December 15, 2008
Stimuli And Global Balance
Obama is preparing a bigger stimulus package for the U.S. The rumored size is now $1 trillion. The U.S. already has a huge current account deficit. It consumes more than it produces. The stimulus will likely make that deficit bigger. But Paul Krugman will be happy now because he demanded a bigger package.
Germany, like China, has a large current account surplus. It produces more than it consumes. The German government is dragging its feet over spending more money on stimulus measures. Today Krugman bashes Germany for not launching a bigger stimulus on its own.
We have a group of countries, the U.S. UK, Spain, ... that had a credit induced spending binge and produced little, while others, China, Germany, Japan, ... produced for exports and saved.
There is an imbalance between those groups which will have to be adjusted one way or another.
When Krugman prescribes stimulus for both sides of the game there is something wrong with his thinking. Stimulus on both sides of the scale can not help to regain a balance. It only freezes the current situation.
So should the U.S. do a Keynsian stimulus at all?
As Yves Smith argues it is probably the wrong thing to do:
The US in the 1920s was the world's biggest creditor, exporter, and manufacturer. Our position then is analogous to China's now. Indeed, Keynes in the 1930s urged America to take even more aggressive measures, and argued that it was not reasonable for the US to expect over-consuming, debt-burdened countries like the UK and France to take up the demand slack. So even though most economists are invoking Keynes, it isn't clear he's prescribe such aggressive stimulus for the US and UK now.
The big U.S. stimulus package risks to crash the dollar. That may help to reignite local production, but will make the accumulated debt burden harder to carry as lenders will demand sharply higher interests.
Could China and Germany launch big stimuli programs to create local demand for all the surplus goods they export?
Michael Pettis, Professor for Finance at Peking University, says no:
The problem with this solution is that the scale of the adjustment is beyond the capacity of most countries. A decline in US consumption equal to 5 per cent of US GDP, for example (which is a low estimate), would require an increase in Chinese consumption equal to 17 per cent of Chinese GDP – or a nearly 40 per cent growth in consumption. This is clearly unlikely.
The German current account surplus this year will be some $250 billion. The total German government spending for 2009 is planed to be $400 billion. I doubt that Germany could raise that by 60% for a big stimulus and ignite consumption of that size.
That leaves one other way to adjust – a sharp decline in global production, with massive factory bankruptcies to end overcapacity. The burden of the adjustment will fall on trade-surplus countries, unless trade-deficit countries are willing to absorb a large part of it. But given political realities it is Asian production which is most likely to decline. The economic pain will be high and potentially destabilising.
There seems to be no way out.
Stimulus programs in the U.S. will help to soften the crash a bit, but they will not solve the basic problem of the need to global re-balancing. A controlled dollar decline over time might help in longer terms.
Stimulus in the surplus countries might induce a bit more consumption there, but will not solve the quite huge problems either. Whatever is available in financial means in these countries will be needed for social measures when production shrinks sharply and unemployment rises.
There was and is over-consumption in the U.S. and overproduction elsewhere. Both, global consumption and production, will decline for now to a globally lower level. Over the longer term, a re-balance of production capacity to consumption capability towards a more local level will have to be made.
All the current stimulus talk simply papers over this.
Posted by b on December 15, 2008 at 03:07 PM | Permalink
In short, whose economy are we stimulating with a $Trillion? Last time we did this (June), the stimulus went to pay oil producers for higher prices. This time, maybe it will end up propping up investment and employment in China and Japan. Even the auto industry bail out may serve little purpose besides increasing investment, employment and vehicle production in India, where GM is moving operations.
The US economy has been hollowed out to such an extent that the major sectors used to be the military, health "care," housing construction and financial services. Well, half of that list just bit the dust. And more military spending won't have much of a multiplier effect. So we're down to health "care" and then infrastructure (long lead times) and local government services.
Greenspan helped encourage the housing bubble during the last recession, because he realized that there was not much else left to stimulate. Now that housing has gone bust, there's still not much left to stimulate.
So what triggers a recovery? Ultimately it has to be a significantly weaker dollar, so that American-source goods and services can compete globally.
Posted by: JohnH | Dec 15, 2008 4:44:22 PM | 1
China's going to have to start a war to divert its impending internal strife. Where and when is the question, not if.
