(What’s Left of) Our Economy: Progress!

Tags

American Affairs, antitrust, Barack Obama, competition, Financial Times, free trade, Jobs, John Maynard Keynes, Martin Wolf, production, Project Syndicate, Robert Skidelsky, stimulus, stimulus package, tariffs, The New York Times, Trade, trade deficit, {What's Left of) Our Economy

I hope you’ll all forgive me for an exercise in self back-patting that (I hope) you’ll read through the end. But the two instances described here of leading economics commentators expressing support for highly unconventional trade policy positions I’ve taken for years are simply too striking to pass up. Even more eye-opening: They appeared within a week of each other!

In chronological order, the first came courtesy of Martin Wolf, the Financial Times columnist who’s more-than-the-average pundit because he boasts both considerable policymaking experience and serious academic chops. As those two bios make clear, he’s also been a strong (though not completely uncritical) supporter of the standard free trade and globalization policies that decisively shaped the entire world economy, including America’s positions, for decades until the CCP Virus’ breakout. (Or did the turning point come with the financial crisis of 2007-08? Oh, well – no need to settle that question right now.)

That’s why I was so amazed to see in his column this past Tuesday the observation that the United States “gains many of the benefits of trade through internal specialisation” essentially because it’s “a large country with a sophisticated economy and diverse resources….”

Wolf’s point may not sound like much. But it not only contradicts the long-standing conventional wisdom – and rationale for supporting the freest possible global trade flows – that emphasizes (1) the centrality of international specialization for maximizing the prosperity of all individual countries and indeed the entire world, and (2) the imperative of exposing national economic activity to global competition in order to force domestic industries continually to improve quality and lower costs.

Wolf has also echoed (unwittingly, no doubt) my own argument that, whatever the validity of these ideas for most countries, there’s no reason for Americans to place any special value on them.

The reason? As I explained in an article in the Summer, 2019 issue of the journal American Affairs, the greatest possible degree of international specialization is advantageous and even crucial for the prosperity of most individual countries because they lack the ability to provide for a critical mass of their essential needs at affordable cost, let alone generate progress.

Any number of reasons or combination of reasons could be responsible. They might lack vital raw materials. Even if they’re wealthy and/or technologically advanced, their domestic market alone might be too small for most forms of economic activity aside from subsistence farming to achieve the scale needed for efficient and therefore relatively low-cost production. Alternatively, this domestic market could be inadequate because most of their people are too poor to be satisfactory customers.

In addition, because they’re so small, inadequate domestic markets have been considered incapable of generating enough competitive pressure needed to force their own producers to keep improving quality, innovating, and to maintain reasonable prices.

Conventional trade thinking has held that these problems could be overcome by individual countries (1) focusing on turning out the goods and services they could provide most efficiently (interestingly, whether in world-leading fashion or not), and (2) selling them where they were in greatest demand (because of other countries’ shortcomings) in exchange for what they themselves required.

Even better, such free trade would continually maximize the efficiency, and therefore the wealth, of all countries, as well as create the conditions for sustainable progress by requiring efforts to enter new, more promising industries to meet global competitive standards.

My own article, however, emphasized that the United States isn’t like most other countries. In fact, it’s uniquely blessed with both the size, the variety of resources, and the economic and social dynamism to supply nearly all its needs and wants from within. In the words of that 1980s inspirational song, in economic term, the United States “is the world.’

As a result, Americans have no inherent need to keep their home markets open, or open them wider, in order to secure adequate supplies of goods and services. And if they’re unhappy with the levels of competition their companies face, because of the country’s gargantuan scale, their best bet for maximizing such competition is resuming the vigorous enforcement of antitrust laws – which, as I documented, had long been largely neglected.

Wolf didn’t accept the policy implications I drew concerning these insights about America’s economic distinctiveness. But since he evidently accepts the basic proposition, it’s legitimate to ask why not.

The second example of a leading economic authority making one of my central points came yesterday on the Project Syndicate website. That in itself is pretty remarkable because, as I’ve previously suggested, Project Syndicate is best described as a digital op-ed page for globalist elites. Just as remarkable, and gratifying, the author of the post in question is Robert Skidelsky, a veteran British politician and venerable academic who’s best known for a highly acclaimed three-volume biography of John Maynard Keynes, the most influential economist of the 20^th century and a scholar whose work still shapes much global economic thought and policy.

According to Skidelsky, one of two major gaps in President Biden’s economic proposals – and especially his stated desire to rebuild manufacturing in America – is its failure to impose tight curbs on imports. Without a plan that Skidelsky (and its originator) calls “compensated free trade,” the author writes that domestic industry won’t be “built back better.”

That’s already nearly identical to arguments I make all the time. But what I found most intriguing was Skidelsky’s principal rationale: America’s still towering trade deficits are bound to permit too many of the job- and production-creating benefits of Mr. Biden’s stimulus spending to drain overseas.

That’s virtually identical to the case that I and a colleague made early during the recovery from the previous U.S. recession. Unfortunately, then President Barack Obama apparently didn’t see our New York Times article, because he ignored the continuing growth of the deficit, and partly as a result, the rebound he presided over was the weakest in American history.

