Consumer Greed Causes Trade Deficit With China
"What about the argument that American producers are undercut by cheap goods imported from low-wage countries like China? Whose fault is this? The answer is easy. If American consumers refused to buy goods produced in China, there would be no Chinese-made goods on store shelves.
American consumers who prefer lower prices to higher prices are the true enemy of American companies and their unions whining about "free but fair trade." They should show up in front of Walmart and other sellers of foreign products and denounce American consumers who buy foreign-made products. That would be honest. The "free trade but fair trade" lobby finds it more effective to pursue their agenda by stealth — namely intimidate and bribe congressmen into enacting tariffs and quotas."
73 Comments:
At least the Chinese make up for selling us cheap goods by buying expensive American college educations :)
Report: More Chinese students studying in US
Nov 15, 2010
Nearly 128,000 Chinese students studied in America in 2009-10, a 30 percent increase over the previous academic year, the annual study by the Institute of International Education found.
Chinese citizens comprise about 19 percent of the international students in the U.S., the highest percentage of any country. India and South Korea are next, accounting for 15 percent and 10 percent, respectively.
The U.S. hosts more international students than any other country — 691,000 last year, up 26 percent in the past decade — which experts say shows the appeal of the higher education model here.
Overall, they contribute nearly $20 billion to the U.S. economy through tuition, room and board, and other expenses, according to the U.S. Department of Commerce.
The top U.S. institutions hosting international students — with more than 7,000 each in the 2009-10 academic year — were the University of Southern California, University of Illinois and New York University.
When you flood stores with junk, the only thing that gets sold is junk thereafter.
Mr. Williams wants to turn citizen against citizen. If anything, strip Mr. Williams of his US citizenship, and throw him in a Third World factory. Then have him beg for citizenship back by reconsidering his position, given a first-hand account. That should make him wonder if he really thinks turning citizens against each other is a wise idea.
Bring on the tariffs with enough vigor and anti-circumvention in them, so that they actually stick this time around. Tariffs are open and honest weapons to deal with Third World junk.
At least the Chinese make up for selling us cheap goods by buying expensive American college educations :)
The more reason to modify civil rights law to deny them any seat. Then hand the seats to every single college-eligible US citizen. For free.
If you're worried about who pays, it can always be other internationals.
"When you flood stores with junk, the only thing that gets sold is junk thereafter"...
Well shame on you Professor Perry for 'flooding the stores with junk'...
ROFLMAO!
You still don't get the simple concept of market forces do you sethstorm?
sethstorm if you think there's a market for overpriced items made by overcompensated employees then here's your chance to put your ideas into real action by starting a business that caters to such conditions...
This would be a much better argument if consumers had better information about what they're buying. For instance, if you buy apple juice, you'll see for most brands a list of 5 or more countries the juice might come from, including China. Businesses understandably push back when asked to label where stuff actually comes from. You could avoid the famous "Made in China" sticker if you really wanted to, but what if you were ok with "assembled in China" but wanted to buy things with American-made components out of a principled stand against IP theft and Chinese government technology transfer requirements. It would be really hard to make an informed choice.
You still don't get the simple concept of market forces do you sethstorm?
I do. That junk overwhelms anything of quality by its volume, then all you get is junk.
Sean, that may work when paying a few extra cents for dolphin safe tuna. However, I doubt U.S. consumers, in general, will buy a $200 American microwave oven instead of a $100 Chinese microwave oven that works just as well.
Wal-Mart expands Black Friday hours, unveils deals...plans $298 laptop, $198 TV deal
November 15, 2010
Wal-Mart will offer discounts on a wide range of items from toys to clothing, including $9 Wrangler jeans and $15 Lego tubs. The company's big electronics sale...featuring $298 15.6-inch HP Laptops, $198 Emerson 32-inch LCD HDTV TVs and $59 Kodak Digital cameras.
Also, it seems to be a good deal for America when the Chinese exchange 1,000 microwave ovens for one college education.
Quote from sethstorm: "I do. That junk overwhelms anything of quality by its volume, then all you get is junk."
Americans are so stupid. They can't even stop themselves from buying crap, even when they know its crap.
When will the all knowing and beneficent Federal government finally step in to protect these ignoramuses from themselves?
"When will the all knowing and beneficent Federal government finally step in to protect these ignoramuses from themselves?"...
The federal government already has...
Here's two examples of the feds' asinine interference:
Example # 1
Example # 2
Juandos, example two says:
"If the Feds are right, automakers will spend $51.5 billion over the next five years putting the standards into effect and the average price of a new car will rise by $985 by 2016. Savings, though, are expected to be even greater, with the average consumer will net an extra $3,000 in their wallets per in fuel savings over the life of the vehicle."
Why not just make Americans drive around in golf carts?
Is AEI funded by Communist China?
It's unnecessary for Americans to spend an extra $985 to save $3,000 in fuel over the life of a vehicle.
PeakTrader,
Sean, that may work when paying a few extra cents for dolphin safe tuna. However, I doubt U.S. consumers, in general, will buy a $200 American microwave oven instead of a $100 Chinese microwave oven that works just as well.
You're most likely right. After all, why would I consent to be the one guy to buy a $200 microwave when everyone else is buying the $100 equivalent (although I have done such things when a quality argument can also be made).
But the argument here is that US consumers are making an informed and rational choice. I don't think that's completely true.
Sean, they're making a rational choice based on imperfect information.
However, if you gave them more information, it could still be imperfect and politically biased.
seth-
really? junk overwhelms quality? that's odd, i never seem to have any problem finding quality goods for sale.
my local BMW dealer is full, the armani store is loaded for the holidays, and whole foods is stuffed with food. it's easy to find quality furniture and fixtures for my new house. you are just spouting nonsense.
the availability of cheap goods offers choice, it does not destroy the rest of the market.. i don't care what you price a ford fiesta at, i don't want one. i wouldn't take on for free.
so what on earth are you ranting about? where is your evidence that quality products have gone away? it sounds to me more like you (as ever) want to buy ligne roset quality at martha stewart prices.
also:
thanks for the rant about "kick him out and make him beg to come back until he agrees with me". it's always helpful to provide reminders of just how deeply fascist and intolerant most self described "progressives" (note: yes, i mean you seth) are.
PeakTrader,
Sean, they're making a rational choice based on imperfect information.
My point exactly.