Posted by: Obamageddon | Dec 15, 2008 5:02:38 PM | 2
If I have my history correct, every economic expansion since WWII began with an increase in demand for housing. This time, the housing bubble over-supplied the housing market to the extend that no additional housing needs to be built for decades, except maybe subsidized housing for the poor. In part, this is due to the fact that boomers are moving past their home buying years.
So, again, what the $Trillion going to stimulate?
Posted by: JohnH | Dec 15, 2008 5:06:22 PM | 3
There's a joke somewhere in here about these assholes needing a bigger stimulus, but I'm not going there.
Posted by: biklett | Dec 15, 2008 5:42:12 PM | 4
Early in the Bush years, when we had a budget surplus left over from the Clinton years, the 'right' economic thing to do was to have a big tax cut. When we later had a budget deficit (and even today), the 'right' thing to do was to have a big tax cut. Same solution for two opposite economic situations. Tell me that makes sense.
Posted by: Ensley | Dec 15, 2008 7:17:30 PM | 5
The wealth of societies in which the capitalist mode of production prevails appears as an immense heap of commodities. It hardly matters who at this time overproduces and underconsumes. This contradiction of accumulation is basic to the capitalist mode of production.
It's not "ridiculous" to repeat the verity: the developing world especially needs US/Euro consumption.
Posted by: slothrop | Dec 15, 2008 7:26:29 PM | 6
looks like globalization is over & hello massive USA protectionism in favor of internal economy & targeted export-growth. This is probably the only sane option left for the USA. The 3 Automakers are about to get semi-nationalized & primed for export or at least import-substitution all in favor of America's new baby -- industrial-policy.
and for the rest of the world, its either -- loan the Yanks another trillion or they'll just print it anyways.
Posted by: jony_b_cool | Dec 15, 2008 9:25:42 PM | 7
I think i was the first China Hand, but whatever. I rarely post, and it's fine with me if others use the name.
At any rate: China start a war?
The number of wars of aggression China has fought in the last few millenia have been few and far between. Largely, what wars have been fought by China have been fought within its current territory, and that has typically been the pattern since, basically, forever.
Guangdong/xi, Fujian, Yunnan, Xinjiang, Sichuan, Gansu, Inner Mongolia -- all of these provinces were once independent of Han control, but they were almost never brought in by conquest. Mongolia, of course, brought itself in by conquest -- and that pattern holds for Gansu and Xinjiang, as well. Fujian, Yunnan, Guangdong, Guangxi, and the other more southern provinces were all at one time like Vietnam is today: essentially Han colonies that intermingled with local populations until they were eventually assimilated into regular government.
In the last, oh, eight hundred years, about the only place one can claim "war of conquest" in any meaningful sense is with Tibet, but if standards of international law have any meaning then that's a very debatable point. Even if one doesn't accept that, then the argument that the Chinese move was essentially defensive and reactionary is virtually impossible to refute. Tibet was first conquered and subjugated by the British, and remained firmly in their duplicitous orbit right up until the Chinese "brought it back"; that should be enough, there, but even if it isn't then of course the Kissinger subterfuge (of arming and organizing the Tibetans as a guerilla force to be used against the Chinese) may be called forth.
Then, of course, there were Vietnam and Korea -- but China didn't start either one of those, and in neither case was interested in conquest. In both, China's role was merely that of a puppeteer looking to install a government (succeeded in Korea, failed in Vietnam).
So while there are many paranoid Western bullies who would like to insist that China's wartime past is just as bloody and aggressive as Euro-american colonialism, history ridicules them.
The biggest threat to China is internal dissolution. Essentially, China is four, five, or six different nations combined into a single political body; some are extremely wealthy and powerful (the central and coastal Han states), but essentially unstable (easy to invade, difficult to defend, and quite prone to cultural osmosis and change); others are "poor" in technology and wealth, but "rich" in ecological and cultural wealth (most of south China, maybe Tibet), while still others are simply poor or still developing (Inner Mongolia, Xinjiang, parts of Sichuan and south China).
The probability is not that China will "start a war" -- that's what the U.S. and Britain do, and it's selfish and stupid to try and pretend like every nation, everywhere, follows their lead in that -- but rather that China will break up into several different, independent bodies and then experience another 80 years of internecine warfare and barbarism.
