(What’s Left of) Our Economy: Don’t Let China Off the Global Imbalances Hook


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One reason I’ve been writing so long about global imbalances is that they played a crucial role in setting the stage for the last financial crisis and its dreary aftermath. As (should have been) clear from the record trade and broader financial surpluses amassed by oil exporting countries and mercantile Asian countries, and from the record deficits racked up by the United States in particular, these imbalances revealed that the global economy was on a completely ruinous course during the previous bubble decade. Too much of the world’s productive capacity was being transferred to countries that could not consume enough, would not consume enough, or some combination of the two. Conversely, too much of the world’s consumption was accounted for by countries like the United States, which were losing their capacity to produce.

But I also write a lot about these imbalances because so few others do – which made me elated that no less than the International Monetary Fund has just come out with a chapter on the subject in its latest World Economic Outlook report. The chapter is a treasure trove of data, and I hope to be posting on lots of these statistics and their implications. It was also great to see the Fund echoing my warnings that lopsided trade and investment flows still threaten global financial stability, and that their rebound during notably weak worldwide (and U.S.) recoveries casts big doubts as to how quickly real national or global economic health can be restored.

I do, however, have a bone to pick with the IMF. Like the U.S. Treasury, the Fund seems to be more worried about Germany’s surpluses as a threat to global stability, and less worried about China’s.

On the surface, this shift seems reasonable. Since the U.S. and global bubbles peaked (in 2006), Germany’s worldwide trade and financial surplus grew from six percent of its total economy to 7.5 percent. China’s during this period shrank from 8.3 percent all the way down to 1.9 percent. In fact, in absolute terms, Germany’s surplus is now bigger than China’s.

Here’s what this analysis leaves out, though. Countries growing quickly are supposed to be running big trade (and financial) deficits, especially if the fast growers are beating the global averages. In particular, their out-performing economies are supposed to buy many more goods and services from their more sluggish trade partners than they sell to them. From 2006 to 2013, China was a clear world growth leader, with its gross domestic product expanding by an annual average of 10.10 percent in real terms. Yet it continued to run huge surpluses both in absolute terms and as a share of its output.

More strikingly, China has not only been a fast grower. It’s also a low-income, relatively low-tech country whose fast growth should also be attracting huge amounts of capital from around the world on a net basis. But again, with China, it’s been exactly the reverse.

Big surpluses are much more natural for relatively slow growers like Germany, which are supposed to pull in fewer imports in particular. Its real GDP expanded only at an average annual rate of 1.43 percent between 2006 and 2013. And if the slow-growing country is wealthy and technologically advanced — like Germany — a surplus is even more defensible.

That’s not to say that Germany doesn’t deserve criticism. In particular, after the Eurozone was created, it was happy to lend huge amounts of the common currency to the monetary union’s more spendthrift countries, like Greece. But it was much less happy to give them much opportunity to generate the export earnings needed to pay these loans back. Further, Germany’s trade has benefitted considerably because the euro has for years been a weaker currency than its former national currency, the deutschemark, would have been. And the country has long maintained a formidable array of nontariff trade barriers. Germany is more than large and rich enough to give the world economy a substantial boost if Berlin would only encourage more importing.

But China remains the biggest and most harmful anomaly in the global economy. Until the mercantilism fueling its surpluses is halted voluntarily or by foreign pressure, the world will remain threatened by a new financial crisis if and when global growth does reach a takeoff point.

(What’s Left of) Our Economy: Why the ISM Manufacturing Report Should be a Non-event


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In a few minutes, analysts of America’s manufacturing sector and its economy are going to start pouring over the newest monthly gauge of U.S. industry released by the Institute for Supply Management (ISM). And literally, with each passing month, the evidence keeps mounting that it’s a massive waste of time.

Recently, I’ve showed that correlations between ISM’s headline reading on American manufacturing’s health historically has had little to do with the sector’s actual growth rate, as measured by the Federal Reserve’s industrial production index. I’ve also explained that surveys like the ISM’s inevitably suffer from survivorship bias – they may arguably say something useful about what exists of a sample at any given moment, but they’re unable to measure directly how the size of that sample has changed over time.

