Tuesday, December 26, 2017

Christmas 2017

I thought I might give us all a break this week. No macro today! 

Mostly, I want to say thank you for tolerating me for another year. I started this blog in 2010 right after I retired from Indiana University. I think I have now posted 441 times. What fun!

I started this blog for two reasons. First, I wanted to keep up with what was going on with global macro. Second, I wanted a way to keep up with friends. It worked. I think about macro a lot and the issues show no signs of easing. And it turns out that since I see some of you in the flesh now and then, I often get the chance to talk shop with you at parties and other venues.  

But even better than all that is that I continue to hear from so many of you. The blog distribution list started very small and was built one person at a time over these years. Some of you are friends from long ago in public school in Miami. Others went to Georgia Tech, Arizona, or UNC with me. The remainder includes family, friends, and neighbors. And I love that I continue to harass my former colleagues and students from Foster, Kelley, SKKU, and those I had the pleasure of teaching in places such as Helsinki, Hanover, Budapest, Hanoi, Budapest, Big Arts, and more.

You cannot imagine how much pleasure I get when I hear from you. Some of you post a comment on the blog site but most of you send me emails. Sometimes you like a post. Sometimes you don’t. Sometimes you don’t even read the post but you reply just to say hello or to tell me how you are doing. What an incredible blessing!

Finally, let me say that while I love the macro and the chance to write and argue about contemporaneous issues, I personally find too much angst among my friends. I see people who are very bothered if not highly stressed about the future of our country and the world. All I can say is that now is not the first time nor will it be the last time we think the world is going to Hell. I remember all too well walking around Miami in the early 1960s wondering when the missiles from Cuba were going to rain on me and my friends and family. You should have seen all the people trying to build nuclear bomb shelters in the coral rock of Miami!

I say this because too much worry diverts us from the truly important and possible things we can do with our lives. Having a political opinion is fine and important. But taking care of our loved ones and helping our friends and neighbors navigate life hold more chances for personal growth and true satisfaction.  

I hope you have a wonderful Christmas and New Year and that we find productive and fun ways to work together and muddle through the best we can. Stay in touch!

Tuesday, December 19, 2017

Hyperinflation in Higher Education

This week I decided to follow up on a graph I saw in the Wall Street Journal that compared college tuition and out-of-pocket costs to the costs of medical care and overall living costs. See the graph at the bottom. All I can say is, Wow. The red line in the chart goes from the year 2000 to 2016. It shows that costs of higher education increased by just short of 150%. Imagine if your waistline increased by 150%. 

We all complain about the rising costs of medical care. It is the yellow line in the chart, and it rose by about 75% over those same years. Apparently a nice course in the liberal arts is worth a lot more than a course in biology. Okay that's a distortion, but what the graph says is that the costs of college education went up twice as fast as medical care costs from 2000 to 2016. And then there is all that other stuff you buy -- all those silly aged steaks, lovely cars, and ovens. The overall Consumer Price Index increased by under 50%. 

It is pretty clear from the pretty graph that higher ed spending is the winner. As a former professor, I resent that. Where was all that money when I was sweating it out in my office without electricity and running water? 

Mean conservatives have looked at all this and have come to some conclusions. They see a connection between the ease of getting loans for college, tax benefits, and the expansion of grants and scholarships. Some of these big meanies are proposing a crazy thing. Maybe if the government quit favoring higher ed so much, the price might not go up another 150% in the next years. Crazy idea, eh?

But Junior has to go to school, right? School? Are you kidding? Don't scream at me but I remember what it was like to go to school. Jim and I roomed together for three years in what might now be considered a Georgia prison. Back in those olden days there was no student union, there was not even an espresso maker or a StairMaster in our dorm's break room. Basically there was nothing in the break room except for a couch. No TV. No beer. No JD. No computer games. The entire floor of our dorm shared one pay telephone and one bathroom. We had to pass 18 hours per quarter to graduate in four years and therefore the lack of almost all amenities was necessary since we actually had to study. Study, really?