I’m hardly above wishing to have gotten some credit for these ideas.  But progress on the economics of trade (as opposed to the ongoing U.S. policy departures from free trade absolutism bemoaned by Wolf) has been so slow to develop that I’ll take it in whatever form it comes – and of course be keeping an eye out for more.           

(What’s Left of) Our Economy: How Big a China Virus Hit?

Tags

China virus, coronavirus, COVID 19, Economic Policy Institute, Employment, employment multiplier, Jobs, output, output multiplier, production, {What's Left of) Our Economy

The short answer to the headline’s question? “Really big.” Which is kind of obvious. So today I thought I’d present some information on techniques economists use to come up with a somewhat more specific idea.

First let’s look at jobs – because jobs obviously affect people and their ability to provide for themselves. Economists taking a “put people first” approach would start by looking at the official federal government data on how many Americans are employed by those parts of the economy that clearly will be most seriously affected. Those numbers look like this as of last month’s preliminary figures, in millions of employees:

retail trade:                                                            15.659           1.22

educational services:                                               3.838           1.94

  (includes public & private institutions)

leisure & hospitality:                                            16.873

arts, entertainment, & recreation:                           2.494          3.79

  performing arts & spectator sports:                     0.516

  spectator sports*:                                                 0.146

accommodation & food services:                        14.379          1.61

  accommodation:                                                  2.092

  restaurants & other eating places:                     11.103

*January figure

The indented categories are industries of special interest that are sub-sectors of the larger categories below which they appear. And if you add up the major categories, you come up with 54.193 million workers – nearly 42 percent of the total U.S. private sector workforce.

Sharp-eyed readers will notice a number to the right of the worker figures – that number shows what’s called the employment multiplier for the sector in question. Simply put, it means how many jobs in other parts of the economy the maintenance, creation, or loss of a single job in the first sector affects. In other words, every job in American retail companies and stores affects 1.22 jobs elsewhere (e.g., from suppliers that furnish that industry with the inputs it needs to function, and from the purchases its own workers make from other industries).

Employment multipliers aren’t easy to find – these come from a Washington, D.C. think tank called the Economic Policy Institute, and don’t cover all the initially affected sectors. But from these data alone, it’s obvious that the total number of U.S. jobs that could be lost, or see a cutback in hours, is much greater than the employment damage done, for example, by the simple closing of a single restaurant or sports stadium.

Most economists would also look at how much output the most seriously affected industries contribute to the gross domestic product (GDP – the total sum of all the goods and services Americans turn out during a given time period). GDP and output matter, of course, because if businesses aren’t producing goods and services, they won’t need employees. Here how they look, according to a measure called “value-added” – which seeks to eliminate various forms of double-counting that result when trying to gauge production in sectors that make final products, and sectors that make their parts, components, materials, ingredients, and other inputs. Also important – these figures are not adjusted for inflation.

Percent of total U.S. value-added

retail trade:                                                            5.50           0.66

healthcare services & social assistance:               7.60

educational services:                                            1.20           0.72

performance arts, spectator sports, museums &

  related activities:                                               0.70            0.81

accommodation & food services:                       3.10

  accommodation:                                               0.80

  food services:                                                   2.30

Again, the sub-categories are indented. Here the total percent figure is much smaller than the employment figure. But at 21.20 percent, it’s not bupkis, either.

And as with employment, don’t forget those multipliers (also presented to the right)! Here, the readily available data is scantier, and those I use are from 2012. But clearly the indirect output (and growth) impact will be non-trivial. (These output multipliers come from the Manufacturing Institute of the National Association of Manufacturers.)

Even if the China Virus situation wasn’t still evolving – and possibly dramatically, no one should take these numbers to the bank. Especially important is remembering that none of them take into account the danger that all these jobs and output and income and related business revenue losses bring about the kind of financial system seize-up seen during the financial crisis of 2007-2008. Moreover, although business and entire industry shutdowns will be extensive in the above and other sectors, they won’t be total, or (usually) anywhere close. And the damage will not last forever, or anywhere close.

All the same, we’re talking major drops in employment, incomes, and production – which is exactly why the economic response from Washington needs to focus on getting and guaranteeing money and credit where it’s needed pronto.

(What’s Left of) Our Economy: Trade War(s) Update

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Argentina, Bloomberg.com, Brazil, business investment, China, CNBC, consumption, currency manipulation, debt, Democrats, digital services tax, election 2020, EU, European Union, export controls, Financial Crisis, France, Huawei, internet, investors, manufacturing, production, steel, steel tariffs, tariffs, Trade, Trade Deficits, trade enforcement, trade war, Trump, Wall Street, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

The most important takeaway from this post about the current status of U.S. trade policy, especially toward China, is that it may have already been overtaken by events since I began putting these thoughts together yesterday.