However, if you gave them more information, it could still be imperfect and politically biased.
I'm not sure I get your point here. Are you saying people shouldn't vote with their dollars for what they value? People that buy "fair trade" certified items for example... just a bad idea?
Sean, what is it they value?
Making poor employed peasants even poorer unemployed peasants, while also making trading partners, e.g. Americans, poorer?
Why not just send them billions of dollars in welfare checks?
Or impose our labor standards on them or else.
If every country agrees to a minimum labor standard (i.e. a higher standard), it'll be their gain and our loss.
sean-
no decision is made with perfect information. arguing that we need it is just the circular "if knowledge were perfect decisions are perfect" idea.
this is a deeply flawed idea as it presumes costless gathering and presentation of information. demanding perfect information rapidly causes the incremental cost of the additional info to exceed the decision making benefit.
this is particularly true in a market like apple juice. (cited by you). if it matters a great deal to you, there are innumerable brands of US apple juice. why impose costs on everyone to solve a problem to which there is already an obvious and easy solution?
PeakTrader said...
Except in practice, that knockoff doesn't work as well. Corners are cut to meet Wal-Mart's demands.
morganovich said...
To kick the guy out is constitutionally allowed. Not by left-wing standards, either.
He wants to turn our citizens against each other.
seth-
then buy something else.
there is an enormous selection of products available all along the price and quality curves.
your problem seems to be an inability to see that price and quality tend to be correlated.
you want gagineau quality at wal mart prices. that's not going to happen.
you find that big v8 priced like a fiesta yet?
seth-
"To kick the guy out is constitutionally allowed. Not by left-wing standards, either.
He wants to turn our citizens against each other."
i'm not even sure where to start with this. you sound like something out of orwell. "turn our citizens against each other?", how do you even get there?
not only have you totally missed the thrust of his argument which is to use sarcasm to show how ridiculous the position of the protectionists is (hint, he's not really advocating this march to walmart, just showing how stupid the logic of the protectionists is), but you then claim that he can be deported for exercising free speech.
perhaps you would be so kind as to show me where in the constitution government is granted that power?
i think you are badly confused.
this is not weimar germany or venezeula.
"Except in practice, that knockoff doesn't work as well. Corners are cut to meet Wal-Mart's demands"...
Well then sethstorm then the choice is easy for you, don't shop at Walmart...
No one is forced to go to Walmart, Kmart or any other similer vendor...
Remember if you don't like what's out there being sold, you can always attempt to make it yourself to your oh so high standards...
When you pay $1 more to help the poor fair traders, you'll pay $1 less for something else to hurt the poor free traders.
If they were all fair traders, we would pay more dollars and consume less. They would produce less, but consume more, e.g. what we produce.
So, fair trade is much like a welfare program.
sean,
American consumers do not give a damn where products are made. Walmart tried in the 1980s to sell "Made in America". Lee Iacocca did the same with Chrysler. That strategy didn't sell products then and it won't sell them now.
If enough Americans cared about "American made components", they would pressure American retailers to reveal such information. Some American retailers would see the opportunity, change their sourcing, and reap billions.
Your problem is simple, sean. Few people care. But that won't stop people like you from trying to use the power of government, will it?
Jet Beagle,
Where in this thread did I state that I favor making government force people to buy American?
morganovich,
if it matters a great deal to you, there are innumerable brands of US apple juice. why impose costs on everyone to solve a problem to which there is already an obvious and easy solution?
And after speaking to some people from China about how they always peel apples rather than simply wash them off (because of the pesticides), I do buy versions that don't mix in juice from China. Maybe that's a good idea, maybe it's not: but it's the best I can do with the information I have.
My point is only that information matters, and people undervalue it. When a price sticker is all you see, a price sticker is your only product differentiator, and that is why people do spend a lot of time buying both cheap crap as well as overpriced items like BMWs. Obviously you can't have perfect information, and trying yields diminishing returns. But we're not that close to that.
You're right, non-government based solutions to these problems work fine, as long as you know better than to think the prices of items is a fair statement of value.
Peak Trader,
If every country agrees to a minimum labor standard (i.e. a higher standard), it'll be their gain and our loss.
Actually, I think that's the idea: the belief that bargaining power and not oversupply is causing low wages. IF that's true (a big if, I admit), then it's a significantly better attempt to address the problem than welfare checks.
sean-
i disagree with your notion that we are not close to the amount on consumer information that yields negative returns to effort.
if we were as far away as you posit, firms would be clamoring to provide more information to garner higher prices and take share from those who care.
there has been a very clear revolution there in food, to the great benefit of firms like whole foods. they get higher prices due to organic products. you are free to buy from them if you like, as am i (and i do). but it'as still a small part of the market.
if this sort of information/quality were valued by the rest of consumers who are instead shopping at safeway and costco, then more producers would provide it and benefit from the higher prices.
the fact that they are not shows that the market has barbelled into those who care and those who don't. given that those who care have multitudes of existing options (including organic aisles at safeway) all your plan does is add costs to the purchases of those who don't care as you force a feature onto them that they don't want (or at least are not willing to pay for).
this is the literal equivalent of my demanding that you get a 6 disk CD changer and bluetooth ipod link in every new vehicle (and pay for them) just because i think everyone should care.
why so keen to push costs onto others that they don't want in order to solve problem you perceive yourself to have despite the fact that numerous solutions to it already exist?
morganovich,
) all your plan does is add costs to the purchases of those who don't care as you force a feature onto them that they don't want (or at least are not willing to pay for).
I'm sorry, since you seem to know it better than I do... what's my plan? :)
sean-
that's a bit of a weak rhetorical dodge to avoid the meat of the issue
you seem anxious to demand/require more information disclosure as users lack the ability to make choices. such requirements/inducements are what i refer to as your "plan".
you lament the "failure" of a free market to provide enough information when it has in fact provided plenty and pretty much precisely as much as has been demanded.
all you are doing is taking your preferences and projecting them onto everyone else by making the assumption that they care about the same things you do and would be willing to pay for them.
most of them are not.
the free market is working quite well here and provides pretty much just what information is demanded. you can buy fish in SF that is identified by boat and captain if you want to, but it's VERY expensive.
you seem to understand that gather and presenting information has costs. why impose such a feature upon people who don't want it?
morganovich,
you seem to understand that gather and presenting information has costs. why impose such a feature upon people who don't want it?