The more China integrates with the rest of the world, the more likely it is the breakup will happen. Thus, the question of "Where and when, not if" is rather:
Where and when is the world going to step in and help negotiate the breakdown of a closed, authoritarian police state that's currently keeping the lid on something like 1.6 billion people? Because unless our world has built up a robust international polity by that time, then the entire world will surely suffer, and a humiliating nuclear end to us all is not inconceivable.
Posted by: china hand #2? | Dec 16, 2008 12:57:45 AM | 8
Jeeze, China Hand, that is scary -- we woke up this morning in Denmark to, of all things, an earthquake, over 4 on the Richter scale, which is small potatoes except that this is supposed to be one of the most stable places in the world.
Whatever, if China goes into self-destruct mode, it's gonna be one heck of an earthquake. As for the war thing Obamageddon suggests, although unlikely according to past history, as you point out, earthquakes can happen where they have not been known before. In the case of China, there is one tension I have not seen referred to and that is the is the overweight of males in the China population, because of the one-child policy. I haven't seen any statisitics on this, true, but the importance would be most significant in the younger procentile of the population.
Posted by: Chuck Cliff | Dec 16, 2008 1:31:17 AM | 9
One part of China is missing in the discussion: the island of Formosa (Taiwan).
China has pledged to bring it back into the fold, but until now it seems content to wait... how long this will continue if the US might declines and China faces internal unrest is unclear.
Posted by: No So Ana | Dec 16, 2008 3:13:06 AM | 10
Thanks to all for what seems to be the start of an interesting thread.
Although those of us who still feel the residual effect of educational Clavinism (or Emersonian "plain living and high thinking") will undoubtedly be emotionally attracted to the moral rectitude underlying b's analysis of U.S. profligacy vs. German, Japanese, and Chinese frugality,
I can't help wondering if there may not be something akin to a "fallacy of composition" in that argument. In other words Slothrop may be right, or at least on the right track. For other variants of rational panic and high dudgeon (albeit somewhat provincially U.S. centered) over the imbalances highlighted in b's thesis, one might take a look at
Brad Sester, the Richmans , or P. Navarro, all of whom, it seems, elaborate on the circumstances expounded above without sharing b's conclusions.
Over and above the point directly at issue, it's fun to see various schools of thought contending (h/t Chairman Mao) in trying to navigate through the turbulent financial rapids, and in offering widely varying solutions to the crisis. Unfortunately, it is quite possible that all of them are inadequate to the task at hand. Those who are not trained economists can take only meager consolation in seeing the discord among the experts.
Posted by: Hannah K. O'Luthon | Dec 16, 2008 3:32:19 AM | 11
That was "Calvinism", of course, in line 2 of #11
Posted by: Hannah K. O'Luthon | Dec 16, 2008 3:34:06 AM | 12
Back to b's original piece:
I believe that a masive decline of the value of USD and Euro cannot be avoided and will be necessary to get out of the crisis.
To the first part: The US has Trillions in outstanding debts, and now it makes more debts (700 billions to the banks, A trillion stimuls package, more to follow) if possible - since this will reach its limit at some point the printing press will be used. (If this does not happen in 2009, then the next downturn is just around the corner). In Europe the situation is similar: All states have a lot of debts, and many are stimulating by "helicopter". It does not matter if all Euro-countries are doing it, even one mid-sized one will be enough to cause the investors to loose confidence - and then it will happen in days. (That is the main point: The investors, who react as a herd and seem until now not to posses - as a herd - the capacity for long-time analytical thinking -> Short term issues and vague feelings take over in a business which laudes itself as "most rational". Right now they have confidence in the governments, but how long this will continue to be the case...)
The second part: We need a new global economy. To get there, we first must get rid of all the excess debts, bonds and shares put into financial instruments. It is no longer possible to nationalize it, since it is put into island tax havens (including swizerland and GB). It is now even possible any more to tax it in a meaningful way. But it moves around the globe in seconds, and causes upheavels which are felt by millions, but not the priviliged class (with their offshore bank acounts). There might be some ways to restrict this, e.g. coordinated action which restricts trade and induces heavy tariff barriers, but I do not see any movement towards this. Only massive inflation is currently a realistic possibility.
Massive inflation will cause suffering, make no mistake. But maybe - just maybe - it will prompt our political class, so dependent on favorable TV covareage an campaign financing, to build a better future for all of us.