What follows is a lightly edited version of talking points I put together for staffers at CNBC in preparation for their interview with me yesterday. I thought this exercise would be useful because these appearances are always so brief (even though this one, unusually, featured me solo), and because sometimes they take unexpected detours from the main subject. .

Before presenting them, however, let’s keep in mind this new Bloomberg piece, which came on the heels of remarks yesterday by President Trump signaling that a trade deal with China may need to await next year’s U.S. Presidential election, and plunged the world’s investors into deep gloom. This morning, however, the news agency reported that considerable progress has been made despite “harsh” rhetoric lately from both countries. It seems pretty thinly sourced to me, and the supposed course of the trade talks seems to change almost daily, but stock indices are up considerably all the same.

Moreover, even leaving that proviso aside, what I wrote to the CNBC folks yesterday seems likely to hold up pretty well. And here it is:

1. The President’s latest comments on the China trade deal – which he says might take till after the presidential election to complete – seriously undermines the claim that he considers a deal crucial to his reelection chances because it’s likely to appease Wall Street and thereby prop up the economy. Of course, given Mr. Trump’s mercurial nature, and negotiating style, this latest statement could also simply amount to him playing “bad cop” for the moment.

2. His relative pessimism about a quick “Phase One” deal also seems to reinforce a suggestion implicitly made yesterday by Commerce Secretary Wilbur Ross when he listed verification and enforcement concerns as among the obstacles to signing the so-called Phase One deal. I have always argued that such concerns are likely to prevent the conclusion of any kind of trade deal acceptable to US interests. That’s both because of China’s poor record of keeping its commitments, and because the Chinese government is too secretive and too big to monitor effectively even the most promising Chinese pledges to change policies on intellectual property theft, illegal subsidies, discriminatory government procurement, and other so-called structural issues.

3. Recent reports of the United States considering tightening (or expanding) restrictions on tech exports to Chinese entities like Huawei also support my longstanding point that the US and Chinese economies will continue to decouple whatever the fate of the current or other trade talks.

4. In my opinion, the President is absolutely right to play hard-to-get on China trade, because Chinese dictator Xi Jinping is under so much pressure due to his own weakening economy, and because of the still-explosive Hong Kong situation.

5. I’ll be especially interested to learn of the Democratic presidential candidates’ reactions to Mr. Trump’s latest China statement, as well as the announcement of the reimposed steel tariffs on Argentina and Brazil, and the threatened tariffs on French “digital services” [internet] taxes. With the exception of Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders, the candidates’ China policies seem to boil down to “Yes, we need to get tough with China, but tariffs are the worst possible response.” None of them has adequately described an alternative approach. The reactions of Democratic Congress leaders Nancy Pelosi in the House and Charles Schumer will be worth noting, too. The latter has been strongly supportive of the Trump approach in general.

6. The new steel tariffs, as widely noted, are especially interesting because they were justified for currency devaluation reasons, with no mention made of the alleged national security threats originally cited as the rationale. Nonetheless, I don’t believe that they represent a significant change in the Trump approach to metals trade, because the administration has always emphasized the need for the duties to be global in scope – to prevent China from transshipping its overcapacity to the US through third countries, and to prevent third countries to relieve the pressures felt by their steel sectors from Chinese product by ramping up their own exports to the US. Obviously, all else equal, countries with weakening currencies (for whatever reason) will realize big advantages in steel trade, as the prices of their output will fall way below those of competitors’ steel industries.

7. Regarding the tariffs threatened in retaliation for France’s digital services tax, they’re consistent with Trump’s longstanding contention that the US-European Union (EU) trade relationship has been lopsidedly in favor of the Europeans for too long, and that tariff pressure is needed to restore some sustainable balance. In this vein, I don’t take seriously the French claim that the tax isn’t targeting U.S. companies specifically. After all, those firms are the dominant players in the field. Second, senior EU officials have started talking openly about strengthening Europe’s “technological sovereignty” – making sure that the continent eliminates its dependence on non-European entities in the sector (including China’s as well as America’s). The digital tax would certainly further the aim of building up European champions – and if need be, at the expense of US-owned companies.

By the way, this position of mine in no way reflects a view that more taxation and more regulation of these companies isn’t warranted. But it’s my belief that these issues should be handled by the American political system.

Also of note: Trump’s suggestion this morning that the French tax isn’t a big deal, and that negotiations look like a promising way to resolve the disagreement.

Finally, here are two more points I wound up making. First, I expressed agreement that the President’s tariff-centric trade policies have created significant uncertainties in the economy’s trade-heavy manufacturing sector in particular – stalling some of the planned business investment that’s essential for healthy growth. But I also noted that much of this uncertainty surely stems from the on-again-off-again nature of the tariffs’ actual and threatened imposition.

As a result, I argued, uncertainty could be significantly reduced if Mr. Trump made much clearer that, whatever the trade talks’ fate, the days of Washington trying to maximize unfettered bilateral trade and investment are over, and a new era marked by much more caution and many more restrictions (including tighter export controls and investment restrictions, as well as tariffs), is at hand.

