believe the trade increases the value to themselves, or they would not have made the trade.  So trading per se, no matter what the currency flows, can only lead to wealth creation, not its destruction.

Postscript - New Mercantilism

Lamenting the trade deficit is always a precursor to interfering with free trade.  It is important to note that free trade has always led to prosperity, while protectionism has always led to stagnation. 

Several protectionists today are trying to make the argument that OK, that might have been true in the past, but today is different, and today, free trade is uniquely bad.  Economist Paul Craig Roberts made this argument, that, as Don Boudreaux summarizes it:

the American standard of living is threatened by the world's growing
prosperity, improved education, better governance, and greater fluidity
of capital and resources to move in search of higher returns

Boudreaux, a writer at the fabulous Cafe Hayek, does a good fisking of this argument, but I think I can demolish it even faster.  By this logic, California would be better off if the eastern part of the US was suddenly impoverished and made educationally backwards.  This is absurd.   Sure, the industrial east suffered some temporary dislocations as the south modernized and competed for factories.  But this was only temporarily.  As the south got richer, it wasn't a contest between regions for a fixed number of factories, the number of factories and jobs grew, so that all parts of the country had more. 

Is there anyone who thinks that half of the US would be better off
economically if the other half were turned into a third world nation?  Is there any company executive that thinks they could survive if half their market went away?  So why is half the world better off if the other half is impoverished?  If you are saying, gee, the only reason I can come up with is that zero-sum fallacy Coyote keeps talking about, go to the head of the class.

Update:  In comments and emails, my readership educates me that citizens of German and Italian decent were interned in WWII as well.  While I knew that Germans and Italian POW's were interned in large numbers in the US in WWII, I was not aware of internship of US citizens with German or Italian blood, though the programs for these nationals do seem more limited than the west coast movement of Americans of Japanese decent.   My first and second generation German immigrant family members never reported being harassed in any way, either publicly or privately, during the war and most all served either in the US military or war production industries.  I will still stick by my core point that investment in the US by Asian nationals is not treated the same as investment by European or Canadian nationals.

I have also gotten a number of emails and comments on the differences between various trade and current account deficit indicators.  I tried to avoid getting into all that, assuming, I think rightly, that it would just clutter up the argument and would not substantially affect the conclusion.  Just for the record, though, there are many different metrics, that range from narrow measures of manufactured goods flows to much broader measures of capital and services flow.  You can assume that 90% of the time, the media article you are reading about the deficit probably does not correctly describe the metric it is using.

As a followup to this post on security as a Trojan horse for protectionism, I wanted to link this article in the WSJ($) called The Perils of Protectionism:

Fifty-six percent of the economists polled in the latest WSJ.com
forecasting survey -- conducted in the aftermath of a flap over foreign
management of U.S. ports -- say protectionism will lead to some
slowdown in U.S. growth over the next several years, and 8% predict
that the slowdown will be significant....

The ports controversy came at a time of growing concern about
protectionism around the world. It followed the blocked bid by China's
Cnooc Ltd. to acquire Unocal Corp. last year and emerged as European
governments angle to prevent high-profile utility deals within their
borders. The fear is that if governments take steps to shield their
countries' businesses, international trade and investment flows could
be reduced. Corporations will find it more difficult to reach new
markets.

Protectionism is unambiguously bad," said David Berson, chief economist
at Fannie Mae. Indeed, the free flow of capital across national borders
is conventionally looked upon by economists as a long-term good, and
69% of those surveyed say foreign ownership of U.S. assets is positive
for the economy in the long run.

One example of why the protectionist arguments are short-sighted is demonstrated by this passage from the same WSJ article:

While the ports row has receded, the U.S.'s large bilateral trade
deficit with China, which was $17.91 billion in January, remains a
flashpoint. Some lawmakers complain the imbalance has been inflamed by
an artifically low exchange rate for China's yuan against the dollar.
Though Beijing modestly revalued the yuan last summer, allowing it to
float in a narrow range against a basket of foreign currencies, critics
have continued to lash China's currency policy and call for further
revaluation.

So the Chinese government is artificially subsidizing the US economy through reduced prices of Chinese goods via a low valuation for the yuan vs. the dollar.  And that's a bad thing?  If the Chinese government is holding down the exchange rate, then they are in fact taking their money and the money of their citizens and pumping it into lower prices for US consumers and lower interest rates on US government debt.  Ooooh, color me really concerned.

As far as the "well, we're going into debt to pay for our consumerism" argument, I and others have tried and tried to educate the world that the trade deficit is not a debt, and running a trade deficit is not bad.

For about a year now, I have been arguing that public funding of health care will be used as a Trojan Horse to introduce a near fascist micro-regulation of our lives.  I argue that if the government is funding health care, then they will claim a financial stake in your health, and begin regulating everything from your food intake to your exercise habits, even your risk choices (e.g. snowboarding).  I made this argument here and here, among other places.  The general reaction has been, "gee Coyote, nice theoretical argument but you can put your tinfoil hat away now.  You are being paranoid."

Well, check this out:    (via Reason)

Another doctor who examined the journal report was Dr. Brian
McCrindle, a childhood obesity expert and professor of pediatrics with
a pediatric hospital in Toronto.

He warned that the looming problem must be addressed.

"The wave of heart disease and stroke could totally swamp the public health care system," he said.

He warned that lawmakers had to take a broader view of the looming
problem "” and consider doing things such as banning trans fats and
legislating against direct advertising of junk food toward children.

"It's not going to be enough any more just to say to the consumer 'You have to change your behavior,'" he said.

Notice that he left the second half of his last sentence unsaid.  That second half is "the government is going to have to force them."  Of course, none of this is an issue if we all have personal responsibility for our own health care costs and therefore for the consequences of our own decisions.

Postscript:  By the way, for anyone older than 30 who grew up in the sixties and seventies when all the intelligentsia were painting pictures of Malthusian starvation nightmares, this is GOOD news:

The percentages of overweight children also are expected to increase
significantly in the Middle East and Southeast Asia. Mexico, Chile,
Brazil and Egypt have rates comparable to fully industrialized nations,
James said.

He estimated that, for example, one in five children in China will be overweight by 2010.

The reason for this is not because of some evil corporate conspiracy (though that's what the article attributes it to) but due to the fact that these kids are simply not starving to death any more.  I am absolutely sure that the public health "crisis" from these overweight kids is less of a problem than the public health crisis of 30 years ago, when they were all malnourished and dying of being, well, severely underweight.  I mean, are there any of you out there in the over 40 crowd who didn't get the "there are starving kids in China" guilt trip growing up when you didn't eat your dinner?

Via Instapundit, comes this article by Rebecca MacKinnon on how blogs are filtered and censored in China, and in particular, how Time's Man of the Year Bill Gates seems to be taking a leadership role in the censorship arms race.

