Thursday, September 16, 2010

The Case for China's Currency "Manipulation" Policy, with Some Help from Scott Grannis



Thanks to Scott Grannis for his excellent post today on China's alleged "manipulation" of its currency, and claims that China's currency policy harms the U.S. economy.  Scott makes the following key points (and provides the charts above):

1. China's currency has in fact appreciated, by 23%, since it began pegging the yuan in 1994 (see top chart above). 

2. Scott writes, "China's monetary policy has been successful at delivering relatively low and stable inflation: since 1996, in fact, Chinese inflation has been substantially similar to that of the U.S. (see bottom chart above).  This fact alone is almost proof that they haven't been keeping the currency artificially weak. In other words, our price level has risen about the same as the Chinese price level for the past 15 years. If the yuan had been chronically undervalued during that time, then Chinese inflation would most likely have been higher."

3. And here's Scott's main point: "Even if the yuan were chronically "too weak," what's the problem anyway? If the Chinese want to sell us cheap goods, that's to our advantage. True, some manufacturers here might go out of business as a result, but all consumers would benefit. Why should we pursue a policy—forcing the Chinese to appreciate their currency even more than they already have—that would disadvantage every single one of us—because a stronger yuan/weaker dollar would make Chinese imports more expensive—in order to protect a small number of businesses that are forced to compete with Chinese imports?"

MP: Scott's final point is a key one because it illustrates the special-interest influence on trade policy. If China's currency policy keeps the U.S. dollar "artificially high" due to "manipulation," it potentially bestows widespread benefits on millions of American consumers and thousands of American businesses that benefit when they purchase low-priced Chinese imports. Some U.S. companies that compete against Chinese producers might be worse off, but the harm they suffer is far less than the gain to the entire U.S. economy.

Likewise, if China is forced by the U.S. government to appreciate the yuan and depreciate the dollar, only a small group of American producers will benefit from this form of protectionism, but it will be at the expense of harming all consumers and many businesses.  And the total gain to the now-protected U.S. producers will be far less than the loss to millions of American consumers and companies who will pay higher prices and be worse off.

Unfortunately, the small, concentrated group of domestic producers (sellers) seeking protectionism through tariffs, quotas or currency re-valuation are usually much better organized, have better lobbyists and more political influence than the millions of disorganized consumers (buyers), so it's not hard to predict who usually prevails in the political process.  But that doesn't change the economic reality that we're worse off as a country when a small group of sellers prevails politically and imposes the significant costs of protectionism on millions of consumers.  Thanks to Scott Grannis for another great post.

60 Comments:

At 9/16/2010 8:26 AM, Blogger ES said...

All this argument about who benefits, who is protected, what should happen.

Is there any reason why the CNY cannot float, let the market figure out an appropriate exchange rate?

 
At 9/16/2010 8:34 AM, Blogger morganovich said...

in game theory terms, this is a classic situation for a poor policy result.

benefits (low prices) are widespread, relatively small, and difficult to assess.

the losses (a job, a factory, a company) are focused, large to those they affect, and very obvious to those they impact.

thus, the large benefit goes mostly unnoticed, but those who lose jobs howl making the smaller loss seem like the bigger deal.

 
At 9/16/2010 9:11 AM, Blogger bix1951 said...

I don't understand why all educated economists don't agree about this issue. Seems like they can always find economists to support any politically popular course of action.

 
At 9/16/2010 9:30 AM, Blogger morganovich said...

This comment has been removed by the author.

 
At 9/16/2010 9:32 AM, Blogger morganovich said...

bix-

there's an old joke that if you put 3 economists in a room, you get 3 opinions, 4 if one is from harvard.

economies are VERY complex systems and are difficult to even measure accurately, much less predict or control.

one of the key difficulties arises from notions like "ceteris paribus" (all else being equal). you can say that all else being equal, increasing interest rates will lower inflation, decrease growth, and hurt both bonds and equities.

but there are legions of examples of times when this did not happen.

this is because ceteris is never paribus.

in a nation of net savers, an increase in interest rates may increase buying power.

the most difficult aspect of real time predictive economics is figuring out around which axis the economy is about to (or could be made to) pivot.

any move is the sum of an enormous number of vectors (many of which cannot even be measured directly) and it may never even be clear in retrospect what the key factors were. witness all the disagreement over what caused the financial crisis.

add in the fact that economists are people and prone to partisanship, selective data use to support preconceptions, and flat out sensationalism for personal aggrandizement and love of being in the media and it gets really blurry.

welcome to the monkey house.

 
At 9/16/2010 9:36 AM, Blogger James Fraasch said...

Serious question here.

Take this to its ultimate conclusion. Why not just let China manufacture everything and export it cheaply? That would certainly result in lower prices for Americans, except, I am not sure where the jobs come from? More retail establishments to sell the cheap Chinese goods?

If there are no jobs in America, then there is no money to buy cheap goods from China.

The best policy would be to reduce the barriers to doing business in the US (taxes and regulation) so that American companies can hire American workers to buy American products. That policy would benefit all Americans and the rest of the world as America could then become a chief exporter of manufactured "stuff". When we buy "stuff" from other countries we are effectively exporting our wealth to them.

I guess my question is, how do lower prices on Chinese goods result in better employment here in the States?

Wouldn't the best solution be to figure out a way for us to produce those same products here at a competitive price so that we can reap the rewards?

James

 
At 9/16/2010 9:45 AM, Blogger Shakes The Clown said...

If the Chinese want to make all of their people wage-slaves to give us cheap products I say go ahead. Prices of products made in China are cheap. I like buying them. My home has plenty of them. Sometimes I can't see how they can afford to ship them half way round the world and sell them to me at such cheap prices.

 
At 9/16/2010 10:08 AM, Blogger juandos said...