When pressed, I wouldn't. I'm just pointing out markets are not 100% efficient at identifying and meeting these requests. Therefore, the assertion that the trade deficit is a choice is just a truism.
morganovich,
Or perhaps more accurately, the assertion that the trade deficit is a choice is an assumption based on your assertion: that nobody in fact cares. But if that were the case, it wouldn't make the news: some people care, and others do not.
For those who care, making an individual choice to buy American for more money has a definite cost and no measurable benefit. Making that choice in concerted agreement with a block of other people might be considered to have a benefit. I've been convinced government is not the right organizer for such an agreement, but community reaction to such issues is still nascent, and impeded by strong propaganda from business and media that there's nothing to see here, please disperse.
sean-
people in a free market are free to do as they like. those who care have all the ability to buy american that they could possibly need.
the fact that they choose not to means that on a net basis, they feel better off not doing so.
so yes, trade deficit is a choice. if americans were less concerned about price than trade deficit, they are certainly equipped to do something about it.
information is not the problem, the problem is price.
the easiest way to close the trade deficit is to make it easier/cheaper to manufacture here. this is where government interference plays such a large role. it's not just wages, it's a variety of zoning, environmental, energy, and tax considerations as well.
clearly, ceteris paribus, we ought to have an advantage over someone who needs to ship products across the pacific.
but again, these are choices. few americans would put up with chinese style pollution to close the trade deficit.
the killer is our taxes. US corporate taxes are very, very high relative to most of the world. if you want to reduce the trade deficit, that would seem like a good place to start.
blaming americans for wanting to buy inexpensive goods is just never going to work.
all we can do is get better at competing.
that said, i'm not convinced trade deficits are as meaningful as many seem to claim. if we sell china a pentium processor and a copy of windows for $400 and make $300 in profit and then they put them in a PC and send it back to us for $800, only making a $100 profit, sure it looks like a $400 trade deficit, but who is making all the money?
wealth comes from profits, not sales.
Sean, a universal minimum labor standard in poor countries would raise prices, reduce employment and output, and rich countries would lose more than poor countries, unless productivity or profit offsets those losses.
Peak Trader,
Sean, a universal minimum labor standard in poor countries would raise prices, reduce employment and output, and rich countries would lose more than poor countries, unless productivity or profit offsets those losses.
All things being equal, that's correct. But a "fair trade" preference is not a universal labor standard: it's essentially charity that creates only targeted price increases. And if the increased money flowing into those poor areas fosters investment, economic output could increase. Certainly it's a gamble, economically, but it seems like a worthy charity effort unless I'm missing something.
morganovich,
blaming americans for wanting to buy inexpensive goods is just never going to work.
That's pretty quotable, I like it. :)
Of course our taxes are high, but taxes are high in Germany too, so that's clearly not the only problem going on here.
all we can do is get better at competing.
Yes, but what does it take to be competitive. I think there's a huge gap in understanding there. I don't have the answers, but other than lower taxes and lower regulation, I haven't heard any good ideas from the right. And while those are good ideas, I'm convinced they won't solve all of our problems.
I play a lot of strategy games of different varieties: geeky board and card games, bridge, computer games, whatever. In most competitive games where it's an option (including many economic varieties), the players that only do what seems best for them without being aware of the other players and knowing who to help and who to gang up against... lose consistently. We're committed to that mindset.
wealth comes from profits, not sales.
Sustainable wealth is productive capacity. Competitiveness is experience and skill in creating productive capacity. Borrowing to consume is very corrosive to competitiveness.
sean-
i speak to probably 100 business a month doing research on investments. as you can likely imagine, over time, it gives you a pretty good sense of what people are thinking about.
from my experience, the companies that are moving offshore do so for reasons of taxation, labor cost (particularly benefits), easier regulations both environmentally and in terms of corporate, labor, and liability law, and, astoundingly, because it is now easier to incorporate and build there.
i have heard numerous companies tell me that they can permit and build a green field factory in china in 20% of the time it takes in the US. the government there will help you, not try to get in your way and pick your pocket.
that is a MASSIVE difference, and that's for simple factories. do you have any idea what the permitting process is for a semiconductor fab in the US? it can take years. you'll miss entire iterations of moore's law. don't even try to permit a refinery...
we are also starving US companies of domestic growth by refusing to let skilled workers in. if all the CS grads go back to india, that's where you have to hire them. we educate them here, then don't let them stay. we don't have nearly enough of our own. every time we push them out, the other workers (sales, admin, finance, janitorial, whatever) that work with them go too, as do the stores they shop at, the restaurants that feed them, and the entertainment, housing, and healthcare they consume.
it's a huge net loss that we are mistaking for "protecting jobs from immigrants".
i hear high tech companies complain all the time that they don't want to deal with the logistics of opening an india or china office, but that they just can't get the people they need here. we could do a helluva lot just by changing our immigration policy.
also note: germany's corporate tax rate is 15%. ours is 40%. that's a pretty major difference. their personal income taxes are higher which is why they would be one of the poorest states in the US on PPP per capita income. they use their low corp taxes to export very effectively. adding that 25% back on to our net profits would allow us to do likewise.
it is very difficult to be a competitive exporter when you are paying nearly 3 times the taxes of your competitors.
also:
productive capacity is NOT sustainable wealth. the soviet union and maoist china found this out.
sustainable wealth requires profit.
if i sell you a $500 software package that costs me $50 to make and you sell me a $600 computer that costs you $700, i am seen as having a trade deficit, but am clearly in the better position while your greater "productive capacity" is clearly unsustainable.
morganovich,
productive capacity is NOT sustainable wealth. the soviet union and maoist china found this out.
sustainable wealth requires profit.
Ok, granted. And I should know this since my father went to Japan to teach a join start-up the same lesson: inefficient supply or supply or supply without demand is not so valuable. Then would you agree than sustainable and profitable productive capacity is the key to sustainable wealth?
we are also starving US companies of domestic growth by refusing to let skilled workers in.
True but overblown. I'm in favor of H1Bs, but I think a lot of the problem here is in poor hiring practices. I've given interviews at my group at Intel at multiple sites, and the communication pipeline between good college students and the finial hiring pool is pretty broken. If you only give interviews off of HR and internet resume submissions filtered by GPA, you'll absolutely believe this is true. If you have people with connections to their old colleges actually willing to visit them and recruit, it's a completely different world.
if i sell you a $500 software package that costs me $50 to make and you sell me a $600 computer that costs you $700, i am seen as having a trade deficit, but am clearly in the better position while your greater "productive capacity" is clearly unsustainable.