Of course, the ISM’s headline incorporates more than just manufacturing production. It also includes findings about indicators ranging from employment to new orders to prices paid and received to exports and imports. Nonetheless, when you look at the ISM’s readings on production specifically, it becomes clear that they stack up no better than the headline with the Fed’s figures on manufacturing’s inflation-adjusted growth and shrinkage.

Here’s the comparison for this year so far:

In January, the Fed reported a sharp, weather-related, 1.08 percent decline in manufacturing’s real output. But the ISM’s 54.8 production reading indicated expansion.

In February, the industrial production index revealed a strong 1.34 percent rebound in manufacturing production. The ISM’s production reading fell all the way to 48.2 – contraction territory

In March, according to the Fed, the growth of inflation-adjusted manufacturing output slowed – to 0.89 percent. But the reading was still strong. The ISM’s production results matched up better with the Fed’s – changing from a contraction reading to a solid 55.9 growth number.

Over the next four months, the ISM and Fed figures were even more closely matched, with both revealing faster and slower production increases in the same months.

In August, however, the gap returned. According to the Fed, real manufacturing output fell by 0.40 percent that month. (The figure is preliminary, like all the Fed’ initial findings, and could be revised later this month.) But the ISM’s production figure not only grew, but it’s highest level for the year so far (64.5).

Since I have no crystal ball, I can’t say what today’s ISM report will show. What I can say with great confidence is that there’s little reason to care.

(What’s Left of) Our Economy: A Wall Street Guru’s Wage Inflation Fantasies


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If you want a great example of how decoupled Wall Street is from the rest of the U.S. economy, take a look at investment guru Ed Yardeni’s “Dr. Ed’s Blog” today. Yardeni takes on the “wage stagnation myth” by claiming that:

>”While real mean income per household has been stagnating since 2000, real pre-tax compensation per payroll employee (including wages, salaries, and supplements) is up in record-high territory at $61,307 during August, which is an increase of 16.8% since the start of 2000”; and

>”Real wages and salaries in personal income is also in record-high territory, up 1.8% y/y and 14.6% since the start of 2000. Real average hourly earnings of production and nonsupervisory workers is up 1.1% y/y and 13.4% since the start of 2000.”

Let’s start with the last point. To put it as diplomatically as possible, I don’t know what the heck Yardeni is talking about. I looked at the official Bureau of Labor Statistics tables – accessible in interactive database form on the agency’s website – and they show that average hourly earnings from January, 2000 through this past August (the latest available figures) increased only by seven percent – from $8.28 in seasonally adjusted 1982-84 dollars to $8.86.

Year on year, this wage is up in real terms by 0.91 percent – a rate that’s faster than the 0.69 percent increase between August, 2012 and August, 2013, but not by much.

At first I thought that Yardeni was including government workers in his calculation, but the BLS doesn’t track their wages – which is just as well, since they’re set by government fiat, not by market forces. As a result, these Labor Department figures aren’t indicative of the real health of the economy or of the labor market.

Yardeni is on stronger ground when he’s talking about household income and overall compensation. But these figures – compiled by the Bureau of Economic Analysis of the Commerce Department – include not only wages, but salary income, benefits, and bonuses. So rather than reflect the state of “middle America” or the “working class,” this data provides a broader picture that takes into account upper-income Americans whose prosperity has never been questioned.

I suppose that Yardeni’s investment record truly justifies the esteem in which he’s held by the financial sector. But he sure doesn’t seem very dependable as a guide to the real economy.

Our So-Called Foreign Policy: Cracks in the U.S. China Policy Consensus?


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Sitting here in a suburb of Washington, D.C., it’s impossible to know how the Hong Kong democracy protests will end. A little easier is gauging their implications for U.S. China policy, and especially its root assumption that continued economic engagement by America will gradually open China’s political system and economy, and turn it into a “responsible stakeholder” in world affairs.