Speaking of who benefits consider the following from the Bank of China:

BOC¡¯S PROFIT ATTRIBUTABLE TO EQUITY HOLDERS FOR THE 1ST HALF OF 2010 INCREASED BY 27% YEAR-ON-YEAR

PROFIT AFTER TAX BY DOMESTIC OPERATIONS INCREASED BY OVER 30%

 
At 9/16/2010 10:13 AM, Blogger juandos said...

Does this enhance the Treasury Secretary's credibility?

From the Business Insider: Geithner Will Finally Suggest That China Is Manipulating Its Currency -- Nicely

 
At 9/16/2010 10:20 AM, Blogger Junkyard_hawg1985 said...

Mark, Those are great charts. They also seem to dispell the relationship between inflation and economic growth. During this time period, economic growth in China has been huge on a percentage basis compared to the U.S., yet the inflation rate was equivalent.

 
At 9/16/2010 10:32 AM, Blogger juandos said...

Why do assume (?) these Chinese inflation numbers are correct?

From Bloomberg: Foot Massage Doubles and Chinese Doubt Official Price Data

Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 percent pricier than in 2009. Wu Sengyun, a 54-year-old retiree in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are up more than 20 percent in the past year. (there's more)

 
At 9/16/2010 11:02 AM, Blogger Buddy R Pacifico said...

How can it be argued that inflation in China is the same as the U.S. when China's growth rate is so much higher? China's growth rate is reported at 10.3% but its inflation rate is only 3.3%. There are many recent reports that can be found at SeekingAlpha.com that food prices are soaring in China.

How can it be argued that only a small number of U.S. businesses is harmed by the hard yuan/dollar peg? This seems to be a hardening stance against those who produce in the U.S -- especially for export.

The argument that the yuan "manipulation" is beneficial to U.S. consumers does not consider the harm to Chinese consumers. Imports of food into China would greatly lessen the reported high food inflation. As long as imports are suppressed in China the consolidating of government ownership of business in China will be fortified.

The lack of a market in yuan has consequences that are profound for the market economy in the U.S. and in China. The capitalist U.S. exporter and the consumer in China are being harmed by the market suppresion that is intensifying.

If there should be markets in everything then it should start with the yuan.

Had to disagree with Prof. Perry on this subject, which was hard, becuase he has such a great blog that informs me so much.

 
At 9/16/2010 12:01 PM, Blogger morganovich said...

james-

i think you are framing this issue incorrectly and falling into a nominal over real trap.

first off, a worker does not need a higher nominal salary to be better off.

if you make $47k you will be better off than you would be making $50k if the trade off is 10% lower prices. you can buy all the same stuff and have $2k left over.

we think nominally, but live in real terms. it's easy to see the $3k salary cut and not the $5k you save over the year.

policies to maximize employment never work in the long run because they reduce productivity and raise prices.

if you ban shovels and require the use of spoons, you get more laborers, but either at much lower wages (lower productivity) or with a much more expensive ditch (increased prices). the same is true of tariffs. they just raise prices and harm everyone to benefit a few workers. they are the ultimate special interest give away.

the notion that if we lose manufacturing jobs there are no other jobs has no basis in fact. look at all the farming jobs the us lost. new work at higher wages turned up. the same has been true of manufacturing which is onlt 11-13% of employment. back in 2007, u3 was near record lows. clearly there is other work.

putting geographical boundaries on production is inherently arbitrary. you probably don't make your own clothes. why not? because there are better and more productive uses of your time. you create more value doing something else. do you care if the shirts are made in your town/city? your state? should Massachusetts complain that the import 100% of their cars? would they be better off if they didn't? why is the national boundary and different?

the fact is that manufacturing is a crummy business. its returns to capital are low, competition is fierce, and capx is vast. manufacturing is more sensitive to the business cycle as well.

the US should be thrilled to be getting out of this crummy business. companies like cisco COULD build their own routers, but they don't. they use other companies because they know it's a crummy, low value add business that they don't want to be in.

companies like pmc sierra (telcom semiconductors) could run their own fab, but they don't, again, because its a terrible business with fierce capital needs to stay at current nodes. let Taiwan semi worry about that.

the notion that losing manufacturing and lower prices imported from abroad cost jobs is not so. consider: we import TV's from japan. RCA goes out of business. those jobs are lost, sure, but every consumer who buys a TV saves money. that's money they can spend on something else. so leave RCA and go provide the something else and, bingo, new job.

a reduction in the price of a good increases demand for other goods. if a TV is on sale, maybe to splurge for more cable channels or a home theater installation.

 
At 9/16/2010 12:25 PM, Blogger Sean said...

Morganovich,

"benefits (low prices) are widespread, relatively small, and difficult to assess."

Typically that's the case, but not always. You discount the difficulty that occurs when a large number of players are each trying to target and protect a profitable industry, and you're not.
Everyone knows that if a US-grown export industry capable of producing a lot of jobs appears, some foreign country will use subsidies, tariffs, and non-tariff barriers, as well as plain cheaper labor to try to compete in that industry. Just the knowledge of that is a deterrent for developing any non-offshorable industry of any scale in the US.
So the question in my mind is whether the US can reach "full employment" in such an environment, and if not, what should we do about it?

 
At 9/16/2010 12:52 PM, Blogger morganovich said...

sean-

so what?

if they want to subsidize our consumption, let them.

if i offered to pay for 20% of your car, no strings attached, wouldn't you let me?

manufacturing jobs are not good jobs. we have this lingering fixation on them in the US because of the incredibly anomalous period in the 40-50's when we had the only real industrial base and such jobs were in high (but temporary) demand. typically, manufacturing jobs are just a way to get off the farm. they are simply not terribly valuable.

even nations like germany whose much vaunted manufacturing economy is so envied are not rich compared to the US. on a PPP basis, germans are poorer than alabamans (our 45th poorest state). they have 1/3 less per capita GDP than americans.

look around the US. where are the wealthy regions? where are the poor ones? now look at where manufacturing is done. that should tell you something about what actually produces wealth.

connecticut is not at a disadvantage to michigan because they don't make cars. quite the opposite...

