by BILL WADDELL
I had a chance to browse some of the US dotgov statistics over the weekend (my pathetic idea of a good time, I suppose) and thought I would share a few items that may surprise some folks.
This chart shows the trade imbalance by year from 1970 through 2008. Lest anyone think that policies of one party or the other are to blame – or represent the solution – this should pretty well demonstrate that to be false. It started with the Carter Administration and has grown steadily wider since, through Reagan, two Bushes and Clinton. Our widening gap between exports and imports is not rooted in political ideology – it is clearly systemic.
As lean experts, we should be even more attuned than anyone to the difference between special cause and common cause. It is typical – but incorrect – to explain away the astronomical gap between our huge imports and lesser exports which are rapidly eroding our nation's wealth by blaming one party, one President, one policy decision, one trade agreement. It is obvious that no such political 'special cause' is to blame. That means that reversing that cause, or implementing an isolated correction will not change things. Kicking out the Democrats or Republicans has not changed the course of things for many years – no reason to think it will now.
Presidents and economists go on at length about our growing economy, This chart shows that the Gross Domestic Product per person in the United States is more and more in services – which is not real growth. The growth rate in things we actually produce – goods and structures - is much flatter. Our GDP 'growth' is overwhelmingly in the service sector, which is really just dollars we trade back and forth between ourselves. In lean terms, the production of Goods is value adding – it adds to our national wealth. As a percentage of our economy, it is shrinking and has been for a very long time.
There are many ways to measure the economy, but I believe this is the most accurate. It is a measure of the actual wealth created, divided by the total number of men, women and children in the United States over which it is spread. It is also a very accurate – and discouraging – measure of our overall productivity. How much value are we creating per person.
The dotted line in the chart above shows the average annual increase in Goods produced per person. You can see that during the Nixon-Ford-Carter years we routinely increased our wealth by 9.1% annually. During the Reagan-Bush 1-and Clinton first terms, the rate of improvement in our national wealth slowed by almost half to 4.7% per year. Then, during the back half of the Clinton administration and through the Bush 2 years, it almost halved again to a dismal average increase in Goods produced per person of only 2.5%.
The next chart is a look at the same thing – the annual change in Goods Produced Per Person. The decline has been steady and steep across both parties and all administrations.
Obviously the problem is not political or the result of one tax or regulatory scheme or another, but how about the standard whipping boys – OPEC, NAFTA and China?
There is no question that they are big contributors, but you might be a bit surprised by a few facts. For one, India is almost negligible. Our trade imbalance with them in 2008 was a paltry $7 billion and change. Anyone who has really looked into India knows that they have a long way to go before they deserve to be rated in the same league with China. I added them into the chart just to get them out of the way. So China accounts for about a third of the trade imbalance – a big contributor, but not the cause.
NAFTA is also a contributor, but one surprising fact is that we are deeper in the trade red ink with Canada than Mexico: Last year we were $78 billion in the hole with Canada versus $65 billion with Mexico. When NAFTA was first proposed Ross Perot railed about the 'big sucking sound' we would hear from the south as US jobs were lost to Mexico. The reality is that, if there has been a 'sucking sound', it has been more from the north.
And, of course, the oil situation is what it is. Most significant, however, is that OPEC and NAFTA combined can only account for 40% of the trade imbalance.
Most startling is the 27% from "Others". This is where it becomes plain that there is something deeper at work here than the allure of cheap labor and the unreasonable policies of the Middle Eastern oil sheiks. We import more than we export to places like Sweden, Denmark and Norway; Italy, Austria and Germany; and even Finland and Liechtenstein. We import more from the UK than we export to them – same for Israel and Portugal. In fact, our trade imbalance with the EU is one and half times our trade imbalance with Mexico. So much for cheap labor – over 27% of our imbalance comes from places just as developed and just as expensive as we are. Throw in the Canadian piece of NAFTA and the number is more than a third. And every year the hole gets deeper.
The picture that emerges is that China and OPEC are big drivers of our hurtling decline in wealth creation, but just as great is what is clearly an 'anywhere but here' syndrome. What is just as clear is that most of the dogmatic arguements many people offer are false.
Unions have declined radically over the course of the last 30 years to a now paltry 8% of manufacturing employees. Kicking out the unions has not resulted in a boost for American manufacturing.
The period covered by these statistics also mirrors the presence of Toyota and Honda on the American manufacturing scene – both of whom have been very successful. American manufacturers have not emulated them to any significant degree.
Neither political party gets it. Defenders of one party or the other have little to stand on.
The 'economic recovery' plans put forth by just about everyone in Washington is based on keeping us on this track – which is a formula for an even longer term disaster than the one we currently face.