As I’ve written, this belief has animated America’s grand strategy toward the PRC since the late 1960s, when former President Nixon first floated the idea of normalizing bilateral ties after decades of hostility following the Chinese revolution. Since China achieved one of its most prized goals and was admitted into the World Trade Organization in 2001, engagement’s results have looked steadily less impressive on all fronts.

The triggering event of the Hong Kong protests – China’s refusal to honor fully its promise of substantial self-rule for the city – has so far shown no signs of prompting a policy rethink by the U.S. government. But some buyers’ remorse has begun to appear in media and policy circles. Given how incestuously these segments of the “permanent government” interact with the official government, that’s not bupkus.

I’m not talking about commentaries that rant and rave about repression in China and propose no changes in U.S. policy whatever. They’ve always been a dime a dozen in Washington, and among the nation’s chattering/political classes. Instead, I’m talking about commentaries that are at least mentioning the implications of major, long-time backsliding by Beijing in fields ranging from foreign policy to economic reform to human rights.

The leading example so far comes from the Washington Post. In a September 28 editorial aggressively titled, “Western economic involvement in China isn’t promoting freedom there,” the paper observed that “Recent events must give pause to even the most optimistic believers in capitalism’s power to induce more transparent government in China.” Moreover, the Editorial Board’s comments were focused on China’s campaign of harassment of foreign multinational companies, not the Hong Kong protests.

“As is now evident,” the Post continued, “in China there is nothing deterministic about the relationship between economics and politics. The communist authorities are bent on preventing political liberalization from flowing in with foreign capital, and, indeed, on ensuring that foreign involvement in the economy serves their policy goals, domestic and international, among which ‘security’ is paramount.”

And here’s where things really got interesting. The Post added, “Meanwhile, U.S. markets for both goods and financial services remain wide open to China, as shown by the recent Wall Street initial public offering of a Chinese online retailer with close government ties, Alibaba. Openness, not only to China but to all nations, remains in America’s best interest. The question, though, is whether either U.S. multinationals or the U.S. government are making the best use of their leverage in the Chinese market.”

Of course, the Post wound up falling back on the fantasy of pressuring China multilaterally. When it becomes clear that Japan and Europe won’t cooperate – mainly because the former, unlike the United States, runs a trade surpluses with China and the latter’s China deficit is much smaller than America’s – will the paper bite the bullet and endorse unilateral American action?

Long-time China watcher Orville Schell has long warned against easy assumptions that the more business America and China did, the more China would start resembling the United States economically and politically. But in The New York Review of Books, he’s just delivered an especially stinging – and pre-Hong Kong — indictment of the responsible stakeholder strategy.

According to Schell, “The Western presumption that China, aided by open markets, foreign education, and Western soft power, will irresistibly be swept toward ever greater political openness, which many Westerners have come to view as the inevitable (and desired) evolutionary path for every society, is now being met by Chinese leaders with a loud and defiant denial that could be summarized as follows: ‘We don’t want to be in your teleological dream! Your President Clinton’s ‘right side of history’ is not in the official view of our Party Chairman Xi’s ‘China dream!’”

And for good measure: Even many strong foreign “friends of China” are “beginning to wonder if the prospect of the kind of US–Chinese collaboration that President Carter tried to encourage thirty-five years ago—and that he spoke about repeatedly in Beijing this September—has not now become too naive. Indeed, one increasingly encounters foreigners who have been deeply involved in Chinese affairs expressing disenchantment and concern with China’s recent behavior. What is particularly striking is the number of foreign CEOs, once the backbone of better relations, asking whether they still have a future in China.”

Schell doesn’t come out and call for a new U.S. approach to China. But he strongly suggests that some kind of reassessment is needed: “What the Chinese seem to be saying without being too explicit (they have always been masters at indirection) is that they will now be reckoned with on their own terms, not ours. Like it or not, this is the world’s new reality.”

The Obama administration itself has so far limited itself to urging China to keep its promises to Hong Kong, and urging the protestors to stay peaceful. Given the burst of foreign crises lately, it would be understandable for the president to be hoping like heck that another can be avoided – at least until he finishes his expected visit to China in November. But hope has never been an especially good strategy.

