Marshall Auerback: Chinese Trade Policy Must Focus on Social Consequences

Republished with permission from New Deal 2.0:

Focusing on currency isn’t going to cut it for America’s workers.

You have to have a sense of irony to watch the latest maneuvers on trade with China. Obama continues to turn his administration into “Clinton Mark III”. (Enter Gene Sperling and Jacob Lew, following the revolving door departures of Peter Orszag and Larry Summers). The president continues to turn to many of the very folks who paved the way for China’s eclipse of the US economy. Granting China normal trade status under the World Trade Organization, as President Clinton did during his presidency, facilitated the expansion of China’s external sector, which coincided with a big step-up in the ratio of fixed capital formation to GDP. The WTO entry is how China managed to increase its growth rate from 2002 to 2007, using an undervalued currency to cannibalize the tradeables sector of its main Asian competitors and increasingly hollowing out US manufacturing in the process. At this stage, however, despite the ongoing requests by Treasury Secretary Geithner that “China needs to do more” on its currency, a simple revaluation of the yuan won’t cut it.

Today, the global economy is characterized by huge trade imbalances. Everyone has focused on exchange rates. That is the wrong focus. China’s net business fixed investment now may be equal to two times the combined fixed investment of Europe, Japan, and the United States. That capacity has to go somewhere. Some of it has to go abroad. Some of it has to substitute imports China now buys elsewhere. This will cause even greater trade imbalances, which will be problematic given the political constraints on using fiscal policy to offset the likely deterioration in America’s external sector (and corresponding increased threats to employment).

We’re now seeing the consequences of our “malign neglect” of China’s economic policies: The Chinese are preparing to dominate the higher tech and capital goods areas — from new Stealth fighters, to high speed railways, to solar, to nuclear. So what happens to the US industrial base when Boeing can’t sell abroad because China has the same line of planes and they are cheaper? Oops! There go our military aircraft exports.

This points to the issue of import substitution, which everyone forgets. Exporting into a country with two billion people is a chimera because China doesn’t really want American exports; they want total self-sufficiency. Building your plants in the land of the two billion armpits is a chimera as well, because the locals will steal your know-how and then undercut you and carve up the domestic market, which they control against you. Look at what is happening to the Spanish wind turbine company, Gamesa, as a recent NYTimes article illustrated:

Gamesa has learned the hard way, as other foreign manufacturers have, that competing for China’s lucrative business means playing by strict house rules that are often stacked in Beijing’s favor.

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

China’s capital expenditure as a percentage of GDP has now reached a historically unprecedented 50% of GDP. Throughout economic history, countries with especially high investment to GDP ratios have embarked on inefficient investments. In the 1820s they built too many canals. In the railroad boom in the UK in the 1840s they built three lines between Leeds and Liverpool but the traffic could barely support one. Throughout the 19th century railroad boom after railroad boom led to busts. We saw a repeat of the same across a broad spectrum of industries during the 20th century, right up to the present day. The oil boom of the 1970s led to gluts of rigs and tankers that were idled for a decade. The bubble decade in Japan produced unneeded private investment that, in the two decades since, has been scrapped and replaced. In emerging Asia in the late 1980s and 1990s excesses of residential investment led to gluts that took a decade to work off. In the past decade the US did in residential construction what emerging Asian countries did a decade earlier.

A neurological basis for group cohesion? But who’s in my group?

In stating a moral basis for limiting immigration and not offshoring jobs, I said this:

It is moral to give preferences to in-groups over outsiders, nuclear family over extended family, family over other community members, members of one's religion, political party, union, or other organization over non-members, tested and loyal members over applicants and probationary members, etc.  Neither our civilization nor even our species can survive without cohesive groups whose members are loyal to and support each other to the partial or total exclusion of others.  The ability to form and maintain groups of composition, function, and commitment appropriate to life's difficulties, perils, and threats is fundamental. 

Researchers at the University of Amsterdam started with the same Darwinian premise and found that oxytocin, which is thought to promote feelings of love and trust, promotes such feelings toward in-groups but not toward out-groups, as reported in the NYT Science section today. The researchers even found the effect in the lifeboat dilemma I discussed in my October 14, 2010 update.

The researchers labeled as ethnocentrism their finding that Dutch college students were more favorably inclined to Dutch names than to German or Muslim names. It would be interesting to know if the discrepancy is also observed across other socio-economic and political divides, e.g., this one discussed in a post by Peter Radford today:

Buried in the Atlantic Monthly article Konczal quotes from, is an even more worrying material. The social divisions opening up in America are viewed with disdain or equanimity by those at the top. The new "global elite" feel energized by their ability to exploit worldwide business, and have reached a point where local problems, such as the high wages of the American middle class relative to the emerging middle class elsewhere, is seen in cynical business school terms. As one interviewee in the article says: tough. Maybe the American middle class needs to face up to reality and accept lower wages. Or, worse, if we create four middle class jobs in China, but lose one in the US, we are still ahead.