 
At 9/16/2010 12:58 PM, Blogger morganovich said...

sean-

also: the us was at "full employment" back in 2007 despite continued manufacturing erosion. were were past full employment in 2000.

the loss of manufacturing jobs is not different that the loss of farming jobs. that sure didn't harm us. quite the contrary.

you don't have to make shoes to be able to afford to buy them.

 
At 9/16/2010 1:12 PM, Blogger Ron H. said...

"Does this enhance the Treasury Secretary's credibility?"

Hmmm...I wasn't aware that he had any. References please. :-)

 
At 9/16/2010 1:20 PM, Blogger bobble said...

morganovich, thanks for the excellent comment:

"one of the key difficulties arises from notions like "ceteris paribus" (all else being equal). you can say that all else being equal . . .

[but] ceteris is never paribus."

 
At 9/16/2010 2:13 PM, Blogger bobble said...

if history (think japan) is any indicator, and i believe it is, this will not end well for china.

it still mystifies me why the "let the markets be free" contingent thinks this market manipulation is a great idea.

when the market is constrained in one area, it has effects in "other areas".

one of the "other areas" that yuan manipulation affects is US debt. it facilitates the run up of US debts both private and public. this can clearly be seen in the last few decades.

thus, in addition to/because of cheap stuff, we get housing bubbles and multi-trillion dollar national debts. please explain to me why, overall, this is good.

 
At 9/16/2010 2:36 PM, Blogger morganovich said...

booble-

if you bank lent to you at too low a rate, would you accuse them of harming you?

 
At 9/16/2010 2:39 PM, Blogger Sean said...

Morganovich,

"if i offered to pay for 20% of your car, no strings attached, wouldn't you let me?"
Would you offer such a subsidy to your child, for every single thing they would buy, if you could afford it? Would that be good for them?

Your rant against manufacturing does illustrate the value that is placed globally on secure employment. They are currently useful for employing a large part of the population at a subsistence level. Foreign governments chase them for that: they meet the goals those governments have for their people. Fifteen years ago, it was very different, but that was before the Asian competition had fully shown up. Don't be so naive as to think the same will not happen in most existing service industries in a similar time frame.

"also: the us was at "full employment" back in 2007 despite continued manufacturing erosion. were were past full employment in 2000. "
I find the notion of being "past full employment" rather ridiculous. And if you take into account under-employment as well as simply unemployment, I don't think that analysis holds up. Even if it did, a lot of the jobs that existed were effectively paid on borrowed money that, as a nation, we still have to pay back.


"you don't have to make shoes to be able to afford to buy them."
Of course not, but you have to either provide a trade-able service or be self-sufficient. My point is the competition to take part in production is fiercer than ever before, and in some ways, artificially so.

 
At 9/16/2010 3:27 PM, Blogger bobble said...

morganovich:"if you bank lent to you at too low a rate, would you accuse them of harming you?"

no, the bank is just foolish.

but, if because of the too low rates i went too far into debt wouldn't i be harming myself?

 
At 9/16/2010 4:20 PM, Blogger bobble said...

morganovich:"if you bank lent to you at too low a rate, would you accuse them of harming you?"

answer #2:

again, i'd say the bank was just being foolish .

but, consider: 'sub-prime loans', 'TARP', and 'taxpayer bailout'.

yes, i was harmed.

[btw, what's with the 'booble' reference? i never would have expected that from you. i hope you didn't think my ceteris paribus comment was sarcastic. it wasn't intended to be. it's a concept too few take into account when talking economics]

 
At 9/16/2010 4:43 PM, Blogger Ron H. said...

"it still mystifies me why the "let the markets be free" contingent thinks this market manipulation is a great idea."

It's not a great idea for the Chinese people who don't get cheap imports, but good for us who do. Being in favor of something, (free markets) and accepting that they aren't that way isn't inconsistent.

"...yuan manipulation affects is US debt. it facilitates the run up of US debts both private and public."

Allows? - yes. Causes? - no. Credit being available doesn't mean you have to use it.

"...thus, in addition to/because of cheap stuff, we get housing bubbles and multi-trillion dollar national debts. please explain to me why, overall, this is good."

There are numerous reasons for the housing bubble, including government policies favoring home ownership, affordable housing, lax lending standards, removal of risk from those making loans, etc., etc., complimented by FED policies of low interest rates. All government caused distortions not related to the yuan. Low interest rates encourage borrowing and discourage saving, and that's exactly the path we have taken.

National deficits and debt? Massive government overspending at rates higher than revenue. Facilitated by Chinese credit, but not caused by it.

Blaming Chinese credit is like blaming your credit card company for allowing you to max out your card.

 
At 9/16/2010 5:03 PM, Blogger JMG said...

All those millions of Americans citizens who are happy purchasing cheap Chinese products whilst closing their own factories will have (or their offspring will) to face the repayment of the huge external debt of the US. Unless the Chinese simply cancel their credits. I suspect they won't.

 
At 9/16/2010 5:17 PM, Blogger Ron H. said...

"but, if because of the too low rates i went too far into debt wouldn't i be harming myself?"

Well yes, but whose responsibility is it to manage your personal finances? Surely you don't expect a bank to protect you from yourself.

If this is an analogy to Chinese credit or cheap prices surely you don't expect the Chinese government to protect us from ourselves.

"...but, consider: 'sub-prime loans', 'TARP', and 'taxpayer bailout'.

yes, i was harmed.
"

You are talking about government policies and actions, not mistakes by banks making rational decisions in the absence of coercion.