Second, at the very end, I contended that President Trump deserves great credit for focusing public attention on the country’s massive trade deficits in general. For notwithstanding the standard economists’ view that they don’t matter, reducing them is essential if Americans want their economy’s growth to become healthy, and more sustainable. For as the last financial crisis should have taught the nation, when consumption exceeds production by too great a margin, debts and consequent economic bubbles get inflated – and tend to burst disastrously.

(What’s Left of) Our Economy: Why Amazon.com Could Kill the Entire Economy

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Amazon.com, bubble decade, bubbles, consumption, credit, Financial Crisis, gig economy, Great Depression, Great Recession, Henry George School of Social Science, housing, housing bubble, production, productivity, Robin Gaster, {What's Left of) Our Economy

Yesterday I was in New York City, on one of my monthly trips to attend board meetings of the Henry George School of Social Science, an economic research and educational institute I serve as a Trustee. And beforehand, I was privileged to moderate a school seminar focusing on the possibly revolutionary economic as well as social and cultural implications of Amazon.com’s move into book publishing.

You can watch the eye-opening presentation by economic and technology consultant Robin Gaster here, but I’m posting this item for another reason: It’s an opportunity to spotlight and explore a little further two Big Think questions raised toward the event’s end.

The first concerns what Amazon’s overall success means for the rough balance that any soundly structured economic needs between consumption and production. As known by RealityChek readers, consumption’s over-growth during the previous decade deserves major blame for the terrifying financial crisis and ensuing Great Recession – whose longer term effects have included the weakest (though longest) economic recovery in American history. (See, e.g., here.)

Simply put, the purchases (in particular of homes) by too many Americans way outpaced their ability to finance this spending responsibly, artificially and unprecedentedly cheap credit eagerly offered by the country’s foreign creditors and the Federal Reserve filled the gap. But once major repayment concerns (inevitably) surfaced, the consumption boom was exposed as a mega-bubble that proceeded to collapse and plunge the entire world economy into the deepest abyss since the Great Depression of the 1930s.

As also known by RealityChek regulars, U.S. consumption nowadays isn’t much below the dangerous and ultimately disastrous levels it reached during the Bubble Decade. And one of the points made by Gaster yesterday (full disclosure: he’s a personal friend as well as a valued professional colleague) is that by using its matchless market power to squeeze its supplier companies in industry after industry to provide their goods (and services, in the case of logistics companies) at the lowest possible prices, Amazon has delivered almost miraculous benefits to consumers (not only record low prices, but amazing convenience). But this very success may be threatening the ability of the economy’s productive dimension to play its vital role in two ways.

First, it may drive producing businesses out of business by denying them the profitability needed to survive over any length of time. Second, Amazon’s success may encourage so many of its suppliers to stay afloat by cutting labor costs so drastically that it prevents the vast majority of consumers who are also workers from financing adequate levels of consumption with their incomes, not via unsustainable borrowing. Indeed, as Gaster noted, it may push many of these suppliers to adopt Amazon’s practice of turning as much of it own enormous workforce into gig employees – i.e., workers paid bare bones wages and denied both benefits and any meaningful job security. And that can only undermine their ability to finance consumption responsibly and sustainably. 

I tried to identify a possible silver lining: The pricing pressures exerted by Amazon could force many of its suppliers to compensate, and preserve and even expand their profits, by boosting productivity. Such efficiency improvements would be an undeniable plus for the entire economy, and historically, anyway, they’ve helped workers, too, by creating entirely new industries and related new opportunities (along, eventually, with higher wages). Gaster was somewhat skeptical, and I can’t say I blame him. History never repeats itself exactly.

But to navigate the future successfully, Americans will need to know what’s emerging in the present. And when it comes to the economic impact of a trail-blazing, disruption-spreading corporate behemoth like Amazon, I can think of only one better place to start than Gaster’s presentation yesterday –  his upcoming book on the subject. I’ll be sure to plug it here on RealityChek as soon as it’s out.

(What’s Left of) Our Economy: More Evidence that Trump’s Trade Wars are Winning for America

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capital spending, Dallas Federal Reserve, Federal Reserve, Jobs, manufacturers, manufacturing, output, production, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Here’s how weird today’s (covering June) Dallas Federal Reserve Bank manufacturing report is. It’s prompted me to write my first ever RealityChek post on an individual regional Fed manufacturing report. And I’m writing this subject instead of my original plan to blog on the Iran/Persian Gulf crisis – which is of course generating lots of headlines.

The main reason? The Dallas findings include considerable evidence that domestic U.S. manufacturing is withstanding President Trump’s trade wars quite well thank you – at worst – and that his tariffs are bringing back a good deal more production to the United States than widely supposed. 

For readers not familiar with such reports, every month, several of the regional branches in the national Federal Reserve system issue results of surveys they conduct on the state of manufacturing in the geographic districts they monitor and whose financial sectors they help regulate. The Dallas Fed’s “jurisdiction” is Texas, northern Louisiana, and southern New Mexico. And because Texas is such an important manufacturing state, the Dallas reports are considered especially important in judging the health of American manufacturing as a whole.