Microsoft's MSN Spaces continues to censor its Chinese language blogs,
and has become more aggressive and thorough at censorship since I first checked out MSN's censorship system last summer.  On New Years Eve, MSN Spaces took down the popular blog written by Zhao Jing, aka Michael Anti...

Now, It is VERY important to note that the inaccessible blog was moved
or removed at the server level and that the blog remains inaccessible
from the United States as well as from China. This means that the
action was taken NOT by Chinese authorities responsible for filtering
and censoring the Internet for Chinese viewers, but by MSN staff at the
level of the MSN servers.

In addition to taking down sites that offend the overlords of China, Microsoft is also actively filtering blog content

Back over the summer I wrote a post titled Screenshots of Censorship
about how MSN spaces was censoring the titles of its Chinese blogs, but
not posts themselves. According to my testing in mid-late December,
they now censoring much more intensely.   

On December 16th I created a blog and attempted to make various
posts with politically sensitive words. When I attempted to post
entries with titles like "Tibet Independence" or "Falun Gong"
(a banned religious group), I got an error message saying: "This item
includes forbidden language. Please delete forbidden language from this
item."

I understand that the business climate in China causes businesses some difficult choices.  Refusing to acquiesce to certain government rules, like censorship, essentially cedes a large a growing market to the locals.  But at some point, that's just what you have to be willing to do, when market share is just too ethically expensive.

Its probably time for another once-every-six-months update on global warming.  In this post I will address the current leading climate intervention position, which is:  Even if we don't understand global warming fully, the time to take massive action is now, before the process builds momentum (similar to the notion that it is easier to deflect a meteor away from earth when it is millions of miles away, rather than right on top of us).  The potential downside of global warming, it is argued, is too high to justify waiting until we are sure.   

While I find arguments that attempt to challenge the current global warming orthodoxy in any way tends to get one labeled a Luddite not worth listening to, giving one the feeling of being a southern Baptist advocating creationism in a room full of Massachusetts Democrats, I will once again try to refute this need to immediate and massive intervention.

The shorthand I use for my argument against intervention is "creating a cooler but poorer world".  In a nutshell, given current technology and likely government intervention approaches, slowing global warming almost certainly entails slowing world growth.  And while the true cost of warming is poorly understood, the true cost of reduced world economic growth is very well understood and is very high.  The real question, then, is do we understand global warming and its potential downsides enough to believe that curbing them outweighs the almost certain negative impact from a poorer world.

I will begin by conceding some warming

Typically when making this argument, I will concede some man-made global warming.  It is hard to refute the fact from various CO2 concentration estimates that man has increased the amount of CO2 in the atmosphere over the last 50 years, and that this CO2 likely has had and will have some impact on global temperatures.  As a result, I am willing to concede a degree or two of warming from man-made effects over the next century.  This is lower than most of the warming estimates that you see in the press, but scientists will have to nail down a lot more issues before they can convince me these higher numbers are correct.  Some of these issues include:

• World temperatures rose by a half degree in the first half of the 20th century through mostly natural phenomena.  No one knows why (though solar activity may help explain it), but even global warming's strongest supporters agree that it was probably not due to man.  No one can therefore with any accuracy separate warming in the late 20th century due to this natural effect and warming due to man's impact.  Check out Mann's now-famous hockey stick below:

Global warming advocates love this chart - I mean this is their chart, not the skeptics' - and it probably plays well with non-scientific editors who are believers themselves, but I sure wouldn't want to defend this in a board room.  What if this were a sales chart, and I wanted to claim that the sales increase after I started work in 1950 was all due to my effort.  I can just see my old boss Chuck Knight at Emerson, or maybe Larry Bossidy at AlliedSignal, saying - "well Warren, it sure looks like things changed in 1900, not 1950.  And whatever was driving things up from 1900 to 1950, why do you think that that effect, which you can't explain, suddenly stopped and your influence took over.  And by the way, why did you end your chart with 1998 - I seem to remember 1998 was the peak.  Isn't it kind of disingenuous to leave off the last 6 years when the numbers came back down some?" (update:  Even in the arctic, where the media writes with so much confidence that global warming is having a measurable impact, the difference between cyclical variations and man-made effects is hard to unravel.)

• No one really understands the cyclical variations in world temperatures and climate.  I think it is large, and certainly there are historical records of the last 800 years that seem to point to climactic extremes.  Mann, et. al. claim to have shown that man's effects dwarf these natural variations with their 1000-year hockey stick, but there are a lot of problems with Mann, not the least of which is his unbelievably suspicious refusal to release his data and methodology to the scientific community, behavior that would not be tolerated of any other scientist except one who supported the global warming consensus view.
• It is still not clear that the urban heat island effect has been fixed in the ground data, so satellite data tends to show less warming (but some none-the-less).
• The climate models are absurd in ways even a non-climatologist can figure out.  For example, economies in energy inefficient undeveloped nations are assumed to grow like crazy in the IPCC scenarios, such that "then the average income of South Africans will have overtaken that of
  Americans by a very wide margin by the end of the century. Because of
  this economic error, the IPCC scenarios of the future also suggest that
  relatively poor developing countries such as Algeria, Argentina, Libya,
  Turkey, and North Korea will all surpass the United States."
• I no longer trust the scientific community on global warming.  This quote from National Center for Atmospheric Research (NOAA) researcher and global warming action promoter, Steven Schneidersays it all:

We have to offer up scary scenarios, make simplified, dramatic
statements, and make little mention of any doubts we have. Each of us
has to decide what the right balance is between being effective and
being honest.

While many serious scientists are working on the issue, 100% of the anti-growth, anti-technology, anti-America, and anti-man folks have jumped strongly on the global warming bandwagon, and many of these folks have in fact grabbed the reins, leading major efforts and groups.  It is important to note that these folks do not care about scientific accuracy or facts.  Their agenda is completely and absolutely to use global warming as their lead issue to push their anti-growth agenda.  As such, none of these folks are going to tolerate any fact, study, or scientific voice that in any way questions the global warming orthodoxy.  And can any scientist be considered serious who uttered the following statement (from the UN's IPCC Conference Summary, page 2):

"It is
likely that, in the Northern Hemisphere, ... 1998 [was] the warmest year during the past thousand years."

My physics instructors in college used to criticize us students constantly for not understanding the error range in our lab work.  I wonder what they would think of a group of scientists that stated with confidence that 1998 was the warmest year in the last one thousand, when they only have direct measurement for the last 100 years or so and even then over only a small percentage of the planet and the other 900 years are estimated from tree rings and ice cores.  I am tired of being criticized as a Luddite for challenging "scientists" who think they know with confidence the exact world temperature since Charlemagne. 

Anyway, to avoid getting bogged down in this mess, I am willing to posit some man-made warming, say 1-2 degrees over the next 100 years.  For most who argue the subject, this is the end of the discussion.  For me, it is just the beginning.

What impact, warming?