Surely. But those kind of profit margins aren't generally sustainable over the long term: that why most analysts track earnings along with profits.
also note: germany's corporate tax rate is 15%. ours is 40%.
Name me one company that pays a 40% effective tax rate! Google paid less than 1% last year! Intel paid in the 30% range, which is kind of high. But note that I didn't say a lower corporate tax rate wasn't important. And clearly, regulations preventing greenfield construction are important: even 6 months is a really long time to wait for permits in the real world. So yeah, those are definitely the elephants in the room. I just don't know that they would solve all problems.
tax rates:
last q:
NILE 35%
BTN 34%
RVBD 39%
CALM 36%
NFLX 41%
how many do you need?
the big multi nationals can shield taxes quite effectively, but the small and mid caps cannot. they are the vibrant part of the economy.
for most firms, 35-40% tax is not unusual.
i realize that the top federal bracket is 35%, but a great many firms wind up paying state tax too.
the lower rates (like 30% at INTC) are from using offshore entities.
your info on google is not accurate. google paid 20% tax last q. (547mm on 2.7bn) i think you misplaced a decimal point.
in the US, the smaller the business, the higher the tax tends to be (once you are making 500k or so in profits)
i'm also not sure i agree with your assessment about available talent. as i said, i talk to literally hundreds of companies in great detail about their plans every quarter. i hear the "can't find good/right people" story an enormous amount.
if one firms hiring is that bad, others will out compete it by being better. the labor market for talented folks tends to clear very efficiently.
even now, i don't know any really good guys who can't find work, but i know lots of companies that can't find enough talent.
lots of companies sustain 90% gross margins. software, biotech, drugs, etc. sure, that's not the net margin, but that same argument holds with intel's 27% net margins vs 2% at the guy who made your toaster. that differential is very real and very sustainable. we are shipping all the low margin stuff offshore and keeping the high margin production. there are a couple exceptions (TSMA, UMC) but that's regulatory. mostly, the consumer products we buy from china have razor thin margins. even a lot of tech stuff (like TFT flat panels) winds up losing money once you pay for the fabs. gen 7 flat panel fabs will never pay for themselves.
it's a massive hobbsian dilemma that we have effectively sidestepped.
getting on to sustainable wealth, i still disagree.
there are lots of ways to make sustainable wealth without production. traders and transporters have know this for 1000's of years. you don't have to make the rug to make money marking it up and selling it. i agree that those businesses are under more pressure now, but the good ones are doing great.
services are also tricky here. are you counting that as production? if you can trade a massage for the $95 you need to buy a shirt, you don;t need to produce shirts.
i would argue that services are production and that profitable production tends to encourage more production which adds to wealth, but i am hesitant to claim that just production is a good metric on its own. there are too many other factors.
if bed bath and beyond buys a toaster from china for $25 and sells it to you for $50, they likely made far more on the sale that did the manufacturer. that's still profit but there was no production. it's still good business and still generates wealth.
back to taxes:
there are incremental federal bracket that tax at up to 39%.
75,000 to 100,000 $13,750 + 34% Of the amount over 75,000
100,000 to 335,000 $22,250 + 39% Of the amount over 100,000
15,000,000 to 18,333,333 $5,150,000 + 38% Of the amount over 15,000,000
the blended avg of tax on your income from 75k to 18m is about 37%.
Sean, charity is typically worthy.
morganivoich,
i would argue that services are production and that profitable production tends to encourage more production which adds to wealth, but i am hesitant to claim that just production is a good metric on its own. there are too many other factors.
Briefly before I head to work: I do count tradeable services in my notion of production. Buying low and selling high: not so much.
Second: my figure on Google (still wrong, it's 2.4%) came from a misreading of an article on Google's profits from overseas operations.
Anyway, you make a strong case. Even if there are other factors: it makes sense to tackle taxes and regulation first.
As far as companies having trouble finding good people, I still think there's a lot of dilbert-ism in that: trying to find the top 10% at industry standard pay. But yes, a 5-10% unemployment rate for professionals (I found a ComputerWorld article from 2009 listing 8.6% unemployment for EEs) does indicate that the best should have no trouble getting jobs, and I agree that seems to be the case.
sean-
if buying low and selling high is not a viable, sustainable model for creating wealth (and paying a lot of employees), then how is it that so many of the richest people in america were wal mart founders?
how have so many retail chains stayed in business?
i think you may be taking too limited a view of wealth generation.
sean-
i think that one of the key issues about "good" people is that technology really demands them.
if i am building a new software platform, the difference in output and time to market between the best guys and some "average" guys is huge.
the impact of a few people is disproportionate, so their skill carries a greater premium.
this contrasts enormously with something like an assembly line worker or a store clerk where output varies a great deal less.
you see this VERY intensely in my business (i run a hedge fund). one rockstar manager is worth more than 100 mediocre guys. (and gets paid that way)
i'd rather have one steve cohen managing my money that the whole class of second year merrill lynch brokers.
actually designing tech products takes rockstars, not journeymen. the US managed to collect all the rockstars for decades and decades by being the best place on earth to get rich and welcoming all those who could contribute.
if we continue this "eat the rich" policy of treating the wealth like morally impaired milchcows while simultaneously refusing to let the best and brightest stay here, the result is obvious: they will go home and compete with us.
worse, we are even driving our own minds offshore. i just bought dual citizenship in a non income tax country. i'll have the passport any day now. i am in no way anxious to give up my US citizenship, but at a price, i will. how much money a year would it take to incest you to move overseas?
for those paying six and seven figure tax bills, it starts to look pretty tempting, especially when it looks like your taxes are going to go up and you see an impending fiscal catastrophe due to lax monetary and fiscal policy and ballooning unfunded liabilities.
this is the ultimate in consensual transactions. if you no longer feel that your government (and nation) is worth what you are paying for it, you can leave and country shop. this is easy if you are wealthy and have a business that can be done from anywhere (like most financial services and a lot of technology). the middle and lower classes will get doubly screwed by it as they both cannot move and will be left with a much bigger bill if any meaningful portion of the top 1% of taxpayers who pay 40%+ of taxes leave.
we are getting perilously close to the point where this sort of exodus may begin. 3 years ago, i never heard anyone talk about this, but it's standard watercooler fare in my biz now.
morganovich,
how have so many retail chains stayed in business?
i think you may be taking too limited a view of wealth generation.