Just who is the "we" in this statement?

The elite.

This new elite thinks it is above what it sees as local, and therefore lesser, issues. It is based in places such as New York, London, Moscow, Hong Kong or Mumbai, and sees workers the world over as one big labor pool. Differential wages, and cultural matters are nuisances.

The Atlantic piece is linked in the quotation; Mike Konczal's post at Rortybomb is here.

Update on Wednesday, May 4, 2011 at 08:53AM by Skeptic

The notion that there is a genetic basis for sacrificing one's own life or well-being for close relatives--but not for strangers--was formalized as "kin selection" in the 1960s and has identifiable pre-cursor notions appearing as early as the 1930s in the work of J. B. S. Haldane and others.  Other evolutionary biologists have studied "group selection" wherein the idea is that gene selection in individuals is influenced by the fitness advantage the genes confer on groups without regard to benefit or detriment to individual group members.

Update on Tuesday, May 17, 2011 at 01:11PM by Skeptic

David Brooks discusses a possible genetic tendency to form groups in Nice Guys Finish First.

Purely domestic firms are not sharing in the profit boom.

Justin Fox, editorial director of the Harvard Business Review, has been disaggregating the corporate profit data that seem so encouraging and here is what he found (h/t Michael Powell at NYT):

Pre-tax domestic nonfinancial corporate profits — a mouthful, but also seemingly a fair measure of the underlying health of business in America — are nowhere near record levels as a share of national income. They exceeded 15% of national income once in the late 1940s, and repeatedly topped 12% in the 1950s and 1960s; in the third quarter of this year, they were 7.03% of national income.

This might go some way toward explaining the seeming disconnect between booming corporate profits on the one hand and a very cranky business community on the other. For much of the business community, profits aren't that high by historical standards. These people have every right to be cranky.

Who is doing better? Well, according to the BEA's data, financial industry profits and "rest of world" profits — that is, the money U.S.-based corporations make overseas — are relatively much higher now than they were in the 1950s or 1960s. And the taxes paid by corporations are much lower now than they were then, as a share of national income.

So the reason that corporate profits are near their all-time highs would appear to be that financial corporations (mainly big financial corporations) and multinationals are making lots of money and paying less of it out in taxes. Hmmmm.

The corporate profit picture would seem to mirror what's been going on in the income distribution for individuals for the past few decades. The money is increasingly going to a select group at the very top of the economic food chain, who are able to reap the rewards of global growth, play the financial system astutely, and avoid taxes. You can spin this in a moderately positive way: these are very dynamic economic times, and the rewards are going to those companies and individuals who position themselves to take advantage of this dynamism. But there are an awful lot of negative ways you can spin it, too.

Related post: Only the little people pay taxes.

Update on Wednesday, January 19, 2011 at 08:20AM by Skeptic

Being purely domestic is a great disadvantage.  Being small and domestic is even worse:

While nationalistic rules that favor Chinese companies affect technology and entertainment giants, China’s cheap currency undercuts tens of thousands of small-scale American manufacturers — companies that still make their products at home.

“The small mom-and-pop companies, which are getting crushed by the renminbi, you never hear from them,” said Nicholas R. Lardy, an expert on the Chinese economy at the Peterson Institute for International Economics. “They don’t really have a voice. They just shrink and go out of business.”

From today's NYT lead story reporting that US-based MNCs are starting to support a get-tough-with-China policy on trade.

“Only the little people pay taxes.”

Testimony that Leona Helmsley, the Queen of Mean, said this helped convict her of tax evasion in 1989. Similarly, it's mostly true that only US companies that operate exclusively in America bear the full burden of US corporate taxes. The nominal federal "rate structure produces a flat 34% tax rate on [taxable] incomes from $335,000 to $10,000,000, gradually increasing to a flat rate of 35% on [taxable] incomes above $18,333,333." Link. Add State corporate income taxes, and the total nominal income tax burden on corporations operating only in the US is about 39%. Many purely domestic corporations are able to pay effective rates that are somewhat lower by taking advantage of investment tax credits, accelerated depreciation, and other "tax expenditures," but many firms are in kinds of businesses that don't generate such benefits and they end up paying the full nominal rates.

However, the main beneficiaries of our dysfunctional US tax code are multinational companies that can reduce their US tax liabilities to zero, near zero, or sometimes below zero (generating refunds). Thus, while "two thousand U.S. companies paid a median effective cash rate of 28.3 percent in federal, state and foreign income taxes in a 2005 study by academics at the University of Michigan and the University of North Carolina," according to Bloomberg, Google paid only 22.2% total and only 2.4% to the IRS. By using such common devices as the "double Irish" and the "Dutch sandwich," multinationals can arbitrarily allocate their income to low-tax or zero-tax jurisdictions like the Cayman Islands and their expenses to high-tax nations like the US and Western Europe. This isn't just Google; it's standard procedure, again according to Bloomberg.

So here's my question: Isn't it stupid and self-destructive to have a tax code that puts purely domestic American enterprises at a competitive disadvantage with foreign and multinational corporations? Why don't we stop doing this?