Beyond bad cinema and Sunday supplement hyperbole, its difficult to find the good science aimed at quantifying the impacts, positive and negative, from global warming.  In fact, it is impossible in any venue at any level of quality to find any mention of the positive impacts of warming, though anyone with half a brain can imagine any number of positive impacts (e.g. longer growing seasons in cold climates) that will at least partially offset warming negatives.

Now, I am sure many scientists would respond that climate is complicated, and its hard to judge what will happen.  Which I believe is true.  But surely the same scientists that can cay that the world will warm by x degrees with enough certainty to demand that billions or even trillions of dollars be spent to change energy use should be able to come to some conclusions about the net effects, both positive and negative, from warming.

Certainly sea levels will probably rise, as some ice caps melt, by maybe a foot in the consensus view.  And storms and hurricanes may get worse, though its hard to separate the warming effect from the natural cyclical variation in hurricane strength, at least in the Atlantic.  What does seem to be clear is that the warming disproportionately will occur in colder, drier climates.  For example, a large part of the world's warming will occur in Siberia. 

When I hear this, I immediately think longer growing seasons in cold climates plus less impact in already warm climates = more food worldwide.  It strikes me that since the climate models tend to spit out warming not only world wide but by area of the world, it would be fairly easy to translate this into an estimate of net impact on food production.  This seems to be such an obvious area of study that I can only assume it has been done, and, since we have not heard about it, that the answer from global warming was "increased food production".  Since this conclusion neither supports scary headlines, increased grant money, or the anti-growth agenda, no one really talks about it or studies it much.  I would bet that if I took all the studies and grants today aimed at quantifying the impact of global warming, more than 95% of the work, maybe 100% of the work, would be aimed solely at negative impacts, studiously ignoring any positive counter-veiling effects.

I often get looks from global warming advocates like I am from Mars when I suggest work needs to be done to figure out how bad warming is, or even if it is really that bad at all.  I have learned that there are typically two reasons for this reaction:

1. I am talking to one of the anti-growth types, for whom the global warming issue is but a means to the end of growth limitation.  These folks need global warming to be BAD as a fundamental premise, not as something that can be fact-checked.  They cannot have people questioning that global warming is the ultimate bad thing that trumps everything else anymore than the Catholic Church can have folks start to question the fallibility of the Pope.
2. I am talking to an environmentalists who considers man's impact impact on earth as bad, period.  It is almost an aesthetic point of view, that it is fundamentally upsetting to see man changing the earth in such a measurable way, irregardless of whether the change affects man negatively.  These are the same folks with whom you cannot argue about caribou in ANWR.  They don't oppose ANWR drilling because they honestly think the caribou will be hurt, but because they like the notion that there is a bunch of land somewhere that man is not touching

By the way, though I know this will really mark me as an environmental Luddite, does anyone really believe that in 100 years, if we've really screwed ourselves by making things too hot, that we couldn't find a drastic way to cool the place off?  Krakatoa's eruption put enough dust in the air to cool the world for a decade.  The world, unfortunately, has a lot of devices that go bang laying around that I bet we could employ to good effect if we needed to put some dust in the stratosphere to cool ourselves off.  Yeah, I am sure that there are hidden problems here but isn't it interesting that NO ONE in global warming, inc. ever discusses any option for solving warming except shutting down the world's economies?

What impact, Intervention?

While the Kyoto treaty was a massively-flawed document, with current technologies a Kyoto type cap and trade approach is about the only way we have available to slow or halt CO2 emissions.  And, unlike the impact of warming on the world, the impact of such a intervention is very well understood by the world's economists and seldom in fact disputed by global warming advocates.  Capping world CO2 production would by definition cap world economic growth at the rate of energy efficiency growth, a number at least two points below projected real economic growth.  In addition, investment would shift from microprocessors and consumer products and new drug research and even other types of pollution control to energy. The effects of two points or more lower economic growth over 50-100 years can be devastating:

• Currently, there are perhaps a billion people, mostly in Asia, poised to exit millenia of subsistence poverty and reach the middle class.  Global warming intervention will likely consign these folks to continued poverty.  Does anyone remember that old ethics problem, the one about having a button that every time you pushed it, you got a thousand dollars but someone in China died.  Global warming intervention strikes me as a similar issue - intellectuals in the west feel better about man being in harmony with the earth but a billion Asians get locked into poverty.
• Lower world economic growth will in turn considerably shorten the lives of billions of the world's poor
• A poorer world is more vulnerable to natural disasters
• The unprecedented progress the world is experiencing in slowing birth rates, due entirely to rising wealth, will likely be reversed.  A cooler world will not only be poorer, but likely more populous as well.  It will also be a hungrier world, particularly if a cooler world does indeed result in lower food production than a warmer world
• A transformation to a prosperous middle class in Asia will make the world a much safer and more stable place, particularly vs. a cooler world with a billion Asian poor people who know that their march to progress was halted by western meddling.
• A cooler world would ironically likely be an environmentally messier world.  While anti-growth folks blame all environmental messes on progress, the fact is that environmental impact is a sort of inverted parabola when plotted against growth.  Early industrial growth tends to pollute things up, but further growth and wealth provides the resources and technology to clean things up.  The US was a cleaner place in 1970 than in 1900, and a cleaner place today than in 1970.  Stopping or drastically slowing worldwide growth would lock much of the developing world, countries like Brazil and China and Indonesia, into the top end of the parabola.  Is Brazil, for example, more likely to burn up its rain forest if it is poor or rich?

The Commons Blog links to this study by Indur Goklany on just this topic:

If global warming is real and its effects will one day be as devastating as
some believe is likely, then greater economic growth would, by increasing
greenhouse gas (GHG) emissions, sooner or later lead to greater damages from
climate change. On the other hand, by increasing wealth, technological
development and human capital, economic growth would broadly increase human
well-being, and society's capacity to reduce climate change damages via
adaptation or mitigation. Hence, the conundrum: at what point in the future
would the benefits of a richer and more technologically advanced world be
canceled out by the costs of a warmer world?

Indur Goklany attempted to shed light on this conundrum in a recent paper
presented at the 25th Annual North American Conference of the US Association for
Energy Economics, in Denver (Sept. 21, 2005). His paper "” "Is a
richer-but-warmer world better than poorer-but-cooler worlds?" "” which can
be found here, draws
upon the results of a series of UK Government-sponsored studies which employed
the IPCC's emissions scenarios to project future climate change between 1990 and
2100 and its global impacts on various climate-sensitive determinants of human
and environmental well-being (such as malaria, hunger, water shortage, coastal
flooding, and habitat loss). The results indicate that notwithstanding climate
change, through much of this century, human well-being is likely to be highest
in the richest-but-warmest world and lower in poorer-but-cooler worlds. With
respect to environmental well-being, matters may be best under the former world
for some critical environmental indicators through 2085-2100, but not
necessarily for others.