Today, universities are not spending the money on the faculty -- or at least not on most of them. In fact, the new wave in higher ed is to minimize the use of regular tenure-track faculty. But they do seem to have plenty of money for planting and replanting all the flower beds each season and for building walls, monuments, and other things of architectural beauty. We have more trees on the IU campus than Redwood Park. We build new academic and other campus buildings faster than the NFL can build domed stadiums. Clearly we want the alumni to be comfy when they go to sporting events and we want helicopter parents to enjoy their spring strolls around campus when they come to harass their lovely children's professors. We build luxurious dorms faster than Starbuck's builds coffee shops. Why would a student want to graduate if she could stay in these palaces located within meters of favorite student watering holes?

The kids do not get jobs and the ones who run out of courses to take leave campus and move in with their parents. Meanwhile, the nation has a shortage of plumbers and programmers. Luckily many of these unemployed students are excellent at creativity activities and learning how to discover themselves as they go on their graduation trips to Luxembourg. 

Sorry folks, but this old codger does not like this brand of change. I'd rather see our country surging ahead as a model of innovation and technological progress. I'd like to see adults worrying less about the creature comforts of their kids and helping them better understand the values of things like history, economics, accounting, hard work, patience, and so on. Removing some of the government support might lead to more demanding consumers who require that universities get back to doing what they should be doing. In the meantime, if college is too expensive, young people might try going to a local community college where they might learn something and also gain a marketable skill. They can go to Luxembourg later on their own own dimes. 

Tuesday, December 12, 2017

US Deficits in Goods Trade

Trade and protectionism are hot topics. At the root of the discussion is what has happened to the US as a trading partner. There is much to this debate and I won’t handle it all here today. Instead I focus on something that I think is central to the issue – the performance of US trade in goods.

International trade goes well beyond trade in goods. But as it turns out, a key part of what we consider to be problematic for the US is trade in goods. We trade services (like entertainment, transportation, shipping, and tourism) and we engage in a lot of international exchange with respect to financial and real assets (bonds, stocks, bank accounts) but we generally run surpluses in those trades. If we have a large and persistent trade deficit, it is mainly with respect to goods.

So I am back to playing with the data again this week. With trade figures there are choices to make. Much of what we refer to as trade is measured and captured in our balance of payments (BOP) account. There we find the Current Account and the Financial & Capital Accounts that contain information about exports, imports, and so on. These figures are always presented in nominal terms and thus measure changes in both quantity and price. Export and imports of goods and services are also published in our National Income Accounts (NIA) and those measures of trade are very compatible with the way Gross Domestic Product (GDP) is measured. The NIA accounts are presented in both real and nominal terms.

Yikes – too much information. Anyway, I decided to use the NIA measures since they are compatible with the way GDP is measured. I am using the nominal versions because they are somewhat more compatible with the BOP figures. I did a quick comparison of the real and nominal NIA measures and it didn’t change my overall conclusions. Whew. Where’s that JD?

The table at the bottom shows nominal NIA measures of US exports and imports of goods starting in 1964, the year I began studying Industrial Management at Georgia Tech and was introduced to chili dogs at the V in Atlanta. I present data for five years that are separated by 13 year-intervals because 13 is my favorite number (1964, 1977, 1990, 2003, and 2016). These 5 years bracket 1990 which is a demarcation point for the rise of globalization. This allows me to compare 26 pre-globalization years to 26 post-globalization years. Is this fun or what?

The top of the table presents US imports and exports in billions of dollars. Nominal GDP, also in the table, went from about $6 trillion in 1990 to almost $19 trillion in 2016. Some of that increase is because of price increases – with the rest from quantities. But GDP is not the point today – though it gives you a benchmark as to how much the size of the overall economy changed over those 52 years. Goods exports went from $403 billion in 1990 to almost $1.5 trillion in 2016. Imports increased too – from $508 billion to about $2.2 trillion. The net imports (imports minus exports) was $105 billion in 1990 and increased to $778 billion in 2016.

If I stopped right now many of you would have an aha moment. What you would see is the following post-globalization experience: US imports of goods outran our exports of goods and the trade deficit in goods increased dramatically. There are no smoke or mirrors here. This is the kind of information that supports the popular idea that globalization has not been good for the US and that there might be unfairness working against us – be it so-called free trade agreements or cheating or whatever.