All of this only reinforces the points we made in "The Hollow American Economy"
Tom Palmitesta says
I am not an American but I believe that a strong US is good for me (and the rest of the world). It is hard to come up with causes of the increase in services to the detriment of goods produced. I can offer one from my own experience. When I was much younger I was a shareholder and general manager of a company that produced very good office equipment. But what cost me 5 and was able to sell for 7-8, the reseller sold for 15-20, all the time financed by my credit. So, I did all the work (and had all the headaches, plus unfair competition) but the reseller had all the profit! And I was very lean at the time! When I changed to services I took home much more money than as a manufacturer, with much less investment. I have been a services man since then, advising manufacturers on how to be more competitive (and lean). Could the real cause be seeing only my personal benefit and not that of the country?
Mike says
Before we try to identify the root cause of a problem, we should make sure it really IS a problem. I am not sure a trade imbalance is a problem. I understand your points and those made by many others about the dangers our trade imbalance create regarding our ability to be strong and defend ourselves, etc. However, there is also a large school of thought that claims a trade imbalance is not a problem, and can actually be the result of positive changes in our economic system. Probably the most well-known proponents of these ideas are among the Chicago school of economic theory, based in the work of Adam Smith and Hayek. Some of the most vocal proponents are from George Mason University, including the chair of the Dept. of Economics at GMU, Don Boudreaux. (You can read more about this at the Cafe Hayek website.) Now, I’m not one to discount anyone’s theories simply because they don’t agree with my current worldview, and I am not claiming to agree with either side of this issue. I see a danger here, but I also see the point of view of the other side. I DO believe that we should be very very sure the situation is actually a problem before we spend valuable and scarce resources to solve it.
Bill Waddell says
Mike,
Economists and academics can wax eloquently all day long, but really it is pretty simple, Mike. Whether it is in your home, your business or your country, if you are not bringing in more money than you are sending out, you are headed for bankruptcy.
In 2008, we spent $800+ billion more for stuff from other countries than other countries paid for stuff they bought from us. That is $800 billion+ of our wealth that left the USA and ended up somewhere else. That is real money, and the United States was worth $800 billion less as a result.
That is no different than you spending $800 more for stuff you bought than the total you earned from selling your labor to your employer. Do that too many months in a row and you end up in bankruptcy court.
Any economist who says that running a long term negative balance of trade is OK is insane, particularly when that negative is growing exponentially like ours is.
… and I welcome any of the folks at Cafe Hayek or Chicago Boyz to weigh in and explain how that is not true.
Mike says
Bill, I’m sure the Boyz from Chicago will weigh in if they have the time, but really they have laid it all out quite a few times already. If people are interested they should take the five seconds it requires to search the Cafe Hayek website and read their theories for themselves. They would say that your $800 billion example is a fallacy. I’m not going to go into the whys of that because I’m not qualified to explain it. Please do not discount the ideas of others simply because they are “academics and economists.” That smacks of the elitist attitude of anti-elitism. I learned long ago to stop acting that way because it puts many serious, thoughtful, and intelligent people off. When you start acting like all “Ivy-leaguers” and “academics” somehow just don’t understand reality–but YOU do because you are not “one of them” you risk sounding like the old hard-hat, love-it-or-leave-it, never-had-no-use-for-book-learnin’ crowd I grew up around forty-odd years ago. Those were the kind of people who used to try to make me justify the fact that professionals earn more money than janitors. And don’t tell me it’s “simple” because it most definitely is not.
Bill Waddell says
Mike,
Don’t confuse my utter lack of respect for the economic thinking that has led our country and the world to economic crisis, with ignorance. I am very familiar with the theories and opinions of the folks at Cafe Hayek. Believe it ir not, I have actually studied economics. The Service Economy/Post Manufacturing Economy has carried the day in US economic policy for thirty years. It has clearly failed.
It is also a fact – not an “elitist attitude of anti-elitism” – that the economic theories of the Post Manufacturing Service Economy found their roots and backing among the academics at the eastern elite schools. Your friends at Cafe Hayek are from George Washington U aren’t they?
The acid test is in the results. For a very, very long time the USA was a net exporter and a very, very prosperous country. Can the folks at Cafe Hayek point to a single relevant example of a long term, service economy success? By relevant I mean somethig other than some tiny European fiefdom from 300 years ago? My theory was proven right here over the last 100 years. Where is the proof of theirs? So far, it has proven to be a flat failure in the USA.
Mike says
George Mason University, in VA, not George Washington University, in DC. As I said, I’ll let them argue with you about it.
Bill Waddell says
You’re right, Mike. I stand corrected. Prof Boudreax is from George Mason University and it is not in Washington, DC. It is in Virginia suburbs of DC, about 4 miles beyond the beltway.