Monday, April 30, 2018

Global Goods Competition

As the US refocuses on the impacts of international trade through the lenses of many trade agreements, it doesn’t hurt to consider from where our competitors are coming. The US wants to reduce, for example, its trade deficit with China. To do that, either China will have to buy more of our goods or we will have to buy less of theirs.

Today I want to focus on US exports of goods to China and the rest of the world. I am ignoring services exports because we have a surplus in our trade with services. Our trade problem seems to reside in goods. The IMF keeps some good statistics on goods trade, and their best database has some nice detail for the years 2013 to 2017. That’s five years – a long enough time for my buddy Nolan to reach his current age of 5 and long enough to draw some conclusions. My main conclusion is that if the US wants to raise its exports, it is not going to be easy.

The table below contains some relevant data on exports of goods. We see that in 2013, the world exported goods whose value in dollars was a bit more than $18 trillion. Since that time, goods exports did not increase; rather, they fell to a level of $17.7 trillion in 2017. The appetite for goods exports has clearly not grown. It fell by almost half a trillion dollars. Let’s agree that with a shrinking pie and a lot of eager-beaver countries, it won’t be easy to expand US exports of goods.

Comparing the next two lines, we see that as of 2017, advanced nations were selling only a bit more than the sum of all emerging nations. It was about a 60/40 split in 2017, and that split reflects the very strong desire of emerging markets to grow through exports of goods. Advanced nations will not give in easily so the future portends a time wherein both advanced and emerging nations will want to compete with the US to supply the world’s demand for goods.

The countries I chose to compare were based on foods that I love. I also chose ones that are major exporting countries and some with which the US might have a special trade relationship. Notice that with the exceptions of China, Mexico, and South Korea, all these countries shared the experiences of declining goods exports from 2013 to 2017. I am guessing that all those countries will try to do the same thing we are trying to do in the US – find a way to export more.

China’s exports increased between 2013 and 2017. China represented about 12% of the world’s exports in 2013. China was the largest country exporter. But notice even China can’t be too happy with its $67 billion increase in exports between 2013 and 2017. That represented a 3% increase in four years or less than 1% growth per year. Mexico’s was larger at 8% over four years or 2% per year. South Korea's increase was less than 4% per year. Those performances are nothing to brag about at the bar at Tacos Guaymas Mexican Restaurant. So even China, Mexico, and South Korea will not relent in their goals to produce and sell goods to the world.

In 2013, the US was the world’s second largest goods exporter and we claimed 9% of the worlds exports of goods. That’s not bad. But as I have said before, our problem with goods trade is not production or exporting. Our problem is our voracious appetite for buying goods.

Data source: http://data.imf.org/?sk=388DFA60-1D26-4ADE-B505-A05A558D9A42

Goods Exports of Selected Areas
2013 to 2017, in billions of dollars
Source: imf.org: 
2013 2017      % of             World      Change
     2013 2013 to 2017
 World 18,193 17,702 100 -491
Advanced Nations 10,685 10,171 59 -514
Emerging Markets 7,509 7,136 41 -373
China 2,210 2,277 12 67
United States 1,579 1,547 9 -32
Germany 1,451 1,441 8 -10
Japan 714 687 4 -27
S. Korea 560 574 3 14
Russia 522 353 3 -169
Canada 465 424 3 -41
Mexico 380 410 2 30
India 314 299 2 -15

Tuesday, April 24, 2018

Macro is Asleep

Let’s suppose someone thought you were awake, and you were really sound asleep. They would talk to you and maybe they would ask you to do things and you would not move or speak. That would be surprising to your friend and maybe even upsetting. That’s why I am writing about macro being asleep. It is causing a lot of problems.

What is macro, and how could it be sleeping? I found this definition on Investopedia (https://www.investopedia.com/terms/m/macroeconomics.asp):

Macroeconomics is a branch of the economics field that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product, and changes in unemployment.

