Sunday, January 29, 2012

Japan's First Trade Deficit Since 1980

            This post is a response to three separate articles which have appeared recently in the Wall Street Journal:  End of Era for Japan’s Exports, (Jan 24, 2012)  The factory Floor Has a Ceiling on Job Creation, (Jan 12, 2012) and Building a Case for Producers’ Relevance, (Jan 18, 1012).  Mostly, this post is about jobs—and about the relationship between jobs, trade deficits, and currency exchange rates.   But before beginning, I should perhaps explain why, as a liberal with no particular love for Wall Street, I should wish to quote WSJ or even bother to read anything which might be printed in its pages.
             When I was in college in the late 50s, the word about WSJ was that its opinion pages were filled with outrageous nonsense, but that its news pages contained accurate and reliable information, often including in-depth coverage of economic events across the globe that no one else was covering at all.   I think it still fits that template, except that since Mr. Murdoch purchased the paper, there seems to be a lot more opinion and a lot less of the in-depth coverage which made WSJ the useful research tool that it once was.  But it still contains information on global markets and commodities that you rarely find in other mainstream journals. I subscribe to over a dozen periodicals—mostly liberal journals like American Prospect, Nation, and In These Times.            But I still read WSJ, and I’ll explain why:  Last night, there was an account in my local paper from AP which stated that Japan had its first trade deficit since 1980.   This piece was one paragraph long.  WSJ gave the story a whole page.
            This WSJ article begins by explaining that some of the causes of Japan’s trade deficit are immediate, short term problems:   the tsunami, the loss of its nuclear power, etc.   These events have shut down a lot of Japanese production, and you cannot export that which you cannot produce.  And Japanese exports are also hurt by weak demand in the U.S. and Europe. But within a few years, Japan would have been entering an era of long term trade deficits anyway, due to other causes:   the graying of its population, the appreciation of the Yen, the increasing cost of imported oil and other commodities, and the recent rise of a number of third world industrial powers.
            The Japanese trade juggernaut began about 1950, with a government policy of export- led growth based on an artificially undervalued Yen and cheap credit for Japanese manufacturers.  This policy was so successful that it was called “The Japanese Miracle.”  For decades, Japanese manufacturers were able to promise their workers total job security, through good times and bad, because by running a large trade surplus, Japan was able to export its unemployment to the rest of the world--mostly to us.
             I’m going to digress here to explain something that the article does not go into. Japanese products were able to penetrate markets all over the world because they were able to sell higher quality cars and electronic goods at lower prices than their domestic competition. They claimed that this had something to do with “Japanese efficiency.”   But efficiency had nothing to do with it.  Originally, the Japanese price advantage was cheap labor.  Japanese workers, right after the war, were willing to work for much lower wages than workers in any other developed country. But even after Japanese wages reached parity with the U.S. and Europe, their manufacturers still were able to sell higher quality products at lower prices.  This was partly because Japanese manufacturers had much lower capital costs, since their government insured that loans were available to Japanese employers at much lower interest rates than the world average.  But most of the Japanese manufacturing advantage was due to a radically undervalued Yen.  In the 1960s, when $2,000 Japanese cars were being sold here, they were probably being built at a cost equivalent of over $4,000, but the phony exchange rate covered this loss and even made a fat profit.   If a dollar paid by a customer in the U.S. converts to the equivalent buying power of $3 in Japan, then it becomes pretty easy for a manufacturer to hire enough skilled labor to build whatever quality level he wants and still underprice our market.     And of course, in the 50s and 60s, Germany did the same thing.   I bought a new VW bug in 1967, and I sincerely believed that I did not buy a foreign car just because I was too cheap to pay for an American made car—I merely wanted a higher quality.  I paid $1,850, and there was at least one model of American car I could have bought for $1,800.  I just felt that the VW was a better car.  Well, I now suspect that if this exact car had been built by VW in the U.S. at that time and at that level of quality, it would have cost over $3,800 to produce, which was nearly the price of the cheapest Cadillac.  Of course the VW was a high quality car—why wouldn’t it be?   Price and quality are merely opposite sides of the same coin, but few people understood that. Like the Yen, the German Mark was deliberately undervalued.  We tolerated these trade games because of the cold war.  Our government wanted to build up Japan and Germany as a strong bulwark against the USSR and China, and we were willing to trash the jobs of millions of American workers to do this.
            But in the 1980s, the U.S. patience with Japan began to wear thin.  First, the U.S. demanded that Japan voluntarily limit the number of cars sold in the U.S.   And then the U.S. accused Japan of selling goods overseas at lower prices than they were charging at home.  This is called “dumping,” and it is generally considered an unfair trade practice.  In 1985, the U.S. and Europe’s leading economies pressured Japan into signing the “Plaza Accord,” an accord in which Japan agreed to stop intervening to keep its currency value artificially low.  The Yen rose from 239 Yen to the dollar in 1985 to 128 in 1988.