Update on Friday, January 28, 2011 at 03:09PM by Skeptic

In reporting on how difficult it can be to change the Internal Revenue Code, NYT presents a chart of the effective tax rates paid by selected industries. While this analysis of 7,000 public companies by NYU Professor Aswath Damodaran does not distinguish between purely domestic companies and multinational companies, the industries with the highest effective rates are inherently domestic in their revenue sources--electric utilities (33.8%), retail automotive (32.7%), and trucking (30.9%). Lightly taxed industries include banking (17.5%), petroleum producing (11.3%), and drug companies (5.6%).

Update on Thursday, February 3, 2011 at 02:30PM by Skeptic

David Leonhardt in NYT, based on interviews and a paper by Dyreng, Hanlon and Maydew, reports that, averaging over 10 years, cash tax payments by Carnival were only 1.1% of pretax income.  Boeing paid 4.5%, and GE paid 14.3%. Of the S&P 500, for which the average was 32.8%, 115 paid less than 20%. The Dyreng et al. paper divided its study sample into 30 industries but did not examine the degree of multinational-ness.  However, several industries that appear inherently domestic have the highest effective tax rates.  See Table 4.

Update on Tuesday, March 29, 2011 at 09:10AM by Skeptic

GE paid no US federal income taxes on its $14.2 billion of worldwide profits or $5.1 billion of declared US profits in 2010.  Instead, it got $3.2 billion back from the IRS.  This was reported in this NYT article, which goes on to say:

G.E. reported that its tax burden was 7.4 percent of its American profits, about a third of the average reported by other American multinationals. Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the United States. With those profits still offshore, G.E. is effectively getting money back.

Congress declared for 2005 a repatriation tax holiday during which MNCs could repatriate foreign profits they had accumulated offshore and pay a tax rate of only 5.25%. Not surprisingly, there's current talk of creating another holiday for unrepatriated profits that have accumulated since 2005.

GE's tax department employs 975 people and is a major profit center in the company.

Update on Wednesday, January 16, 2013 at 04:42PM by Skeptic

Created by: www.MastersDegreeOnline.org

Most Read Realitybase Posts in December

Recent posts:

US job creation has been declining since April 2000 and is now in freefall. (features a dramatic graph)

This made me laugh (Sarah Palin)

Larry Summers says US wages can rise only for those in "inherently local" activities. (meaning we're officially doomed)

Oldies but goodies:

The American Dream died in February 1973 (includes graphs from multiple sources all showing stagnation of inflation-adjusted middle class incomes since the 1970s after steady and substantial post-WWII growth)

The Citigroup Plutonomy Memos (key quotations from documents that are being disappeared)

One chart refutes three myths about US foreign trade. (about Smoot-Hawley, the post-WWII export "boom," and "self-balancing" trade)

Comparative Advantage—The Unicorn of Free Trade (a collection of sources and analyses demonstrating that classic Ricardian theory rarely if ever aligns with real-world conditions)

Did the decline of the American middle class “just happen” or is it political?

Alan Blinder pretty accurately describes the dystopian changes for the American middle class in the last third of a century in Our Dickensian Economy. Wall Street Journal online, December 17, 2010 (pay wall). I didn't find anything to disagree with except this statement in the middle:

Starting in the late 1970s, the labor market turned ferociously against those with less education and in favor of those with more. This was not Ronald Reagan's fault, nor George Bush's (either one), nor Mitch McConnell's. It just happened.

Emphasis added. It "just happened?" Not according to Jacob Hacker and Paul Pierson in their new book Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class, reviewed in Foreign Affairs by Robert Lieberman. From the review:

It is generally presumed that economic forces alone are responsible for this astonishing concentration of wealth. Technological changes, particularly the information revolution, have transformed the economy, making workers more productive and placing a premium on intellectual, rather than manual, labor. Simultaneously, the rise of global markets -- itself accelerated by information technology -- has hollowed out the once dominant U.S. manufacturing sector and reoriented the U.S. economy toward the service sector. The service economy also rewards the educated, with high-paying professional jobs in finance, health care, and information technology. At the low end, however, jobs in the service economy are concentrated in retail sales and entertainment, where salaries are low, unions are weak, and workers are expendable.

Champions of globalization portray these developments as the natural consequences of market forces, which they believe are not only benevolent (because they increase aggregate wealth through trade and make all kinds of goods cheaper to consume) but also unstoppable. Skeptics of globalization, on the other hand, emphasize the distributional consequences of these trends, which tend to confer tremendous benefits on a highly educated and highly skilled elite while leaving other workers behind. But neither side in this debate has bothered to question Washington's primary role in creating the growing inequality in the United States.