This definition reveals that macro is about the economy as a whole. It looks at GDP, for example. GDP is the sum of all goods and services produced. Macro does not emphasize toaster ovens or massages or the value of an airfare to Munich. It focuses on one number that represents EVERYTHING that is produced. It also doesn’t zero in on prices of jeans or a haircut – it emphasizes the average price of everything. Some people like to call it “the big picture.” As if we were looking down on the US economy from space and we couldn’t see all the detail.

In macro, we ask if national output is going to rise or fall. Will the inflation rate be 3% or 5%? With that in mind, economics or even what we might call national economics is much broader than macro. We might be interested in the parts of a national economy. How is the coal sector doing? What’s going on in Minnesota? How productive is the retail sector? What’s with Amazon.com?

So when I suggest that macro might be sleeping, I do not necessarily mean that we don’t have economic questions and challenges in the USA. Some of these issues can be national in scope but they are not MACRO.

You might react to above by saying who cares? If it is economic and if it affects the US, then why split a hair? Because it matters for both understanding and for policy. If you have a heart problem, you don’t go to a general practitioner. You go to a cardiologist. They are both doctors and both can treat you, but a GP and a cardiologist examine you differently and have very different options for your treatment.
As I see it today, we are confused about the US economy. We put on our macro hats to view our problems and policies but we don’t really have macro problems now. Macro is asleep.

What’s a macro problem? A recession with very high unemployment is a macro problem. Deflation is a macro problem. Hyperinflation or even high inflation can be a problem. A labor shortage could be a macro problem. And while we worry today that any of those problems could happen in the future, we mostly lumber along today with employment and output growing and inflation under control. 

Notice too that our typical macro policies are on hold. We had a massive government fiscal stimulus after the recession hit in 2008. We pumped money into the economy like a squadron of helicopters dousing a forest fire. But that was years ago and now we talk about normalization of these policies. We are not discussing an aggressive set of monetary or fiscal policies to either spur the economy on or to prevent rapidly rising inflation.

So whether it is macro indicators or macro policies, macro seems to be on hold, asleep. But don’t we have national economic problems? The answer is yes. They just aren’t macro and don’t require standard macro policies. But we are not used to thinking that way. It’s the economy, stupid. Get on with the macro! And that’s our problem. Macro policies don’t fit our current problems. We don’t really know what to do.

What are our national economic problems? What a question! We have plenty of them. But since we both have limited time and energy for this, let’s focus on four. The first is distribution of income. Economists have no consensus on what an ideal distribution of income is. But if it walks like a duck and quacks like a duck, then it might be a duck. What I am saying is that the distribution of income is probably out of whack. No macro stimulus policy is going to permanently change that. We need to seriously address this issue while muttering the oath that one should not throw out the baby with the bath water.

The second and related issue is poverty. President Johnson decided to have a war on poverty. Walk through the streets of any city and you will realize that we did not win that war. I know this is a crazy idea, but to win that war we probably need to focus on poverty. We don’t do that now. We have housing programs. We have food programs. We have shelter programs. We have substance abuse programs.  We have job retraining programs. How many separate programs do we have? That’s dumb. We should have one program. The goal of that program is to treat each person until they are no longer poor. Okay – some problems cannot be solved. But I would bet that a program focused on poverty would have a much better record than one with a thousand parts that is not focused on poverty.

A third solution for national economic problems would aim policy at industrial evolution. We are not a socialist country, and I am not recommending that government take over the economy, but I am suggesting that whether it is energy or artificial intelligence or small business, we could use government funds to both study and incentivize growth that would keep America competitive in an increasingly competitive world.