"[btw, what's with the 'booble' reference?"

I suspect this is a mistype, not intentional.

 
At 9/16/2010 7:18 PM, Blogger Buddy R Pacifico said...

Ron H. answers the following question:

"it still mystifies me why the "let the markets be free" contingent thinks this market manipulation is a great idea."

Ron H's answer:
"It's not a great idea for the Chinese people who don't get cheap imports, but good for us who do. Being in favor of something, (free markets) and accepting that they aren't that way isn't inconsistent."

Ron H, this is a cowardly answer but I will defend your right to state it. The more markets there are the greater the prospects for liberty and freedom's growth and becoming permanent for you and for all in those economies.

 
At 9/16/2010 9:55 PM, Blogger James Fraasch said...

First thanks for the response.

I don't think we are on the same page with what exporting wealth is all about.

What will we export? Services? We import how many billions of stuff? All those dollars end up in China. China then turns around and buys more of our bonds with our own dollars. China is financing our government borrowing so that we can buy more stuff from them. That doesn't seem sustainable to me.

My point is that it is much better that we keep those dollars here, increase employment here as long as we can figure out how to do it competitively. We cannot compete on price with China due to over-regulation (Sarbanes-Oxley anyone) and over-taxation. Remove those barriers to business and I think we can compete on the same level as China.

Removing those impediments could result in the greatest economic expansion in US history. What would result is lower prices (assuming businesses pass their monetary savings onto consumers) and possibly even wage deflation, which in an environment of falling prices would not be a terrible thing.

If I save a $1 on a plastic toy that was manufactured in and shipped from China, I will probably spend the extra dollar on more stuff manufactured and shipped from China (if I shop at Wal-Mart, which I do).

Your argument is that the extra saved dollar (times millions or billions of times/transactions) would result in more "other" jobs and possibly even higher paying ones.

I don't see that relationship. Can you please expand on how you reach that conclusion? We already know it won't be a manufacturing job (you said they are terrible jobs anyway- tell that to the 10% unemployed). So what service industry pops up to support the increased imports from China? More government jobs for regulating trade?

Thanks for the discussion.

James

 
At 9/16/2010 10:25 PM, Blogger glenzo said...

Its called Mercantilism, no?

 
At 9/16/2010 11:03 PM, Blogger Ron H. said...

"Ron H, this is a cowardly answer but I will defend your right to state it."

Why thanks, Buddy, I didn't realize I needed defending.

"The more markets there are the greater the prospects for liberty and freedom's growth and becoming permanent for you and for all in those economies."

I have no argument with that. I'm all in favor of encouraging free markets everywhere, but I'm aware that they don't exist even in the US. You are aware that China is a communist country with only some amount of private market activity. There's not much we can do to change China, and in fact in the spirit of laissez-faire, that I believe you are in favor of, perhaps we shouldn't try, but should let china do what China wants to do.

"The argument that the yuan "manipulation" is beneficial to U.S. consumers does not consider the harm to Chinese consumers."

That is the other side of the coin. If we aren't happy with the way China treats its own citizens, I suppose we could refuse to buy Chinese goods until they float their currency, but I'm not sure they are our responsibility. Perhaps the Chinese people should make some changes for themselves.

"Imports of food into China would greatly lessen the reported high food inflation. As long as imports are suppressed in China the consolidating of government ownership of business in China will be fortified."

Again, China is a communist country. They don't operate the way we do. In fact the part about consolidating government control of business is something we should be alarmed about in the US

On the one hand you appear to be advocating free markets, which I'm in favor of, but on the other, if I understand you correctly, you seem to favor somehow forcing China to do something it doesn't want to do.

 
At 9/17/2010 1:41 AM, Blogger Ron H. said...

"I don't think we are on the same page with what exporting wealth is all about."

James, we don't export wealth when we buy goods made outside of the US. We trade something we have for something we desire more. This means that both we and the party we trade with are better off, as we both have something we wanted more. In the case of buying Chinese made goods, we are trading dollars for those goods. This is not much different than trading dollars I've earned in California to someone in Michigan for a car made there.

" All those dollars end up in China. China then turns around and buys more of our bonds with our own dollars."

Those are no longer 'our own dollars', remember? we traded them for TVs or some such. They now belong to China. As the Chinese don't spend USD in their own country, they must return to the US eventually. Although China does buy some US exports, for the most part they have chosen to take IOUs by buying bonds.

"China is financing our government borrowing..."

Yes. In effect they are taking IOUs. Chinese workers are hurt by this, as they don't get full payment for their work.

The problem we should address is US government spending and borrowing, not the availability of credit from China.

"That doesn't seem sustainable to me."

It's not. The US government can't continue to spend money it doesn't have, and borrow it from China.

Removing those impediments could result in the greatest economic expansion in US history.

You are absolutely right. Reducing regulation and taxes would be the best thing ever for US business growth.

"If I save a $1 on a plastic toy that was manufactured in and shipped from China, I will probably spend the extra dollar on more stuff manufactured and shipped from China (if I shop at Wal-Mart, which I do)."

Well, James, it sounds like you're part of the perceived problem. :-)

"Your argument is that the extra saved dollar (times millions or billions of times/transactions) would result in more "other" jobs and possibly even higher paying ones.

I don't see that relationship. Can you please expand on how you reach that conclusion?
"

Try this. If I can buy things I need cheaper at Walmart, I have more money to spend elsewhere. I am better off. I'm richer.

One of the ways I enjoy spending that extra money is eating in a nice restaurant. My favorite waiter makes a good living on tips from me and others who also have extra money to spend. If the low prices at Walmart were raised because of tariffs or other impediments to cheap imports, I couldn't eat out as often, the restaurant would lose business, and my waiter might lose his job. I'm sure you can think of many other examples like this one to explain why low priced imports are a good thing. By the way, 50% of imports from China are raw materials & production goods, not consumer goods. These are used to make things in the US at cheaper prices.

