(What’s Left of) Our Economy: Former White House Economists Serve Up Steel Trade Fakeonomics

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competitiveness, durable goods manufacturing, imports, manufacturing, multi-factor productivity, national security, productivity, steel, steel-using industries, subsidies, tariffs, Trade, Trump, White House Council of Economic Advisers, {What's Left of) Our Economy

Just because none of the signers displayed the slightest ability to foresee the approach of an horrific national and global economic crisis is no reason to laugh off the letter released by former White House economists warning President Trump not to impose national security-related tariffs on steel imports. Instead, the letter should be laughed off because none of the signers appears to know anything about manufacturing competitiveness.

According to the letter, endorsed by fifteen former Chairs of the White House Council of Economic Advisers, steel tariffs of any kind “actually damage the U.S. economy” partly because they “would raise costs for manufacturers, reduce employment in manufacturing….”

If you think about it for just a minute, what these economists are really arguing is that American steel-using industries can’t possibly achieve reasonable levels of competitiveness without continuing supplies of a key input that are kept artificially cheap by massive subsidies from governments in China and elsewhere. That’s some recipe for preserving and extending free market and free trade practices around the world.

Even worse, however, is that even this dubious claim is directly contradicted by the best data available – including the newest multi-factor productivity statistics released by the Labor Department yesterday.

These data in particular strongly reinforce worries not only that American manufacturing is suffering major productivity problems, but that these problems have been worsening for many years. And just as important, they show that the steel users in particular have suffered from absolutely no shortage of artificially cheap steel.

For example, from 2009 (when the current economic recovery began) through 2015 (the latest data, multi-factor productivity in these industries (which measures the output resulting from a wide range of inputs, including materials like steel) has fallen by 2.17 percent. In durable goods industries as a whole (a super-sector that uses a lot of steel), it rose by 3.92 percent, which sounds OK. But it’s much weaker multi-factor productivity growth than these sectors achieved during the last recovery (which was considerably shorter): 22.27 percent.

What happened to steel imports from 2009 through 2015, measured by value? They surged by 71.87 percent. And these purchases were kept at that level mainly because during the last year of that stretch, steel imports sank by 20.91 percent. In other words, between 2009 and 2014, steel imports jumped by 117 percent – and presumably left over lots of steel for use by durable goods manufacturers the following year.

Steel imports soared during the previous, 2001-2007 recovery as well (by 156 percent). But whereas they increased at roughly double the rate during the first six years of the current recovery, steel users recorded multi-factor productivity gains that were 5.7 times greater.

During the long 1990s expansion (which technically lasted from 1991 to 2001), steel imports increased by only 28.67 percent. And even so, durable goods manufacturers managed a total productivity gain of 22.72 percent – just about the same improvement as during the import-happy early 2000s, even though import growth was only a seventh as great. And this productivity advance was orders of magnitude better than that of the current recovery, even though import growth has been less than a third as strong.

Now it’s true that durable goods productivity numbers have been boosted significantly by the spectacular performance of the information technology hardware sector (whose use of steel is relatively modest). But examining multi-factor productivity trends for much bigger steel users also yields head-scratching results if you take the former White House economists as gospel.

For example, during the first six years of the current recovery, when steel imports rose by nearly 72 percent, multi-factor productivity for fabricated metal makers actually sank by 4.02 percent. In machinery, it was down 0.93 percent. In electrical equipment, appliances, and components, multi-factor productivity dipped fractionally.

Transportation equipment is the only big steel-using sector where multi-factor productivity grew impressively during this period – by a total of 11.09 percent. But during the final year – 2014-15 – it dropped by 4.39 percent. And again, these companies were benefiting from plenty of artificially cheap steel.

So it’s clear that the former White House advisers’ steel trade analysis is anything but data-dependent. That leaves as their only anti-tariff argument their fears about setbacks in American diplomacy – where they possess no special expertise or even knowledge. Far better for these macro-economists to stick to macro-economics – though again, the overall U.S. performance here should inspire no confidence in their judgment, either.

(What’s Left of) Our Economy: Laughable NAFTA Defenses from the New York Fed

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Canada, competitiveness, Federal Reserve, intermediate goods, intra-industry trade, Mexico, NAFTA, New York Fed, North America, North American Free Trade Agreement, rules of origin, supply chains, tariffs, The Race to the Bottom, Trade, Trump, {What's Left of) Our Economy

Although the Federal Reserve Bank of New York says that posts on its Liberty Street Economics blog “do not necessarily reflect the position” of either this branch of the federal reserve system or the system itself, it’s hard to avoid the conclusion that the bank has gone to war against President Trump’s announced plans to renegotiate NAFTA (the North American Free Trade Agreement). Why else would it have run items critical of these plans on consecutive days last week?

Even more important, it’s hard to avoid the conclusion that these posts aren’t vetted seriously for basic knowledge of America’s international trade situation, or even common sense. Key examples from each of these posts should suffice to establish the New York Fed’s combination of bias and ineptitude here.

The first post, by a New York Fed official and an economist from the offshoring interests-funded Institute for International Economics, purported to show that “An underappreciated benefit of … (NAFTA) is the protection it offers U.S. exporters from extreme tariff uncertainty in Mexico….Without NAFTA, there is a risk that tariffs on U.S. exports to Mexico could reach their bound rates, which average 35 percent. In contrast, U.S. bound rates average only 4 percent. At the very least, U.S. exporters would be subject to a higher level of policy uncertainty without the trade agreement.”

But it quickly becomes clear that even the authors are skeptical about this outcome. Their main stated reason hints at one main reason: “”Given the large and well-documented benefits from low trade barriers, particularly those stemming from access to a wider variety of imported intermediate inputs and lower prices of intermediate inputs, it would not be in Mexico’s interest to raise all of its MFN tariffs to their bound rates.”