Finally, if I was Czar, I would work on racism in this country. You do not have to be a genius to know that the Golden Rule trumps just about everything else. We teach our children that starting a conversation with a nasty word is not the way to have a productive conversation. Racism festers in this country, and it holds us all back. We have a lot of laws that should lead to more equality but gaps remain in coverage and enforcement. Calling each other names is not going to do much to move the ball forward. Realizing that this is the most difficult of problems ought to engender open communication and respect since slogans do not accomplish the task. Talking with each other could go a long way as we hammer away at each and every vestige of hate. This one is worth the effort because this one impacts the other three I mentioned above. It is impossible to solve those and other problems in an environment of resentment and distrust.

Tuesday, April 17, 2018

Saving: A Little Brush Fire?

While we have been arguing the last few weeks about tariffs, saving, and trade deficits, the Congressional Budget Office was preparing its Budget and Economic Outlook 2018 to 2028 (www.cbo.gov). It might not seem obvious how the CBO’s work relates to our tariff spat, so I decided to spend a perfectly nice Sunday morning tying the two together. The main idea is that our trade deficits have very little to do with cheating and everything to do with national saving. National saving has a lot to do with government deficits. 

Some of you don’t like the convoluted explanation that insufficient domestic saving (over-consumption) draws in foreign saving, raises the value of the dollar, and creates a (larger) trade deficit. It sounds much too theoretical. And you don’t see how Americans who love their lattes and other luxuries could ever behave like folks in other countries who actually try to balance their budgets.

But that’s all recorded in the past few weeks of blogs. If that hammer wasn’t big enough, I now want to bring the CBO’s latest sledgehammer into the project. Some of you are old enough to remember the world as it was in 2007 before the global recession slapped us around. In those good old days, a cup of coffee cost 20 cents and tasted like tea and most of us drank water from a tap in a thing called a glass. In 2007, the US budget deficit was $161 billion and the net national debt was $5 trillion.

Let’s back up. A government deficit is a one-year measure. In 2007, the government spent about $2.7 trillion, collected revenue of about $2.6 trillion, and sold government bonds to the public totaling $161 billion. Yes, when the government spends more than it collects in tax revenue it must borrow the difference. The $161 billion of 2007 was pretty typical of US government borrowing between 1999 and 2007 though it oscillated from year to year and hit a high of around $400 billion during one of those years.

The government borrows mostly from US savers. Borrowing $200 billion or so per year did not put too much stress on US saving. But imagine what happens when the borrowing rises from $161 billion in 2007 to $1.4 trillion in 2009. You are correct. That’s a 10-fold increase. If households and business firms are trying to borrow from savers at the same time, you can imagine how domestic saving might be insufficient or at least less sufficient to cover the borrowing. In such cases foreigners make up the difference. They bring their savings from countries around the world to the USA.

But wasn’t that $1.4 trillion government deficit a one-time thing? We had a huge and scary recession, and our government did what it was supposed to do to generate more spending in the economy – tax less and spend more. That’s true. And all looked pretty good as government deficits began to get smaller. Then along came two events: the Tax Reform of 2017 and the Bipartisan Budget Act of 2018. Between these two waves of the magic wand, we took the budget deficit from $665 billion in 2017 to $1 trillion in 2020 and $1.5 trillion in 2028.

John Maynard Keynes thought the government should use a deficit in short-term situations with the intent of stimulating output. The fiscal dividend of the rising output would be a surge in tax revenues and a decline in government spending. Viola – a temporary deficit then vanishes into thin air. Keynes would be scratching his head about how nearly a decade after the recession started we are still stoking the fires with larger and larger deficits.

What sorts of things are wrong with this situation besides causing Keynes to roll over in his casket? First, the government is gobbling up our saving in the USA and sucking even more in from abroad. This makes it harder for US firms to borrow, to expand, modernize, and otherwise raise productivity. Economists call this “crowding out” of investment spending. Second, these government deficits that reduce available saving raise the value of the dollar and hurt our trade balance.