(What’s Left of) Our Economy: The Case for New Trade Policies Right Under a Reporter’s Nose


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The New York Times’ Thomas Edsall has been doing a terrific job of monitoring U.S. economic trends – especially in the labor markets – and of spotlighting the scholarly research that’s doing the most to keep clarifying the picture. He could do even better if he would take the next step and start recognizing the central role played by two decades of offshoring-happy trade policy decisions in pauperizing so much of the workforce and miring the U.S. and possibly world economies in a state of secular stagnation.

In his most recent article, evidence for focusing on trade policy as a wage-killer was staring him right in the face – albeit in the 31st paragraph. It came in the form of a 2013 Brookings study he cited reporting, “Our data yield one robust correlation: that declines in payroll shares are more severe in industries that face larger increases in competitive pressures from imports.” This accounts, the authors specified, for “3.3 percentage points of the 3.9 percentage-point decline in the U.S. payroll share over the past quarter century.”

That “payroll share” is American labor’s share of the country’s income. One study of course is hardly dispositive, but this figure is stunning nonetheless. For decades, it’s been a commonplace among economists that trade liberalization has been a best a minor contributor to America’s growing rich-poor gap (a different but closely related indicator). Now Brookings, which has long supported trade expansion, is publishing papers blaming it for the lion’s share of one measure of the typical U.S. workers’ plight. That’s a development worth at least much higher placement – if not a story in and of itself.

Edsall’s article, however, also made clear a likely reason for his failure to appreciate trade’s responsibility for wage lag, growing inequality, and the like: his portrayal of trade liberalization as a natural phenomenon that simply reflects historically unprecedented levels of foreign competition faced by U.S. workers. That heightened competition is all too real. But decisions in Washington and other governments have been central to determining its form – and which Americans would be the biggest winners and losers. Depicting the current version of globalization as a force of nature or an inevitable byproduct of technological advance and other forms of progress needlessly obscures the choices U.S. leaders have always had, not to mention the full-court-press lobbying campaigns by business’ offshoring lobby to shape them.

Even more important, since the state of globalization has resulted from human choices, it can be remade by these same choices. As a result here’s hoping Edsall – and other journalists – will start spending less time agonizing about (admittedly significant) abstractions like “the legitimacy of free-market capitalism” and more illuminating the concrete policy changes urgently needed to get the economy back on a productive, sustainable course.

(What’s Left of) Our Economy: More Manufacturing Fairy Tales from The Atlantic


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There he goes again. At the end of 2012, James Fallows contributed one of two Atlantic cover stories claiming that America is on the verge of spurring a renaissance in its manufacturing sector or actually starting to enjoy one. Since then, we’ve discovered:

>that it took domestic industry more than six years to return to its pre-recession output levels (adjusted for inflation), and that as of August, it’s now a grand total of 0.99 percent bigger than it was when the last recession began at the end of 2007;

>that manufacturing’s trade deficit with the world as a whole has set new all-time records every year since 2011, and this year is running 11.30 percent ahead of last year’s record $647.77 billion pace;

>that its multi-factor productivity rate, although still a good deal higher than that of the private sector as a whole, stands at historically low levels for an economic expansion; and

>that its wages have been fared much worse than private sector wages during the current recovery – among other problems.

But Fallows has just come out with another boosterish Atlantic article, describing “three big trends” that could boost the fortunes both of high-value manufacturing in the nation, and its middle class.

I can’t comment knowledgeably about the third trend Fallows discusses – the supposed possibilities of innovation in logistics and related fields for revolutionizing small-scale manufacturing (on a large scale). But as was the case with the two year-end 2012 manufacturing renaissance articles, his optimistic treatment of the two other trends seems oblivious to the most important data available.

For example, Fallows claims that “U.S. companies large and small are expanding their export ambitions.” That’s nice to hear. But what’s actually happening? According to the most accurate Census Bureau measure of American manufacturing’s overseas sales, the annual growth of these domestic plummeted from 18.76 percent in 2010 (as the sector snapped back from a deep recession) to 1.73 percent in 2013. So far this year, the slowdown in export growth has reached 1.30 percent.