Posted by: No So Ana | Dec 16, 2008 3:37:45 AM | 13
seems since Clinton, the USA has been playing a game of "catch me if you can", not to win but to keep the rest of the world mesmerized while the big-shots get payed. After all, its the biggest economy, the biggest market & the dollar is the worlds reserve currency, so it can. The expensive wars, dotcom/mortgage/oil-market bubbles, de-regulation, globalization (aka off-shoring) low-interest/high-debt and the bailouts. Which is why Obama has to do something big, hence the stimulus package, to keep the game going & it also buys him time for reforms. He's also going to need a lot of diplomacy to keep the other players from calling off the game.
Posted by: jony_b_cool | Dec 16, 2008 5:20:08 AM | 14
Communist historians referred to the Great Depression as the "overproduction crisis". Which was something that the socialists did spare their consumers for decades and decades.
The point is that the market is supposed to function for the benefit of everyone, a skewered market that overproduces to the point of self-collapse is not functioning properly.
Posted by: ralphieboy | Dec 16, 2008 6:40:49 AM | 15
Re: Taiwan --
Watch the current Pres. of Taiwan, Ma Ying-jeou. He's willing to deal with China, and I am sure that, after watching what the U.S. did to Iraq when "liberating" them, saner heads in Taiwan are prevailing and we are now living through a renaissance of PRC-ROC relations.
How far it goes will be an interesting matter. Politically, interesting things are happening. The former president Chen is in jail on corruption charges that are almost certainly true; he has succeeded, in his two terms as president, in rallying the Taiwanese people to an anti-corruption and pro-nationalist frenzy, and then shattered his entire legacy with what appears to be rank embezzlement of public funds and trade in political favors. That could mean the end of his party, since most of them, too, are now in jail on similar charges. Certainly, it doesn't appear to have any sort of meaningful candidate in preparation for the next elections.
I live there, and it's clear that, since the beginning of this latest Iraq war, the pro-unification crowd has made huge inroads in public approval.
I don't think Taiwan will be China's matchstick -- but more ominously, if it is, then it will almost certainly have been lit by the U.S.
But more on-topic:
People seem to believe that China's society won't be able to absorb these strains. I think it can, and that makes the point made over at Naked Capitalism -- about there being great opportunities for those who survive the slowdown with savings and infrastructure intact -- all the more important. The U.S. doesn't really export much beyond services, luxuries, and agricultural stuff. As oil becomes more scarce, the costs of everything in North America are going to rise dramatically -- and as the Chinese economy expands, oil supplies will become ever more tightly strained.
The British had a similar problem in the 1800's -- huge trade imbalances and hoarding by the Chinese government had created a currency-level crisis. Thus were born the Opium Wars, making the entire British people into the world's first narco terrorists.
Until savings among the average population are restored, and a sane assessment of the value to society of basic manufacturing is accepted, then there won't be anything for Americans to buy anything with -- which means the borrowing continues until someone finally says enough.
It looks like the world is saying "Enough!" but the Obama administration hasn't yet heard.
Posted by: china_hand #2? | Dec 16, 2008 10:10:17 AM | 16
@No So Ana - I believe that a masive decline of the value of USD and Euro cannot be avoided and will be necessary to get out of the crisis.
To the first part: The US has Trillions in outstanding debts, and now it makes more debts (700 billions to the banks, A trillion stimuls package, more to follow) if possible - since this will reach its limit at some point the printing press will be used. (If this does not happen in 2009, then the next downturn is just around the corner). In Europe the situation is similar: All states have a lot of debts, and many are stimulating by "helicopter". It does not matter if all Euro-countries are doing it, even one mid-sized one will be enough to cause the investors to loose confidence - and then it will happen in days.
The situation is different in Europe in several realms. Overall Europe has no external debt. The UK has and several other countries too, but their lenders are other European countries. While Britain may inflate and crash the pound, the Eurozone countries are quite restricted in creating inflation. The European Central Bank is much more independent than the Fed and British Central Bank. The ECB has only ONE mandate: price stability. It seems to take that serious.
People investing in European bonds are Europeans. That makes it a bit easier to solve conflicts should they arise. U.S. debt is financed to a great part by Asian countries. If the U.S. crashes the dollar, that would be the source of some serious international trouble.
Posted by: b | Dec 16, 2008 11:27:09 AM | 17
well, b, you are right: The European Central bank does everything it can to combat inflation.