This argument is only a hint, however, because it jaw-droppingly softpedals some of the main characteristics of U.S.-Mexico trade – specifically, the hugely outsized role played in this commerce by intra-industry trade. As I first described at length in The Race to the Bottom, a large share of U.S.-Mexico trade has little to do with the exchange of finished goods that dominates the textbook models. Instead, it consists of parts and components and other inputs of finished goods that travel through international production chains until they’re turned into final products.

And because there’s so little consumer purchasing power in Mexico, and so much in the United States, the lion’s share of this bilateral intra-industry trade in turn consists of intermediates being sent from U.S. factories to Mexican facilities, where they’re assembled into final products for export back to America.

Sure, in principle, a U.S. scrapping of NAFTA (which of course is not the Trump administration’s stated intention) could enable Mexico to substitute non-U.S. parts and components etc for the American-made intermediates that current make up so many of its exports. But without NAFTA, Mexico would also lose much and probably most of its current, unconditional access to the U.S. market. And since that market currently buys nearly 80 percent of Mexico’s exports, and since Mexico’s economy relies so heavily on those exports, it should quickly becomes obvious how self-defeating such a Mexican effort at hardball playing would be.

How bizarre that neither the article’s authors, nor anyone else involved in producing Liberty Street Economics, recognized these longstanding realities. Even weirder: The importance of this intra-industry trade in U.S.-Mexico trade was the major theme of another post from the same authors (plus a third) on this same blog that appeared the very next day.

Yet the NAFTA-related follies of the authors and of Liberty Street Economics hardly end there. In that second post, readers are warned that stricter rules of origin (ROO) for NAFTA could “disrupt supply chains” and in particular backfire on U.S.-based businesses by increasing the costs of their imported inputs and undermining the competitiveness of their exports outside North America.

To which someone who actually knows something current U.S. NAFTA renegotiating plans can only reply, “Seriously?”

For what the authors and the rest of the Liberty Street crowd seem to miss is that the only ROO revamping that would make any sense from a U.S. standpoint is also precisely the kind of revamping that the Trump administration seems to be considering: not only tightening the ROO (to confine duty-free treatment for goods traded inside the NAFTA zone to goods with higher levels of content produced inside the zone), but increasing the tariff penalties imposed on goods with relatively low levels of non-North American content.

In other words, the North American supply chains created by NAFTA wouldn’t be weakened. They’d be strengthened and greatly expanded.

Now the authors could still be right in arguing that such measures would raise the prices of goods made inside North America and thereby undermine their competitiveness outside North America. But they completely neglect two counter-arguments.

First, because the (U.S.-dominated) North American market is already so vast, and because intermediate goods industries in the three NAFTA countries are already so enormous, external tariffs that encourage North American businesses to use even more North American content could well bring gains inside the NAFTA zone that exceed whatever non-NAFTA losses are incurred.

Second, NAFTA as it currently exists was touted as a major boost to U.S. and North American global competitiveness, but there’s no evidence that this goal was achieved. Quite the contrary, at least according to World Trade Organization data.

They show that in 1993, the year before NAFTA went into effect, North America’s share of global goods exports was 17.9 percent. By 2015, it had shrunk to 14.4 percent. The U.S. share during this period fell from 12.6 percent to 9.4 percent, and the Canadian share decreased even faster – from 3.9 percent to 2.6 percent (no doubt, however, largely due to falling prices for the oil it exports so abundantly).

Mexico’s share of global exports did increase – from 1.4 percent to 2.4 percent. But surely that improvement stemmed mainly from selling to the United States, not to any non-North American customers.

The North American share of world merchandise imports did decrease during this period as well. But the decline was much smaller, and one quick look at the U.S. trend makes clear that the lion’s share of this improvement has resulted from the recent, dramatic turnaround in American energy trade patterns – which have nothing to do with NAFTA or any other supply chains.

The Federal Reserve system, and especially its crucially important New York branch, have long been renowned for employing premier economists and sponsoring first-rate economic analysis. But these Liberty Street Economics posts indicate that, at least when it comes to NAFTA, the New York Fed is better described as the Gang that Can’t Shoot Straight.

(What’s Left of) Our Economy: In Case You Thought China is Finished….

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China, competitiveness, consumption, exports, Financial Crisis, Global Imbalances, high value manufacturing, IMF, imports, International Monetary Fund, labor-intensive manufacturing, manufacturing, rebalancing, Trade, {What's Left of) Our Economy

A new International Monetary Fund report on China’s changing trade patterns has challenged so many comforting myths propagated recently by cheerleaders for America’s trade and broader economic policies that it’s easy to lose count.

These myths matter greatly because if you buy them, then it’s logical to buy the approach to globalization pursued by American presidents and Congresses in both parties for the last quarter century. Rather than worry that this U.S. strategy has permitted China to steal the march on America economically, its proponents confidently assert that Beijing’s export- and investment-heavy economic blueprint is reaping rapidly diminishing returns, and urgently needs replacement. Reasons cited focus on soaring Chinese wages and resurgent American competitiveness.

Even better, insist the optimists (which include the authors of this new IMF report), China has already learned this lesson and is “rebalancing” its economy to seek growth led by consumers – which will prove a bonanza for its trade partners. And no need to fret about China mortally threatening America’s domestic manufacturing – with all that’s boded ominously by that possibility for the whole economy as a whole and for national security. The PRC remains stuck turning out mainly labor-intensive goods, or at best simply slapping together more sophisticated stuff from imported high-value components.