As to unemployment; other than during recessions including the current one, unemployment has been
in a narrow range around 5% since the 1980s. Those former manufacturing workers you worry about have found other work, and it appears to pay better than their lost jobs, as per capita GDP is up during that time also.

 
At 9/17/2010 2:50 AM, Blogger PeakTrader said...

After squandering trillions of dollars and creating massive inefficiencies, over the past two years, this is a desperate attempt to raise tax revenues at the expense of lower U.S. living standards.

 
At 9/17/2010 3:27 AM, Blogger PeakTrader said...

Most Americans are unaware about the enormous benefit of China selling its goods too cheaply and lending its dollars too cheaply.

So, it's easier to raise taxes taking away that benefit than raising taxes directly.

 
At 9/17/2010 5:07 AM, Blogger juandos said...

bobble says: "if history (think japan) is any indicator, and i believe it is, this will not end well for china"...

Hmmm, you know bobble you remind me of an interesting point I saw on some sort of documentry about forty years ago even though its NOT exactly related to your point...

It had to do with steel rails from Los Angeles once extensive tram system in back in thirties being torn up to make room for wider, more car friendly streets...

Supposedly the Japanese bought all that 'scrap steel' and gave it back to us in the form of bombs and artillery rounds in WWII...

The documentry was one of those Standard Oil conspiracy thinges...

Still I can't help but wonder if there's a lesson in there somewhere for us today? Could our purchases of consumer goods from China be financing a build up of their armed forces?

China has its own potentially serious domestic problems...

From Seeking Alpha: China's Spending Alternatives

 
At 9/17/2010 5:09 AM, Blogger Jet Beagle said...

James Frasch,

The decline in U.S. manufacturing jobs does not imply a decline in U.S. manufacturing. Just prior to this global recession, U.S. manufacturing value-added GDP - adjusted for inflation - was at an all-time high. The U.S. is still the world's leading manufacturer. At the same time, U.S. imports and U.S. exports reached all-time highs. And - this is probably the most important point - real U.S. income per worker reached all-time highs.

You asked about the service jobs which will be created in the U.S. If you want to know what jobs this economy will produce in the future, do a little research. Just go to Google and type "fastest growing jobs in America".

 
At 9/17/2010 6:12 AM, Blogger Jet Beagle said...

Why does anyone believe that low-value labor intensive manufacturing would have remained in the U.S. were it not for alleged Chinese currency manipulation? Such manufacturing was being moved to such nations as Taiwan, Mexico, Costa Rica, and Pakistan long before the emergence of China.

 
At 9/17/2010 8:02 AM, Blogger juandos said...

"Such manufacturing was being moved to such nations as Taiwan, MEXICO, Costa Rica, and Pakistan long before the emergence of China"...

Ahhh jet beagle, remember the heady days of yesteryear when there were all sorts of dire warnings about the Maquiladora Industry?

My! Oh my! How times have changed...

 
At 9/17/2010 8:59 AM, Blogger morganovich said...

bobble-

my mistake on the "booble". it was a typo, not a deliberate statement. as you may have gleaned from my prior posts, i type like an epileptic monkey with mittens on. no slight was intended.

i'm not sure your argument about the lending holds. first off, if you were a beneficiary of a cheap loan, you probably still made out better post crash (so long as you could pay your loan)

more importantly, we are not going to be bailing out china, so why it it your problem if they get buried?

 
At 9/17/2010 12:39 PM, Blogger bobble said...

morganovich: "my mistake on the "booble". it was a typo "

glad to hear that.

lol, i get the "booble" tag here a lot. it never bothers me because it generally comes from the lunatic fringe. since you are one of the most rational CD posters, i was a bit taken back :o]

 
At 9/17/2010 12:56 PM, Blogger James Fraasch said...

Still not in agreement with the logic to reach the conclusion that sending money to China (or any other country) is fine since it is a mutually beneficial agreement.

We are not only losing some manufacturing jobs but also many service jobs to overseas companies. The US Govt puts far too many demands (comparatively speaking) on corporations to comply with taxes and regulations. It raises the cost of business far and above just the simple difference in tax rates that currently exist between countries.

I am an elected official on a school board. I concern myself with being competitive with other school districts. Our test scores are there, our teachers our there, but our taxes are 10-15% higher than everyone else who offers very similar services and standards. Over time this will create a drain on our community as families who would otherwise choose to live here find out they can get the same services for less taxes in neighboring communities. That's just logic.

This is not far off from how I see the China scenario. Eventually we will export away all our productive pieces and be left with what? A service economy? We can't all be waiters and waitresses or retail clerks selling imported goods.

In the short term the exporting of jobs and/or manufacturing may not be seen as a bad thing, especially as we have been at almost full employment for a decade. But when we are where we are today, wouldn't it be nice to have all those jobs back? I have to do some more thinking about the logic behind the long-term impact (which I view to be negative) of exporting jobs and production overseas. I'll get back to you on that.

James

 
At 9/17/2010 2:57 PM, Blogger bobble said...

Ron H:>>> [yuan manipulation affects is US debt. it facilitates the run up of US debts both private and public]

Allows? - yes. Causes? - no. Credit being available doesn't mean you have to use it. <<<<


have to? - no. causes? - yes.

do low prices cause people to buy?

do high taxes cause people to work less?

low priced credit from china causes the U.S. to borrow more, both private and govt.

 
At 9/17/2010 3:52 PM, Blogger Jet Beagle said...

James Fraasch: " Eventually we will export away all our productive pieces and be left with what? A service economy? We can't all be waiters and waitresses or retail clerks selling imported goods."