Today’s Dallas Fed report began unusually enough, with a series of seemingly contradictory findings stemming from its usual indicators. For example, the so-called headline figure – which purports to measure district manufacturers’ perceptions of overall industry conditions for a particular month – not only worsened for the second straight month. It sank even deeper into numerical territory that supposedly signals manufacturing contraction.

At the same time, these companies’ reports on their output (like all the regional Fed manufacturing surveys, the Dallas Fed’s gauges “sentiment,” or companies’ descriptions of their activities, rather than measuring the activity itself), rose slightly higher into the numerical territory signaling manufacturing expansion. So did the “new orders” indicator – though it was slightly weaker in absolute terms. (That is, it wasn’t signaling expansion as strongly as the output indicator.)

Dallas Fed district manufacturers also stated that they were continuing to hire, and work their employees more hours per weak – though the growth here slowed from that they reported the previous month. The only indicator which registered a major monthly drop was capital spending. It dropped by double-digits percentage points to a two-year low, but still remained in expansion territory.

Interestingly, the Dallas results roughly mirrored the June report from another closely watched Fed district – Philadelphia’s.

But what was really weird about today’s Dallas Fed report were the answers regional manufacturers gave to a series of “Special Questions” about the impact of President Trump’s tariffs. The responses from 115 companies made clear that they believed that the levies effects were more damaging than last September, when they previously answered these questions (and when Texas and national manufacturing was going great guns).

But the difference was anything but dramatic. By many key measures, strong majorities reported that the tariffs had “no impact” on their fortunes. The companies expected the tariff damage to fade considerably within two years. And many of them were responding to tariff pressures they faced by replacing foreign suppliers with domestic suppliers. In other words, they were replacing imports with domestic orders and production.

For example, between last September and this month, the share of Texas manufacturers stating that the U.S. and foreign retaliatory tariffs had had “no impact” on their production levels fell only from 65.9 percent to 60.9 percent. The share reporting “no impact” on employment dipped from 82.1 percent to a still lofty 78.3 percent, and on capital spending from 69.4 percent to 64.9 percent. I.e., these results don’t exactly scream “Tariffmageddon!”

For those companies that did report tariff-related changes, the gap for each of these indicators between those reporting damage and those reporting benefits definitely widened in favor of damage. But again, the differences – over a nine-month period during which lots of tariffs were actually imposed or increased – were on the limited side. The biggest deterioration, for example, took place in capital spending. In September, 20 percent of the manufacturers responding reported that the tariffs were leading them to cut such investments. This month, that share rose to 27.2 percent. Slightly behind capital spending in this respect was output, with the “decrease” share increasing from 20 percent to 26.1 percent.

The share of companies reporting benefits from the tariffs declined, too – but much more modestly. And in June, they still averaged close to ten percent.

By contrast, the companies’ views on their ability to cope successfully over time with the U.S. and foreign retaliatory tariffs brightened through 2021. The share expecting net tariffs damage dropped from 41 percent to 32 percent, and the share expecting net benefits doubled – to 18 percent.

And potentially most interesting of all – many more companies that reported net negative impacts from tariffs were responding by replacing imports with domestic production, not with non-tariff-ed foreign products. The sample size here is small (46 firms), but 17.4 percent said they were “mitigating” the tariff damage by finding new domestic suppliers and another 17.4 percent were bringing “production or processes” back in-house. Only 10.9 percent answered “finding new foreign suppliers.”

When it comes to China, I’ve long maintained that any reduction in Chinese industrial capacity benefits the United States, even if imports from China are replaced by imports from elsewhere. But the Dallas results show that the number of companies responding by bringing production back home in one way or another – as President Trump has promised – could be much higher than many skeptics have claimed and predicted.

Sentiment surveys like the regional Fed reports are no substitute for the actual data (largely for the “survivorship bias” problems I’ve explained in this post). But if more of these institutions could keep track of their manufacturers’ stated experiences with and responses to the Trump trade wars – and on an ongoing, not sporadic, basis – they could help the nation better understand the real consequences.

(What’s Left of) Our Economy: Trade and Supply Chain Disruption Myths are Getting Disrupted by Apple

Tags

Apple Inc., Breitbart.com, China, deadweight loss, design, engineering, global value chains, John Carney, manufacturing, marketing, Nikkei Asian Review, production, research and development, sourcing, supply chains, tariffs, Trump, {What's Left of) Our Economy

Yesterday’s report from Japan’s Nikkei Asian Review (NAR), on how the U.S.-China trade war is affecting Apple Inc.’s sourcing plans, was stunning not only for claiming that the company is studying moving up to 30 percent of the China production capacity it uses out of the People’s Republic. It also greatly undermined three of the most pervasive myths surrounding the decision by such companies to concentrate so much manufacturing in China, and the resulting impact on the American economy.

Since Apple’s production in China and elsewhere is handled almost entirely by independent contract manufacturers like Taiwan’s Foxconn, its reported decision to ask them to start estimating the costs of partly leaving China speaks volumes about why multinational companies place various links in their supply chains in the countries decided on.

