Friday, October 28, 2016

Trade Deficit Slowly Bleeding the U.S. of Money and Jobs

A primary topic in this year’s election cycle has been trade.

Former Democratic presidential candidate Bernie Sanders and Republican presidential nominee Donald Trump have vigorously denounced past trade agreements, noting that they have hurt American workers. Both have taken a strong stance against the Trans Pacific Partnership (TPP).

Their condemnations have resonated with millions of voters.

While serving as Secretary of State, Hillary Clinton praised TPP as a deal that “sets the gold standard in trade agreements."

However, last fall, once the trade pact was finalized after years of negotiations, Clinton said she opposed it. Her change of heart may have been nothing more than political expediency.

Clinton’s history on free trade is mixed. She spoke in favor of NAFTA when her husband signed it into law in 1993, but called it a "mistake" during her 2008 presidential campaign. She voted both for and against trade deals during her eight years in the Senate.

Her running mate, Tim Kaine, recently said that finding more American export markets would “add workers” and result in “more jobs and higher wages.”

That has always been the promise of free trade agreements, but the reality has been something different, as I highlighted previously.

The median household income in 2015 was $56,516, an increase of 5.2 percent over the previous year — the largest one-year rise since at least 1967, the Census Bureau reported in September.

Median household incomes finally rose across virtually every American demographic after years of stagnation or decline, according to the latest government data.

However, the median income is still 1.6 percent lower than in 2007, before the Great Recession. Most troubling, it also remains 2.4 percent lower than the peak reached during 1999.

Consider that for a moment: the typical American household now has less income than in 1999. That’s stunning!

Meanwhile, Americans pay more today for needs like health care and higher education than they did in 1999.

Rents, health insurance, prescription drugs and tuition have all risen -- and are still rising -- much faster than the general rate of inflation and, more importantly, much faster than median family income.

Anyone arguing that current trade policies somehow benefit America or it’s workers is either woefully ignorant or hopes that he/she is speaking to the woefully ignorant.

The U.S. has run a persistent trade deficit every year since 1976 — yes, for four decades.

As I noted in 2013:

The U.S. has consistently run a gaping trade deficit for decades because we import more than we export. In fact, the U.S. has led the world in imports for decades and is also the world's biggest debtor nation.

Countries with big, persistent trade deficits have to continually borrow to fund themselves. The problem for the U.S. is that we don't export nearly enough to continue paying for all those cheap foreign goods that we've grown so accustomed to.

Our greater oil production and independence was supposed to diminish the trade gap, but that hasn't happened.

The U.S. trade deficit in goods and services totaled $351 billion through August, the latest data available. With four months to go this year, that figure will continue to rise and will likely reach $500 billion once again.

As you can see below, half-a-trillion dollar annual trade deficits have been the norm for many years.

U.S. Trade Deficit, past decade (source: U.S. Census Bureau)

2005 - $714 billion
2006 - $762 billion
2007 - $705 billion
2008 - $709 billion
2009 - $384 billion
2010 - $495 billion
2011 - $549 billion
2012 - $537 billion
2013 - $462 billion
2014 - $$490 billion
2015 - $500 billion

Year after year, the trade deficit sucks hundreds of billions of dollars, and millions of jobs, out of the U.S. as we continually buy products from overseas that could instead be made here at home.

Yes, we get cheaper goods at the local Walmart as a result, but is it really worth the lost jobs and the lower paying ones that have replaced those in manufacturing?

Manufacturing employment in the United States fell by 9 percent from 2008 through 2014, according to the Congressional Research Service (CRS). However, the CRS also notes that Canada, France, Italy, Japan, Sweden, and the United Kingdom all saw similar declines over that period.

The United States’ share of global manufacturing activity declined from 28 percent in 2002 to 16.5 percent in 2011. Since then, the U.S. share has risen to 17.2 percent, according to the CRS. Yet, the evidence shows that manufacturing still contributes significantly less to our economy today than it did in 2002.

As the CRS notes, “Part of the decline in the U.S. share was due to a 23% decline in the value of the dollar between 2002 and 2011, and part of the rise since 2011 is attributable to a stronger dollar.”

While manufacturing’s share of GDP in the U.S. stood at 24.3 percent in 1970, it now contributes less than half that amount.

Manufacturing amounted to just 12.1 percent of total U.S. gross domestic product in 2014, according to United Nations calculations.

To be fair, even the U.S. Chamber of Commerce refers to this trend as “a global phenomenon,” noting that this issue is plaguing advanced economies around the world.

The Chamber observes that, “The decline in manufacturing’s share of U.S. GDP over the last forty years is nearly identical to the decline in world manufacturing as a share of world GDP, which fell from 26.6% in 1970 to 16.2% in 2010."