Not that the Fund is necessarily the last word on the subject. But its new China trade study sure presents copious evidence for the following conclusions:

>Instead of hitting a wall, China’s exports are more competitive than ever. As I reported earlier this week, calculations based on the IMF’s data show that these shipments are grabbing more global market share than ever. This success, in the meantime, debunks another example of hopium regarding China’s future – that slowing global growth in and of itself means that Beijing’s policies urgently need changing. Such analysis has always ignored China’s potential to keep growing through exports by winning ever larger shares of a stagnant and even shrinking worldwide pie.

China’s exports have indeed been falling lately on a year-on-year basis, as has its worldwide trade surplus. But both remain at lofty levels, indicating that trade’s role in powering the country’s growth is still impressive. These statistics also indicate that if and when global growth revives significantly – as the leaders of the world’s major economies keep trying to achieve – China will be the paramount beneficiary. As a result, the imbalances that helped set the stage for the financial crisis will head back to dangerous proportions again.

>Despite the clearly stunning increase in household wealth throughout China’s population and workforce in recent decades, not only is rebalancing progress painfully slow when gauged by trade’s role in the economy. It’s been at least as slow in the sense that matters most to companies and workers in other countries who hope to supply this larger and potentially immense Chinese consumer market.

For as the Fund observes, (a) “While Chinese consumption is on an upswing, imports of consumption goods and services remain modest except for tourism….” and (b) “even as China succeeds in rebalancing toward consumption, it could be that this increased demand is satisfied by production from within China, and not from other countries.”

>Finally, as I’ve written previously, the IMF and the World Bank have found that China’s manufacturing keeps moving steadily up the technology and value chain – i.e., from low-cost, labor-intensive products to capital- and knowledge-intensive goods. This trend, moreover, includes providing ever more Chinese-made parts and components of advanced manufacturing products. In fact, as the new Fund reports, a higher share of the content of China’s exports is now Made in China than is the Korean content of Korean exports and the Taiwanese content of Taiwan’s exports.

Not that China isn’t experiencing major economic problems – notably, a soaring ratio of the whole economy’s debts to the size of its economy, and state-run or dominated financial institutions and markets that are too easily manipulated – sometimes incompetently so – by the government. But the IMF findings add to the case that the productive sectors of China’s economy are passing the test of global competitiveness – and with increasingly impressive marks. In fact, the only major relevant points omitted are that much of this progress keeps being made in violation of global commercial rules and norms, and at the expense of America’s productive sectors.

(What’s Left of) Our Economy: China Import Price Puzzles

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China, competitiveness, currency, currency manipulation, dollar, import prices, imports, Little Murders, manufacturing, multinational companies, productivity, subsidies, technology transfer, Trade, value-added taxes, VAT, yuan, {What's Left of) Our Economy

One of my favorite literary passages of all times comes from “Little Murders.” If you’ve never seen the stage or film version, I strongly recommend both, and for me, the high point of this late-1960s Jules Feiffer 1967 black comedy about life in a rapidly deteriorating New York City comes when Detective Miles Practice exasperatedly describes his frustration at solving a massive ongoing wave of violent crime.

The 345 unsolved homicides he and his colleagues are investigating have three characteristics in common, Practice explains. “A – that they have nothing in common; B – that they have no motive; C – that, consequently, they remain unsolved.”

I’ve felt a little like Detective Practice today as I’ve tried to dig deeper than usual into this morning’s new Labor Department data on the prices of imports bought by Americans in April. And it’s not just that the figures seem to undercut an argument I’ve made consistently during the ongoing debate over U.S.-China trade policy. It’s that the differences among various industries defy anything close to easy explanation.

As many of you surely know, since early in the previous decades, Chinese government policies that determine the value of its currency, the yuan, versus that of the U.S. dollar have been major bones of contention between the two countries. Essentially, many Americans have accused Beijing of keeping the yuan artificially weak, which gives Chinese-made goods unwarranted price advantages over their U.S.-made counterparts in markets all over the world. And if Made in China goods are outselling Made in America goods for reasons having nothing to do with market forces, then American production and jobs will be penalized for reasons having nothing to do with free markets, or free trade, either.

Because this issue has loomed so large for so long, I’ve been following the import prices figure closely in order to see how the yuan’s changing value has affected the actual price of Chinese-made products in the American market. And what I’ve found indicates that, although currency values matter a lot, these prices doubtless change for a variety of other reasons, too – including other forms of Chinese government interference with trade, but not limited to such protectionism.

For example, if the Chinese are making growing quantities of relatively advanced manufactured goods and selling them to Americans, and de-emphasizing less advanced goods, then the effects of Beijing’s currency policies could be (at least partly) masked by the higher prices these more sophisticated products presumably command. And in fact, I’ve shown that precisely this shift in Chinese manufacturing and exporting has been taking place, and argued that, as a result, precisely this masking effect is influencing the prices of Chinese imports. To me, it’s strong evidence that China’s yuan is still too cheap – even though for reasons we needn’t delve into now, China is now trying to prop up the yuan’s value.

Now, however, I’m not so sure. Because the detailed, product-by-product figures kept and reported by the Labor Department show that in many cases, prices of advanced manufactured products sold by China to Americans are falling faster than the prices of less advanced goods. Moreover, the prices of many Chinese products in the U.S. market are falling more slowly than those of comparable imports from other countries – which supports the idea that Beijing’s new currency stance is harming Chinese products’ price competitiveness.

Some caveats need to be made at this point. First, the number of manufacturing industries in which direct comparisons can be made between the prices of Chinese and other imports is relatively small – because the Labor Department issues detailed data for many more U.S. imports overall than for U.S imports from China. Second, some of the missing China data concerns industries where Beijing has encouraged massive overcapacity – notably steel – and clearly helped create significant (and worrisome) deflation.