Maybe, but my rationale is that important subclasses of the merchant realm make their money more through abuse of information than providing actual value. In my mind, the main value of retail comes from product triage, storage, shipping, display, and insurance, and not so much from price arbitrage.
But much more importantly, while such activities can be valuable, it is intuitive that, drawing a box around any specific region, you can't sustain the economy in that region just by selling within that region products made elsewhere.
morganovich,
if i am building a new software platform, the difference in output and time to market between the best guys and some "average" guys is huge.
the impact of a few people is disproportionate, so their skill carries a greater premium.
I agree that in some positions, that really is the case. But not in all of them does the pay reflect it. I read in Businessweek articles whining from startups that they can't get top-notch software guys for 50K a year and it just makes me laugh.
if we continue this "eat the rich" policy of treating the wealth like morally impaired milchcows while simultaneously refusing to let the best and brightest stay here, the result is obvious: they will go home and compete with us.
I agree that good people are valuable and need to be paid that way. I just think the perception of the magnitude of the problem is overblown, because while some guest workers really are fantastic, many are really not. Bright workers from around the globe are a very valuable commodity. They are also a little overvalued in many cases: we take for granted too easily the culture of communication and teamwork that we have in the US. It's not always the 4.0 GPA student you want: sometimes it's the 3.4 or even 3.0 guy that loves what he's doing enough to do it well. That's why he didn't get the 4.0: so much what he did in college was a waste of his time.
this is the ultimate in consensual transactions. if you no longer feel that your government (and nation) is worth what you are paying for it, you can leave and country shop
Agreed. And sometimes that's what it take to convince the government that it's attitude is just screwed up.
sean-
i'm less sure this issue is overblown.
you need rockstars to be team leaders and top designers/engineers. i agree that it's not many people and that grades are not the right metric, but when you are sending most of your grads out of the country after school, you are losing a lot of talent. it's also very difficult to hire proven talent from overseas.
if you cannot get/move them here and need to hire them overseas, they take A LOT of jobs with them, not just one.
you tend to move the whole team. for all the hype around the virtual workplace, it really doesn't work that well for complex projects. you need everyone in one place and one time zone or else you lose a ton of communication and efficiency.
the one guy we won't give a visa takes the jobs of a dozen journeyman coders and engineers offshore with him.
this is why i think this visa issue is such a miscalculation. to "save" one job, we lose a dozen.
start ups never attract top talent with base salary. they do it with equity. i agree that they all bitch that they can't afford what they need, but that's start ups for you. generally, they (the successful ones) are founded around a core of highly competent folks who wanted to go do their own thing.
sean-
why would you need to draw a box around a region?
imagine a town with one employer, wlamart. the store produces nothing, but makes money and pays wages. so long as they can buy goods, everyone can keep coming out ahead.
sure, the goods have to come from somewhere, but that somewhere need not having anything to do with the town or the US.
you are correct that someone in the world has to make them, but i think you are missing the value a store adds to the manufacturer.
you are not equipped to buy a toaster straight form the gungzhou toaster company. the store is. this benefits GTC as much as it benefits you, as without them, they would have no sales.
retailing is just another kind of service if you really think about it. they aggregate goods from producers so that you don't have to. they let you see them and take them home now. that sort of facilitation is valuable.
we don't have to produce any goods in the US to make money this way and the producers who sell to us would have no way to get to market effectively (they can just drop ship to you. do you want to pay $15 in freight and wait 6 weeks for a toaster?).
in many ways, retailing is a more sustainable business model than manufacturing. how many of the brands sold by sears have been around longer than sears?
morganovich,
but when you are sending most of your grads out of the country after school, you are losing a lot of talent.
Yes, that is true. Even if we overvalue some of those guys, definitely it's aloss.
the one guy we won't give a visa takes the jobs of a dozen journeyman coders and engineers offshore with him.
Yes, I agree, one of the main reasons I do actually agree H1Bs are good for America.
On the other hand, many MNCs will set up shop around the globe anyway, whatever the cost, for various reasons.
For example, if you want to sell in India or China, it's a *really* good idea to have a shop there or you'll face a lot of problems. OF course, you have to be very careful or your IP will be gone very quickly. It's a tough trade-off.
morganovich,
imagine a town with one employer, wlamart. the store produces nothing, but makes money and pays wages. so long as they can buy goods, everyone can keep coming out ahead.
Unless people came from out of town to buy at the store, the store would fail and so would the town. And if people do come, that becomes part of the model. It is useful in a lot of ways to draw boxes around things: it's a very engineering sort of thing to do. Without that tool, problem solving (in this case, planning and budgeting) is nigh impossible.
we don't have to produce any goods in the US to make money this way
If you don't trade goods or services to an external entity, then no: it doesn't work.
that sort of facilitation is valuable.
As I said, retailers provide multiple services other than price arbitrage, so they are valuable. They are also insufficient of themselves because their services are geographically centered. Granted, the internet is changing when and where geography matters, but in some things geography still matters.
In many ways, retailing is a more sustainable business model than manufacturing. how many of the brands sold by sears have been around longer than sears?
That's rather irrelevant to the point. If you have manufacturing, retailing helps you get the most out of it. But retailing fails without manufacturing. But a unit that can survive on retailing alone must be able to sell to a sufficiently large external audience to support itself, and there are limits to that model. China doesn't need America's help to sell Chinese stuff to China, for example.
"If you don't trade goods or services to an external entity, then no: it doesn't work."
i understand that, but there are lots of external entities. this is why i resist your desire to draw boxes. capitalism does not respect them. it's working aorund them that makes it so successful.
production of most consumer goods is a fickle, incredibly low margin business. i'm happy to be in a different business.
manufacturing also fails without retailing. the two are symbiotes.
how many products do you buy direct from factory?
aren't you happy to have a supermarket instead of having to shop at a cattle ranch, chicken farm, proctor and gamble, and 30 other places every week?
isn't that worth something? isn't that, in effect, just another kind of service?
china certainly needs US retailing to sell to the US. probably, they always will.
i understand your point that wealth comes from goods and services, but retailing is really just another service.
if you hire a decorator to go find furniture for your house, that's a clear service with value to you, yes? a store is the same thing. they went and found furniture and got it so you can buy it. such facilitation is a valid, profitable, wealth generating, and sustainable enterprise.
i'm not sure why you are so resistant to believing that retail creates wealth. it does not create stuff, but it allows it to be purchased, which is just as important.
making most stuff is easy. productivity increases will mean the we need fewer and fewer people to make all the stuff we need, but with more stuff, retailing will grow in importance.
it's going to be a much better business over the next 30 years than most kinds of manufacturing.
morganovich,
i'm not sure why you are so resistant to believing that retail creates wealth. it does not create stuff, but it allows it to be purchased, which is just as important.