IT'S THE GOVERNMENT, STUPID

Hacker and Pierson refreshingly break free from the conceit that skyrocketing inequality is a natural consequence of market forces and argue instead that it is the result of public policies that have concentrated and amplified the effects of the economic transformation and directed its gains exclusively toward the wealthy. Since the late 1970s, a number of important policy changes have tilted the economic playing field toward the rich. Congress has cut tax rates on high incomes repeatedly and has relaxed the tax treatment of capital gains and other investment income, resulting in windfall profits for the wealthiest Americans.

Labor policies have made it harder for unions to organize workers and provide a countervailing force to the growing power of business; corporate governance policies have enabled corporations to lavish extravagant pay on their top executives regardless of their companies' performance; and the deregulation of financial markets has allowed banks and other financial institutions to create ever more Byzantine financial instruments that further enrich wealthy managers and investors while exposing homeowners and pensioners to ruinous risks.

. . . .

The dramatic growth of inequality, then, is the result not of the "natural" workings of the market but of four decades' worth of deliberate political choices. Hacker and Pierson amass a great deal of evidence for this proposition, which leads them to the crux of their argument: that not just the U.S. economy but also the entire U.S. political system has devolved into a winner-take-all sport. They portray American politics not as a democratic game of majority rule but rather as a field of "organized combat" -- a struggle to the death among competing organized groups seeking to influence the policymaking process. Moreover, they suggest, business and the wealthy have all but vanquished the middle class and have thus been able to dominate policymaking for the better part of 40 years with little opposition.

Hacker and Pierson are by no means alone in saying that political influence is critical to economic success. For example, Kevin Phillips argues persuasively that this is not a recent phenomenon but that over several centuries here and abroad the growth of new industries and new fortunes has depended more often than not on government largess and protection than on laissez-faire policies, individual initiative, investment and risk taking. Wealth and Democracy: A Political History of the American Rich. In investment terms, spending money on campaign contributions and lobbyists may have a much bigger payoff than equivalent spending on R&D, plant & equipment, human capital, financial engineering, or any of the other traditional types of investment to increase the stock price.

Larry Summers says US wages can rise only for those in “inherently local” activities.

After his December 13 speech to the Economic Policy Institute, Larry Summers said this in response to a question:

If our college graduates or our high school graduates find themselves embedded in an individualistic competition with workers from around the world, or if they develop skills for which the demand is going to fall due to possible replacement by technology, their wages are not going to rise. A necessary strategy for increasing wages is that we develop areas of unique strength that are less subject to international competition. That means the vast range of activities described in my speech where the market is inherently local. That also means maintaining the capacity for innovation so that our production is producing things that are not in what business strategists call commoditized businesses where that competition is going to be much more brutal.

Mark Thoma says this about the Summers answer:

No matter how hard we try, some people are still going to be in competition with workers around the world and their wages are going to stagnate relative to others. This will lead to an increasingly divided society in terms of the haves and the have nots, and how we choose to deal with this reality -- the steps we take to close the gap, or not -- is one of the more important questions we face.

Thoma's reference to "some people" seriously understates the size of the problem.  Inherently local activities include plumbing and other construction trades, food service, nursing and most other health care services, guard labor, police, fire, and most other security services, most hospitality workers, hair stylists, installation and maintenance workers, etc. Those workers are not directly subject to wage competition from workers in other countries, but they are subject to wage competition from (mostly undocumented) immigrants from those other countries. As a result, their wages are under pressure even though the activities are "inherently local."

On the other hand, we're observing that many higher paid jobs, like software engineering, lawyering, accounting, university teaching, research and development, etc. are not "inherently local" and are being offshored at an accelerating pace.

Thus, a huge and growing percentage of US workers are in direct wage competition with citizens of developing nations, and that depresses the general wage levels also for those not directly affected, including federal, state, and local government employees. The way to avoid this wage competition, Summers says, is to put more emphasis on education and innovation—a "strategy" that is inherently ineffective and has been manifestly failing for decades.

In a related story, President Obama spent 4+ hours today building relationships with the CEOs of 20 very large companies. Perhaps 4 of them, Comcast, Pritzker Realty, Duke Energy, and NextEra Energy, could be considered to be in "inherently local" businesses, but the other 16 are about as multinational as they come. As I read the signs, there is no political will to change course--America's bipartisan support of unlimited globalization will continue and so will the decline of real US wages and the tax base.

This made me laugh.

"Hi. This is Sarah Palin. Is Senator Lieberman in?"

"No. This is Yom Kippur."

"Well, hello, Yom. Can I leave a message?"

The history of US per-capita petroleum consumption will surprise you.

I'm participating in a forum about global warming, which raises all the usual questions about how much US petroleum consumption has contributed and is contributing, whether US policies have done too little to discourage petroleum use, and whether a "carbon price" would finally fix that aspect of the global warming problem. To try to anchor that discussion in some facts, I found the following graph illustrating two facts that are counterintuitive for most of us: First, US per-capita consumption of petroleum has been very stable since 1983. Second, consumption has fluctuated only slightly with retail price changes, even the dramatic price spike of 2007 and 2008.