The author also cites a McKinsey & Co. report predicting that, going forward, high-value manufacturing is increasingly likely to stay in the United States because global supply chains are becoming more vulnerable to disruption, because too many quality problems are emerging at offshored and other foreign factories, because by definition driving labor costs down in these sophisticated industries is less important all the time, and because international transportation is getting more expensive.

Encouraging? Sure. Reflected in the data yet? Not even close. For example, here’s a – partial – list of manufacturing parts and components industries that have seen double-digit import growth so far this year (through July): motor vehicle engines and engine parts; motor vehicle steering and suspension equipment; motor vehicle seating and interior trim; motor vehicle brakes; vehicular lighting equipment; aircraft parts and equipment; printed circuit assemblies; non-automotive miscellaneous engine equipment; speed changer, high speed drives, and gears; air and gas compressors; heavy-gauge springs; and electronic capacitors and parts .

Right behind them, with high single-digit annual growth so far this year, are miscellaneous auto parts; motor vehicle electric equipment; plastics materials and resins; relays and industrial controls; ball and roller bearings; motors and generators; power boiler and heat exchangers; and many others.

The clear conclusion: Despite McKinsey’s forecasts, domestic manufacturers are displaying no reluctance whatever to use worldwide supply chains and massive amounts of imported inputs rather than procure these products domestically.

The second major positive development Fallows anticipates is a mini-(but presumably significant) rebound in manufacturing jobs that pay a middle class wage. Again, he cites McKinsey:

“[M]anufacturing and service-sector roles increasingly overlap. Big industrial firms hire lots of designers, software engineers, accountants, and other service professionals. Architecture firms and design companies need their own 3 D printers (and people to maintain them) and advanced-materials workshops. Across the board, McKinsey concludes, we should expect to see more of the kind of jobs that could help offset the winner-take-all pressures that have distorted America’s income distribution.” Among the sectors where such jobs will be in high demand: automotive.

Everyone should cheer this type of development. But why didn’t Fallows mention that so far during the recovery, inflation adjusted wages for manufacturing workers have fallen by more than two percent? Real wages for all private sector workers, by contrast, have actually risen by 0.19 percent. And that automotive sector? Real wages there are down by nearly six percent during the recovery. Moreover, these wage figures cover all employees – including professionals – not simply blue collar production workers.

And there’s a final problem with Fallows’ article: It’s apparently based in part on interviews with General Electric’s head of aviation, David Joyce. Joyce has proudly shared with the author facts and predictions such as “GE’s U.S.-based engine factories already send 55 percent of their output abroad and expect to send 75 percent within five years.” The company’s goal, Joyce told Fallows is “make it here, sell it there, and service it everywhere.”

But GE, like most other multinationals, is notorious for disclosing only those international trade, investment, and sourcing facts that portray it in the most favorable light. As I’ve written, I’ve asked the company to reveal its global trade balance – not just its exports. GE refused. In Fallows’ case, he should have asked Joyce about some other key data – the foreign versus U.S. content of its jet engines and related products, and how this ratio has changed in recent years. Instead, he’s let the company continue to spread propaganda.

It’s true that, if enough anecdotes like those in Fallows’ piece are strung together, they become data. But when the data still massively override and strongly clash with the anecdotes, reporting a handful of feel-good stories can only mislead, however unintentionally – and possibly add complacency to the list of obstacles facing domestic manufacturing.

Im-Politic: A Trial Balloon for a Secular Israel?


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A Washington Post op-ed article published in the print edition today calling for Israel to jettison its Jewish identity and become a fully secular state is bound to provoke outrage from many of that country’s supporters — both for the overall substantive stance it takes and for the specific substantive arguments it makes. I find the latter pathetically weak myself.

Yet because major newspaper opinion pages play such a big role in setting the federal government’s agenda – in part by signaling what views are seen as legitimate both by elected and appointed officials and by the political and chattering classes with which they’re so incestuously intertwined — I’m even more concerned about what the article’s publication seems to reveal about the editorial practices of the Post’s editorial page staff and the political views they seem to reflect. In fact, even those agreeing with this article should be worried.