But let’s not stop there. In the second part of the chart we display trade in goods as a percent of GDP. In 1964 goods exports were 3.9% of GDP. By 2016 goods exports accounted for twice the share of the economy at 7.8%. But notice that the pre-globalization gain of 2.8 percentage points (from 3.9% to 6.7% of GDP) compared to the 1.1 percentage point gain in the post-globalization years. That is, exports gained as a share of the economy much more before- compared to after-globalization. What about imports? Imports of goods increased 2.7 points before globalization and then 3.4 points post-globalization.

It is true that imports of goods picked up its pace after globalization while exports did the opposite. But notice also that much of those changes came in the 13 years after 1990. During the time from 1990 to 2003, exports fell as a share of GDP while imports rose dramatically. But then in the most recent 13 years we see that reversing as the share of exports increased at more that twice the pace of goods imports.

What can we say?

First, goods trade – both exports and imports were rising as a share of the economy for 52 years – both before and after globalization began accelerating in 1990.

Second, when we compare the data before 1990 with what happened afterward you can see much bigger increases in imports of goods relative to exports.

Third, if we look closer at the data since 1990 we see that most of the advantage of imported goods peaked by 2003 and has reversed since.

What does all this mean? For one thing it means that this is a pretty rich stew with a lot of vegetables. If we combine these numbers with the numbers from last week’s blog post we wonder if some of these trade results have something to do with the fact that so many countries have been narrowing the economic gaps between them and the US.

The 1990s were a time when many countries decided to open-up and use trade as a development tool. These countries wanted to rebuild and become more competitive and many were very successful as we saw in this blog last week. As incomes across the world grew, so did their appetites for goods and the growth of US exports of goods verifies this. But as their incomes grew they also became stronger competitors to the US and our goods imports rose as well.

Since so many countries were starting from very low incomes and poor productivity it made sense for the US to make special compensations or to ignore remaining protections in these countries. US citizens gained many of the benefits as more goods were available to them at lower prices. Lower prices gave US residents more dollars to spend and these people redirected some of these surpluses to US companies and created millions of jobs. The GDP data below show remarkable growth in our economy as some jobs declined while other expanded. 

There are some who think that the US can use its own arsenal of protectionist policies to preserve and restore jobs in the US. But that thinking is short-sighted. Despite catching up many countries still retain much lower incomes and a distinct price advantage that goes with it. Protecting US citizens from low prices on low-skilled goods makes no sense. It’s like sticking a finger in the dyke. What makes more sense is to recognize that the world has changed and that developing countries need to protect their own industries and workers less. Let’s not raise the worldwide level of protection – let’s lower it. 

But what about all those US workers in firms and industries that cannot compete? The answer is pretty simple in principle. Protecting these workers is only a temporary measure so long as the American worker makes $50k per year and foreign competitors make half or less. What makes sense is to encourage other countries to keep catching up with our incomes – and to find ways to better train and retrain our workers to fit better into US advantages in education, science, technology, entertainment, communications, and so on. The data below suggest that the export/import issue started turning in 2003. Perhaps we can keep that alive in the next 13 years following 2016.

Billions of Dollars
Nominal GDP
    Exports of Goods
    Imports of Goods
    Net Imports
As  Percent of GDP
    Exports of Goods
    Imports of  Goods
    Net Imports
Source BEA.gov

Tuesday, December 5, 2017

Catching Up to the USA 1990 to 2017

Happy December!

I had so much fun last week with data I decided to do even more this week. This time I have some tables to discuss and they need a little explaining. But first, a little background. The idea today is to shed some light on how much the world has changed in the last 28 years. My data starts in 1990 and looks at changes through 2017. The data come from the International Monetary Fund; it's their measure of real GDP per capita. RGDP per capita is one way to measure changes in the economic welfare of the average person.

This sort of cross-country comparison is not easy. I chose per capita real GDP because it seems closest to the buying power of people in these countries. Country comparisons usually require conversions of non-US currencies to the dollar so all the GDP figures below have been translated to dollars. It is traditional for longer-run comparisons to use an exchange rate called the purchasing power parity value of the exchange rate to the dollar. The IMF used the 2011 PPP value of the dollar for these comparisons. Yes, using PPP is highly debatable but I am sticking with it!