This conclusion casts doubt on a key premise implicit in all calls to take
actions now that would go beyond "no-regret" policies in order to reduce GHG
emissions in the near term, namely, a richer-but-warmer world will, before too
long, necessarily be worse for the globe than a poorer-but-cooler world. But the
above analysis suggests this is unlikely to happen, at least until after the
2085-2100 period.

Policy Alternatives

Above, we looked at the effect of a cap and trade scheme, which would have about the same effect as some type of carbon tax.  This is the best possible approach, if an interventionist approach is taken.  Any other is worse.

The primary other alternative bandied about by scientists is some type of alternative energy Manhattan project.  This can only be a disaster.   Many scientists are technocratic fascists at heart, and are convinced that if only they could run the economy or some part of it, instead of relying on this messy bottom-up spontaneous order we call the marketplace, things, well, would be better.  The problem is that scientists, no matter how smart they are, miss with their bets because the economy, and thus the lowest cost approach to less CO2 production, is too complicated for anyone to understand or manage.  And even if the scientists stumbled on the right approaches, the political process would just screw the solution up.  Probably the number one alternative energy program in the US is ethanol subsidies, which are scientifically insane since ethanol actually increases rather than reduces fossil fuel consumption.  Political subsidies almost always lead to investments tailored just to capture the subsidy, that do little to solve the underlying problem.  In Arizona, we have thousands of cars with subsidized conversions to engines that burn multiple fuels but never burn anything but gasoline.  In California, there are hundreds of massive windmills that never turn, having already served their purpose to capture a subsidy.  In California, the state bent over backwards to encourage electric cars, but in fact a different technology, the hybrid, has taken off.

Besides, when has this government led technology revolution approach ever worked?  I would say twice - once for the Atomic bomb and the second time to get to the moon.  And what did either get us?  The first got us something I am not sure we even should want, with very little carryover into the civilian world.  The second got us a big scientific dead end, and probably set back our space efforts by getting us to the moon 30 years or so before we were really ready to do something about it or follow up the efforts.

If we must intervene to limit CO2, we should jack up the price of fossil fuels with taxes, or institute a cap and trade scheme which will result in about the same price increase, and the market through millions of individual efforts will find the lowest cost net way to reach whatever energy consumption level you want with the least possible cost.  (The only real current alternative that is rapidly deploy-able to reduce CO2 emissions anyway is nuclear power, which could be a solution but was killed by...the very people now wailing about global warming.)

Conclusion

I would like to see some real quality discussion as to the relative merits of the path the world is on today vs. an interventionist world that is cooler but poorer, more populous, hungrier, and less politically stable.  If anyone knows of some thoughtful work in this area, please leave a link in the comment area or in my email.

By the way, I got through this whole post without mentioning or quoting Bjorn Lomborg, which really is not fair since he has been very eloquent about just this cooler but poorer argument, but since he is treated like the anti-Christ by global warming believers, it generally only causes people to stop listening when you mention him.

Note finally that other past articles in this series can be found here and here and here.

Disclosure:   I am not funded in any way by the automobile or electric power industry. In fact, my personal business
actually benefits from higher oil prices, since our recreation sites
tend to be near-to-home alternatives for those who can't afford to
drive across country, so global warming intervention would probably help me in the near term.  However, I do own a fair amount of Exxon-Mobil stock, so you may assume that all my opinions are tainted, following the tried and true Global Warming formula that any money from the energy industry is automatically tainting, but incentives that tie grant money, recognition, or press exposure to the magnitude of warming a scientist predicts never carry a taint.  My opinions carry with them an honest concern for the well-being of non-Americans, like the Chinese, which I'm told used to be considered a liberal value until liberals and progressives decided more recently that they actually fear and oppose economic growth in places like China.

After you finish this post, I have an updated post on the same topic here.

Well, the US trade deficit is up again, and you can be sure the news was accompanied by a lot of moaning and groaning and soul-searching.  The main reason that all the media and the majority of Americans freak out over large trade deficit numbers is that they look at the American economy as a large bank vault with a fixed supply of money on the shelves.  They reason that if more money is going out of the vault to buy things than is going back in from sales, then eventually the vault will go empty and we will be bankrupt.  Either implicitly or explicitly, those who fear trade deficits perceive the trade imbalance to be red ink, something bleeding out of a fixed supply.

This view of the trade deficit as a being a growing and unsustainable debt is wrong.  I will try to explain in a couple of ways.

The micro view

Lets first look at it from the perspective on one individual.  Lets say Fred made $50,000 this year, and lives in a US where, before he makes his spending decisions, trade is exactly in balance with China.  Fred spends some of his income on rent, and invests some in some nice US equities.  And he takes $1000 of what he just made that he might have saved and buys himself a nice Chinese-made plasma TV so he can really enjoy the Superbowl next year.

So, where's the debt?  One can argue that net savings is lower (perhaps - we haven't gotten yet to where the Chinese are spending their extra US dollars), but Fred seems to have increased the trade deficit without incurring any debt.  In fact, Fred is actually better off, since in a free society no one engages in a transaction that doesn't return more value than one spends.  In this case, the plasma TV provides more than $1000 of value back to Fred, or else he would not have engaged in the transaction. 

Yes, many people are buying Chinese TV's with consumer debt, but these same people are buying much more American stuff with consumer debt as well.  To the extent that there is or is not a "problem" with people taking on too much consumer debt, this problem is absolutely unrelated to the country of origin of the goods they are buying.  You can max out your Visa card on American stuff just as easily as on Chinese stuff.

But wait, you say.  The reason the debt is not obvious is from the way I structured the problem.  I assumed the rest of the economy was static while Fred was making his decision.  But if Fred had bought American, somewhere in the US economy there must have been less debt.  So we will tackle this next.

The Economy is Not Zero Sum

Repeat please:  The economy is not zero-sum.  Never has it been so hard to convince people of a concept that should be so obvious.  I used up bushels of electrons explaining why the economy is not zero sum here, but the short proof is easy:  Look at the world in 1900.  Look at it today.  The world as a whole and most every individual is far richer.  The fact is that economies create wealth every day, and free economies create a LOT of wealth.

At the heart of every argument that the trade deficit is bad is the mercantilist notion that the US economy is a bank vault leaking funds.  But this analogy that seems to be in everyone's head is flawed.  The supply of money or wealth in the US, in the vault, is constantly growing.  If you really have to think of it as a vault, then think of what's inside as rabbits rather than gold bars.  Does anyone doubt that if you start with a hundred rabbits and every year sent a few to China that you might still have more rabbits than you started with in the vault?  A free economy is like a group of rabbits on Viagra.  Even if the Chinese took billions of dollars they got from selling goods to the US each year and burned the money in a big bonfire, the US still would be growing in wealth.

Of course, the vault analogy sucks for a larger reason, that the US economy is deeply integrated with that of the rest of the world.  In fact, much of the wealth creation comes from this very integration, providing a more robust division of labor and a deeper well of creativity and entrepreneurship than any one country could achieve on its own.  And the dollars we send overseas don't stay there, they come back.  But we will address this next.