There is absolutely no evidence to support this assertion. As I pointed out before, U.S. manufacturing over the past decade has been stronger than ever in history. Despite all the outsourcing of low-value, labor-intensive production, U.S. manufacturing value-added GDP reached an all-time high in 2004. And then surpassed that high in 2005. And then it reached another high in 2006, and again in 2007. Real U.S. manufacturing value-added GDP was about the same in 2008 as it was in 2007. It was only during this very recent global recession that manufacturing GDP declined.

Perhaps the problem is that you do not understand what is meant by "real manufacturing value-added GDP". If you do not, please visit the Bureau of Economic Analysis website and learn what you do not know.

 
At 9/17/2010 4:09 PM, Blogger Jet Beagle said...

James Fraasch: "and be left with what? A service economy? We can't all be waiters and waitresses or retail clerks selling imported goods."

Do you truly not understand what is meant by "the service sector"? Are you unaware of what jobs are considered service jobs? Here's a small list of service jobs in addition to the two you listed:

Job title and persons employed

registered nurses - 2,583,770
EMT's and paramedics - 217,920
nurses aides - 1,438.040
polive officers - 641,590
accountants/auditors - 1,106,980
truck drivers - 2,385,710
HVAC/refrigeration technicians - 244,410
auto/truck mechanics - 839,800

I could list hundreds of other service jobs which are thriving in America. If you do not understand that the service sector has been larger and employed more workers than the manufacturing sector for many decades, then perhaps you should learn that.

 
At 9/17/2010 5:26 PM, Blogger PeakTrader said...

Jet Beagle, yes, the service economy also includes outsourcing to replace work done in-house:

Outsourcing — the practice of using outside firms to handle work normally performed within a company — is a familiar concept to many entrepreneurs...entire industries have evolved to serve companies' outsourcing needs.

Benefits of outsourcing:

Control capital costs.
Increase efficiency.
Reduce labor costs.
Start new projects quickly.
Focus on your core business.
Level the playing field (between large and small firms).
Reduce risk.

 
At 9/17/2010 7:40 PM, Blogger Jet Beagle said...

Peak Trader,

That's true. One often ignored fact about the so-called alarming decline in manufacturing jobs is that many of them did not disappear at all. When a factory outsources its security force, for example, the positions are moved from the manufacturing sector to the service sector. In such a case, the BLS statistics will record a decline in manufacturing jobs and an increase service jobs.

I'm not arguing that real production jobs have remained the same. Over the past four decades, though, far more production jobs have been eliminated through automation than through offshoring.

 
At 9/17/2010 7:56 PM, Blogger Jet Beagle said...

James Fraasch: "This is not far off from how I see the China scenario. Eventually we will export away all our productive pieces and be left with what?"

The facts are just the opposite of your vision, James. As U.S. imports from China have increased the past decade, U.S. manufacturing output has risen to all time highs. We produce much more today in the U.S. than we did 15 years ago or 20 years ago or 30 years ago. Here's the facts about real, inflation-adjusted U.S. manufacturing value-added GDP:

2003 - reached all time high

2004 - a new all time high

2005 - a new all time high

2006 - a new all time high

2007 - a new all time high

2008 - a slight decline, but still the second highest year ever

2009 - global recession reduced manufacturing GDP to 2005 levels, but still the 5th highest year ever

U.S. manufacturing the past decade was stronger than ever,and growing. That's a fact.

 
At 9/17/2010 10:16 PM, Blogger Ron H. said...

bobble, I see our entire disagreement is because we use different definitions of the word "cause".

By your definition the availability of credit 'causes' debt. If your bank offers you a $20k line of credit, it has 'caused' you to borrow that amount, and go into debt. You don't see this as your responsibility, but that of the bank.

Likewise, if the US government spends more than it earns and asks for loans to make up the difference in the form of selling bonds, then those who buy those bonds including other country like Japan and China, and US financial firms and even private citizens, are 'causing' the US to be in debt. The 'cause' of the debt isn't government overspending and borrowing, but all those who loan the money.

I think I've got it now. Let me know if that's not correct.

Incidentally, I don't see how private borrowing fits in here.

 
At 9/17/2010 10:19 PM, Blogger Ron H. said...

James, you seem to be valuing money for itself. Money only has value for what it represents. I assume you get paid for your work, so money you earn represents your labor. You can trade that labor for many other things like food, rent, a new car from Michigan or a TV from China. It's all the same. You are trading your labor for things you want more. The beauty of money is that it represents whatever you want it to.

If you don't worry about sending money to Michigan for a car or sending money to California for artichokes, you shouldn't worry about sending money to China for a TV.

Read the comments from JetBeagle carefully. He is explaining things much better than I am.

 
At 9/18/2010 12:08 AM, Blogger bobble said...

Ron H:"By your definition the availability of credit 'causes' debt. If your bank offers you a $20k line of credit, it has 'caused' you to borrow that amount, and go into debt. You don't see this as your responsibility, but that of the bank."

ron, we're still not on the same page.

the key here is the *price* (of available credit).

price affects human consumptive behavior. this is one of the cornerstones of economics.

example: the lowered *price* of chinese merchandise *causes* people to consume more chinese merchandise.

likewise, if the *price of credit* is lower, people will consume more of it. this is not the lenders fault or the borrowers fault. its just a line on a supply/demand graph.

a side effect of the yuan manipulation is a flow of lower priced credit to the US. china doesn't do this on purpose. its an inescapable result of the currency manipulation.

the lowered price of this credit causes U.S government and private entities to consume more credit. there is no coercion. economics dictates that at a lower price, more will be consumed.

is this bad or good? could be either.

my original point was; this increased credit consumption was used to finance a housing bubble and mammoth government budget deficits. to me that's bad.

let me rephrase your statement so that i agree with it.