The first myth? That production and sourcing decisions are based overwhelmingly on the kinds of free market forces and developments that supposedly dominate the current world trade system, and that explain its root assumption that any government interference will reduce – to every country’s detriment – trade’s ability to maximize global efficiency.

According to the NAR piece, however, a team of 30 Apple employees has begun “discussing production plans with suppliers and negotiating with governments over financial incentives they might be willing to offer to attract Apple manufacturing, as well as regulations and the local business environment.” In other words, Apple’s decisions won’t solely, or even mainly reflect the principle of comparative advantage – which holds that economic activity naturally flows and should flow to locations where it’s most efficiently conducted.

The NAR article also hints at a point that’s become crucial in today’s trade war-spurred debate – about whether trade barriers like the Trump administration’s recent tariffs create major “deadweight losses” for the world economy by forcing companies to spend precious time and resources coping with government interference, rather than on continuing to improve their products and processes. For as the NAR piece states, among the advantages China has offered manufacturers for so long have been “lighter labor rules.” That’s a euphemism for a government policy of ruthlessly repressing worker’s rights to organize freely.

NAR could have also added practices such as government-encouraged technology extortion (which forces foreign businesses to hand over their knowhow to Chinese partners in return for the ability to operate in China), value-added taxes (which fosters producing inside China by penalizing importing and rewarding exporting), an artificially depressed currency (which has effects similar to those value-added taxes), explicit requirements that goods made in China contain certain levels of Chinese content, and all manner of tariffs and subsidies that are illegal under World Trade Organization rules.

Moreover, as detailed in my 2002 book on globalization, The Race to the Bottom, foreign government distortion of trade is hardly confined to China. It’s long represented the way much manufacturing-related business has been done around the world.

In other words, the deadweight loss issue, and government interference in trade flows, is nothing new, and raised few hackles among economists until the United States under President Trump started imposing serious trade barriers of its own. (See this article by Breitbart.com‘s John Carney for an excellent discussion of the issue and the hypocrisy of Trump tariff opponents.)

The second Apple- (and broader offshoring-related-) myth debunked by the article is that the reshuffling of global supply chains already being prompted by the Trump tariffs will devastatingly disrupt worldwide manufacturing and economic fortunes. But here’s what one Apple supplier representative told NAR: “It’s really a long-term effort and might see some results two or three years from now. It’s painful and difficult, but that’s something we have to deal with.” In other words, rather than whining and/or throwing in the towel, such companies are apparently rolling up their sleeves and getting to work.

P.S. – So, reportedly, is Apple. Not that the company hasn’t whined about the Trump tariffs. But according to the NAR article, its examination of diversifying away from China – where currently more than 90 percent of its worldwide manufacturing is located – began “at the end of last year” to “expand [the aforementioned] capital expense studies team.”

Moreover, the trade war evidently wasn’t the only issue on Apple’s mind. Said “one executive with knowledge of the situation,” a “lower birthrate, higher labor costs and the risk of overly centralizing its production in one country. These adverse [China] factors are not going anywhere. With or without the final round of the $300 billion tariff, Apple is following the big trend [to diversify production].” The biggest implication – which should have always been obvious – is that because countries and their economies, societies, and demographics are constantly changing independent of government policies, no smart business would ever view its supply chains as being set in stone.

The final myth – that performing nearly all Apple manufacturing in China has enormously strengthened the U.S. economy, and that this proposition holds for much China production by U.S.-owned multinational companies.

Because Apple products sell for so much more than the cost of their materials, it’s clear that most of the value they create comes from the company’s mainly U.S.-based research and development, engineering, design, software development, and marketing operations. So its slogan “Designed by Apple in California, Assembled in China” is not only accurate but extremely important economically.

Nonetheless, the company itself has maintained that a significant number of its goods suppliers have been U.S.-owned (though not necessarily American-located). Yet the NAR article found that this number has been shrinking steadily since 2012 – and that the number of China- and Hong Kong-owned suppliers has been rising so strongly that last year they exceeded the number of their American counterparts for the first time.

In fact, as I’ve reported, the China content of most goods produced in China been increasing so significantly for so long that the notion of the People’s Republic as a simple assembler of products that add little value to the Chinese economy is becoming rapidly outmoded. Further, this development has always been a prime objective of the Chinese government, as is especially obvious from its technology extortion and local content requirements.

It’s true that these developments per se don’t affect the aforementioned “white collar” manufacturing activities vital to creating Apple products. But it’s legitimate to ask whether, without the Trump trade war, this extremely high value work would long remain mainly in the United States. After all, even in a world of instant global communications, manufacturers have found it highly advantageous to locate functions like research and development etc close to their factories – because the two broad aspects of manufacturing tend to interact with each other so continuously, and because big differences in time zones means that there’s still nothing as easy and convenient as contacting a colleague by driving a few blocks away or phoning or texting or emailing from there, much less by walking down the hall.