However, I do not believe that it will be able to stem the tide (even though in Europe the drop will not be as severe as in the US): All European countries (certainly all countries adopting the Euro) put hundreds of billions into banks: If a big part of this is lost, where will the respective states get the money to make it up? At the same time tax breaks and similar means are used to stimulate the economy - even though say spain does it a lot more than Germany.
And this is my point: The stability pact envisioned not only a european central bank, but also a limit to the debt the countries may make - and all of them are exceeding the limit right now, and are likely to exceed it even more in the near future. Thus I believe the value of the Euro will drop.
You are right in saying:
People investing in European bonds are Europeans. That makes it a bit easier to solve conflicts should they arise
The drop of the Euro will be mostly the problem of the Europeans, and only in part a problem of the rest of the world.
Anyway, my point is: what is coming in two or three years is going to be quite painful - and I can only hope that it will spur the correct reforms (meaning cut down the greed).
Posted by: No So Ana | Dec 16, 2008 12:48:02 PM | 18
It's pretty obvious that Krugman thinks the world of Keynes, as most of us on the Left do. But Krugman has got to do something to put an end to his Keynesian wet dreams before they get the better of him!
Posted by: Cynthia | Dec 16, 2008 3:52:26 PM | 19
I can see how a huge Keynesian project going full throttle will do little, if anything, to jumpstart an economy in a nation whose debt load is soaring to nosebleed heights and whose manufacturing base is heading towards extinction. But I can't see how anything Keynesian is less likely to get an economy up and running with deflation, as opposed to inflation, on its horizon.
Posted by: Cynthia | Dec 16, 2008 4:27:32 PM | 20
Why isn't a stimulus a good move? You improve infrastructure and start-up "green" manufacturing at a time when the decline of the dollar means an export bonanza for the US? Meanwhile China's stimulus will mean even more exports (heavy equipment and knowledge) from US.
Posted by: slothrop | Dec 16, 2008 4:40:18 PM | 21
We could just admit that (our concept of) money is obsolete.
Posted by: rapt | Dec 16, 2008 4:48:23 PM | 22
I completely agree w/premise (eg: Keynes inappropriate medicine), have been thinking the same for a while. Even assuming Keynes model is useful, seems to me that taking from Keynes the "rebuild infrastructure" mantra misses the point: back then, we had little infrastructure... we were building new stuff. I might characterize that as effort as having built what was wanted and needed for that day.
Sure seems to me like a more thorough creative thought process, determining what is most needed today, might occur to some of these PHD econ wags. Given vastly greater accumulated knowledge of today... I would consider a Keynesian excercise for today an active response to the question: what is most wanted and needed.
I also am quite certain such a process would yield entirely different target projects then roads & bridges.
As Barry Ritholtz said a while back (and I think you linked), get our best/brightest in econ/energy/physics/engineering (for starters) and create a Manhattan project for each. I'd also cut Wall Street out of picking winners and losers, maybe (just maybe) let them handle some of financing on a very short leash. They have failed... utterly. They have removed themselves from the game. Why some people (Paulson/Bernacky) try and move 'em back to front of line is beyond me.
And lastly, from your linked NC article:
London Banker's arguments are two-fold: first, deflation is more likely than inflation because the underlying messes have not been cleaned up.
Is that ever an understatement... from where I sit, they haven't even tried. And worse, the mess' architects still in place waiting to do it again as I see no disincentive to dissuade them. I mean, shouldn't those nimrods be headed to jail, instead of retooling 'em w/taxpayer $$? Why are rating agencies still rating? Why have we had no discusssion whatsoever attributing actions & implementation to GWB's 8yrs of "free markets" and "capitalism"?
Note this differs from the commonly-held view that deflation can be cured without addressing institutional arrangements.
see my previous comment...
Second, he argues that punitively low yields will lead foreign investors eventually to retreat even from government debt. He argues that they will tire at throwing good money after bad, and will prefer to seek returns closer to home.
Aside from that being (IMO) simply stating the obvious, AFAIC that's already happened here.
And referring to your early comments (Krugman/stimululus etc.) and idea it may be wrong medicine, I'd point out Pelosi has made (at least that I'm aware) 2 statements regarding stimulus and it's size, both saying "name of the game" is "jobs, jobs, jobs." Which for me anyway, only highlights narrow minded and thoroughly unenlightened approach to whatever BO ends up pushing for.
I mean, we can create jobs jobs jobs splitting rocks w/a sledge hammer.