All the same, most of the statistics I’ve found are real head-scratchers. For example, since the business press has been filled in recent years with articles on strongly rising Chinese wages, it’s not entirely surprising to see that the cost of imports of Chinese garments – a labor-intensive industry – have actually increased a bit since 2012 (the earliest China-specific figures available), whereas overall garment import prices are down.

But why have the prices of Chinese-made clothing been so much stronger, and less internationally competitive, than the prices of Chinese made machinery – an admittedly broad category but one in which the output is very capital-intensive, complex, and (I thought) relatively expensive? (Think boxer shorts versus machine tools.) In fact, on the whole, the more technologically advanced a Chinese product is, the faster its price is falling and the more price competitive it is with foreign rivals.

Rapidly rising productivity could easily explain this trend for Chinese information technology products like computers and semiconductors and communications equipment. But if that’s the case, then why do goods that are less advanced but hardly primitive – like fabricated metal products and household appliances – display the opposite characteristics? This is a special puzzle given that fabricated metal products contain so much steel – which has been so rock-bottom cheap in China for so long. And why are China’s chemical products (another broad category) able to cut prices so impressively and gain on their competition in the U.S. market, but not plastics products – which are a major category within chemicals?

Some tentative conclusions and possibilities:

First, these figures are a valuable reminder that even manufacturing industries that seem closely related can have enough differences to produce widely varying results

Second, some of this variation in Chinese manufactures could reflect their positions on the government’s priorities scale. In principle, the products that perform best price-wise could be the beneficiaries of the biggest government subsidies (including value-added tax rates, which are extremely granular) and research budgets. They could also be the sectors where Beijing exerts the greatest pressure on foreign investors to transfer their best technology.

Third, since much foreign tech transfer in China is still voluntary, the price gap illustrated above also could stem at least partly from different tech transfer approaches taken by multinational companies from different countries. For example, it’s widely believed that American companies that operate in China – and which are especially active in information technology – share their know-how with Chinese partners much more freely than do firms from Japan and Germany.

Even so, however, these import price figures raise many more questions than they answer, and they seem to be telling us that all of us need to be paying a lot more attention to them.

(What’s Left of) Our Economy: The Times’ Trade Deficit Pollyannaism

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bubbles, business investment, capital flows, capital spending, China, competitiveness, currency manipulation, global division of labor, global financial system, investment, manufacturing, Neil Irwin, subsidies, The New York Times, Trade, Trade Deficits, U.S. dollar, {What's Left of) Our Economy

At least Neil Irwin’s New York Times article yesterday on the real meaning of trade deficits made two points rarely seen in journalistic examinations of the subject. He acknowledged that these shortfalls subtract from an economy’s size. (And should have added that worsening trade balances slow an economy’s growth – a big problem for the slow-growing United States these days.) And he noted that the foreign investment inflow triggered by deficits should be put to productive uses. Otherwise, it can create dangerously bubbly effects, as with U.S. housing and personal consumption during the last decade.

What Irwin didn’t discuss were the real-world obstacles created by trade deficits to using those capital inflows wisely, and unfortunately, they’re much more important and germane to policymakers and the public.

For example, let’s say that a country’s trade deficit is heavily concentrated in manufacturing (which America’s is). And let’s say that it partly reflects not only the dollar strength resulting from the central role played by the United States in the global financial system, but foreign countries’ policies of artificially undervaluing their currencies. If Washington didn’t respond adequately, wouldn’t many prospective investors balk at pouring money into domestic manufacturing for fear of having to compete not only with foreign companies, but with foreign treasuries? And wouldn’t a turn-the-other-cheek American policy toward other foreign subsidies produce similar effects?

Alternatively, a large manufacturing-centered trade deficit could inhibit productive domestic investment by killing off large numbers of manufacturing jobs – which have long been among the economy’s best-paying. Investors considering building new factories in America could understandably be dissuaded by the resulting reductions in family incomes – which could well ripple far beyond manufacturing as displaced industrial workers began competing for the jobs remaining in the service sector, and undermined its own wage growth.

Another live possibility: If U.S. trade deficits significantly reflected the offshoring activities of multinational companies, and American trade policy encouraged the supply of the high price U.S. market from much lower cost (and lightly regulated) foreign markets, wouldn’t many of these multinationals take the hint and send much of their capital abroad?

Nor are these scenarios hypotheticals. If you look at the business investment share of the U.S. economy, as pointed out by Dean Baker of the Center for Economic Policy Research (in a recent email), it grew steadily between 1950 (when it was 9.99 percent of pre-inflation gross domestic product) to 1980 (when it hit 14.21 percent). By 2007, the last year before the Great Recession struck, it had fallen back to 13.27 percent. Last year, it stood at 12.83 percent. (Unfortunately, the inflation-adjusted data only go back to 1999.)

Of course, such capital spending is driven by many forces. Baker, for example, emphasizes the destructive effects of financial deregulation, which greatly increased the rewards of short-term-focused speculative activity versus the longer-term gains generated by funding production and innovation. But can it be a total coincidence that domestic American business investment peaked just as imports – especially from predatory trading powers like Japan – were starting to make big inroads into U.S. markets?

Even more suggestive: Research published in 2014 by analyst Aaron Ibbotson of Goldman Sachs showed that U.S.-owned multinationals have not simply stopped or slowed investing in new plant and equipment. Instead, they’ve increasingly channeled such investment overseas, especially to emerging market countries like China, in order to supply their industrial needs.

Not that these are the only problems potentially and actually created by running trade deficits – especially big, chronic ones – that Irwin missed. For instance, when foreign interests buy American assets with trade surplus earnings, they buy control over the U.S. economy. This arguably is not a significant issue when the buyers are other private companies, or when they come from countries that are allied or friendly with the United States, or neutral. When a large and growing share of these acquisitions are made by China – which is neither friendly, nor private sector dominated – threats emerge ranging from market distortions (created by heavily subsidized financing arrangements) to national security dangers.