If you go back and read what I said, you'll find I am not. It is a valuable part of an economic composition, and it's even great for employment. But we over-rely on it, and the trade deficit is useful to measure because it points that out. It tells us that as a geo-political unit, we spending beyond our means. The relevance of that unit to you may vary, but it's still a useful measure. I can move anywhere in the US without learning a new language, getting a passport or visa, learning vastly different laws, etc. There really is a certain amount of homogeneity in the nation we live in even despite the great variety that exists here, so it's not a terrible abstraction.
this is why i resist your desire to draw boxes. capitalism does not respect them. it's working aorund them that makes it so successful.
No, capitalism is successful because because it focuses on ownership, which wraps up control, benefit, and responsibility into a nice box, and distributes planning around those easy-to-understand boxes. That does not invalidate other abstractions, although it may help you to ignore the ones that really are invalid.
making most stuff is easy.
Only in the sense that a lot of people in this big globe can do it, given sufficient determination. But didn't you just say how you need rockstars for design, etc?
productivity increases will mean the we need fewer and fewer people to make all the stuff we need, but with more stuff, retailing will grow in importance.
Productivity increases are happening there too. Would you like to own a book or video store right about now? I can get groceries delivered to my door. In fact, with sufficient determination, I could get away with practically never leaving my house for any purpose whatsoever (perish the thought).
In fact, if you want to follow that line of thought, I strongly believe that one day we will be able to build an economy that doesn't need people at all.
In my mind, the primary reason that manufacturing is not a profitable business is because so many countries rate it so highly that they're happy to subsidize it out of profitability. It's not because manufacturing is so easy or unnecessary. I, my father, and my wife's father all work in manufacturing companies: there's a lot of technology in manufacturing, especially in the manufacturing still done in the US. That's not to say retailing isn't easier.
sean-
the reason i said "most" stuff, was that i was excluding technology.
making a pentium chip is NOT easy.
but assembling a car is. making a toaster or a set of couch cushions is. 90% of the things we buy day to day are so easy to make that there is functionally no barrier to entry.
couple that with productivity, and you get a terrible business. manufacturing is cheap because it is mostly very easy making it pretty much a commodity. it's the next step up from agriculture, but it's much worse as an economic model that design or sales. this is why there are so many very successful "virtual" companies like apple. it takes a rockstar to design an iphone and to write the software, but anyone can put one together with about 2 hours of training.
netflix and amazon are just the next generation of retailers. they have done very well.
trade deficits are not the same as spending beyond you means. if you earn $10 and spend 5 at the store in the next town, you could be described as having an inter town trade deficit, but you are not living beyond your means. the 2 things are totally separate.
the economy as a whole works the same way. you're going to argue that the money to buy has to come from somewhere and that it must balance, but you are leaving out profits.
if i sell you things on which o make a greater profit than you make on what you sell me, i have more surplus. if i then spend it on more of your stuff, i am not living beyond my means.
if i sell china a copy of windows 7 for $300 and make $200 in profit and then sell me a $300 smart phone and make $50, trade balances. but if i then spend $100 on more chinese goods, i have a deficit but am still living within my means. however, if they bought another $100 item from me, they would be running a debt.
This comment has been removed by the author.
morganovich
but anyone can put one together with about 2 hours of training.
If you're talking about line assembly, fine. But what's more commoditized then nylon? But I've listened to my Dad talk literally for hours about the chemistry and physics involved in spinning and rolling the stuff, and that's just the preview. My father in law is an automation engineeer at a pigment factory, and what he does required years of study and on-the-job training. When he's out of touch, the plan is in trouble. Fewer people are required for manufacturing than was once the case, but the people who remain often don't have trivial jobs.
if you earn $10 and spend 5 at the store in the next town, you could be described as having an inter town trade deficit, but you are not living beyond your means.
If you earn all your money in town, and so do all of the other inhabitants, but you shop outside of it on a regular basis, you might want to consider moving. If you apply half a model, don't cry that it's broken. ;)
if i sell china a copy of windows 7 for $300 and make $200 in profit and then sell me a $300 smart phone and make $50, trade balances. but if i then spend $100 on more chinese goods, i have a deficit but am still living within my means. however, if they bought another $100 item from me, they would be running a debt.
So you spend $100, sell for $300, then buy something for $300, then you're $100 in the hole. The Chinese guy spends $250, then sells for $300, then buys your software for $300? You're both behind by your development costs but trade balances. So you're running a bilateral balance, but an overall trade deficit, and you're probably not happy about that. Spending $100 more is probably not a good idea unless you have a lot in the bank.
What I originally thought you were pointing out by "profit" was effectively that a bilateral deficit doesn't matter if you're running an overall balance or surplus, which is true.
Of course, if a nation's GDP is rising at a rate faster than its trade deficit, it can cover that deficit indefinitely, even if it is continually transferring wealth outward. But that still doesn't mean that trade deficits don't matter.
sean-
don't get me wrong, i am not claiming that americans have been living within their means, it's very clear that we have not been as our vast expansion of consumer debt shows, but it's a separate issue.
but it is quite possible to run a consistent trade deficit and remain solvent and even prosper. you are looking at trade as though it is the only part of the economy.
you are just tracking dollar flows. they are not the same as wealth/capital accumulation.