At current interest rates i don't have a desire (economic reason) to increase my debt level. If my bank lowers the interest rate sufficiently on a loan, this will 'cause' me to borrow and go into debt. It is my responsibility to pay that debt back.

 
At 9/18/2010 2:03 PM, Blogger Ron H. said...

Bobble, OK, we're close enough on the 'cause' definition., but I see another problem.

Is it possible that you are conflating FED policy as regards interest rates with currency exchange rates?

"price affects human consumptive behavior. this is one of the cornerstones of economics."

Absolutely.

"?example: the lowered *price* of chinese merchandise *causes* people to consume more chinese merchandise."

Yes. This is a marginal effect, however. You will only buy so many toasters even if the price approaches zero.

"likewise, if the *price of credit* is lower, people will consume more of it."

Yes. The *price of credit* being the interest rate. Again, this is a marginal affect. It appears that people and businesses have consumed as much credit a they can possibly swallow, and in some cases MORE than they can swallow, as evidenced by the vomit of loan defaults and foreclosures. With interest rates effectively at 0%, government attempts to force more borrowing down our throats isn't working.

"a side effect of the yuan manipulation is a flow of lower priced credit to the US. china doesn't do this on purpose. its an inescapable result of the currency manipulation."

No. The price of credit, or interest rate, is not a result of the exchange rate of two currencies. Buying or selling bonds can effect interest rates and liquidity but pegging an exchange rate isn't involved.

As to private borrowing, FED rates being held low during a time when government influence encouraging home ownership and lending to marginally qualified people had much to do with creating a housing bubble and encouraging higher personal debt while discouraging savings.

 
At 9/18/2010 3:20 PM, Blogger bobble said...

ron, i think we're mostly on the same page now.

but, i would like to address this:

Ron H:"No. The price of credit, or interest rate, is not a result of the exchange rate of two currencies. Buying or selling bonds can effect interest rates and liquidity but pegging an exchange rate isn't involved."

actually, i think we agree on this. i just tried to simplify my post by leaving out some of the process.

to peg the yuan at an artificially low value in dollar terms, china buys dollars. they warehouse those dollars by buying dollar denominated bonds including, but not limited to, treasuries.

their aggressive buying increases the price of the bonds. the interest rate of a bond moves inverse to the price. thus, the interest rate of dollar denominated bonds falls.

overall, the process that china uses to peg the yuan exchange does lower interest rates in the U.S.

Ron H:"Is it possible that you are conflating FED policy as regards interest rates with currency exchange rates?"

me conflate? lol, that could never happen :o]

seriously tho. my view is that china buying all those treasuries enables the FED's profligate ways.

 
At 9/18/2010 6:05 PM, Blogger Ron H. said...

Bobble, I think we are probably as close as we are going to get on this.

I am pleased with your final sentence:

"seriously tho. my view is that china buying all those treasuries enables the FED's profligate ways."

- which I agree with.

The word 'enables' more closely resembles my definition of 'allows' than 'causes'.

Thanks for the discussion, but my fingers are tired. :-)

 
At 9/18/2010 8:54 PM, Blogger James said...

If the Chinese want to sell us cheap goods, that's to our advantage.

Let’s take a look at the first time this argument was used in the United States. Great Britain settled North America in order to import raw materials and later as a market for British manufactured goods. As British Prime Minister Robert Walpole put it in 1721 “it is evident that nothing so much contributes to promote the public well being as the exportation of manufactured goods and the importation of foreign raw materials.” To promote that end Walpole imposed tariffs on imports subsidized exports. For Britain’s North American colonies an outright ban on advanced manufacturing was imposed.

After gaining independence most imports still came from Britain and were paid for with raw material and farm exports. Adam Smith advised America to continue that way and if Thomas Jefferson had had his way it likely would have no matter that Alexander Hamilton wanted high tariffs.

But war changes everything. In 1793 England went to war with France and soon Holland and Spain joined in. All the warring states put their merchant ships in safe harbor and kept them there. This had two profound effects of the US economy. First American shippers rushed in to fill the void to supply farm products to the world. American shippers remained a force in world trade until they became one of the first victims of free trade in the 1950s.

The second and more important effect was the birth of American manufacturing. The economic isolation caused by this war and the later War of 1812 made manufacturing very profitable.

After peace returned in 1814 Great Britain returned to the market to find a large amount of competition. British producers soon noticed that their domestic competition had an Achilles' heel. What we would today call a week balance sheet. They decided to sell product below cost to drive out local producers. Domestic producers appealed to Congress for tariff help only to be told “If the Chinese want to sell us cheap goods, that's to our advantage” or rather if England etc. Before long local manufactures were driven out of business. England then reaped huge rewards due to little competition. The cheap price of dumped goods was soon made up and consumers had to pay up.

That set up the tariff battle line that was eventually won by the trade protection side. On one side was the mostly Northern manufactures and on the other side were Northern shippers and farmers. The early phase of the fight went to the free traders but when European markets collapsed in 1819 Northern farmers joined the call for protection. That tipped the balance of power and lead to the 1828 “Tariff of Abominations” which was the largest tariff we ever had. Higher that the 1930 Smoot-Hawley tariff.

With tariffs the nation and its citizens prospered.

 
At 9/18/2010 10:20 PM, Blogger Ron H. said...

"With tariffs the nation and its citizens prospered."

"And they all lived happily ever after."

Did they really? Thanks for the interesting story, James, but why stop with the 'Tariff of Abominations'? As a student of history, you must be aware that this tariff began driving a wedge between Northern industrial states, and Southern agricultural states, and along with other difficulties ultimately led to the Civil War. Of course the Northern industrial producers who no longer had to compete with foreign competition were pleased.

You have made this argument for tariffs before, and I'm not sure why you think that if we all pay more for things, we will be better off.