Third, these government deficits accumulate. If the US borrows $500 billion one year and another $1 trillion the next, then in those two years it has added $1.5 trillion to the national debt. The US net national debt was about $5 trillion in 2007. By 2017 it tripled to just under $15 trillion. The CBO says it will rise to $29 trillion by 2028. What a ride! In 2007 the net debt was 35% of the national economy. By 2017 it rose to 77%, and by 2028 it will be closing in on 100% of the economy.

Keep in mind that these forecasts extrapolate from current law only. It is possible to imagine this government raising spending (or lowering tax rates) even more during the next 10 years. It is also a sure thing that the US will encounter another recession before 2028. Either of those eventualities will cause the deficits to bleed even more and the national debt to be taller than a giant beanstalk. 

Need I say more? Between households, firms, and our lovely government, we are spending our brains out and the impact is to lower national productivity and competitiveness. We have too little business spending on capital and a corresponding trade deficit. Are we sure we don’t want to tend to this brush fire? Whether it is the government or the consumer, can we not find a way to restore more balance between revenue and spending? I guess we can always start over after the fire ravages our nation. 

Tuesday, April 10, 2018

Cheaters, Saving, and Investment

It is easy and perhaps even fun to describe the US balance of trade as born of cheaters and clearly unfair to US workers. The logic seems simple and intuitive. We are a great nation, and yet we import more goods from other countries than we can export to other countries. If trade was perfectly fair, then, of course, Americans could not lose. After all, we are smart, educated, attractive, competitive, and whatever else you want to add. How could we possibly be so uncompetitive? Surely those other guys are cheating. End of story. Where is my celebratory JD?

Not so fast. Economists have another explanation, and it has to do with how much a country saves and invests. Whammo, the intuition vanishes and the reader is pretty sure that economists are from another planet. In defense, I will point out that intuition has an advantage when people decried the Earth flat. From anyone’s vantage point, the world did not look round. This “saving and investment thing” lacks intuition but that doesn’t make it wrong.

One more point. Some friends have told me that maybe saving and investment do matter to the trade balance – but there is no way to get Americans to consume less and save more. While it might seem like an uphill climb, the data in the table below suggest that the USA is an outlier. When compared to other countries and other regions of the world, we are second-class citizens of saving. Maybe if people understood that this imbalance is truly a problem we might begin to do something about it. If the choice was between a devastating trade war and inducing Americans to save more, might one not entertain policies to raise saving?

To review: If a nation spends more (and saves less) than its ability to produce then it will import the difference. Or put another way, the paucity of saving means that firms and government will have to draw in or borrow foreign money to meet its spending needs. This capital inflow raises the value of the dollar, increases imports of goods, and reduces exports of goods. Viola. A lack of saving leads to trade deficits in goods.
What do the numbers in the table show you?

First, I have 15 countries and regions listed in the table (data taken from an International Monetary Fund report). The highest saving rate among those 15 in 2017 was the 40.5% of GDP for emerging Asia. Just below are Japan and Germany with respective saving rates of 27% and 28%. The lowest in the list is the United Kingdom at 13.4%. At 17.5%, the US was in the third place from the bottom. We clearly do not save very much. I knew that Japan saves more than us by a long shot. But so do 12 of the 15 in the table. The average for all developing countries was 31.7%, and for all advanced countries, 22%.

We do better at investment. The almost 20% investment ratio for the US is bigger than our desire to save.  But in looking down the list, our investment ratio is bigger than only Germany, Italy, UK, and Sub-Saharan Africa. The average for developing countries was 32%; for advanced 21.1%. So we are a laggard when it comes to both saving and investment. Does the low saving retard investment?

What really matters for the trade deficit is how short our saving is relative to investment since that gap is the key to capital inflows as explained above. Half of the regions included have negative saving ratios – meaning that saving is less than investment and those countries will have capital inflows and trade deficits. Our saving deficit of 2.3% of GDP puts us in the middle of those countries with the (negative) deficit sign. So it looks like we are in the bottom third of the whole group when it comes to saving insufficiency as a percent of GDP.

