Saturday, October 02, 2010

China's Currency Policy is the Greatest Anti-Poverty Program in America, Why Should We Complain?

Warren Meyer writing in Forbes asks "Why Are Democrats Promising to Raise Prices?" by pressurng China to appreciate its currency instead of celebrating cheap imports from China as one of the most effective anti-poverty programs in America today?
Democrats claim the American manufacturing base is declining in the face of unfair competition from a Chinese government that is unfairly helping its own manufacturers through currency manipulation and export subsidization. To which I say: So what?

We should be thrilled that the Chinese government and its people see fit to spend their own money to subsidize lower prices for American businesses and consumers. Last week, President Obama put substantial pressure on the Chinese prime minister to revalue Chinese currency, a revaluation that would have the effect of raising prices of all Chinese goods in the United States. What possible sense does such a move make, particularly in a recession?

There is no question that if Democrats are successful in changing China’s currency policy and/or imposing new tariffs (taxes) on Chinese goods, prices will rise for all Americans, but particularly so for the lower income brackets that are supposedly the Democrats’ constituency.  In a sane world, Democrats would be celebrating Chinese imports as one of the greatest anti-poverty programs that exist in America today. 

29 Comments:

At 10/02/2010 11:12 AM, Blogger Buddy R Pacifico said...

Markets are the greatest anti-poverty programs for not only America but the rest of the world. Correct?

There are several overriding issues that China is controlling that are market crushing. They are no market for the yuan, ignoring foreign intellectual property rights, subsidies for exporters and domestic market openings restricted to joint government ventures. All of these are resulting in greater government ownership, not privatization, of almost all industries.

Greater government control of all industries is market restriction and contraction (duh). This is a serious setback for consumers who produce and rely on growth of markets to improve their lives.

 
At 10/02/2010 11:46 AM, Blogger jorod said...

Chinese are killing companies with union labor. At the same time they use their own cheap labor to destroy other competitors. Where will this lead, nobody knows. Perhaps, in the end, the Chinese will suffocate under a mountain of overproduction.

 
At 10/02/2010 12:35 PM, Blogger James said...

Economic Theory

Firms get the maximum profit by taking the market price for their product. To be sure there are good reasons to deviate from the market price. For example, selling below the market price can intimidate others from entering the market or to pressure the competition. If the 1950s and 1960 it was very common to see Ford and Chrysler announce price increases for their now model year cars only to roll them back after General Motors announced a smaller increase. General Motors had a lower cost of production due to economies of scale. Rather than take the full market price they accepted a lower profit in order to pressure the competition.

There are many factors that enter into the market price but the cost of production is not one of them. Costs tell the firm whether or not the firm should offer a product in the market. Studebaker, the South Bend Indiana car maker could not make a profit at the market price. As a result they left the market.

Application

When firms move production to China to get cheaper labor and thus reduce the cost of production they need not pass any of that cost savings on to the consumer and they do not. If they do lower price the completion matches that price. If profits are squeezed the competition can also go to China. So why give the consumer a break?

Conclusion

The lower prices of outsourcing are an illusion. This is especially true for the poor who are hurt more than others. Outsourcing causes wages to decline more than prices and that is shown in the numbers:

The Numbers

The harm done by free trade is reflected in the U.S. Bureau of Labor Statistics series “Real average weekly earnings for production and non-supervisory employees on private non-farm payrolls, seasonally adjusted” usually referred to as Average Weekly Earnings or Real Wages. The current reading is at reference [1]. A tabular history of the series can be seen at reference [2] and a chart at page 26 of reference [3] which you can see at Amazon if you have an account. These data show that the last time real wages made an all time high was 1973.

Using the BLS Inflation Calculator [4] with the data we get:

1973 wage of $332 (1982 constant dollars).... 750 (2010 dollars)
2010 wage of $298 (1982 constant dollars).... 673 (2010 dollars)

The difference is a loss of $77 a week or $4000 a year. That is the amount of decline that the average worker has lost in real wages since 1973. In my judgment that is a serious decline in prosperity.

By comparison consider what real wages did from 1947 to the high in 1973:

1973 wage of $332 (1982 constant dollars).... 750 (2010 dollars)
1947 wage of $196 (1982 constant dollars).... 443 (2010 dollars)

The difference is a gain of $307 a week or $15,964 a year. Just think of what a wealthy nation we would have been if we had continued to grow from 1973 instead of decline.