(Hat tip to Elliott H. Gue at Investing Daily.)  Total US petroleum consumption peaked at 18.85 million barrels per day (MMBPD) in 1978. It then declined sharply to 15.23 MMBPD under the influence of the Iranian oil embargo, CAFE standards, and a deep recession. Then total consumption rose slowly to 20.80 MMBPD in 2005 and has declined since. (Data on total consumption from EIA.) EIA estimates that US petroleum consumption will increase only 11% from 2008 to 2005 2035 [corrected 12/15/2010], which means per-capita consumption will continue to decline at a modest rate.

CBO says this projected [amended 12/17/2010] decline is due to the new CAFE standards and that a price increase of $2.00 per gallon would not further constrain consumption. To put that in political context, the President's Bowles-Simpson Deficit Commission proposed a $0.15/gallon gasoline tax increase, and the cap/trade bill that passed the House would limit the carbon price to about $25/ton of CO2, which would be only $0.25/gallon of gasoline.

In conclusion, the US has been better at managing petroleum consumption than probably most people think, and still further improvements will not be easy, cheap, or politically palatable.

Update on Tuesday, December 21, 2010 at 09:15AM by Skeptic

In contrast to EIA's projected 11% increase in US petroleum consumption by 2035 is the projection of Cambridge Energy Research Associates that US gasoline consumption will decrease at least 20% by 2030.  Other government and industry officials, including the CEO of EXxon-Mobil, agree. AP has the story here. 

Update on Friday, January 28, 2011 at 03:23PM by Skeptic

Exxon Mobil's latest long-term forecast projects (at 18) a 20% overall decline in US passenger car gasoline consumption by 2030--even with more people and more cars--because of increasing fuel efficiency. 

Update on Friday, May 13, 2011 at 11:26AM by Skeptic

The steep decline in per-capita crude oil consumption from 1978 to 1983 was primarily due to reduced consumption in the residential/commercial, industrial, and utility sectors, as is clearly shown by the following graph from EIA. Clearly, those declines were not due to gasoline prices.  There were a lot of new regulations in those days mandating energy efficiency and forcing a phase-out of petroleum fuels for electricity generation. During these five or six years the non-transportation uses of petroleum shrank from 47% of total consumption to 38% (and are now down to 36%).

US executive pay trends 1936-2004

Look what's happened since the early 1980s.

From NYT, via Real-World Economics Review blog. Since the text in the graph is tiny, here are some key facts.  Executives are defined as the three highest paid officers of the 50 largest companies in 1940, 1960, or 1990. The dark line is the median, which rose from 25 times the average worker's pay in 1970 to 119 in 2000 before dropping back to 104 in 2004.  Meanwhile, the average pay of the top 10% (N=15) rose to 700 times the average worker's pay. 

Obviously, even the median pay of these elite executives has risen rapidly, but another reason for the growing disparity is that the wages of ordinary workers has been stagnant on an inflation-adjusted basis. Those real wages rose at an average annual rate of 2.2% from 1974-73 1947-73 [corrected 12/11/10] and then leveled off.  If they had continued rising at that rate for another 32 years to 2004, they would be just about exactly double what they actually were then (using the rule of 72).  That would mean the ratios of executive pay to worker pay would be half those on this chart. Since US executive pay was about twice the average in other advanced countries, it appears the other half of the gap increase was due to an apparent lack of competitive restraints on US executive pay. Of the two, I think the stagnation at the bottom is by far the larger social and economic problem than the rent-seeking at the top.

America's economic situation is (a) an existential crisis, (b) just another business cycle, (c) something else?

Today I'm thinking the fundamental policy difference among us may be our respective judgments about the problem: Is it big problem, a medium sized problem, or a little one?  Depending on how we see that, we may conclude we need dramatic, transformative action, little policy tweaks, or no government response at all.  As I hope prior posts make clear, especially the last one, I think we are much closer to (a) than to (b).  What do you think? 

US job creation has been declining since April 2000 and is now in freefall.

US adult employment as a fraction of all adults reached an all-time high of 66.3 percent in March 2000. Since then, there has been an accelerating downward trend, and the ratio has recently dropped below 61%, a level we have not seen in 25 years.

This ten-plus year decline was not caused by changing demographics. It started when the earliest baby boomers were just turning 55. Moreover, the fraction of those age 65+ who are employed increased from 12.7% in March 2000 to 16.3% in November 2010, according to the same BLS database. Our demographic crisis lies ahead, as seniors are projected to increase from 22% of the population today to 38% by 2030 (slide 6), and of course that will depress the employment to population ratio even more.

The causes were a bursting of the internet bubble initially but more profoundly the offshoring of jobs. The NASDAQ index closed at an all-time high of 5,048.62 on March 10, 2000. A year later, dot-com companies were shrinking and failing right and left, the NASDAQ index was below 2,000, and the US was officially in a recession. The employment-population ratio naturally declined as it has in every recession, but then it did not rebound as it always had in the past. Our trade deficit, only -1% in 1997, exploded to -6% by 2005—a 5% negative shift away from domestic production with domestic labor. To a first approximation, offshoring 5% of GDP eliminated about 5% of the 131 million jobs that existed at the end of 1997, say 6.6 million direct jobs plus perhaps millions more indirectly. (Automation also eliminates jobs, but we have had automation continuously since WWII and have managed until 2000 to have job growth despite that.) As the chart clearly shows, the creation of domestic jobs to replace offshored jobs fell behind population growth, and is accelerating in the wrong direction.