The first big cause for concern stems from the decision to run this article in the first place. I’m certainly not opposed to anyone publishing articles with which I personally disagree, or to publishing articles that inject fundamentally new ideas into the national policy debate. Indeed, given how narrowly pro-status quo the debate permitted by the national media tends to be, I’d like to see much more outside-the-box thinking presented.

But I remember being told years ago by a major DC-based journalist that decisions over who gets published – and quoted – in the mainstream media often depends largely on whether their views have any support among U.S. leaders. The one exception: If an iconoclast is a world-renowned authority on the subject in question. But no elected national officials I can think of have endorsed the call for a totally secular Israel. And the article’s author – UCLA psychology professor Patricia Marks Greenfield – has no actual or supposed expertise Middle East affairs or international politics or Jewish history or any other relevant discipline. (She’s not even a celebrity – though that’s another column!). As a result, the Post’s publication of this piece raises a disturbing possibility: It’s a trial balloon.

In other words, it’s entirely conceivable that either the Post’s influential owner (Amazon.com founder Jeff Bezos) or the paper’s top operational executives now believe it’s time to introduce the idea of a secular Israel into the Middle East policy brew. Alternatively, the paper might be serving as a stalking horse for factions in the American power structure (including the Obama administration) who are considering this position.

The second big cause for concern – and it may be explained by the first: This article clearly was unedited for content. No one on the Post staff asked Greenfield to substantiate her claim that “What was necessary for Israel after the Holocaust is no longer necessary….” The reference of course is to the view that thousands of years of Jewish history make clear that Jews can only be truly secure if they hold a monopoly on the authorized use of force and coercion in the political communities in which they live – i.e., if they have a state of their own.

It’s likely that the author is talking about the experience of Jews in the United States and Western Europe since the end of World War II. But she should have been required to state that explicitly. Just as important, someone at the Post should have asked her to integrate into her analysis the recent revival of anti-Semitism in Europe. No one did.

What’s kind of ironic is that Greenfield’s article contained some genuinely important data on Israeli demographics – data that could in theory call into question some of the justifications given for maintaining Israel’s official Jewish identity (although they could just as easily have the opposite implications). Responsible editors would have urged the author to focus her piece on those statistics, and encouraged her to provide a few brief indications of how they might affect crucial Israeli (and U.S.) policy debates. Instead, they presented their readers with a full-throated call for radical political reform from a dubious source that literally comes out of nowhere. As sometimes ask on Fox News: “What the heck just happened?”

(What’s Left of) Our Economy: A Trade Theory Mystery

Here’s something I’ve never understood about standard free trade theory – and something that should bug you, too.

Proponents of the theory – who include nearly all economists for centuries, living and dead, along with numerous fakeonomists from think tanks and elsewhere and most major newspaper editorialists and media pundits – insist that the freest possible global competition, fostered by the freest possible trade flows, will help produce the greatest possible global efficiencies and the best possible array of products and services. Here’s my starting question: Why does it have to be global competition? Why can’t it be purely domestic competition, especially in the case of the United States?

Here’s what I mean. As of 2013, the United States economy made up some 22.6 percent of the whole world economy – a little more than one-fifth. (This calculation comes from apples-to-apples data from the World Bank and the Central Intelligence Agency.) At $16.8 trillion in current dollars, it must be obvious that the U.S. economy could and does generate plenty of competition from Americans “trading” exclusively with themselves. Free trade theory logically is saying – at best – “Yes, but that’s not nearly enough.” But it’s never been clear why.

Looking at the issue purely mathematically, it seems as if the theory holds that opening up the U.S. economy could generate about 3.4 times the competition for American producers than they would face with no trade (the ratio of the $57.5 trillion of annual output outside the United States to that $16.8 trillion U.S. economy). Alternatively put, every new unit of foreign competition added to that already faced by American goods and services providers generates just as much competitive pressure as every new unit of purely domestic competition – which could be sparked by purely domestic growth. Have you, however, seen any economist make this argument, either empirically or theoretically? I sure haven’t.