Irwin should have also mentioned that changing trade balances are crucial indicators of global competitiveness, and in fact signal which countries are likely to be major and minor producers of various goods and services. Indeed, the ostensibly most efficient possible global division of labor that results is a principal justification for encouraging trade. If manufacturing, to take one sector, is judged to create no special advantages for the American economy, then it’s fine to be indifferent to trade deficit signals that U.S. industry’s world-class status is at risk. If manufacturing is prized, then the deficit is indeed a valuable scorecard, and one that’s sending a troubling message.

Of course, Irwin’s column also argued that the strong dollar that puts constant upward pressure on the trade deficit creates major diplomatic and national security benefits for the United States, and there are respectable, if not dispositive, arguments to be made along these lines. But when it comes to the domestic growth, employment, and wage impact of trade deficits – not to mention the effects on all the productivity growth and innovation fueled by manufacturing – portrayals of these shortfalls as close-calls or nothing-burgers belong in a set of political talking points, not in a supposed economic primer.

(What’s Left of) Our Economy: Trade Myths That…Aren’t

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chemicals, China, competitiveness, consumer electronics, Employment, gross domestic product, inflation-adjusted growth, machinery, Matt O'Brien, recovery, Robert Samuelson, Trade, Trade Deficits, U.S. International Trade Commission, Washington Post, {What's Left of) Our Economy

To say it’s been a bad week at the Washington Post for trade policy coverage and commentary would be a gross understatement. As I pointed out over the weekend, columnist Colbert King on Sunday tried to sell the contemptible idea that many critics of job- and wage-killing American immigration and even trade policies are motivated by racism. Yesterday, no one at the Post sank nearly that low, but the economic ignorance put on full display by two of its leading lights was nearly as depressing.

First came the latest offering by economics columnist Robert Samuelson, describing as “myths” the claims that “Persistent U.S. trade deficits reflect recent free trade agreements” and that “The large trade deficit ($540 billion in 2015) is an important cause of the U.S. economy’s slow growth.”

It seems that Samuelson isn’t familiar with the Census Bureau’s data on America’s non-petroleum goods trade flows. These measure imports and export flows that strip out oil trade (which hasn’t been an issue in trade negotiations and, until recently, in any aspect of trade policy) and services trade (where trade agreements have made only modest liberalization progress.)

As a result, these non-petroleum numbers present the trade flows that are heavily influenced by not only trade deals but by related policy decisions like dealing (or ignoring) currency manipulation. And the Census data show that since the onset of the recovery, it’s up from As made clear by my new article for Marketwatch.com, it jumped from $263.78 billion after inflation on an annualized basis to $681.74 billion in the fourth quarter of last year.

Early in his article, Samuelson attributes this trend to the dollar’s existential strength, but in his conclusion, he also blames policy mistakes – specifically, Washington’s failure to “police” currency manipulation and illegal subsidies. So it seems that this myth is far from mythical.

And as made clear by my Marketwatch.com piece, this strong recovery-era non-oil trade deficit rebound has slowed the growth rate of the current sluggish expansion by more than $400 billion in inflation-adjusted terms. The absolute numbers involved, as suggested by Samuelson, are indeed smallish compared with the size of the U.S. economy (currently $16.46 trillion in constant dollars).

But in calculating the trade deficit’s impact on growth, that’s not the number that counts. What matters is the growth itself, which since the recovery began in the middle of 2009 has been a bit less than $2.1 trillion. So that $400-plus billion trade deficit growth figure amounts to a nearly 20 percent slice – which sure sounds like it deserves adjectives bigger than the “modest” used by Samuelson. In fact, had the real non-oil goods deficit simply remained stable during the recovery, last year’s American inflation-adjusted growth would have been just over three percent, not just under 2.40 percent. That rate of expansion – the U.S. post-World War II norm – hasn’t been achieved in a decade.

Comparably uninformed was Matt O’Brien’s post the same day contending that the threat China’s economic rise has posed to American employment and wages “is slowly starting to go away.” O’Brien cites by-now familiar claims that China’s cost advantage over the United States is quickly vanishing, largely because the PRC ostensibly faces a labor shortage after decades of glut.

I’ve already poked numerous holes in the “overpriced China” meme; if you’re curious, start with this post. But what’s also missed by O’Brien – and so many others – is the threat posed by surging Chinese competitiveness in capital- and technology-intensive industries where labor costs by definition are secondary. It’s easy to measure this rising competitiveness by examining the detailed U.S.-China trade data put out by the U.S. International Trade Commission. And for numbers showing astonishing catch-up – and more – there’s no need to go back to 2001, when China was admitted to the World Trade Organization. Even developments since 2009, the start of the current American recovery, have been stunning.

Here are how America’s trade balances with China in major advanced manufacturing industries have worsened from that point through the end of last year in pre-inflation dollars):

telecommunications equipment: 160.68 percent

farm machinery and equipment: 65.32 percent

construction equipment: $33 million surplus to $953 million deficit

search, detection and navigation instruments: 65.82 percent

semiconductors: 407.85 percent

iron and steel: 34.50 percent

relays and industrial controls: 182.42 percent

ball and roller bearings: 265.62 percent

turbines and turbine generator sets: 62.41 percent

electro-medical equipment: 313.40 percent

metal-cutting machine tools: $118.71 million surplus to $3.68 million deficit

plastics materials and resins: 20.87 percent

And P.S. to O’Brien: These sectors remain very important American employers.