"If you earn all your money in town, and so do all of the other inhabitants, but you shop outside of it on a regular basis, you might want to consider moving. If you apply half a model, don't cry that it's broken. ;)"
this is not an accurate statement because it ignores the fact the net value can be created in a town providing a surplus of wealth. you are assuming constant real assets. if we keep making more stuff and just trade with ourselves, we'll still have more stuff. the labor of the people produces things. if we then use a little bit of that surplus to buy things from outside, it does not mean we don't still have more stuff than we used to.
this is basic ricardo, which, admittedly is the most counter intuitive economic theory for most people.
imagine a small community that is self sufficient in everything. we raise our own pigs and cows and grain and make our own shoes and tools. we have a zero trade balance.
we are good at making these things, so our wealth goes up every year.
then, some clever farmer realizes that the next town has an excellent toolmaker and decides to buy a shovel from him.
he pays dollars for it.
now, there is a trade deficit. dollars go out and do not come back.
so, the community has a little less food, but a new tool. however, this assumption about a little less food may not be accurate. comparative advantage means that instead of spending time making the shovel, the farmer is better off growing food and has more time to do so. if he can grow enough extra food to cover the price of the shovel, he's actually better off for the trade deficit just as you are from doing your own job to make money to fund your trade deficit with the shoe store rather than making your own shoes.
this is intensified further if the shovel itself saves him more time. (note that even things like dishwashers and waffle irons save time for the buyer and time is money)
so, even though our town now has a dollar trade deficit, it may well be better off for it. you are making the assumption that "foreign" money needs to flow in to make us wealthier.
such is not the case. we can do that ourselves. our wealth is not a static pool. the game is not zero sum.
so long as we run a deficit of less than our annual production, we are still getting wealthier (even without considering the goods we buy as wealth).
to put this in perspective, the US generates $14tn in new stuff each year. that is additive to our wealth. with no trade, it means we get to consumer add and save $14tn.
we have a trade deficit of $350bn, about 2.5% of the economy.
that means we are still keeping 97.5% of it or $13.65 tn as new wealth/consumption.
how does that mean we are poorer, especially if the things we traded for allowed us to make more of the things we did make?
i recommend reading both bastiat and milton friedman on this. trade deficits are more a reflection of wealth and profit than they are cause for concern.
read "free to choose" and bastiat's essay on english and french trade.
sean-
also, i think you are confusing GDP and GDP growth.
GDP does not need to grow for us all to become wealthier.
GDP itself is a measure of that. this is easier to imagine of you thing of a comopany.
if you have revenue of $10 million and make a net profit of $1 million in 2009, you are better off than in 2008. if you do the exact same thing in 2010 (analogous to zero GDP growth) you are still better off than in 2009.
few people would complain about their business only paying the $1 million a year because it wasn't growing.
so, comparing trade deficit to growth is the wrong metric. you have to compare it to GDP as a whole.
GDP starts from zero every january. the whole number is added goods and services, not just the growth portion.
even if you business had a drop in revenues to $9mn and profits to $500k, you'd still be better off at year end than at the beginning despite "negative GDP growth".
morganovich,
this is not an accurate statement because it ignores the fact the net value can be created in a town providing a surplus of wealth. you are assuming constant real assets.
It's an incomplete statement for the reason you mention, but as a rule of thumb I stand by it.
recommend reading both bastiat and milton friedman on this. trade deficits are more a reflection of wealth and profit than they are cause for concern.
Honestly, I think what I said comprehended everything you reviewed. My statement on GDP "rising at a rate faster than its trade deficit" was incorrect because GDP comprehends the trade deficit, but the underlying concept is correct. If you have a trade deficit, you're taking on debt. You may be able to cover that debt because of your productivity, and maybe your trading partner is less likely to spend his dollars because he feels poor, but none of that says that trade deficits, like any measurement of debt, are not an important indicator to watch.
Friedman made no argument in "Free to Choose" that convinced me otherwise, but any wholehearted supporter of free trade must be tempted to say trade deficits don't matter, because you can't do anything about them anyway (or shouldn't, at least).
few people would complain about their business only paying the $1 million a year because it wasn't growing.
Really? :) You're a hedge fund guy, right? How would you feel if your employees thought like that? But there are a number of problems with GDP signifying continual accumulation of wealth, largely because of the nature of consumption. Just because you got a haircut or ate a chicken sandwich last week doesn't mean you don't need another one. There are other problems, but basically there's a reason why economists focus on GDP growth rather than simply GDP.
even if you business had a drop in revenues to $9mn and profits to $500k, you'd still be better off at year end than at the beginning despite "negative GDP growth".
Tell that to the folks at AMD that got a 15% pay cut! The argument seems intuitive because you started from a large number relative to an average person's consumption. When there's a recession, there's a reason people feel worse off: need and consumption occur at a periodic rate as well.
"If you have a trade deficit, you're taking on debt. "
this is completely untrue. read the village example again.
if we produce new corn and pigs and peaches every year, giving away some of the to buy a shovel from the next country does not create debt.
we are just using part of our domestic production (or domestic surplus, it works either way) to buy from outside.
why does that create debt? you are confusing medium of exchange with net real debt and assuming that we must be in deficit if someone else holds our currency.
we still have more corn and pigs and peaches than we used to.
regarding the corporate example, yes, really.
you can make great money investing in a shrinking/steady state businesses if the price is right. it all depends on what multiple to cash flow you pay.
if you pay $10 million for the steady sate biz i described, you get paid $1 million a year to own it. that's 10% ROIC, an excellent return relative to the current risk free rate.
you don't need growth to generate wealth. GDP is per year. you are speaking of it as though only the 2% growth is new stuff. it's all new stuff.
"Tell that to the folks at AMD that got a 15% pay cut"
that is an apples and oranges comparison. AMD mostly loses money and was fighting for survival. there are always companies that will struggle to make it in capitalism. in fact, it's required. there will always be a marginal producer.
but even with the 15% pay cut, the AMD employees had higher lifetime earnings than they had had before. if their expenses were out of line with earnings, then maybe they were worse off. if they weren't and they had say, a 20% cushion, they might still be better off after that year.
at the end of 2009, there were still $5.4bn in new semiconductors from AMD and employees had still been paid $2.5-3bn that they did not have before. that is still considerable wealth production.
you are still mistaking acceleration for velocity.
google is giving out 15% raises and big bonuses. just like AMD, this anecdote proves anything.
sorry, that should read "proves nothing".
morganovich,
this is completely untrue. read the village example again.
Terminology was in my way. I was going to say a trade deficit is a wealth transfer (example of giving away surplus stuff), but then I started thinking about the example of sending pieces of paper and getting goods back, so I called it taking on debt (promising to give goods in the future for goods now).