What are the implications?

Except for the very wealthy, employment (including self-employment) is by far everybody's most important source of income. Without employment, most of us would sooner or later become destitute.

Incomes from employment support not only employees but also, typically, family members and, inevitably, government through taxes. Unemployment, therefore, starves families and reduces government revenues at the very time that the demand for government safety net services is increasing.

Our economy is lagging far behind its potential. We know that at least 66% of US adults want to work because that's the fraction that was working a mere decade ago. Yet now only 61% are working. If we could wave a wand and restore the employment-population ratio to the 2000 level, something like 11 million more Americans would have jobs and incomes, and GDP would be 8% greater.

Full employment would eliminate some of our fiscal woes and greatly ameliorate others. For example, during the late 1990s, when employment and real wages were both rising modestly, the Social Security trust fund was getting healthier every year—if that trend had continued, we could be increasing benefits and/or reducing payroll taxes instead of wringing our hands about doing the opposite. State and local governments could have balanced budgets without tax rate increases. And so on. If real median wages were also rising, the American Dream could be resurrected.

A continuing decline in the employment-population ratio, especially if accompanied by continuing decline of average middle-class earnings, would be an unmitigated disaster for America. Every time a family, business, or government tightens its belt a notch, the economy shrinks until all the belts have to be tightened again and more jobs are eliminated—and belts are tightened again. Money becomes unavailable for retirement savings, education, culture, environmental protection, or anything else that is not an urgent necessity. Hope would disappear, and our political system could develop dangerous fissures.

And yet hardly anybody inside the DC Beltway talks about how to achieve economic growth and full employment, or even the desirability of doing so. Nobody proposes any policies that are different from what we've been doing in the previous post-war recessions, or from the normal-times policies of the GOP since the 1970s and both parties since 1992. Why the bipartisan passivity about this? Do they love us less than the Chinese Communist Party leadership loves its citizens?

Update on Tuesday, December 7, 2010 at 09:06AM by Skeptic

In response to the comment by PeiperTX44, the post-war growth in the employment-population ratio was For Women Only.  For men it declined from 86% to 66% today, while for women it rose from 30% in 1948 to 59% in 2000 when it also began to trend downward. As I and others have pointed out, middle class wages stagnated after 1973 so household and family incomes were able to grow only by adding another wage earner, and perhaps that's PeiperTX44's point--for middle class Americans the problems started long before 2000.  Eventually that coping strategy played out and middle class household and family incomes also stagnated. On the post-2000 employment-population ratio trend, middle class household and family incomes will decline at an accelerating pace.

Update on Saturday, December 11, 2010 at 08:20AM by Skeptic

Mike Konczal at Rortybomb has a graph here of the declining employment-population ratios for young people. In 2000, 72% of 20-24 year-olds were employed.  Now it's 60%. He calls it a "generational crisis."

Update on Wednesday, December 15, 2010 at 08:00PM by Skeptic

From the St. Louis Fed is this graph of an index of total hours worked. If this were adjusted for continuing population growth, it would look like the graph that started this post. Hat tip to Mark Thoma.

Update on Tuesday, December 21, 2010 at 09:55AM by Skeptic

According to the St. Louis Fed, employment in all levels of government as a percent of population nearly doubled from 1948 to 1977 and then leveled off.  It is now declining.

Hat tip to Paul Krugman.

Update on Monday, January 3, 2011 at 09:20AM by Skeptic

Brad Delong thinks the employment population ratio important enough that it is one of three graphs at the top of his home page. [UPDATE 2/23/11: Those charts are no longer there.]  His plot, from Economagic, appears to be for people 16+ years old, whereas I used 20+.

Update on Friday, January 7, 2011 at 09:30AM by Skeptic

If you want to remain unperturbed by the employment/population ratio, this is how you do it: Assume a linear trend from 1967, as spencer did at Angry Bear.

ADDED 6/28/2011: You can amuse yourself by extrapolating the straight line and estimating the year in which it will exceed 100%, i.e., more people working than there are people.

Update on Saturday, January 22, 2011 at 10:12AM by Skeptic

Paul Krugman has posted a graph showing that the ratio of Americans age 25-54 in employment has been declining since 2000, while in France that ratio is still increasing.

Waiting to hit bottom

Paul Krugman says there is a pervasive feeling in his circles that the economy must get worse before leadership will emerge to try to make it better.

Obama's trying to be Bill Clinton in an FDR world.