Not that encouraging data is lacking. Here, for example, are some representative high value manufacturing sectors where the U.S. trade balance with China improved between 2009 and 2015, and the size of the improvement:

semiconductor manufacturing equipment: 297.66 percent

pharmaceutical preparation: 483,530 percent (not a misprint!)

analytical laboratory instruments: 106.18 percent

electricity measuring and testing devices: 528.43 percent

surgical and medical instruments: $90.44 million deficit to $248.80 million surplus

metal-forming machine tools: 75.68 percent

aerospace: 195.10 percent

One further problem, though, is that with the prominent exception of aerospace, the trade numbers of the worsening sectors are much bigger than those of the improving sectors. So surely the employment numbers are bigger, too.

Indeed, if you move out to broader manufacturing groupings, you find rapidly deteriorating American competitiveness in areas far removed from widely acknowledged Chinese areas of advantage like smart phones and other consumer electronics products, as well as electronics components. For instance, in non-electrical machinery, the U.S. bilateral deficit has risen by nearly 147 percent since 2009, and in chemicals, a $2-plus billion surplus is now a $468 million deficit. Curiously, the former have been described in the Wall Street Journal as “global champions” and the latter was thought destined for a huge competitiveness boost from cratering prices for natural gas, a key feedstock.

There may of course still be plenty of facts and figures to marshal on behalf of the case that American workers and voters have little to fear from and lots of reasons to support current trade policies. But if these two Post pieces are any indication, supporters of these strategies will need to work much harder to find them.

(What’s Left of) Our Economy: Manufacturing Insourcing is More Grimly Comic in Fact than in Fiction

Tags

"The Campaign", "Trading Places", Boston Consulting Group, China, competitiveness, Dan Aykroyd, insourcing, manufacturing, renaissance, reshoring, wages, Will Ferrell, Zach Galifianakis, {What's Left of) Our Economy

Here’s a TV-watching tip for the upcoming holiday – and No, it’s not the college football championship games. Catch or stream the 2012 Will Ferrell comedy “The Campaign.” And it’s not mainly because I’m a big Will Ferrell fan. Rather, the film deals with the idea of manufacturing insourcing in an especially funny way. In fact, make that “two funny ways” – only one of which the scriptwriters seems aware of.

“The Campaign” is about a Congressional race in a small-town North Carolina district between the worthless – though sort of lovable – gadabout of an incumbent (Ferrell). and a humble, endearingly wholesome political novice unwittingly fronting for ruthless tycoons. The puppet is played perfectly, touchingly old-fashioned sense of honor and all, by (get this) Zach Galifianakis. Special casting bonus for fans of the near-classic “Trading Places”:  Dan Aykroyd, whose arrogant young financier character in that 1983 feature was chewed up and spit out on a bet by his bosses, the nefarious Duke brothers, plays one of the equally villainous “Motch Brothers” in “The Campaign.”

I’m betraying no momentous secret by revealing that the climax involves the challenger indignantly refusing to go along with the Motches’ plan for the district. But the scheme itself was striking (at least for a policy wonk) and creative: The moguls need a pliable Congressman to help them buy up huge tracts of land, build factories on them, and then sell them for a ginormous profit to a Chinese manufacturer. He, in turn, would staff them not with the locals, but with 50-cent-an-hour workers shipped in from the PRC. As the Motches proudly announce, “We call the concept ‘insourcing.’”

The writers obviously viewed the term as a simple pun that would elicit laughs from an audience by-then largely familiar with the term “outsourcing.” They also seem to have known that insourcing (along with “reshoring”) was a term that had begun to be used by analysts who believed that the United States was on the verge of an historic manufacturing renaissance. Production and jobs would increasingly be brought home, they confidently predicted, because wages in outsourcing destinations (like China) were rising, along with the freight costs of shipping the output to American customers. In fact, just like the insourcing cheerleaders, the Motches explain that their plan would combine labor savings with the transportation savings from producing close to their market.

But here’s what the “Campaign” writers couldn’t have known: As dependent as insourcing has been on cheap labor, lower costs on this front haven’t required using workers from China. Thanks to the always available option of re-outsourcing (which has continued to undermine workers’ bargaining power), Americans – especially in the non-union South – have accepted sufficiently abysmal pay to supercharge profitability.

In fairness, the pioneers of real-world insourcing claims – the Boston Consulting Group – made clear from the start how the South’s low wages were keys to the U.S. manufacturing renaissance. But although the journalists and politicians who believed such predictions seemed neither surprised nor dismayed about this low-road route to restoring competitiveness, “The Campaign’s” story line apparently assumed that American wages could never sink low enough to attract much investment. I wonder if the writers realize that, once again, truth has been stranger than fiction. And in a final irony, not even rock-bottom wages have been enough to cure what’s ailed U.S. manufacturing.

(What’s Left of) Our Economy: RIP, Manufacturing Renaissance – & Reshoring – Claims

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Asia, China, competitiveness, Deloitte, investment, local content, Manufacturers Alliance for Productivity and Innovation, manufacturing, manufacturing renaissance, MAPI, Mexico, multinational corporations, North America, Obama, offshoring, reshoring, TPP, Trade, Trans-Pacific Parternship, {What's Left of) Our Economy

Because manufacturers (and others) don’t always do what they say, surveys of their intentions on hiring and investment and the like should always be taken with a big boulder of salt – the more so since the questions are often asked and the answers given in a political and policy context. So when one of these surveys clashes with manufacturing reshoring and renaissance claims that America’s most powerful manufacturers – the offshoring multinationals – have been energetically pushing, they deserve special attention. That’s why it’s worth looking closely at a new sounding on where new factories are likely to be built from a major consulting firm and a leading manufacturers association.