References

[1] Current Average Weekly Earnings data at
http://www.bls.gov/news.release/realer.t02.htm [2]

[2] Table of Weekly Earnings data 1947-2000 at http://www.workinglife.org/wiki/REAL+WAGES++1947-2000

[3] Ravi Batra, The Myth of Free Trade: The Pooring of America

[4] BLS Inflation Calculator http://data.bls.gov/cgi-bin/cpicalc.pl

 
At 10/02/2010 1:47 PM, Blogger PeakTrader said...

The Obama Administration wants Americans to produce more and consume less to raise tax revenues, provide the illusion of prosperity, preserve big government, and protect states from bankruptcies, particularly to those who believe the past 10 years were the "Lost Decade."

 
At 10/02/2010 1:51 PM, Blogger Methinks said...

Buddy, this seems to be a problem a problem for the Chinese. Let them worry about it.

James,

I was going to say that this is a fine piece of post hoc ergo propter hoc being peddled as research until I realized that we didn't have anything that could pass for "free trade" during that period of time. Or now, for that matter.

Many variables go into the price of labour. To look at trade policy only and declare that all variation in the price of labour results from a single policy is ridiculous. Mischaracterizing that policy as "free trade" makes it laughable.

 
At 10/02/2010 2:00 PM, Blogger Methinks said...

Peak, the problem with the bama is he can't understand that simple math where a tax increase on the marginal dollar creates a disincentive to create that marginal dollar. Much better to blame it on China and the long gone Bush.

He kind of reminds me of Stalin, who seriously and naively expected the peasantry to increase agricultural production even though the state would take the entire increase and more as tribute to him. Obama seems to be genuinely confused by people's unwillingness to toil for his majesty.

 
At 10/02/2010 2:15 PM, Blogger PeakTrader said...

Methinks, the situation reminds me of the saying: "Who is the greater fool, the fool or the fool who follows him."

 
At 10/02/2010 2:22 PM, Blogger Buddy R Pacifico said...

Methinks said...
"Buddy, this seems to be a problem a problem for the Chinese. Let them worry about it>"

Methinks, don't you worry. Those of us that actually struggle to open markets will support your choice to consume in them when they open.

 
At 10/02/2010 7:59 PM, Blogger Ron H. said...

"All of these are resulting in greater government ownership, not privatization, of almost all industries."

Thanks for the interesting article, Buddy. This is unfortunate for the Chinese people, but I don't see how it affects our being helped by their generous subsidies of our imports.

Markets COULD be a great anti poverty program in China if they were allowed to operate freely, but they aren't. Perhaps if you addressed that concern to the Chinese government...

 
At 10/02/2010 8:12 PM, Blogger Methinks said...

Buddy,

That's mighty nice of you to consume in a free market and all. But, my ability to consume is not why I favour a free market.

I favour a free market because a free market allows me to make personal choices unmolested by the state. I can come to my own personal, production and consumption arrangement.

Free markets are not an anti-poverty "program". While rising out of poverty for the majority of the population is often a bi-product, it is not a purpose of the free market. For the free market has no purpose - it is merely a condition of being where adult individuals are free to come to their own uncoerced arrangements with other individuals.

They haven't the power to raise anyone out of poverty. But they do allow an individual the freedom to lift himself out of poverty. And that's exactly what individuals usually do.

I think we have to be careful in how we talk about the free markets, especially in light of the statist utopian promises and claims that the (let's face it - nonexistent) free market did not deliver on the promises of prosperity. No such promises were made. All it promises is uncoerced choice, the power of the little individual over his own life stripped from the powerful and mighty in government and giving it back to him, the rightful owner.

That is all that free markets promise and that is everything.

 
At 10/02/2010 9:34 PM, Blogger juandos said...

You all might want to take a look at these numbers: US-China Trade Statistics and China's World Trade Statistics

 
At 10/02/2010 10:08 PM, Blogger rufus said...

That was a good link, Juandos.

Low prices don't mean much if you don't have a job.

Look, the Austrians could draw you a nice elaborate chart explaining how this will all work out "In the End," but they won't mention that it might take 100 Years. Meantime, the Chinese pick off our industries, one by one, until we all starve to death.