So What do the Chinese do with Those Dollars?

OK, so we are all short-sitedly (at least according the the "progressive" intelligentsia) sending dollars to China to satisfy our consumerism.  So what do those Chinese do with those dollars?  They can't spend them domestically, because stores and vendors in China don't accept dollars any more than the Wal-mart down the street from me accepts Yuan.

Most all the dollars have to come back to the US, or the person in China holding them gets no value.  You could say, well that person can take them to the bank and exchange them for Yuan, and that is true.  But that bank would not accept the dollars for exchange unless it knew it could get them back to the US, or had another client that needed them to make a purchase in the US.  So, the dollars will have to come back to the US to purchase something.

Some of the dollars come back to purchase US goods and raw materials, but of course this is less than the total dollars the Chinese have to spend, or else there would be no trade deficit.  In fact, this all that the words "trade deficit" really means.  It means that of the dollars the Chinese receive from sales to the US, only a portion is used to buy American goods that are shipped back to China.  The rest goes to buy American .. something else.

What?

Well, some of it goes to purchase American goods that stay in the US.  Lets shamelessly steal an analogy from Don Beadreaux and Jack Wenders.  If Chinese companies buy American steel and lumber and ship it to China, it shows up in the trade balance.  If they buy the same products and build a factory in the US, it does not.  The Chinese use a lot of their dollars to invest in buildings, real estate, capital assets, factories, production facilities, etc. in the US.  And this is bad, how?  I know that since the Japanese investment boom of the eighties, there are lots of folks who call themselves "liberal" who suddenly got very upset about foreigners owning US-based assets.  It is impossible for me to see this concern as anything but xenophobia and racism, since hundreds of years of Dutch, Canadian, and British investment never worried a soul but Japanese and Chinese investment has everyone in a lather. 

By the way, if you worry about China as a security threat, wouldn't you rather see them invested in the US economy, and therefore have a strong interest in our continued prosperity?  One could easily wonder why Saudi Arabia does not use their power over oil reserves to screw with the US like they tried to do in the early 70's.  The reason is that all of their wealth is invested in dollar and euro-denomitated assets.   People worry about the power the Saudis may have to mess with our economy, but their reinvestment of dollars back in our economy has made this a game of mutual assured destruction.  The same thing is occuring with China.

The other thing the Chinese do with the money is invest in dollar-denominated financial assets, which in many ways is just an indirect way of investing in the same capital assets listed above.  They will invest dollars in equities and, yes, debt securities.  But the fact that the Chinese choose to spend their dollars on debt securities does not mean that the trade deficit is causing the debt.  If the Chinese had a predilection for debt securities, more so than say an American holder of dollars, one might argue that this predilection drives down interest rates a bit and therefore might increase total debt, but this is a fairly tenuous chain of causation and not, I think, what seems to be bothering folks who panic over the trade deficit.  In fact, one can argue that the causation runs more strongly the other direction, that the large US budget deficit keeps the dollar higher than it might otherwise be, increasing the trade deficit.

So when people lament that "we now consume much more than we produce", they are making a meaningless statement because the we in the first part are not the same as the we in the second part.  The US and the Chinese are sending equal amounts of money back and forth - its has to be, over the medium to long term, or exchange rates would crash.  All the trade deficit means is that there is a difference in WHERE Chinese and Americans consume the goods.  Americans consume Chinese goods in the US.  The Chinese consume some of the US goods it buys in China, and then consumes the rest in the US.  The trade deficit represents the net amount of American goods and services the Chinese buy in the US and choose not to haul back to China.  Instead, they take ownership of the American goods here, in the form of capital assets or financial securities that represent ownership or calls on the cash flow of these capital assets. 

Anyway, you can find more here at Cafe Hayek.

Postscript:  By the way, the US has run a trade deficit of a magnitude that panics people for over two decades.  If this is bad, surely we would be able to find the damage somewhere.  But the US over the last two decades has had the strongest economy in the world.  I suspect that a lot of people would answer "we have run up a huge debt".  But any increase in total debt in the US is not relevant to the trade deficit, or only tangentially related as discussed above.  The Federal debt is run up because the politicians are all spending whores who support their reelection with "good works" paid for with our money.  Consumer debt, which may or may not be "too high", is based on individual spending and saving choices, and is unaffected by whether a person buys an American or Chinese TV.

Per the BBC News:

More than 5% of the net's most popular domains have been registered using "patently false" data, research shows.

A US congressional report into who owns .com, .net and .org domains found that many owners were hiding their true identity.

Congress has just discovered that people, knock me over with a feather, do not always include all their correct personal private  and personal confidential information in online web databases that can be read by everyone:

The report found that owner data for 5.14% of the
domains it looked at was clearly fake as it used phone numbers such as
(999) 999-9999; listed nonsense addresses such as "asdasdasd" or used
invalid zip codes such as "XXXXX".

In a further 3.65% of domain owner records data was missing or incomplete in one or more fields.

I personally am a fan of (555) 555-5555 in filling out web forms.  For years, I never, ever put my correct phone number in the WHOIS registry, and only correctly filled in enough blanks to get my credit card authorized.

As is usual with every privacy reduction effort, it starts with an honest desire for better law enforcement:

Increasingly whois data is being used by law enforcement
and security companies to find out who is running a website involved in
spamming or some other scam....

The GAO recommended that more effort be made to verify
the information by domain owners and that greater use be made of
commercial software tools to check who runs a website.

                   

I get the law enforcement issue, but I think it is dwarfed by the privacy and free speech issues.  There are a lot of really good non-illegal reasons not to want the detailed personal and private information of web site owners plastered all over public data bases, and there are particularly good reasons that web site owners might not like the government to know who they are.  Like every blogger in China, for example.  I don't think that US Government bodies (or major corporations, or political groups, or fringe groups like the KKK) are above seeking some type of retribution (e.g. audits) against folks online who criticize them, and I am sure China and Saudi Arabia are not above it.  If you start a web site criticizing your current employer, do you really want to reveal your name?  I for one thought for a long time about whether to blog as myself or anonymously.

As for hunting down phishing and other such scams, liscencing web owners in a way similar to say gun owners is not necesary.  Scams are illegal because somewhat is defrauded of money, and that money leaves an easier trail to follow than any electronic trail, even with better ICAHN data.  You can use zombie computers and other techniques to defeat most electronic tracing, but the money WILL end up in the bad guys hands and can be found.

Next up:  Requiring background checks before you can register for a web site.

Frequent readers of this blog know that I have a particular disdain for technocrats and the damage they do via government coercion.  Just to make sure that I am not subject to the Princess Bride accusation of "You keep using that word -- I do not think it means what you think it does", I will define my terms.

In my parlance, a technocrat is someone who believes that individuals, either acting alone or in groups, are making the wrong decisions and that a few very smart people can make things better for everyone by overriding everyone else's decision-making. 