Unemployment in the US, other than during recessions, has been in a narrow range around 5% since the 1980s. The US is still the world's largest manufacturer, while real income per US worker has reached all time highs. So what's the problem? The goods produced cheaply in China are mostly low margin goods that US manufacturers have long since moved past. There is no money to be made there.

Please read the thoughtful and informed comments by JetBeagle on this thread. You might reconsider your call for tariffs.

You have probably also previously heard the argument that imposing tariffs on goods reaching the US border make as much sense as imposing tariffs on goods made in New York when they reach the California border. Think about it. One of the reasons this country is prosperous is that all US States conduct business with each other in a total free trade zone.

Why not allow everyone to do what they do best and then trade freely for things that others do best?

 
At 9/18/2010 10:47 PM, Blogger Ron H. said...

"Robert Walpole put it in 1721 “it is evident that nothing so much contributes to promote the public well being as the exportation of manufactured goods and the importation of foreign raw materials. To promote that end Walpole imposed tariffs on imports subsidized exports. For Britain’s North American colonies an outright ban on advanced manufacturing was imposed."

This is a politician speaking. Would you really trust him to work in everyone's best interest, or do you think he was concerned with the interests of a group of his supporters? You know, much like politicians today.

If exporting manufactured goods and importing raw materials was the best arrangement for everyone, why was it necessary for Walpole to impose tariffs and provide subsidies? Wouldn't the market work automatically toward the most efficient arrangement without government interference?

You will also recall that bans on manufacturing and numerous other unpopular impositions and regulations eventually caused the colonies to hand Britain its ass on a platter.

 
At 9/19/2010 12:54 AM, Blogger James said...

Ron H.

I am an engineer and I am very careful with my numbers. I have had a graduate course in statistics. Do not expect to bamboozle me with fudged numbers. Real wages of what are generally called blue collar workers, about 80 percent of the workforce, are not up they are down having last produced a record high in 1973. See

http://www.workinglife.org/wiki/index.php?page=REAL+WAGES++1947-2000

To be sure there are lots of ways to obscure that decline. One is to use household income. That allows the more than one wage earner household income of today to be compared with the single wage household income of the past.

Another is to use average income. That allows the growing wages of high income earners like Bill Gates to more than offset the declining wages of blue collar workers. Add Wall Street bonus to income and it will more than offset blue collar wage declines.

The reason we are better off if we have tariffs and pay more is that the set of people who are consumers and the set of people that are workers are for all practical purposes the same people. As noted above real wages are declining. Since real wages reflect the price of things a decline in real wages means that wages are going down more than prices are going down.

Here is what JetBeagle is missing: When government measures US manufacturing output it includes the value of imported parts used in the product. When the Toyota plant in Georgetown, Kentucky installs a starter motor made in Japan in a Camry the value of that starter is counted, by the government, as US manufacturing output.

This is not rocket science but you do have to pay attention and understand that our government is solidly behind free trade and will let unemployment rise and real wages decline to whatever in order to protect free trade. To that end government is willing to fudge the numbers. See Bill Gross “Haute Con Job” and Kelvin Phillips’s “Lies, Damn Lies and Government Inflation Statistics.”

 
At 9/19/2010 3:10 AM, Blogger sethstorm said...


If you don't worry about sending money to Michigan for a car or sending money to California for artichokes, you shouldn't worry about sending money to China for a TV.


Except that China is a regulatory domain that is beyond the control of the US. Michigan and California are not so due to the federal government.

 
At 9/19/2010 4:27 AM, Blogger Ron H. said...

James, thanks for your response and the information. I'm greatly impressed by your graduate course in statistics and will remember not to bamboozle you with fudged numbers, as I see you are aware of such trickery. :-)

I will read your references and respond later, but for now, I will address your wage chart from Working Life.

Some questions:

- Why does this chart only show data through 2000?

- What is the special magic of 1982 dollars?

- You suggest that government will fudge numbers, which I agree with, but this chart indicates it is based on BLS numbers, so what gives it special verity?

- Can I assume that the chart represents wages for production workers, in other words goods producing workers that represent approximately 20% of the private workforce?

You mention 80% of the workforce being blue collar workers, but there aren't that many in manufacturing so please clear that up.

A couple of comments:

- Nobody takes numbers for household income seriously except news reporters and commentators who don't know any better.

- What I see so far seems to indicate that manufacturing jobs in the US aren't desirable. The number of workers hasn't increased since the 1970s, while the number in service industries has increased dramatically. If per worker income is indeed higher, this must be where the increases are.

- Why do you think a Japanese made starter is a problem? If the whole car was imported as parts and assembled in the US, there is still value added. If not sub-assemblies, what production goods and raw materials would you include in manufacturing output?

This sounds like what Walpole called goodness. The importing of raw materials and the production of finished products.

By the way, that job manufacturing starters isn't likely a good paying or desirable job. I can't imagine saying "Son, I hope when you finish school you will be able to get a job making starters at that big starter factory across town."

 
At 9/19/2010 9:23 AM, Blogger sethstorm said...


Why do you think a Japanese made starter is a problem?

The country of origin was not the United States. Second, the manufacturing standards would not be up to the US's own. The same applies for companies that try to appear domestic to the US, but are truly foreign subsidiaries.

The only thing you've indicated is that service sector work is more disposable.

 
At 11/13/2010 7:09 AM, Blogger Harry@Platt said...

oh comon, it couldnt be clearer that US trys to inflate the rest of the world because that will make US's debt cheaper.
The reason why China need more foreign reserve is the fear of another hot money attach as what happened decade ago. RMB will be appreciated in the near future, that is for sure, therefore the risks/costs for chinese central gov to buy the RMB using its current foreign reserve. China is accumulating the USD in order to against the future speculative capital in-flow (in plain english: another asian financial crisis.).
Americans were just using the currency issue to please the voter.

 

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