No "Economic Model" can model "Time." Ergo: ALL Economic Models are, in any practical sense, pretty much worthless.

Common Sense, on the other hand, will hardly ever let you down.

 
At 10/02/2010 11:54 PM, Blogger bobble said...

low prices are nice.

just don't hold your breath waiting for the "bond vigilantes" to stop the ever expanding US debt bubble.

as a result of the yuan manipulation, china has hundreds of billions dollars to purchase US treasuries.

this enables the US government to run deficits out as far as the eye can see. china supports this. US austerity is not in china's interest.

 
At 10/03/2010 12:02 AM, Blogger bobble said...

democrats?

over half the republicans in the house voted for it

 
At 10/03/2010 12:24 AM, Blogger Ron H. said...

James, you have presented that table from "Workinglife" before. I asked you previously why you trusted these BLS numbers, but not other government numbers, including BLS numbers, which you considered "fudged", but you didn't respond. I still have the same question.

I promise I won't try to bamboozle you as I remember that you have taken a graduate course in statistics, and are therefore immune to bamboozlement.

The BLS inflation calculator you provided a link for may be one of those tools used to produce fudged numbers. As has been discussed exhaustively in previous threads at this blog, the CPI may not be a good measure of the true cost of living or rate of price inflation.

You might find this one more useful, as it provides several methods besides CPI.

"The lower prices of outsourcing are an illusion. This is especially true for the poor who are hurt more than others. Outsourcing causes wages to decline more than prices and that is shown in the numbers:"

Do you really mean offshoring?

By the way, outsourcing could be one reason for a shrinking number of manufacturing jobs. Over the years manufacturers have outsourced many functions such as accounting, payroll and janitorial services so they can concentrate on their core business. This causes those outsourced jobs to now be counted as service jobs instead of manufacturing jobs.

 
At 10/03/2010 10:10 AM, Blogger juandos said...

First and foremost how many US manufacturing outfits head off shore due to insidious and insane EPA interferences?

Did any of you happen to read this Art Laffer commentary in the WSJ back in August of this year?

The Soak-the-Rich Catch-22

Doesn't this commentary describe much of the ‘Manchurian Candidate’'s candidate present attitude today?

Between these two situations what other choice to do we have other than depending on China?

 
At 10/03/2010 12:50 PM, Blogger James said...

Ron H.,

Indeed you raised this point before and I failed to respond. I had intended to but got busy and let it fall through the cracks. I apologize for the delay and I will respond now.

Just to reiterate the problems that make the CPI understate inflation as compared to the way it was once calculated:

• Richard Nixon developed the division of “core” and “headline inflation” to hide inflation in food and energy.
• Ronald Reagan took housing out and replaced it with “Owner Equivalent Rent” to make CPI smaller than it would otherwise be.
Product Substitution. If flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon).
Geometric Weighting. Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption.
Hedonic Adjustment. A computation by which additional quality is attributed to a product or service. The government says that if the quality of a product got better over the last 12 months that it didn’t really go up in price and in fact it may have actually gone down!

I do not trust the CPI but I use them because you have to play the hand you are dealt and this is the most commonly used index. Comparing value then and now is a problem for which there is no iron clad solution. What we are doing here is what academics call: “decision making under conditions of uncertainty.”

I would point out that without the fudging of the CPI the comparisons made in the earlier post would have been even more dramatic. This is because each and ever one of the changes above makes inflation less than it would have been had the change not been done. A higher inflation would reduce the 2010 real wage.

You are correct in that I used outsourcing wrongly. Sloppy of me. I should have said jobs done outside the country that used to be inside the country. A company buying a service from an in country supplier rather than doing it themselves if not causing a problem.

 
At 10/03/2010 2:29 PM, Blogger PeakTrader said...

Ron, I suggest you read:

"Common Misconceptions about the Consumer Price Index: Questions and Answers"

To see why your assumption about inflation is weak, biased, and unscientific.

 
At 10/03/2010 2:47 PM, Blogger PeakTrader said...

Juandos, yes, many people seem to believe the rich "receive" too much wealth.

Would the poor be better off if the top 10% created a trillion dollars of wealth or if they didn't?

 
At 10/03/2010 2:51 PM, Blogger Ron H. said...