To listen to economists and pundits and even many beat reporters even nowadays (or especially nowadays?), the emergence of the kinds of global value chains epitomized by Apple’s operations has been as much a force of nature, or technology, as economic globalization itself has been portrayed. They’ve ignored how the Trump trade policy revolution reminds invaluably that these trends have also stemmed from human decisions that are anything but givens. The reaction of Apple, and all the other companies that have either left China or are contemplating leaving because of the President’s actual and threatened tariffs, is a welcome sign that the folks who deal with these problems in real life, and not simply in the abstract, have finally been getting this message.

Those Stubborn Facts: In Manufacturing, US is Number…Four

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manufacturing, production, Those Stubborn Facts

Switzerland per capita manufacturing output per person, 2014: $15,000

Germany per capita manufacturing output per person, 2014: $9,500

Japan per capita manufacturing output per person, 2014: $7,000

US per capita manufacturing output per person, 2014: $6,500

China per capita manufacturing output per person, 2014: $2,100

(Source: “Advanced Economies Must Still Make Things,” by Vaclav Smil, IEEE Spectrum, March 29, 2016, http://spectrum.ieee.org/at-work/tech-careers/advanced-economies-must-still-make-things)

(What’s Left of) Our Economy: The Closer You Get, the Weaker US Manufacturing Looks

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Atlanta Federal Reserve Bank, automotive, Federal Reserve, Financial Crisis, Great Recession, industrial production, inflation-adjusted growth, information technology hardware, manufacturing, Obama, production, technology, {What's Left of) Our Economy

Although they’ll be revised twice more in the next two months alone, the December manufacturing output figures released Friday by the Fed just gave us more of the kinds of new full-year numbers that make data geeks (figuratively) salivate – and that everyone else needs to know about.

They mean that we can speak with added confidence about where domestic industry does and doesn’t stand since the financial crisis triggered the Great Recession eight years ago – and some of the crucial details show that American manufacturing could be in even more serious trouble than is already recognized.

First, these first full-year 2015 industrial production data indicate that domestic manufacturing keeps growing more slowly even than the rest of the sluggish U.S. economy. That matters because one of the biggest lessons taken from the financial crisis by a wide range of leading American public figures was that the nation needed to rely for its growth more on sectors that create real wealth (like manufacturing) and less on sectors that largely rearrange wealth (like finance). President Obama was only the best known. 

We won’t get the first full-year numbers on the economy’s overall 2015 growth until the end of this month, but through the first three quarters of the year, it expanded by 2.15 percent after adjusting for inflation. The manufacturing figures during the same period? 1.79 percent.

Moreover, the gap is unlikely to have narrowed much in the final three months of 2015. The Federal Reserve reports that real manufacturing output expanded by a mere 0.16 percent from the end of the third quarter through the end of the fourth quarter. That’s about the same rate as the total gross domestic product projection put out by the Atlanta Federal Reserve’s impressively reliable growth tracker.

Second, real production growth in the automotive sector slowed tremendously in 2015, and automotive has until now been manufacturing’s biggest growth leader by far. Inflation-adjusted output of vehicles and parts did improve more (3.70 percent) last year than overall manufacturing output (0.74 percent). But that automotive growth rate is down from 9.78 percent the year before, and is automotive’s worst growth performance since its 32.81 percent near freefall in 2008. In fact, as noted in Friday’s post on the industrial production figures, the automotive sector entered technical recession in December, with its after-inflation production down on net over a seven-month stretch.

Automotive’s boost to manufacturing is also clear from examining statistics going back to start of the last recession. Real output for American industry is now down 1.51 percent since the downturn’s December, 2007 onset – eight years ago. Without automotive, that production slump is 4.81 percent. Moreover, no other major sectors of manufacturing show any signs of picking up the slack.

Finally, these new 2015 manufacturing output numbers should remind us that the sector has also been powered by growth engine where the numbers are downright dubious – information technology hardware. Last year, the Federal Reserve tells us, inflation-adjusted output in computers and parts, semiconductors, telecommunications gear, and similar sub-sectors rose by 1.61 percent – more than twice as fast as overall manufacturing. And since the last recession began, its growth has been a stellar 45.83 percent. In fact, without these high tech industries, American manufacturing output would be down by 5.29 percent.

But as I’ve written before, here’s the problem: The inflation-adjusted data for information technology hardware likely overstate output by a considerable amount. The reason: These products tend to have a high import content, and this import content has probably been under-counted because the prices of these info-tech goods are falling faster than government economists can track. As a result, when this import content is adjusted for inflation, the numbers come out too low – and the domestic content figures that make up the rest of these products come out too high.

In his State of the Union address four years ago, President Obama rightly emphasized the need to create “an economy that’s built to last -– an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values.” And he pointedly noted that “this blueprint begins with American manufacturing.” As he enters his last year in the White House, this goal with respect to manufacturing sadly remains un-achieved.