Much has happened in the world since 1990. The Soviet Union imploded, and the Berlin Wall came down. Globalization re-started. Many free trade agreements were consummated. The year 1990 was a time when the USA had a considerable lead on most countries in terms of economic size and competitiveness. Home Alone was the most popular film in 1990, and Windows 3 was released by Microsoft.

Table 1 lists 36 countries I selected to compare with the US. In 1990, real GDP per capita in the USA was nearly $37k. Right behind the USA in 1990 were Germany, Italy, Canada, France, and Japan. Saudi Arabia was ahead of all these countries with a value of $46k. Among those at the bottom in 1990 were two countries freed from the Soviet Union (Lithuania and Latvia) and three Asian countries (China, India, and Vietnam).

Table 2 measures the growth of real GDP per capita of these same countries between 1990 and 2017.  During that time period US per capital GDP increased to almost $54k and grew about 2.5 times. Twenty-two of these countries grew faster than the USA. But three stick out in the list for growing more than the rest, with China growing 10 times between 1990 and 2017. You might say that since the per capita real GDPs of those countries were small in 1990, they had the chance to grow faster and that would be true. But notice that not all of those countries with lower incomes in 1990 grew so fast. Obviously the speed demons had something special going on that helped assist the growth. Latvia and Estonia took advantage of the dissolution of the Soviet Union. Several Asian countries -- especially China, Vietnam, and India -- showed remarkable ability to change and grow.

Table 3 focuses on how fast this group of 24 is closing in on the per capita RGDP of the US. I did a double-take and then some research just to check the top line of Table 3 that shows Ireland's per capita real GDP was $66K in 2017. Ireland's value went from 60% of the US in 1990 to 120% in 2017. Now that is catching up! Where's the Irish whiskey? I am ready to drink to that. No offense intended to JD.

The order of countries in Table 3 is in terms of how much each country caught up to the US. Taiwan is second in the table because it went from 40% to 80% of US per capita RGDP. Countries that closed the gap on the US the most were Ireland, Taiwan, S. Korea, Lithuania, China, Latvia, Poland, Turkey, Vietnam, India and Israel.

Mexico is one of the countries that did not close the gap with the US. Mexico's per capita RGDP was about 30% of the US in 1990 and it remained at 30% in 2017. Canada's values were larger than Mexico's but Canada did not gain on the US either, remaining at about 80% of the US in 2017.

Some countries slid downward. For example, the bottom of the chart is taken by Saudi Arabia whose per capita RGDP was 120% of US in 1990 and fell to 90% in 2017. Other sliders were Italy, Venezuela, Greece, Japan Russia, France, S Africa, Brazil, Haiti, and Germany. Recall, the US grew by 2.5 times in those 28 years. These last countries grew slower than that.

There are many factors that contribute to a country's growth in real purchasing power. Today's blog post does not explain why some countries grew faster than others. But it does show quite a disparity in performance over a 28-year time period. We are not all the same in relative terms as we were when we watched Home Alone in 1990. These differences will reflect the bargaining positions and powers as trade and other relationships are fashioned in the years ahead. Understanding changes in economic power might be useful as we negotiate in the future.

Real GDP Per Capita (Purchasing Power Parity)
Source: IMF: World Economic Outlook Database October 2017

Table 1
Country 1990 2017
Argentina 11,225 18,844
Brazil 10,562 14,127
Canada 31,411 43,875
China 1,515 15,151
Colombia 7,523 13,174
Egypt 6,848 11,842
Estonia (1995) 11,003 28,684
Ethiopia 644 1,926
France 30,421 39,691
Germany 32,067 45,757
Greece 21,442 25,314
Grenada 7,210 13,470
Haiti 2,027 1,650
Hungary 17,015 26,348
India 1,802 6,538
Iran 11,571 18,255
Ireland 21,208 66,196
Israel 20,065 33,037
Italy 30,969 34,606
Japan 30,362 38,878
Korea 11,633 35,897
Latvia (1995) 8,298 24,873
Lithuania (1995) 9,307 29,105
Mexico 12,411 17,753
Poland 10,163 26,658
Puerto Rico 22,286 34,537
Russia 20,801 25,427
Saudi Arabia 45,643 50,365
South Africa 9,899 12,215
Spain 23,662 34,788
Taiwan 15,546 45,412
Turkey 10,834 24,109
UK 27,077 39,755
US 36,999 54,223
Venezuela 14,786 11,290
Vietnam 1,473 6,267