James,

Thanks For your response. In my opinion, for all the reasons you listed, the CPI is virtually useless for making comparisons over long periods of time. Even though, as you say, it may understate the true change in manufacturing wages, I would not want to rely on only that chart you link as proof of anything. There are many other factors involved, so I don't understand how you can say that wages have fallen more than prices over time, as the measure of both is uncertain. I believe you need to look elsewhere to support your assertion.

The idea that "free trade", which doesn't exist in the real world, somehow hurts my standard of living doesn't make sense. I don't see your connection of foreign trade and a lower standard of living. It seems to me that we should direct our efforts to those things we do best, and trade with others for what they do best. Division of labor, absolute & comparative advantage, and all that.

You mentioned auto makers in the '50s and '60s. Did you notice how much the quality of those domestic cars improved over time when faced with stiff foreign competition? Do you consider that a bad thing?

Also, if you will accept some other government numbers, you will agree that US manufacturing output has risen over time to the highest level ever. This despite fewer manufacturing workers. So, what's the problem

 
At 10/03/2010 3:41 PM, Blogger Ron H. said...

LOL Thanks for the link, Peak, but it's a BLS defense of the CPI! Doesn't this strike you as a pretty laughable? Would you expect them to say that it's inaccurate & shouldn't be trusted?

Here's a sample: ...the CPI's objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction."

So, the BLS can measure my satisfaction level with the food I buy? They must feel that I'm just as happy with hamburger as I am Porterhouse steak. I'm not sure how they determined that though, as they didn't ask me.

The "hedonic quality adjustment" is another joke. The BLS description includes the term "estimate" which you understand means "guess", right? I can't fathom how The utility of a new feature on a TV can be measured. This will be valued differently by different people, obviously.

Perhaps the CPI shouldn't be taken so seriously. It's too bad that real world policy is made using such a flawed model.

Like with other complex models, (think climate) the outputs never quite reflect the real world.

I'm not sure which of my weak, biased assumptions you were referring to, but let me return the reading suggestion favor by recommending something I'm sure you'll find enlightening, as I did.

 
At 10/03/2010 5:49 PM, Blogger James said...

RonH,

Did you notice how much the quality of those domestic cars improved over time when faced with stiff foreign competition?

That is a commonly held misconception. If fact it was the high quality of American cars that improved the quality of foreign cars which allowed their cheap labor to almost destroy domestic production. I will explain what really happened.

First, a note about Toyota, which is often praised by free traders for saving US consumers from poor quality products. Few companies owe as much of their success to trade protection as does Toyota. Toyota started out as Toyoda Automatic Loom a manufacturer of textile machinery. At the time Japan’s biggest export was silk. They moved into car production in 1933. Their product was very poorly made. Had Japan followed free trader theory they would have purchased from the most efficient producers GM and Ford which were operating in Japan at the time. Instead Japan chose to protect their industry. In 1939 Japan kicked GM and Ford out of the country. After the war they protected Toyota and the government gave them money. In 1958, after 25 years of trying to make a decent car, Toyota exported their first car to the US. It was a piece of junk called the Toyopet. It failed. Convinced that industry was more important than silk, Japan kept on protecting Toyota until they got it right. We on the other hand exposed GM, Ford, and the rest to the products of cheap foreign labor.

In the 1920s and 1930s American car companies were setting up production around the world producing a product superior to anything the locals could produce. At home American car companies competed with each other but had little foreign competition because of tariff protection. Things did not work out well due to local trade protection and the war. When the British surrendered Singapore to the Japanese negotiations took place in a Ford factory which the Japanese turned over to Nissan to assemble military vehicles.

Before World War II there were few imported cars. GIs returning from Europe brought back some cars and trade barriers were lowered in the 1950s and cars began to be imported. The imports were designed for high price fuel and winding lightly traveled roads. The high priced fuel resulted in small cars with small engines. Performance was gained with lots of gears. The winding roads caused them to be designed for good handling. All this and low wages in war torn Europe meant that the imports were cheap and fun to drive if you were ok shifting all those gears. The fly in the ointment was they were, except for some luxury cars, unreliable, expensive to maintain, too small to be a family car, and underpowered. They were basically 1915 Fords updated with 1939 technology. The VW bug which latter became a success did not even have a fuel gauge. Still they proved popular enough that in the late 1950s domestic producers came out with small cars to compete with them. The domestic small cars were of superior quality that they took substantial market share away from the imports. Competition from imports did not cause domestic cars to improve. It was better quality domestic cars in direct competition that drove the imports to improve. After that improvement it was the improved but still cheaper imports that caused domestic quality to decline as cost reduction became paramount. Squeezed by cheap foreign labor domestic manufactures almost went out of business in the 1980s except Ronald Reagan saved the industry by protection in the form of quotas. Because of the cheap labor domestic producers abandoned the small car market to the imports.