Technocrats sometimes have a "macro" flavor, focusing on the broad sweep of the economy, seeing market failures everywhere that they feel they could override if only someone would follow their "plan".  This hubris was of course one of the foundations for that juggernaut Soviet Russian economy, and was in fact the thinking behind America's closest brush with fascism, Roosevelt's NRA, which was modeled on Mussolini's economic work.  My college roommate Brink Lindsey has a lot of background on the early 20th century roots of technocratic opposition to capitalism in his book Against the Dead Hand: The Uncertain Struggle for Global Capitalism.

Technocrats also can have a "micro" flavor, focusing on individuals who they feel are making bad decisions for their own selves.  Classic examples are helmet and seat belt laws, where "smarter" people use government coercion for your own good.  We typically call these micro technocrats nannies.  I discussed governments overriding individual decision-making here.

Just the other day I mentioned in this post that I had had a conversation with a technocrat who was:

lamenting that allowing a company like GM to die is dumb, and that a
little bit of intelligent management would save all those GM jobs and
assets.  Though we did not discuss specifics, I presume in his model
the government would have some role in this new intelligent design (I
guess like it had in Amtrak?)

I went on to describe why it was OK to let GM fail.  In particular I noted that it was bad for everyone to artificially force quality assets (people and facilities) to remain in an under-performing corporate structure, which is what the government in effect does when it tries to override the market's decision that a corporation needs to die.

I bring this all up because I saw this classic example of technocratic statism from David Ignatius in the Washington Post. 

Economist Philip Verleger was traveling in Asia last month when the news
broke that General Motors was slashing 30,000 jobs to try to reverse its death
spiral. A Japanese economist he had known for many years asked him a stark
question: "What great nation will allow its major manufacturing company to
fail?"

The convulsions wracking GM are scary, but they're getting surprisingly
little attention amid America's sea of other troubles. Certainly, we've heard
barely a peep out of the Bush administration, which evidently worries more about
keeping energy companies happy than Rust Belt manufacturers. Commentators have
blamed GM management for being too shortsighted and its workers for being too
greedy. But few people seem to appreciate that the nation as a whole has a stake
in maintaining a dynamic industrial base, or that government policies could help
reverse our industrial decline....

But suppose we took GM's near-death experience as a national wake-up call and
decided to get serious about reviving the long-term health of the U.S.
manufacturing sector. What if political leaders treated this as a fundamental
national mission, equivalent to President John F. Kennedy's call to put a man on
the moon? Could government make any difference?

Try this thought exercise: Suppose a government plan could revitalize the
automobile industry and the rest of the transportation sector, encouraging it to
leapfrog several generations of technology; suppose this same plan could cut
U.S. dependence on foreign oil to zero; and suppose, finally, that the plan
could develop new technologies that would bump our economy to a higher growth
path and foster U.S. economic leadership in the 21st century. Would that idea be
worth exploring?

Yes, good idea, lets hand over the automobile industry to the same folks who built and maintained the levees in New Orleans.  It is interesting he quotes a Japanese economist chiding the US for letting its major companies fail.  The author is basically advocating the Japanese MITI approach, making technology choices and managing industries and preventing large organizations in which national pride is somehow tied up from failing.  Which, of course, has resulted in a 15 year recession in Japan.  And Europe.  Don Boudreaux at Cafe Hayek responds further:

I'm tempted to do a long riff here on all the details that Ignatius misses "“
such as, for example, the fact that it's simply not true that as goes GM so goes
America; such as the fact that there is
nothing at all special or inherently better about manufacturing and
manufacturing jobs over service-sector production; such as the fact that
infecting decisions about investment and production with politics will reward
political appeal at the expense of genuinely economically sound uses of
resources.

But it's late, so I'll just point you to Ignatius's closing paragraph:

I'm no technologist, so I can't evaluate the technical details of Lovins's
proposal. What I like is that it's big, bold and visionary. It would shake an
America that is sitting on its duff as foreign competitors clobber our
industrial giants, and it would send a new message: Get moving, start
innovating, turn this ship around before it really hits the
rocks.

This paragraph reflects an attitude that is rich soil for totalitarianism to
take root. It ignores individual freedom; it ignores the possibility that the
admired Big Plan might be flawed, either technologically or economically or
both. Ignatius is all orgasmic simply because The Plan is centralized and Big
and (allegedly) will compel or inspire the masses once again to behave in ways
that promote national greatness.

Heaven help us.

If you think he is exaggerating, as many people do, by invoking the threat of fascism, go back and read what the fascists of the 1930's were writing.  It is nearly identical to Ignatius's words.

There are two lessons technocrats never learn:  1) Their grand plans never work and 2) The statist machinery they create via their grand plans is always taken over from the well-meaning by the power-hungry and corrupt.  As I stated before:

Technocratic idealists ALWAYS lose control of the game.  It may feel
good at first when the trains start running on time, but the
technocrats are soon swept away by the thugs, and the patina of
idealism is swept away, and only fascism is left.  Interestingly, the
technocrats always cry "our only mistake was letting those other guys
take control".  No, the mistake was accepting the right to use force on
another man.  Everything after that was inevitable

And, in fact, you are seeing just this today, as technocrats on the left lament that the machinery of state control they created, from the FDA to public schools, is being taken over by their political enemies.  Unfortunately, they lament the loss of control, not creating the all-powerful state in the first place.  Much more on this topic here and here.

Postscript:  I tossed off the statement above about letting the same organization that built the New Orleans levees fix the automobile industry.  That quick joke makes a valid point, but I should mention that Ignatious does try to preempt this argument:

But then, who can expect individuals to act responsibly when we have an
administration that asserts, in apparent sincerity, that the proper response to
our massive deficits is more tax cuts that plunge us even deeper into debt?
We've become so inured to public-sector mismanagement that the idea of
government solving problems is almost laughable.

In effect, he is arguing that yes, the government has mismanaged things, but this is only because they did not let the really smart people run things.  This is a particularly seductive argument for the left, where most technocrats reside, since it lets them say that government is inefficient only because that idiot Bush is in charge. 

But this ignores the fact that the stupid and corrupt always take over the machinery of state.  Technocrats love railroads, and think America is stupid for not riding the train, like those brilliant Europeans are.  Many supposedly smart people, both Democrats and Republicans, have had their shot at Amtrak, and it still sucks and loses money.  One reason among many for this failure is that incentives matter.  The government has the incentive to patronize powerful voting blocks, not to run an efficient operation or serve customers well.  That's why we get half-billion dollar bridges in Alaska to islands with populations of fifty people.  That's why scientific decisions at the FDA get politicized.  That is why have the government backing a technology ostensibly to reduce fossil fuel use (ethanol) that has been proven to actually increase fossil fuel use.  In effect, government always turns smart people stupid.  More on the specific dangers of government industry building here.