It's true that if you dip into savings to buy tools (borrow to invest) you can truly be better off than if you hadn't. Yes, trade is not a zero sum game, so obsessing over all trade deficits can be counter-productive (what matter if wealth flows out if what we trade is allowing wealth to grow faster than it is transferred?). But Warren Buffet's example of selling off land to buy corn is probably more applicable to our situation: we're not borrowing to invest in ourselves, we're borrowing to consume. But if you weren't watching trade deficits, you probably wouldn't be alerted to that, even if the more serious problem is consumption relative to investment rather than the fact of the trade deficit. The latter is hard to recognize as a problem without peripheral information: it shows up first as either stagnation, debt, or funding consumption by taking equity out of asset bubbles, etc. But if you watch things like import penetration and trade deficits, you'll get an early warning, even if those aren't problems per se.
you can make great money investing in a shrinking/steady state businesses if the price is right. it all depends on what multiple to cash flow you pay.
Of course, you are correct here. Knowing what a cash cow is worth is valuable. My point is more of perspective. If you thought you were going to get $1M per year from a business, and then one year, it halves, you're not going to be happy about it: you'll have lost something relative to your expectations, even if you are definitely better off having the business than not.
if their expenses were out of line with earnings, then maybe they were worse off. if they weren't and they had say, a 20% cushion, they might still be better off after that year.
More importantly, if their expenses were in line with their earnings, now their expenses have to be cut to remain in line.
you are still mistaking acceleration for velocity.
I'm not... I guess I'm just saying that if consumption is a velocity and production is a velocity, a change in either trajectory ("acceleration") is usually more of interest than the base velocity.
that is an apples and oranges comparison. AMD mostly loses money and was fighting for survival. there are always companies that will struggle to make it in capitalism. in fact, it's required. there will always be a marginal producer.
True, but not relevant to the point: negative changes in earnings year to year are generally considered a negative event.
sean-
you do not have to "dip into savings" to buy tools (or goods)
you can do it from cash flow.
acceleration may be what gets talked about, but it's velocity that matters.
in a year with 5% growth, 95.23% of production is "velocity".
you are assuming that the tail wags the dog and that a $300bn deficit matters compared to $14.3tn in gdp.
"negative changes in earnings year to year are generally considered a negative event."
this is a tautology. of course you would rather have revenues go up.
the point i am trying to make is that even if they go down, you can still be better off at the end of the year than you were at the beginning. things were still produced. people were still paid. perhaps not as many and as much as was hoped, but it still adds to the stock of stuff in the world and and the lifetime earnings of the workers.
think of it this way:
if you are in a car going 75mph, you don't have to speed up to keep getting farther from your origin. just keep doing what you are doing. even if you slow down to 60mph, you are still getting further away.
GDP works this same way.
assuming no population growth, US GDP could go flat for decades and we would keep getting richer.
you do not need growth to accumulate wealth.
i also think the buffet analogy is not apt.
we are not selling land (finite supply) for corn. we are selling goods and services that have infinite supply in the long run. we make more every year. we're not running out of any of them like we would land.
if we sell corn for cars, well, who cares? we'll grow more next year. we have more than we need.
the fact that we divert a bit of that surplus overseas does not hurt us in any way. it may even help if it frees us up to do things in which we have comparative advantage.
morganovich,
you do not need growth to accumulate wealth.
It's true that the amount of wealth accumulation is production minus destructive consumption. It's also true that with a growing population, per-capita income will go down without GDP growth.
we are selling goods and services that have infinite supply in the long run. we make more every year. we're not running out of any of them like we would land.
If that were true, then there would be no problem. However, Buffet also stated that we were trading away our technology advantage, our companies, etc. It's not fundamentally bad that we're actually selling away things like the contract on our toll highways to foreign investors, or that companies like Lenovo buy IBM's PC business, or that in order to build railways, chips, or nylon in China you have to sell technology and business knowledge to the Chinese, or that the lower end of software development is typically done in in India, China, or Eastern Europe. But we have in fact sold our competitiveness in many situations, something a little harder to replace than "goods and services" might imply.
morganovich,
it may even help if it frees us up to do things in which we have comparative advantage.
That's true. It's also true that one of the more important sources of "comparative advantage" in a field is simply an established presence. This mean institutional knowledge of how to do a thing, an ecosystem of customers, suppliers, and support. A lot of things, once outsourced, don't come back, and competing in new areas is very hard, especially if labor costs, taxes, or regulation costs are already a headwind. We should care that competitiveness and productive capacity are lost in markets that do have some margin.
morganovich,
if you are in a car going 75mph, you don't have to speed up to keep getting farther from your origin. just keep doing what you are doing. even if you slow down to 60mph, you are still getting further away.
Believe me, I understand this! I'm just saying that not only do I care more about my income than what's in my bank account on a given day, I also care whether that income is going up or down, because I don't want to have to lower my consumption or savings.
sean-
yes, per capita income can drop if population grows and GDP does not, but that does not mean wealth is not being accumulated any more than slowing from 60mph to 50mph means you are no longer moving.
notions of "selling your competitiveness" seem pretty flawed to me. a tiny fraction of irreplaceable goods get sold. technology is always for sale. you want trade, you've got to sell what's valuable. IBM's pc biz was a disaster. it was a great sale for IBM. they got money for it that they could use to grow their good businesses. that seems like the opposite of selling your competitiveness to me.
i find it interesting that we get so worked up when US companies offshore, but then also get worked up if china buys companies here.
i was using "comparative advantage" in the ricardian sense as an expander of the production possibility frontier.
http://en.wikipedia.org/wiki/Comparative_advantage
not in the "competitiveness" sense that a i think you may have taken it.
comparative advantage allows 2 countries that trade goods to increase the overall amount of goods in the world by trading even if one country is more efficient at making everything that the second country is.
such gains can easily offset trade deficits through more pareto optimal distribution of production.
morganovich,
i was using "comparative advantage" in the ricardian sense as an expander of the production possibility frontier.
http://en.wikipedia.org/wiki/Comparative_advantage
not in the "competitiveness" sense that a i think you may have taken it.
I don't know why so many people don't recognize they are the same.
notions of "selling your competitiveness" seem pretty flawed to me. a tiny fraction of irreplaceable goods get sold.
Maybe, but some pretty smart businessmen provided me the notion. Huawei (sp?) gathering Cisco's technology is probably a better example.
IBM's pc biz was a disaster. it was a great sale for IBM.
Can't argue with that. It was a win/win.
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