Thomas Palley makes the case here that Obama is trapped by economic judgments and staffing decisions he made two years ago.  His fundamental misjudgment was that the US was entering a recession much like the 1991-92 recession when in fact we were headed into a disaster more like the 1930s. Palley quotes from an FDR speech describing those problems that sound much like today's problems.

Not only is Obama understating our problems, but he overestimated the efficacy of neoliberal economics that has guided the GOP since the 1970s and both parties since 1992.  Palley points out that it wasn't Clinton Administration policy magic that ended the 1991 recession and created the prosperity of the late 1990s--it was the internet bubble.  In turn, GWB was bailed out by the housing bubble.  Other than more bubbles, neoliberal economics has no technical answers, and the political answer--solidarity with the tens of millions of victims--is coming from the Tea Party instead of the Democrat in the White House. Obama needs to connect with his inner FDR.

Protectionism for investment returns

The founder and co-chief investment officer of the world's largest mutual fund, Bill Gross of PIMCO, advises his investors that America is in economic decline and warns that protecting US wages would be bad for investment returns.  He summarizes his latest investment outlook this way: 

The global economy is suffering from a lack of aggregate demand. With insufficient demand, nations compete furiously for their share of the diminishing growth pie.

In the U.S. and Euroland, many policies only temporarily bolster consumption while failing to address the fundamental problem of developed economies: Job growth is moving inexorably to developing economies because they are more competitive.

Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and their developing economy counterparts, both in asset and in currency space.

He concludes with these paragraphs (emphasis his):

If so, investors should recognize that an emphasis on currency depreciation and trade restrictions are counter to their own interests. Not only would their dollar-denominated investments lose purchasing power over time from a global perspective, but they would do so also via a policy of near 0% interest rates, which are confiscatory in real terms when accompanied by positive and eventually accelerating inflation. In addition, although corporate profits are in many cases broadly diversified across national borders, there should be little doubt that the objective of tariffs and trade barriers is to advantage domestic labor as opposed to domestic capital; profits, therefore will ultimately not benefit. 

Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and other developing economies, both in asset and in currency space. The United States in short, needs to make things not paper, but that is not likely unless we see a policy revolution in Washington DC. In the meantime, our unemployed will continue to fill out forms and stand in line. We’re living here in Allentown. 

He says we must make "fundamental reforms to counter our lack of global competiveness," which stems from our labor costs being up to 10 times labor costs in developing nations, and "level the playing field," but we should do it his way: 

The constructive way is to stop making paper and start making things. Replace subprimes, and yes, Treasury bonds with American cars, steel, iPads, airplanes, corn – whatever the world wants that we can make better and/or cheaper. Learn how to compete again. Investments in infrastructure and 21^st century education and research, as opposed to 20^th century education are mandatory, as is a withdrawal from resource-draining foreign wars. It will be a tough way back, but it can be done with sacrifice and appropriate public policies that encourage innovation, education and national reconstruction, as opposed to Wall Street finance and Main Street consumption.

I don't see how any of that relieves pressure on US wages. Innovation and education have been our policy emphasis for decades, and it's time to admit that Chindia is quickly closing the gap in both. We either protect wages or protect returns to capital. Neither Bill Gross nor anybody else has a credible plan to do both. 

The point that globalization is good for capital and bad for labor is also made in Citigroup's advice to its investors in the Plutonomy Memos.

DC Disconnect

In the nation's capital, everybody's talking about how the new Congress should fix the federal budget deficit and taxes, and the Republicans are talking about fixing health care.  So, you might think these professional politicians must be reacting to voters' top concerns as reflected in the recent electoral earthquake.  You'd be wrong.  According to the latest CBS News poll, only 4% of respondents said the new Congress should concentrate on the budget deficit, 2% said taxes, and 14% said health care.

Meanwhile, all the pundits seem to agree that the new Congress will do nothing about the economy or jobs, although this is the top concern--by a very large margin--of those polled.

What Should New Congress Concentrate on in January?

Economy/jobs     56%

Health care        14%

Budget deficit      4%

War                    2%

Immigration        2%

Education           2%

I don't think DC politicians are deaf, but both parties' ear trumpets seem to be turned in a different direction.  Multinational Companies and Wall Street are enjoying boom times, and legislation that might create large numbers of domestic jobs and boost the real economy would be likely to reduce their profits and power. 

Update on Tuesday, December 14, 2010 at 10:50AM by Skeptic

Robert Waldman points out that a large majority of voters in the recent election favor tax increases to sustain Social Security. Even 59% of self-identified Republicans and 60% of self-identified Tea Partiers.  But the policy elites are determined to do the opposite.

Trade we can believe in?

Obama failed to get a trade deal with South Korea this week. Good for him! He wanted to revise the lopsided Bush Administration FTA, but the South Koreans wanted to keep the Bush draft because it would increase Korea's exports to the US and still keep US beef and autos out of Korea. In the past, the US has routinely agreed to take the mucky end of the stick in order to get FTAs done. Here's an admission of that reported in Public Citizen's Eyes on Trade blog, and it's directly relevant to the South Korean FTA.