After the war, if the world had followed free trade theory, today Ford, Chrysler, and General Motors, along with free trade victims Studebaker, Nash, Hudson, and Willys would be car makers to the world. Instead they are weak high cost competitors nearly out of business. How did this happen? We blindly stuck to free trade while the rest of the world protected.

 
At 10/03/2010 7:28 PM, Blogger Ron H. said...

James, thanks for the lengthy but off topic history lesson. What an interesting story! Does nothing bad ever happen to businesses except "free trade", which doesn't really exist and certainly didn't exist in the past?

The extinct car models you mention were all gone by the early '60s, with the last Willys model year being 1955, so they weren't done in by foreign competitors. As you must be aware, companies start up, merge fail, evolve, are sold, and go out of business all the time for a variety of reasons not connect to foreign competition.

By the way you shouldn't try to bamboozle me with fudged history, as I'm an old guy, and I remember some of these things.

Another thing I remember is that GM and Ford introduced the Vega and the Pinto in 1971 as answers to small imports. If that was the best they could do, then maybe they deserved the beatings they took.

Speaking of manufacturing jobs and low pay, do you think that that unions had any influence on the failures of GM & Chrysler and near failure of Ford?

You are aware, aren't you, that when a government supports industry, such as Japan protecting auto makers, that means that Japanese taxpayers helped pay for my car, just as Chinese workers today are helping pay for the stuff I buy at Walmart, right?

Today Toyota successfully competes with US auto makers on their own turf, under the same conditions except in more business friendly states and without Union workers. Those Toyotas have more North American content than many Gm & Ford cars.

How is "Free Trade" involved here? That cheap foreign labor you decry isn't involved.

I believe that GM and Ford are both doing well in their overseas operations, including GM in China. Why not in this country? Is there something other than mythical "Free Trade" that might account for it?

 
At 10/03/2010 7:51 PM, Blogger PeakTrader said...

James says: "We blindly stuck to free trade while the rest of the world protected."

That helps explain why U.S. living standards improved substantially more than our protectionist trading partners, and allowed the U.S. to lead the rest of the world combined in the Agricultural-Industrial-Information-Biotech revolutions.

 
At 10/03/2010 8:00 PM, Blogger PeakTrader said...

Ron, if you read the entire link, you shouldn't find it "laughable."

"...a constant level of satisfaction" doesn't equal "They must feel that I'm just as happy with hamburger as I am Porterhouse steak," etc.

 
At 10/03/2010 8:19 PM, Blogger PeakTrader said...

The link says:

"Hamburger and steak are in different CPI item categories, so no substitution between them is built into the CPI-U or CPI-W."

"The CPI's objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction."

 
At 10/03/2010 10:41 PM, Blogger juandos said...

"Would the poor be better off if the top 10% created a trillion dollars of wealth or if they didn't?"...

Well PT as you well know we've yet to see a poor person get someone a job with a paycheck attached to it...

 
At 10/03/2010 10:51 PM, Blogger juandos said...

Regarding James history Cliff notes about foreign products especially the Japanese ones is quite interesting but I have to fault him for one small but not insignifcant bit of missing information...

The role played in the improvement of Japanese industrial product by one Dr. Edward Deming...

When I was young (late fifties to early sixties) Japanese electronics and electrical appliances were just shy of being absolute (pardon the word here) crap!

Deming's influence at pushing his 'total quality managment' filtered throughout the whole Japanese manufacturing over time...

Still I think James description of the situation is quite on target...

 
At 10/04/2010 1:55 AM, Blogger Ron H. said...

"Peak, you are right. My "hamburger to steak" comment wasn't fair. I know that the categories are separate.

What I thought was laughable was the idea of asking the BLS if a report they produce is an accurate indicator of my standard of living. I couldn't imagine any other answer than the one they provide.

Nor can I imagine how the BLS presumes to know my level of satisfaction and whether it's constant.

 

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