Another Postscript: By the way, people smarter than me do change industries all the time.  The are called "entrepeneurs" and they raise capital from people voluntarily and they succeed or fail only if individuals choose to do business with them.  I find it fascinating to compare Sam Walton with Mr. Ignatius.  Sam Walton raised money voluntarily to support a different vision of retailing, and was successful because many, many people have chosen voluntarily to shop at his stores.  Mr. Ignatius wants to change the automobile industry at the point of a gun, using government's coercive power to force companies to adopt certain technologies and build cars in certain ways, funding the effort with tax dollars taken unwillingly from productive Americans.  Isn't it amazing that "progressives" will want to rally around Mr. Ignatius's vision while excoriating Wal-mart at every turn? 

OK, another Postscript:  At the heart of many of Mr. Ignatius's concerns, and of many people on the left, is that America is "losing" to other countries.  Could someone on the planet please provide maybe just one single fact to support what they mean by this.  I mean, I hear this all the time, but what is it referring to?  Other than, of course, the lamentable fact that 43-year-old Ivy League educated men still can't stop ending sentences with a preposition.

Since 1990, the US economic growth rate has dusted that in most of Europe and Japan.  Only developing nations like China have growth rates that outpace us, and I guess that is what these folks are worried about.  But this is what is never said:  If you don't want countries like China to "catch up" with the US in technology and economy, then you have to be willing to consign billions of people to eternal poverty.  It is amazing to me that "progressives"  who ostensibly care about the poor get so upset when countries like China develop real capabilities that can finally pull themselves out of poverty.  Inevitably, as they do this, they will do some things better than we do.  Over time, our economies will shift, as we do the things we are good at and vice versa.  I know this is kind of novel for some - its an idea that has only been around for 200 years or so.  Having other people get wealthier is only a threat if you believe economics are zero-sum, another urban legend popular on the left that can be demolished with about 5 seconds thought.

One of the virtues of being a bit older is that you can start personally observing history repeating itself.  In the late 80's and early 90's everyone was running around screaming that we were "losing" to Japan and we had to imitate their statist technocratic approach.  Fortunately we did not.  Only in politics could you hear people like Mr. Ignatius being taken seriously when they scream "our economy is losing - lets go out and imitate the people losing even worse"

Update: Sorry this is getting so long, but I can't ignore Virginia Postrel on the same topic of technocrats:

Competition provides not only useful criticism but a continuous
source of experiments. It gives people...the ideas with which to create still
more progress and encourages them, too, to come up with incremental
improvements. By picking winners, stasist protectionism eliminates this learning
process, which includes learning what does not work.

"Premature choice," warns the physicist Freeman Dyson, "means betting all
your money on one horse before you have found out whether she is lame."
Protecting established interests from new challengers is one form of premature
choice. But technocratic planners also sometimes kill existing alternatives to
force their new ideas to "succeed." To protect the space shuttle, NASA not only
blocked competition from private space launch companies, it also eliminated its
own expendable launchers. Such pre-emptive verdicts often mark public works
projects. Planners pick an all-purpose winner, squeeze out alternatives, and
eliminate any real chance of experiment and learning.

Consider the infamous Denver International Airport. Aviation officials touted
the $4.9 billion project as essential to keep up with the region's growth. They
promised it would be a vast improvement over the old Stapleton Airport, which
was often socked in by bad weather. But its sponsors foisted DIA on unwilling
customers. The airport is 25 miles outside Denver, pretty much in the middle of
nowhere, while Stapleton was just 15 minutes from downtown. To make matters
worse, there are no hotels near DIA. And the new airport's cost per passenger is
somewhere between $11.75 and $18.14, depending on how you count--substantially
more than either the $4.59 at Stapleton or the $9.91 promised by former Mayor
Federico Pena. Frequent travelers resent the inconvenience and the generally
higher ticket prices. "I liked Stapleton better," one told The Denver Post. "You
could literally leave about 45 minutes before your plane departed. With DIA, you
have to leave an hour and a half before." A flight attendant expressed a common
sentiment: "It's a beautiful airport. But we hate it."

On the airport's first anniversary, journalists had trouble reaching a simple
verdict on DIA. There were complaints all right--lots of them. But some
passengers liked the spiffy new airport, with its marble floors and inviting
shops. And flight delays had in fact dropped dramatically. The first-anniversary
stories were confused, lacking a central theme.

The reporters had missed the main problem: The city had eliminated the most
obvious source of feedback--competition from the old airport. It had made DIA a
protected monopoly rather than an experiment subject to competitive trial. By
shutting down Stapleton, DIA's political sponsors had made it impossible to rule
the new airport a definite error. No matter how many complaints passengers
lodge, officials can always point to other advantages. At the same time,
however, DIA's monopoly keeps it from becoming an accepted success. Without a
genuine trial, we simply have no way to tell whether travelers (or airlines)
would rather trade a convenient location for fewer weather-related delays. One
airport must fit all: Love it or hate it, if you're flying from Denver you don't
have a choice.

Technocrats often decry competition as wasteful, and always use examples of failed companies and poor private technology choices (e.g. dot com bust companies) as an example of inefficiency of a competitive marketplace that technocrats could avoid.  As Postrel points out, though, these individual failures are not failures of the system, but rather are triumphs.  In the immortal words of the Microsoft tech center, they are a feature, not a bug, and a critical feature at that.

Well, our most socialist state is attempting to repeal the laws of supply and demand:

Hawaii issued a list of wholesale price caps for gasoline, the
state Public Utilities Commission said, amid this month's
record-breaking run up in retail gas that saw island residents paying
some of the highest prices in the nation.

This marks the first state cap on gasoline prices since the 1970s
energy crisis, when the average inflation-adjusted price of a gallon of
regular unleaded hit $3.

Hawaii's recently enacted gas cap law goes into effect on September 1, with the pre-tax wholesale cap in Honolulu set at $2.1578

Gee, I bet this will work out really well.  Either the price cap will be set high, such that it is meaningless, or it will be set low, such that Hawaii will likely get this:

update:  given the structure of the price caps, the result could actually be higher rather than lower prices at the pump -- see update #2 below.

It's good to know that Hawaii is looking to China for economics ideas.

The Chinese government and its state-owned oil companies are locked
in battle over artificially low gasoline prices at the pump that has
caused a massive shortage in the southern manufacturing province of
Guangdong....

The crisis
highlights the persistent problems Beijing faces as the economy is
transformed to a more market-based system but that is often retarded by
authorities who fear loosing political control in the face of
full-fledged capitalist rules.

Beyond the obvious run-up in world-wide oil prices and Hawaii's logistical isolation that raises all of the prices on the island, the article on CNN identified one other possible culprit for high prices: the state government

Higher-than-average taxes on gasoline in Hawaii contribute to those
high prices. The state levies a 16 cent per gallon tax, and various
local authorities add on other taxes.