I can't express my disappointment in BO, 2 fold:
* failure to accurately articulate what got us here... eg. "measure the problem" and drive stake through the heart of it. Because it keeps happening again & again, just bigger each time.
* articulate a more creative, genuine & authentically original plan which utilizes all resources (human, material) available, as opposed to what really looks to me like cookie cutter, text book Keynesian template.
Also, I wonder... anybody else out there curious just what kind of "financial instruments" AIG is gon'a sell that will provide them profits capable of paying off their (what is it now?) $250b little loan thingie? Has anyone even asked? Am I the only one who gets the creeps just thinking about it?
Posted by: jdmckay | Dec 16, 2008 6:24:54 PM | 23
If you target the longer term portion of stimulus in such a way to subsidize a manufacture infrastructure, then you are improving "effective demand" (putting $s into worker pockets) and preparing US to pave the way for the new big thing (afaik, it looks like replacing vehicles w/ electric hybrids). And, with declining dollar, you export recession, forcing China et al. to move towards big domestic investment.
This seems to me "keynesian." What is not "keynesian" is pumping zillions to reinflate bubbles or create new bubbles to keep FIRE capitalists happy. This is more of the "casino" economy JMK warned about (but happily made his fortune in). The proper keynesian response will be, is, resisted by capitalists because it unhappily "transfers" the $s of kleptocrats into "the real economy."
Another problem is that the salience of the "state" to legitimate sensible responses to the crisis is declining. The global capitalist class doesn't care about this or that country's competitiveness. The irregular development and deindustrialization of the globe works for them.
But I'm just thinking about things, you know. I'm entitled to given the utter inability of nobel economists to predict w/ consensus whether or not the "stimulus" is inflationary or not!
Posted by: slothrop | Dec 16, 2008 7:20:19 PM | 24
Perhaps perversely, the attack by Willem Buiter on the ECB (and Steinbrueck) for lagging behind in it's inflationary efforts makes me consider them the most reliable central bank, and the EUR the safest currency.
The independence of the ECB is embedded in the Treaties. A unanimous decision by all member states is required to change the Treaty. Given this operational independence ‘on steroids’ of the ECB, it is unlikely that any Euro Area national government or coalition of governments could bully the ECB into engaging in a burst of public-debt-busting unanticipated inflation.
I'm also with London Banker in his final post, the damage to confidence from bungling governments is at least as severe as the underlying financial issues.
During the reckless boom years, savings collapsed in bubble economies as retail and commercial and financial actors alike chased speculative yields with greater and greater leverage. During the reckless bust years, savings will collapse further as retail and commercial and financial actors chase safety by hoarding their meagre remaining assets from further erosion by refusing to lend at negative returns and refusing to finance failed corporate and investment models that only enrich poltically-connected management and intermediaries... Each bailout further undermines the market discipline which is bedrock to a saver or investor’s decision to part with hard-earned cash by trusting it to the intermediation of the management of a bank or business... It’s this simple: I won’t invest in a country that bails out failure and punishes savers... I will know when it is safe to reinvest when policy interest rates, bank/intermediary oversight and accounting standards give me confidence I am better protected than the corporate or financial elite...
It appears that in aggregate the world is inevitably going to suffer a decline in both production and consumption; and losses on financial assets whose value was premised on higher values for both. The arguments now are merely on allocation - who, where and when.
Posted by: PeeDee | Dec 16, 2008 9:39:07 PM | 25
Nothing profound to say, but the description of Obama's intentions does sound like the standard cure for a hangover: Haveanotherdrink!
Posted by: Gaianne | Dec 17, 2008 12:40:38 AM | 26
The US economy was propped up by consumer spending and housing. The growth of housing prices is what gave Americans the motivation to spend more on consumer goods, even in the face of falling real wages.
Now that the housing market is no longer feeding the furnace, no amount of Keynesian spending will get consumer spending back to previous levels.
Posted by: ralphieboy | Dec 17, 2008 4:58:56 AM | 27
I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.
Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.
If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com and PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)
Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.
Author, "Five Short Blasts"
Posted by: Pete Murphy | Dec 17, 2008 10:44:04 AM | 28
@Pete - it adds to the discussion and thereby can not be spam.
Thanks. The idea is interesting. I'll have to think about it.
But within its frame how to explain that much less dense countries consume less than the U.S.?
Posted by: b | Dec 17, 2008 11:34:15 AM | 29