In an October 2006 speech to a Korean audience, then-Deputy USTR Karan Bhatia said that it was a myth that "The U.S. will get the bulk of the benefits of the FTA. If history is any judge, it may well not turn out to be true that the U.S. will get the bulk of the benefits, if measured by increased exports… the history of our FTAs is that bilateral trade surpluses of our trading partners go up." 

(Probably it's not an accident that the transcript to which Eyes on Trade linked is no longer available on the USTR website.  UPDATE 9/8/12:  But the full text of Bhatia's 10/24/06 remarks is in the Wayback Machine here.)

Not surprisingly, other nations have been eager to make trade deals with the chumps at the USTR and White House because they've always come out winners at our expense. Our large chronic trade deficit and millions of jobs eliminated are the result. I'm for new and revised FTAs that reduce our trade deficit and produce a net increase in the number of jobs in America, and I'm against FTAs that don't. Always have been. If Obama's willing to say "No" to bad deals and bide his time, he could start repairing his reputation as a too-eager negotiator and too compliant with MNCs and Wall Street.

Update on Monday, December 6, 2010 at 08:35AM by Skeptic

In response to the Obama Administration's claim it will boost the US economy by opening up foreign trade, Paul Krugman uses standard economic theory to demonstrate that increasing exports don't help the domestic economy if they are matched by increased imports. It's an increase in net exports we need.  PK ends his post with this paragraph:

If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-creating; a deal with South Korea, not. If you want the Korea deal, fine; but don’t claim virtues for it that it doesn’t possess.

BTW, Krugman's Nobel Prize is for his contributions to modern trade theory, and he's the author of a textbook on international economics.

Update on Saturday, September 8, 2012 at 09:21PM by Skeptic

The evidence that the results of USTR negotiations has been tragic for Americans is in the data (discussed here): 

My new political home is the Tea Party?

A Reagan administration deputy trade administrator summarizes Tea Party attitudes toward trade in this NYT op ed.

But Tea Partyers will ask, what good does it do to reduce the role of our government if foreign governments are free to rig the rules, attack American industries and take American jobs? As a result, the otherwise pro-market Tea Party may find its economic program far more at home with a nationalist trade policy that confronts foreign abuses and fights for American companies.

Tea Partyers also have an instinctive aversion to deficits, and they are undoubtedly concerned that our enormous trade imbalances — which require us to sell hundreds of billions of dollars in assets each year — will leave our children dependent on foreign decision makers. Indeed, the value of foreign investments in the United States now exceeds the value of American investments abroad by $2.74 trillion, and China alone has roughly $2.5 trillion in foreign currency reserves, primarily dollars.

Deficits, moreover, aren’t just a statistic; they raise serious concerns about America’s global leadership role. The Tea Party will demand to know why, if our trade policy is so successful, so many experts believe that the 21st century will belong to China, not the United States.

And the Republican establishment will have to deal with the fact that Tea Party heroes like Alexander Hamilton, Theodore Roosevelt and Ronald Reagan had no problem restricting imports to promote our national interest. Given the Tea Party’s desire to restore America’s greatness, it will push Washington to stand up to China and re-establish American pre-eminence, even at the cost of the country’s free-trade record.

Finally, trade is an issue where Tea Party concerns about “elites” thwarting the will of the voters will resonate.

In this case, the elites include both Democrats and Republicans. You would need a high-powered microscope to tell the difference between Bill Clinton and George W. Bush on the subject of trade. Even during this slow economic recovery, Mr. Obama is pushing for a new market-opening round of talks at the World Trade Organization.

I agree with all that, but I'm not going to be seen in public with tea bags dangling from my straw hat. 

David Brooks says America needs a National Greatness Agenda that transcends current Left and Right ideologies.

A search of this blog will reveal that I love to criticize David Brooks, but I want to praise his column this morning. I find it hard to be as optimistic as he is that something will happen, but he is surely right about what needs to happen:

The coming movement may be a third party or it may support serious people in the existing two. Its goal will be unapologetic: preserving American pre-eminence. It will preserve America’s standing in the world on the grounds that this supremacy is a gift to our children and a blessing for the earth.

If deficits and debt don't crush us, the rhetoric about them will.

One result of the midterm elections is likely to be strident political focus on federal budget deficits and national debt. Also, Obama's bipartisan deficit commission is charged with proposing a plan by December 1 to eliminate the budget deficit.  So, today I'm creating a new category, Fiscal Deficits, and starting to prepare myself for the onslaught of misinformation.  Something that's likely to be useful on several future occasions is this post today by Bruce Webb.  He links to quantitative information about the current federal debt and who holds it--China, the Fed, and others--and provides some ways to think about how much is too much.  Bruce is also an expert on Social Security finance, which also makes AngryBearBlog worth following.   

Update on Wednesday, December 1, 2010 at 08:07PM by Skeptic

By the way, a post-election poll shows that the public doesn't care much about deficits.  An overwhelming majority say the top priority should be the economy and jobs.