And the more you think about the matter, the more far-fetched the efficiency case for free trade becomes. For example, of that $57.8 trillion of annual non-U.S. global output, $9.2 trillion – 16 percent – came from China in 2013. Whatever you think of China’s reforms over the last few decades, it’s at best an economy where the state continues to play a lead role, and at worst one that remains largely communist. How does trading with this kind of largely non-free market economy enhance efficiency in the United States or the world at large? And China’s output and share of world trade have both been skyrocketing in recent decades, generating the added puzzle that a low-efficiency largely non-market economy is beating the growth and trade pants off lots of higher-efficiency largely free market economies.

So let’s assume that trading with China really doesn’t enhance U.S. and global competition and efficiency. That leaves trade theory saying that totally free global trade generates just under 2.9 times the competition American producers would face with no global trade at all (the ratio of the $48.3 trillion of output outside the United States and China to the $16.8 trillion U.S. economy). Pardon me for being completely unimpressed, even leaving out the theorists’ failure to show that each extra unit of foreign competition produces the same increase efficiency-enhancing pressures as each extra unit of domestic growth.

And China, of course isn’t the only foreign economy that arguably should be left out of this mix. Russia’s $2.1 trillion economy as of 2013 adds up to 2.8 percent of world output. But it’s clear that Russia doesn’t have much of an economy outside energy. Neither do the OPEC oil producers, whose total annual output is $3.4 trillion, according to the latest World Bank data. Their export of relatively cheap oil has enhanced U.S. efficiency by holding down the world price of a key economic input. But with U.S. energy costs coming down rapidly thanks to booming domestic production, the imported oil bonanza should keep shrinking for the foreseeable future.

More important for the purposes of this post, that efficiency-producing effect is fundamentally different from that created by head-to-head competition. Taking away Russian and OPEC gross product means that free trade theory is down to insisting (again, with no empirical evidence) that a non-U.S. world economy about 2.5 times bigger than America’s could create enough competitive pressure to justify completely open trade flows. Color me even less impressed.

And here’s a final (for now) fly in the ointment of trade theory. The United States could generate more competition solely through its own devices not only by growing faster. It could also achieve at least the same goal by enforcing anti-trust laws more energetically. For evidence of just how extensively the U.S. economy is cartel-ized and monopolized, take a look at Barry C. Lynn’s eye-opening 2010 book Cornered.

There are of course many other theoretical problems with standard trade theory other than the competition conundrum I’ve laid out. For example, the theory has always assumed a world of full employment. And it’s never adequately accounted for significant international capital flows. Combined with the competition conundrum, maybe that’s why it’s failing the U.S. economy so spectacularly, with rebounding post-recession deficits slowing economic growth even further during an already historically weak recovery, by extension undercutting job-creation as well, and adding to the astronomical national debt. And that’s why anyone seeking a return to America’s historic economic vigor and genuine economic health should view the ongoing deadlock over new U.S. free trade deals as an indicator that’s strongly bullish.

(What’s Left of) Our Economy: Concerns About the Quality of U.S. Growth Remain Amply Justified


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As usual, all the buzz about this morning’s final (for now) revisions to second quarter U.S. economic growth was about the quantity of growth. For a country that’s still pretty growth starved, that’s understandable. But I wish the powers-that-be paid more attention to the quality of growth. In the proverbial long run, the only sustainable growth is high quality growth. Or have you already forgotten the last decade’s historic bubbles and their bursting, and think that Americans can keep borrowing and spending their way to prosperity?

Today’s gross domestic product (GDP) numbers were by no means devoid of good news on this score. In line with my finding yesterday, business investment powered 25.65 percent of the second quarter’s 4.60 percent annualized growth. This role is much bigger than that played by such investment before the late-1970s, when Corporate America supposedly started to get hooked on fast buck strategies at the expense of genuinely productive uses of profits and credit. And measured as a share of real gross domestic product on a static basis, the latest 13.11 percent business investment number is historically elevated, too.