As the nation has heard endlessly from the biggest names in American industry and their witting and unwitting political dupes, U.S. domestic manufacturing is either enjoying an historic comeback, or is on the verge of one. These boasts and predictions have become a little less common lately, as manufacturing data keeps disappointing, but they haven’t been recanted or simply dropped because they serve two powerful purposes.

First, at a time of continued U.S. economic weakness, contentions that American-owned manufacturing firms are boosting their U.S. production and employment counter fears and accusations that they have abandoned their home country wholesale. Second, a crucial feature of these renaissance claims – that China’s competitiveness has faltered so dramatically that American industry is actually abandoning the PRC and returning stateside – helps the multinationals defend the offshoring-friendly trade deals they worked so hard to pass by indicating that they did little, if any, long-term harm to the U.S. economy despite critics’ accusations.

It’s hard, however, to read the Footprint 2020 study just released by Deloitte and the Manufacturers Alliance for Productivity and Innovation (MAPI), and take any of the above seriously for one minute longer.

Take the reshoring narrative so central to the renaissance story. According to the Deloitte-MAPI report, “reshoring is a real phenomenon.” But get a load of this kicker: “[A] common misconception is it represents a return of previously offshored operations to US soil. In practicality, reshoring may include returning operations to Mexico. This offers greater access to the US market, but allows companies to maintain advantageous operating cost structures. Sixty-six percent of survey respondents offshored their operations in the past 20 years, and a third are now considering bringing them back to North America. These moves focus on primary production and assembly operations currently located in China, India, and/or Brazil. Mexico is the first choice destination to re-shore operations, followed by the US.”

To be fair, there is a respectable argument made that even reshoring (and other) investment in Mexico helps domestic U.S. industry, too. The supposed reason: Manufactured goods made in Mexican factories, especially if they’re owned or related to American firms, use much more in the way of Made in the USA parts and components than similar products made in Asia and elsewhere.

But this argument overlooks the reality that the U.S. content of America’s imports from Mexico has been falling, and that this trend will accelerate if Congress approves the Pacific Rim trade deal just concluded by the Obama administration. That Trans-Pacific Partnership (TPP) will make it easier for countries like Japan to send more goods, like automobiles from Mexican assembly plants into the United States that contain more parts and components from outside Mexico and “North America.”

The idea that investing in Chinese manufacturing doesn’t make much sense nowadays also takes a body blow from Footprint 2020. The study found that 98 percent of the companies surveyed plan to expand operations in countries where they’re already in business, either through adding on to existing facilities, or by opening new factories or labs or warehousing and distribution centers. The country that will get the biggest share of this new capital? China. (The United States is second.) Moreover, between the 2002-2007 period (before the financial crisis struck) and the 2010-2015 period (when the American manufacturing renaissance was supposed to have taken off), “North America’s” appeal to American-owned companies increased only slightly, while “Asia’s” (meaning largely China) nearly doubled.

Of course, for literally years, manufacturing renaissance claims have been steadily punctured by the most authoritative data available on production, trade balances, productivity, and wages. With hitherto cheerleading multinational manufacturers themselves now throwing cold water on this idea, too, it’s legitimate to wonder whether domestic industry is closer to suspended animation than to rebirth.

(What’s Left of) Our Economy: New Data Further Mock Wage Inflation Claims

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automotive, competitiveness, contract talks, Detroit automakers, inflation, inflation-adjusted wages, low road, manufacturing, real wages, recovery, United Auto Workers, wage inflation, wages, {What's Left of) Our Economy

Even if you keep emphasizing that wage figures aren’t the only, or even best, measure of U.S. employee compensation available, you’ll have difficulty saying or writing the term “wage inflation” after seeing the new real wage figures available from the Labor Department.

According to the new data, inflation-adjusted wages for private sector workers fell by 0.38 percent from May to June – the worst monthly performance since February, 2013. (My numbers come straight from the raw data posted on the Labor Department website.) Just as bad, May’s figures were revised down from a 0.09 percent decline to a 0.19 percent drop. On a year-on-year basis, June’s 1.75 percent after-inflation wage increase was the lowest since last December.

The year-on-year figures get interesting because they reveal what a low bar has been set for wage-inflation worries. Those June, 2014-15 real wage gains were not only much better than the previous year’s – which were zero. They were the best June-June numbers since 2008-09. During that stretch, when the deep recession was turning into a weak recovery, real wages shot up by 4.14 percent. But that increase followed a June, 2007-2008 fall of 2.17 percent. In other words, choices of baselines count.

But here’s one baseline that should be completely uncontroversial. The current recovery is commonly dated to mid-2009. Since that June, American private sector workers have seen wages rise a grand total of 1.65 percent faster than the cost of living. And the anointed experts wonder why so many consumers remain cautious (when they’re not bemoaning this prudence)?

As has been the case for way too long, manufacturing’s real wage performance kept lagging that of the overall private sector in June. Month-to-month, its constant dollar wages sank by 0.47 percent – the biggest such drop since August, 2012. Moreover, the year-on-year manufacturing real wage figures show the importance of baselines even more strikingly than their private sector counterparts.

The June, 2014-June, 2015 manufacturing real wage rise of 0.86 percent was the best June-June increase since that early 2008-2009 late-recession period (when it surged by 5.10 percent). In fact, it’s only the second increase since then. Yet since the recovery began, inflation-adjusted manufacturing wages are down by 1.59 percent, adding to the evidence that the sector’s strong comeback following a scary recessionary nosedive has come largely at the expense of its workforce.

Finally, the new real wage data provide some essential background for just-started new round of Detroit automakers’ contract talks with the United Auto Workers’ union. Numbers for sectors as specific as autos and light trucks (together) per se lag the broader figures by a month. But in May, they plunged 1.76 percent on month, after increasing by 1.19 percent in April. From May, 2014 to May, 2015, they fell 1.40 percent – nearly twice as much as the 0.73 percent decrease on year the previous May. And since the recovery’s June, 2009 technical onset, they’ve dropped by 9.86 percent. Detroit’s low road back to competitiveness, in other words, keeps getting lower.