If so many of these countries can have adequate savings, then why can’t we in America? Do we really need all that crap we buy? Are there no policies that might improve incentives for saving? 

Table. Saving and Investment as a Share of GDP, 2017
USA and Selected other Countries and Regions


Saving Investment S-I
United Kingdom 13.4 17 -3.6
Sub-Saharan Africa 15.3 18.7 -3.4
USA 17.5 19.8 -2.3
Italy 19.6 16.9 2.7
Canada 19.9 23.3 -3.4
Advanced nations 22 21.1 0.9
France 22.1 23.1 -1
Spain 22.5 20.6 1.9
Emerging Europe 22.5 24.8 -2.3
Middle East, Africa, etc 25.2 26.8 -1.6
CIS 25.6 24.3 1.3
Japan 27 23.4 3.6
Germany 27.6 19.4 8.2
Emerging and developing nations 31.7 32 -0.3
Emerging Asia 40.5 39.6 0.9

Tuesday, April 3, 2018

10,000 Tariffs

In working on my last post about import villains, I stumbled across an incredible realization. Steel and aluminum are just the tip of the iceberg. Most of us mere mortals have not tried to explore the labyrinth of information called the Harmonized Tariff Schedule (HTS) where we list all the tariffs levied against our trading partners. My reaction to perusing that schedule is a lot like the feeling one gets when they first try to understand all the notes on the neck of a guitar. Yikes, I didn’t realize all those notes were in so many places! Luckily, on a six-string guitar in one octave, there are only 72 places for notes.

The HTS contains 22 sections of goods categories broken into 99 chapters covered on 3,710 pages including over 12,000 import tariffs. Are you kidding me? I didn’t even know there were 12,000 goods.

What’s my point? My point is that a trade novice evaluates or judges the change in the tariff on steel imports without any real understanding of the whole tuna. Imagine such a novice who thinks that we don’t have many tariffs and that a 25% tariff is weirdly high or unusual. In that case you might come to one kind of conclusion about steel and aluminum. I am tired of typing steel and aluminum so let’s just say S&A.

But now, after a fascinating morning with my friend Google, I know there are more than 12,000 goods tariffs. One of them is the 127% levied on Chinese paper clips. Paper clips! I found examples of very high tariffs including those on canvas sneakers, leather and foot ware, synthetic yarns, canned tuna, and a large variety of lovely foods from the EU including cured ham, truffles, oats, and mineral water.

Inasmuch, a less na├»ve person would interpret the newly increased S&A tariffs in a different light. A 10% or even a 25% tariff is neither startling or unusual. That does not mean I am supporting or advocating these new tariffs – it simply means we need a more realistic approach to evaluating them. From the reactions in the press, you would have thought that CNBC had purchased Fox Business News. Not so.

These new tariffs are really like a blip in the ocean. Given all the tariffs we already have on imports, I doubt these new tariffs are going to drastically change those 3,710 pages. But it is interesting that among all those 12,000 goods that somehow S&A avoided a tariff and that past attempts to levy them had been so unsuccessful.

Why do we have so many import tariffs? Is the world so unfair to the US that we had to slap on tariffs to be competitive and save US jobs? Or is this more of the same game of government spoils that is applied so routinely by companies within our borders? The government has a lot of elected officials with lovely salaries and benefits. Perhaps we have so many protections because it pays well?

I am asking more questions than I am answering. But this thing with S&A really opens a much bigger set of questions once we view it in a wider context:
Why have we not had tariffs protecting S&A when we protect so many other industries?
What does any of this have to do with US national security?
How many of these 12,000 existing tariffs improve national security?
How many other goods should have tariffs because of national security?
Do we really need any tariffs to protect national security?
How can we preach the values of competition when we seem so far from the ideal?
While the WTO made initial progress in removing barriers to trade, why is the Doha Round dead after so many years of negotiation?
Have we given up on the idea that reduced trade barriers are good for the global economy?
Where is my JD?