That’s because Big Business (i.e., capital) always seeks cheap, or cheaper, labor, which developing economies provide.

This has created undesirable outcomes for the U.S., since lost manufacturing has led to greater importing of the things we no longer make, which hurts our economy.

While exports add to GDP, imports subtract from it. Quite simply, a trade deficit creates a drag on the economy.

Every $1 billion of a larger deficit subtracts about 0.1 of a percentage point from the annualized GDP growth rate. That's bad news for an economy that is currently struggling to eek out a mere 2 percent annual growth rate.

Ultimately, America’s greatest export over the past few decades has been its own jobs. This is a terribly self-destructive trend.

America needs to produce more, export more and save more. For more than four decades, we've done exactly the opposite.

No nation can continually buy more from abroad than it sells. It's simple arithmetic. Where will the money for all these purchases come from?

It’s a very simple logic: You can't buy more than you sell indefinitely.

Saturday, October 08, 2016

Brazil and Venezuela: from Bad to Worse

Brazil has South America’s largest economy (and the second largest in the Western Hemisphere, behind the U.S.), with an output of $3.26 trillion for its roughly 200 million citizens.

Venezuela has South America’s second largest economy, with an economic output of $953 billion for its roughly 30 million citizens.

The two Latin American nations are now facing economic situations ranging from crisis to chaos.

Brazil has been mired in recession since early 2014, its longest since the 1930s.

However, the IMF estimates the country may finally return to meager growth next year. The Brazilian economy shrank 3.8% last year and the IMF now forecasts it will fall another 3.3% this year.

If so, it will mark the first time the Brazilian economy has contracted by more than 3% for two consecutive years in more than a century.

In the second quarter, Brazil’s economy contracted 3.8% and that was after it already shrank 5.4% in the first three months of the year. This has crushed tax collections.

As a result, the government’s budget deficit was the largest ever recorded in the 12 months through February.

About 12 million Brazilians are now out of work, up from 8.8 million a year ago. The unemployment rate has soared to 11.8%, up from 8.7% a year ago and 6.8% two years ago.

Even those who have jobs are suffering; wages declined 3% in August.

The country is currently embroiled in wildly turbulent political upheaval.

Brazil’s president, Dilma Rousseff, was removed from office in August following an impeachment vote in the Senate. Her dismissal came on the heels of a corruption scandal involving the state-controlled oil company Petrobras.

An investigation found that Brazil’s biggest construction firms overcharged Petrobras for building contracts. Part of their windfall would then be handed to Petrobras executives and politicians who were in on the deal.

Billions of dollars are said to have been diverted or swindled. Former President Luiz Inacio Lula da Silva was also implicated in the scandal.

Yet, as bad as things are in Brazil, they are even worse in Venezuela, which is in the midst of a full blown economic collapse.

The plunging price of crude oil, the country’s primary export and means of income, has crippled Venezuela. The country relies on oil and gas for 95% of its export revenue. This means the nation cannot fund desperately needed imports and businesses cannot not replenish their inventories.

Venezuela is suffering through shortages of basic food and basic medicine; virtually everything is in short supply. The nation is presently facing a widespread famine. Lines at state-run supermarkets begin at 3 a.m., yet sometimes there is no food at all. The government introduced food rations at its grocery stores in 2014.

In June, the NY Times reported the following:

A staggering 87 percent of Venezuelans say they do not have money to buy enough food, the most recent assessment of living standards by Simón Bolívar University found.

About 72 percent of monthly wages are being spent just to buy food, according to the Center for Documentation and Social Analysis, a research group associated with the Venezuelan Teachers Federation.

In April, it found that a family would need the equivalent of 16 minimum-wage salaries to properly feed itself.

The nation is facing a humanitarian crisis of a magnitude that is unprecedented in the Western Hemisphere.

But the country also suffers from political corruption, which has led to widespread civil unrest.

The government refuses to accept humanitarian aid. Instead, it denies there is any economic or humanitarian crisis at all. It claims there is nothing wrong and that stories to the contrary are a plot by outside forces hoping to take down the socialist government.

For president Nicolás Maduro, to admit the existence of the crisis would be to admit that the revolución has failed.

Meanwhile, Venezuela has the highest inflation rate in the world, a staggering 470%.

The International Monetary Fund has predicted that, if current trends continue, inflation could reach 1,700% this time next year.

Though the oil price crash – from more than $100 per barrel in 2014 to roughly $50 today, after reaching a low of about $30 per barrel earlier this year – has played a role in Venezuela’s misery, the government’s policies are largely to blame.

This shouldn’t be happening in a country with the world’s largest proven oil reserves.

A new revolución appears inevitable.