(What’s Left of) Our Economy: Better U.S. Growth Through Tariffs

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Alabama, Bloomberg, economists, FDI, Foreign Affairs, foreign direct investment, imports, incentives, Jobs, manufacturing, production, recovery, tariffs, Trade, {What's Left of) Our Economy

If there’s anything you can count on other than death and taxes, it’s nearly all of America’s economists and members of the political and policy elites abhorring unilateral tariffs on imports as dangerous folly. (Multilateral tariffs, applied with the approval of the World Trade Organization, are generally more popular, as they’re seen as an internationally acceptable means of enforcing global trade rules.) Which is why it’s so important for RealityChek to keep pointing out examples of these duties working like a charm to help bring valuable production and jobs to the United States.

A recent Bloomberg item showed just how effective tariffs can be. This report on a recent $120 million Chinese investment in a copper tubing factory in Alabama contained the usual boilerplate about the Chinese company wanting to avoid higher wages back home and seeking to manufacture closer to its customers. To their credit, the reporters also noted that Alabamanians needed to shell out $20 million in incentives to make sure the Chinese chose their state – a widespread practice that should remove much of the shine from this piece of the American manufacturing renaissance meme.

But they and their editors also buried a crucial inducement for China deciding to produce these goods in the United States – to avoid tariffs on copper products. Nor has this been an isolated case. Years ago, in Foreign Affairs quarterly, I described how Reagan-era tariffs and quotas resulted in major new foreign investments in American auto assembly plants and steel mills. And similar measures clearly continue driving the construction of lots of new foreign-owned facilities in the United States today. Of course, America’s trade competitors have mastered this strategy, too. Scholarly research makes clear that erecting trade barriers in order to induce “tariff jumping” investment is common in developing countries. But Europe also attracted considerable U.S. and other multinational capital in the electronics and information technology sectors with this practice.

Tariffs are especially promising for America, however, not only because of that matchless consumer market mentioned above, and the leverage it creates with foreign governments and corporations alike. They’re especially promising because this huge consumer market is so far away from most of the foreign production sites that still supply it so successfully. Making products in America is both a great way to cut transportation costs and a great way to cut delivery times.

American labor and regulatory costs of course remain on the high side. And foreign governments are rarely shy about using a wide range of subsidies – including artificially cheap currencies – to keep their own goods and services competitive. All the more reason, then, for Washington to set about meaningfully boosting the weakfish U.S. recovery by using tariffs more systematically to lure productive, job-creating foreign investment and technology.  Why keep arguing with success?

(What’s Left of) Our Economy: U.S. Productivity Ain’t What it Used to Be

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compensation, labor productivity, manufacturing, manufacturing renaissance, production, productivity, recovery, wages, {What's Left of) Our Economy

What a lousy day for economic news! (Or should I say, “What a day for lousy economic news”?) On top of the terrible trade figures I posted on this morning, the Labor Department released some comparably dreary productivity numbers.

These latest labor productivity data show that, in the fourth quarter of 2014, on a quarterly basis, output per hours worked in America’s non-farm businesses fell for the second time last year at an annualized rate. (A broader measure, multi-factor productivity, is tracked by Labor, but with a much longer time lag.) At least the 1.80 percent decrease was better than the five percent decrease registered in the first quarter. But that reading (which is still preliminary) was undoubtedly yet another economic casualty of the harsh winter. Also encouraging was that the third quarter productivity increase was revised up from an annualized 2.40 percent to 3.70 percent.

Nonetheless, for the full year, the economy’s productivity increase was 0.80 percent – the worst performance since 2011’s 0.10 percent. Even during the previous decade, whose thoroughly bubble-ized economy is no one’s ideal, annual increases regularly and considerably exceeded these rates.

The new productivity figures revealed a manufacturing performance that was mixed at very best. On the one hand, the sector remained the nation’s productivity leader by a wide margin. It’s 2.50 percent annual productivity gain was more than three times greater than the overall economy’s. Yet its fourth quarter sequential performance lagged, as output per hours worked rose by only 1.30 percent.

Manufacturing’s annual productivity improvement was its best since the whopping 6.20 percent gain in 2010 – which reflected the sector’s rapid bounce-back from a frightening recession. But as with the non-farm economy generally, manufacturing’s performance during the current recovery (which began in the middle of 2009), has trailed that of even the bubble decade. That’s sure not how I spell “renaissance.”

The most surprising news in this productivity report was on the paycheck front, and it was a pleasant surprise. Unfortunately, it wasn’t a very big pleasant surprise. Adjusted for inflation, hourly compensation in manufacturing (which includes not only wages but salaries and benefits) rose faster in 2014 than compensation in the non-farm business economy overall for the first time since 2009. In fact, the increase in real hourly manufacturing compensation was the first positive reading since that year. If only it wasn’t a measly 0.80 percent (versus 0.70 percent in the non-farm sector).

Moreover, if the 2014 statistics are the start of a new trend, the nation will have exchanged one type of serious productivity problem for another. In recent decades, this measure of efficiency has risen much faster than compensation – meaning that, contrary to economic theory, workers were not benefiting adequately from better business management techniques and advances in technology. Last year, productivity growth slowed but pay picked up. One major sign of a genuinely healing economy is when both are rising at historically respectable rates once again.