In Honolulu, for example, total state, federal and local gas taxes
amount to about 53 cents per gallon, one of the highest rates in the
United States. The national average, according to the American
Petroleum Institute, is about 42 cents per gallon

It seems like only a few days ago I was pointing how governments have a hard time resisting meddling in oil markets, and that this meddling never works out well.

Even in the US, which is typically more comfortable with the operation
of the laws of supply and demand than other nations, the government has
been loathe to actually allow these laws to operate on oil.  During the
70's, the government maintained price controls that limited demand side
incentives to conserve, thus creating gas lines like the ones we are
seeing in China today for the same reason.  When these controls were
finally removed, a "windfall profits tax" was put in place to make sure
that producers would get none of the benefit of the price increases,
and therefore would have no financial incentive to seek out new oil
supplies or substitutes.  Within a few years of the repeal of these
dumb laws, oil prices fell back to historical levels and stayed there
for 20 years.

Like the gas rationing and price controls in the 1970's, this occurs in a Republican administration (Hawaiian Governor Lingle).  It continue to be difficult to take the Republican Party's professed support for free markets seriously.

Hawaii's Star Bulletin reported that Governor Linda
Lingle (R) is an opponent of the caps. The newspaper said Lingle
believes it would be better to force oil companies to open their books
and show consumers how much money they make at each stage of business.

If she is so opposed to it, why didn't she veto the bill?  And is having government officials marching into private offices to confiscate accounting data really her preferred "free market" alternative?

Update:  Apparently the cap in Hawaii was passed pre-Lingle, and she fought to reverse it, so I will cut her some slack. Lynne Kiesling has more details on the plan, which includes how the cap will be calculated week to week.  Politicians there are calling it a "market-based price cap".  LOL.  Next we will see freedom-based speech limitations and privacy-based telephone taps.  Note that how the cap is calculated does not change the statement I made before:  Either the price cap will be set high, such that it is meaningless, or
it will be set low, such that Hawaii gets gas lines.

PS- Lynn is the economic goddess of energy markets, so if energy and power markets and regulation interest you, I recommend her blog.

Update #2:  Jane Galt makes the good point that the Hawaiian price caps are on wholesale gasoline prices, so while there may be gas shortages at the wholesale level, retail prices may be able to float higher to close the supply gap.  This would ironically lead to higher, not lower prices at the pump, and large profits for gasoline retailers.  Since wholesale sources of gas tend to be out-of-state corporations, and gasoline retailers tend to be smaller, locally owned businesses, I wonder if this is a case of rent-seeking by gas station owners.

A couple of years ago, California suffered through a summer of electricity blackouts while the state and  state-protected power monopolies nearly bankrupted themselves.  While California politicians have tried to cover their behinds by blaming Enron for the problems, the real mistake that led to the debacle was allowing the wholesale price of electricity to float higher, while the retail price remained low and fixed.  As a result, as wholesale prices skyrocketed, the State and the power monopolies had to buy high and sell low, causing massive financial losses.  At the same time, consumers saw no change in prices, so they had no incentive to change their behavior and cut back on usage, which they would have done if retail electricity prices had been allowed to rise with the market.

Via Instapundit and Gateway Pundit, comes this article about gas shortages in China and the ensuing lines at retail gas stations, that look worse than anything we suffered through in this country.  The article makes fairly clear what is going on:

The Chinese government and its state-owned oil companies are locked
in battle over artificially low gasoline prices at the pump that has
caused a massive shortage in the southern manufacturing province of
Guangdong.

For weeks skyrocketing global oil prices and rising
demand has led to a fuel-supply crunch as domestic refineries have been
caught short in Guangdong.

Some fear it is only a matter of time before gas-guzzling cities such as Shanghai are hit too.

The
government has blamed recent stormy weather for the shortfall, which is
feasible but not enough to result in the kilometre long queues at
filling stations that drivers in Guangdong have endured for nearly a
month.

As oil prices climbed, a standoff erupted between China's
National Development Reform Commission (NDRC) -- a key economic policy
planning body -- and the country's two largest state oil groups
PetroChina and Sinopec, analysts said Wednesday.

The crisis
highlights the persistent problems Beijing faces as the economy is
transformed to a more market-based system but that is often retarded by
authorities who fear loosing political control in the face of
full-fledged capitalist rules.

I blame Enron.  Anyway, I wrote about gas line and what caused them in the US here.  Some genius also attempted the same policy as China is pursuing in post-war Iraq, with similar results.

One of the worst parts about living through the eighties was listening to all the angst about Japanese companies "buying America".  I never really understood the issue that people had with foreigners buying American assets (beyond pure xenophobia).  It was all especially puzzling because most of the wailing came from people who are today wailing about American outsourcing.  So its bad when American companies buy productive assets in other countries AND its bad when foreigners buy productive assets in this country?

Anyway, I missed it the first time around, but apparently Paul Krugman is upset that a Chinese company might buy Unocal.  Here are his reasons for concern:

Yet there are two reasons that Chinese investment in America seems different
from Japanese investment 15 years ago.

One difference is that, judging from early indications, the Chinese won't
squander their money as badly as the Japanese did....

The more important difference from Japan's investment is that China, unlike
Japan, really does seem to be emerging as America's strategic rival and a
competitor for scarce resources - which makes last week's other big Chinese
offer more than just a business proposition.

His first is just laugh out loud funny.  We actually have an economist claiming that the world was better in the 1980's because there was a huge market inefficiency (ie, the Japanese overpaid for unproductive assets). 

His second argument seems to be that US supplies of oil are more secure if American companies own them.  This is stupid.  If he means that it is more secure economically, then he should have his economist merit badge taken away for life.  Even he must know that oil is a fungible commodity, and as such trades world wide at a price set by supply and demand.  If more of Unocal's oil goes to China, this replaces other oil coming from somewhere else that is now available on the market.  And, if he means it is safer politically, he forgot to study the last 50 years of history.  Every major oil producer of the world - Saudi Arabia, Mexico, Venezuela, etc are pumping oil that used to belong to American oil companies, but was nationalized and taken from them.  Does Mr. Krugman's statement mean that the left and the NY Times are suddenly more ready to support the property rights of American oil companies overseas? I doubt it.  It is actually an improvement over history that a totalitarian state like China is actually buying American oil assets rather than just expropriating them.

By the way, I call Mr. Krugman's view of national economic success the "monopoly board" view of the world.  In his mind, America and China are playing monopoly, and once China gets St. James Place, America can never own all the oranges.  This is not the way the world works.  When America grew economically in the last century, it did not mean that all the other countries had less opportunity to grow.  In fact, we pulled many countries along with us.  His zero-sum view is just the macroscopic counterpart to the zero-sum based worry about rich people getting richer in this country.

Marginal Revolution and Cafe Hayek both have good analyses of Paul Krugman's neo-mercantilism.

Postscript:  Gee, I hate to play the race card, but why is it we always get a national panic when it is China or Japan buying US assets and not when it is the Dutch, the English or the Canadians (who are far larger investors in US assets and companies than the Chinese)?