Another positive long run sign: The economy is growing in real terms even though government spending is falling. Since the recovery began, total public sector consumption and investment is off nearly seven percent adjusting for inflation. In fact, as noted by Rex Nutting of Marketwatch.com, in absolute terms, federal spending is now below its level at the start of the Great Recession. In fact, this spending has been dropping in abolute terms for seven straight quarters.

At the same time, it’s far from clear that the United States is on an austerity path. Since the recovery began officially, in mid-2009, nearly 56 percent of the decline in real federal outlays has come in defense. Moreover, state and local government spending during the recovery has dropped by only 5.99 percent – substantially less than the 8.53 percent federal spending decrease – and it’s up 1.47 percent over those last seven quarters during which federal spending fell.

Other signs also abounded that America remains far from creating what President Obama has called “an economy built to last” – one based on producing real wealth in the form of everyday goods and services, not simply binge consuming. Principally, the 2000s bubble was inflated mainly by soaring spending by households and by soaring spending on homes. The new GDP figures show that such spending now comprises 71.26 percent of the total economy after inflation. That’s lower than the 71.56 percent level in the first quarter of this year. But it’s higher than the 70.94 percent in the second quarter of 2009 and the 71.16 percent of the last quarter of 2007.

In other words, the economy has become more housing and consuming heavy not only since the recovery began, but since the last recession started. To me, that still sounds too much like an economy built to implode.

(What’s Left of) Our Economy: New GDP Figures Show Record Exports and Imports — and Continuing Big Trade Recovery Drag


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Today’s revised second quarter gross domestic product (GDP) figures show that inflation-adjusted U.S. exports hit a new quarterly record of $2.0807 trillion (annualized) – but that real imports stayed at a record level, too ($2.5411 trillion annualized). Although overall economic growth picked up dramatically from April through June, trade’s drag on the still-subpar U.S. recovery remains considerable, with nearly all the damage inflicted in the private sector. Meanwhile, President Obama’s export doubling goal looks like more of a flop than ever. Here are the highlights:

>The new record trade figure represents a slight upward adjustment from the $2.0762 trillion figure of last month’s second estimate, and pegs quarterly real export growth at 11.1 percent annualized, rather than the 10.1 percent of the previous estimate.

>The new data also reveal that inflation-adjusted U.S. imports increased slightly from levels reported last month for the second quarter. Real imports rose by 11.3 percent in the second quarter at an annualized rate, not the 11 percent estimated previously.

>As a result, the quarterly U.S. inflation-adjusted trade deficit was revised down from the annualized $463.5 billion estimated in last month’s GDP release to $460.4 billion. This level still represents an increase from the $447.2 billion annualized real trade shortfall for the first quarter.

>The new real trade deficit means that the trade shortfall’s drag on second quarter growth fell from 0.43 percentage points to 0.34 percentage points. The trade drag in the weather-affected first quarter was 1.66 percentage points – the largest ever for a non-recessionary quarter.

>Yet the trade deficit’s widening from $366.3 billion in the second quarter of 2009 means that worsening trade flows have reduced the American economy’s cumulative growth during the current economic recovery by 5.69 percent. Nearly all this damage, moreover, has come in the private sector.

>Greater still has been the growth-killing impact of U.S. trade flows affected heavily by trade agreements and other American trade policy decisions, since these new quarterly figures in the GDP report also include a dramatically shrinking trade shortfall in energy products.

>A more complete analysis of the impact of trade policy on economic growth will be possible next week, when the August monthly trade figures are released. The prior July figures, however, revealed that the policy-driven trade deficit dipped from its June level of $46.87 billion to $46.67 billion – not far below May’s all-time record of $49.04 billion.

>The new GDP figures also make clearer than ever the hubris of President Obama’s export-doubling goal. Mr. Obama believed that his efforts could help America’s overseas sales rise by 100 percent between the first quarter of 2009 (when he began his presidency) through the end of 2014. With 2014 now half completed in a data sense, real U.S. exports during this period are up only 35.16 percent.


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