(What’s Left of) Our Economy: Can Greece Ever Bounce Back?

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Asia, Austan Goolbee, competitiveness, currency, devaluation, education, European Union, Eurozone, exports, Gary P. Pisano, Greece, Harvard Business School, human capital, industrial commons, manufacturing, Marc Champion, productivity, recovery, savings, technology, trade surpluses, Willy C. Shih, {What's Left of) Our Economy

Trying to cover the Greece crisis is the analytical equivalent of driving through a very small town. If you blink, you might miss the latest development. So rather than try to keep up with each new twist and turn, let’s look at the most important economic question raised by the country’s predicament: Is there any hope for a return to decent, healthy growth rates?

The textbook economics conventional wisdom seems to be Yes, albeit with great difficulty. I’m a lot less sure, for reasons that reveal many fundamental flaws with textbook economics – mainly its inability to eliminate political, social, and cultural differences.

That conventional wisdom was recently summed up by the University of Chicago’s Austan Goolsbee, who served as President Obama’s chief White House economist. As Goolsbee told the Washington Post, Greece’s main problem is a woeful lack of price competitiveness. Its costs to produce goods and provide services – and especially its labor costs – are way too high, and its productivity and quality levels are way too low to give its businesses much hope of outselling foreign rivals. In other words, unless you ignored economics completely, or there was simply no choice (as with many personal services), you’d have to be an idiot to Buy Greek in most cases.

Goolsbee proceeded to note that countries in this situation can generally at least hope to gain competitiveness by devaluing their currencies. This step makes the price of anything turned out by the devaluing country cheaper than foreign counterparts (all else, like productivity, equal). But since Greece is a member of the Eurozone, it lacks this option. Its price gap can only be closed if enough of its fellow Eurozone members stoke inflation in their own economies, or if it boosts its own productivity by slashing wages (and/or in principle other business costs, like excessive regulations).

But let’s say Greece takes one of these two basic roads. Does anyone honestly think it will start winning in global markets, or even its home market, even once a respectable stretch of time passes? If so, they shouldn’t. To begin understanding why, let’s recall that Greece got into its mess in the first place largely because a big macro-economic prediction failed. Specifically, Greece’s entry into the European Union (in 1981, long before the Eurozone currency area was born in 1999) didn’t bring nearly enough durable convergence with its more prosperous and better run neighbors.

As required, Greece brought its laws and standards in line with the new European norms. And it made non-trivial economic progress – particularly after it began receiving huge injections of foreign aid. But that’s about where convergence worthy of the name stopped. Bloomberg’s Marc Champion tells the story well. Unlike most of the rest of the European Union, Greece collectively took the money and ran, embarking on a huge spending and stealing (literally) spree rather than investing in productive activity. The Euro’s creation wound up simply giving Greece many more resources to waste, as it enabled Greeks to borrow at the kinds of low rates much more appropriate for a much better-run economy. And for good measure, Greek governments for years lied massively about the nation’s finances – with a helping hand from Wall Street.

That is, Greece squandered nearly all the economic opportunities that macro-economics had predicted from its membership in Europe because – like the rest of the currency union in particular – it was free to remain largely autonomous politically. In every way other than economic, Greece was free to remain Greece, and too much of that identity had become a formula for profligacy.

But just as macro-economics can’t come close to adequately explaining Greece’s descent into economic degeneracy, it struggles at best to illuminate a plausible path to real recovery. For Greece needs much more than competitive prices to return to some semblance of economic viability. It needs a reliable legal and regulatory environment, to persuade domestic capital to stay home for productive use and to persuade foreign capital to give it a chance. Even if it had noteworthy natural comparative advantages in any sectors other than some farm products that are hardly staples, it would need the kind of scale that few of its extractive and especially manufacturing industries boast.

And to achieve that end, it would need what Harvard Business School professors Gary P. Pisano and Willy C. Shih and Samuel P. Pisano have called an industrial commons – the “R&D know-how, advanced process development and engineering skills, and manufacturing competencies” needed to produce the high value products and services upon which first world living standards ultimately depend. Countries without these capabilities are doomed to lengthy servitude in what’s called the low-value ghetto – simple, labor-intensive activity that pays very low wages, fosters very little learning or innovation, and, by the way, is an awfully crowded neighborhood in today’s global economy.

As numerous Asian countries have demonstrated, the low-value ghetto can be left behind by economic strategies that (to simplify a bit) successfully encourage very high rates of domestic saving and a laser-like focus on quality education that can create the wherewithal needed to advance up the value and skills ladder. In some cases, such progress has been able to start attracting – and effectively absorb – the foreign capital and knowhow that can provide a vital boost. Does that sound like spendaholic Greece today? Of course, as the Asian experience also demonstrates, it’s also essential to have a robustly growing global economy that can accommodate ever greater exports and indeed trade surpluses. Does that sound like the wheezing global economy today?

Greece does boast formidable human capital – just take a look at the math, science, and engineering faculties of any number of major American colleges and universities. That suggests potential in fields like software development, as well as lower value tech work like call centers (which are much likelier to create significant job opportunities). The country’s geography also suggests continuing possibilities in logistics (which is why shipping has always been strong).

But it’s precisely these kinds of changes that will have to begin and take hold for Greece to escape basket-case status. If they don’t, expect to keep hearing nonsense on the order of “If enough wealthy Germans and other Europeans would just take more vacations there, Greece’s problems would be solved.” That may make macro-economists feel good, but it represents a cruel hoax on Greece.