Table 2
Country 1990 2017 Change
China        1,515      15,151 10.0
Vietnam        1,473        6,267 4.3
India        1,802        6,538 3.6
Lithuania (1995)        9,307      29,105 3.1
Ireland      21,208      66,196 3.1
Korea      11,633      35,897 3.1
Latvia (1995)        8,298      24,873 3.0
Ethiopia           644        1,926 3.0
Taiwan      15,546      45,412 2.9
Poland      10,163      26,658 2.6
Estonia (1995)      11,003      28,684 2.6
Turkey      10,834      24,109 2.2
Grenada        7,210      13,470 1.9
Colombia        7,523      13,174 1.8
Egypt        6,848      11,842 1.7
Argentina      11,225      18,844 1.7
Israel      20,065      33,037 1.6
Iran      11,571      18,255 1.6
Puerto Rico      22,286      34,537 1.5
Hungary      17,015      26,348 1.5
Spain      23,662      34,788 1.5
UK      27,077      39,755 1.5
US     36,999      54,223 1.5
Mexico      12,411      17,753 1.4
Germany      32,067      45,757 1.4
Canada      31,411      43,875 1.4
Brazil      10,562      14,127 1.3
France      30,421      39,691 1.3
Japan      30,362      38,878 1.3
South Africa        9,899      12,215 1.2
Russia      20,801      25,427 1.2
Greece      21,442      25,314 1.2
Italy      30,969      34,606 1.1
Saudi Arabia      45,643      50,365 1.1
Haiti        2,027        1,650 0.8
Venezuela      14,786      11,290 0.8

Table 3
Country 1990 2017 Rel to US Rel to US Chg Rel
Ireland      21,208      66,196 0.6 1.2 0.65
Taiwan      15,546      45,412 0.4 0.8 0.42
Korea      11,633      35,897 0.3 0.7 0.35
Lithuania (1995)        9,307      29,105 0.3 0.5 0.29
China        1,515      15,151 0.0 0.3 0.24
Latvia (1995)        8,298      24,873 0.2 0.5 0.23
Estonia (1995)      11,003      28,684 0.3 0.5 0.23
Poland      10,163      26,658 0.3 0.5 0.22
Turkey      10,834      24,109 0.3 0.4 0.15
Vietnam        1,473        6,267 0.0 0.1 0.08
India        1,802        6,538 0.0 0.1 0.07
Israel      20,065      33,037 0.5 0.6 0.07
Grenada        7,210      13,470 0.2 0.2 0.05
Argentina      11,225      18,844 0.3 0.3 0.04
Colombia        7,523      13,174 0.2 0.2 0.04
Puerto Rico      22,286      34,537 0.6 0.6 0.03
Egypt        6,848      11,842 0.2 0.2 0.03
Hungary      17,015      26,348 0.5 0.5 0.03
Iran      11,571      18,255 0.3 0.3 0.02
Ethiopia           644        1,926 0.0 0.0 0.02
Spain      23,662      34,788 0.6 0.6 0.00
UK      27,077      39,755 0.7 0.7 0.00
US     36,999      54,223 1.0 1.0 0.00
Mexico      12,411      17,753 0.3 0.3 -0.01
Germany      32,067      45,757 0.9 0.8 -0.02
Haiti        2,027        1,650 0.1 0.0 -0.02
Brazil      10,562      14,127 0.3 0.3 -0.02
Canada      31,411      43,875 0.8 0.8 -0.04
South Africa        9,899      12,215 0.3 0.2 -0.04
France      30,421      39,691 0.8 0.7 -0.09
Russia      20,801      25,427 0.6 0.5 -0.09
Japan      30,362      38,878 0.8 0.7 -0.10
Greece      21,442      25,314 0.6 0.5 -0.11
Venezuela      14,786      11,290 0.4 0.2 -0.19
Italy      30,969      34,606 0.8 0.6 -0.20
Saudi Arabia      45,643      50,365 1.2 0.9 -0.30