            According to WSJ, Japanese authorities tried to mitigate the effect of this change by flooding the economy with cheap money.  But this produced an asset bubble, which eventually crashed.  And the crash caused two decades of economic stagnation in Japan. One of the reasons that China is so reluctant to let the Yuan appreciate is that they remember what happened to Japan after the Plaza Accord.  (Of course, one could argue that the Japan disaster resulted not so much from the revaluation of the Yen but from the decision of the Japanese government to flood the country with cheap money—or perhaps even from the decision of the Japanese consumers to spend this easy money by just bidding up the price of real estate rather than buying more Japanese goods.)
            When the Japanese trade juggernaut first started, Japan had the cheapest labor costs of any country that had the industrial know-how to manufacture anything.  But Japan was soon joined by South Korea and Taiwan, and must now compete with new industrial tigers like China and Brazil, as well as new sources of cheap industrial labor such as Thailand, Indonesia, and Latin America.  Japanese manufacturers are responding by “off shoring”  some of their production—sometimes moving the entire operation overseas, sometimes just moving the low skill, labor intensive jobs, hoping to preserve at least some jobs in Japan by doing so. This is, of course, exactly what American manufacturers were forced to do when threatened with the Japanese trade advantage a generation ago.  Today, some  Japanese jobs are being off-shored to the U.S.   Mori Seiki is planning to build a machine tool plant in Davis, California.  But most jobs are being off-shored to countries that have one thing in common—an undervalued currency.
            The second article, The Factory Floor Has a Ceiling on Job Creation, by David Wessel, examines whether improvements in the manufacturing sector will solve our unemployment problem.  The short answer: No.    Wessel provides a graph showing factory employment as a percentage of total employment in the U.S. since 1950.   In the early 50s, factory jobs accounted to over 30% of all employment.  (And since these jobs usually paid better than service jobs or retail employment, they probably provided much more than 30% of the country’s spendable income.)  Then we started outsourcing jobs to low wage countries, and today, only 9% of U.S. employment is in factories.  So, if we could bring back all the jobs outsourced since 1950, would that bring back a nation with factory jobs for 30% of its people?  No—not even close, because another trend since 1950 has been automation.  Although we employ only 11.8 million people in manufacturing, total output since 1950 has increased 500%.  Productivity has also increased 500%, and real factory wages, on average, have more than doubled since 1950.
            So even if we could bring back all the lost production, it would not bring back all the lost jobs.  And even if we could, the modern factory job requires more skill and training than a generation ago.  In 1950, a factory job was a ticket to a middle class life for a person with no education beyond high school.  But today, an applicant without prior experience will usually need about 2 years of tech school to get an entry level factory job.
            Yet factories are important because they are a primary driver of growth.  As Obama’s “Manufacturing Czar,” Ron Bloom says, “If you get an auto assembly plant, a 
Wal-Mart follows.  If you get a Wal-Mart, an auto assembly plant doesn’t follow.”
            The third article, Building a case for Producers’ Relevance, by Justin Lahart, claims that the 330,000 new factory jobs added in the last two years, while not equal to the 2.3 million jobs lost in the two years before that, are still an important part of the recovery.  In fact, he says that’s mainly what’s driving the recovery.  In the third quarter, goods production accounted for 28% of GDP.   That’s far less than the 43% in 1960, but it’s still 28%. 
            I think we are approaching an era where we could bring back all the production that we ever out-sourced.  In my view, this would add at least 3.5 million jobs.  This would not completely solve our unemployment problem, but it would nearly cut it in half. Of the 13+ million officially unemployed, at least 5 million would be unemployed in a normal economy, due to routine job changing, bankruptcies, seasonal lay-offs, etc. That really only leaves a deficiency of 8 million jobs.   And since manufacturing jobs act as a primary driver for other jobs, each one these new jobs might eventually create one additional job. If that happened, we’d have nearly full employment.  
            If we had a government policy deliberately aimed at bringing back these off-shored jobs, we could easily do this. In his State of the Union Address, President Obama indicated that he would be pushing for precisely such a plan.   But don’t expect any help from the Republicans in Congress.  Most congressional Republicans depend heavily on Wall Street elites for campaign funding. This is a problem for both parties, but Democrats can access other sources of money--labor PACS, green PACs, trial lawyers, etc.  There are Republican voters who hate Wall Street, and they have pretty loud voices--but not very deep pockets.  So the GOP must give Wall Street what it wants. Right now, full employment is not what it wants. Wall Street loves a slack labor market. It allows them to bust unions and hire people for pennies.  Since they now have this advantage, I’m sure they have no desire to give it up.

Saturday, January 28, 2012

Limerick of the Day, Jan 28, 2012

And then there's this fellow called Newt,
Whose own horn he continues to tewt.
When I hear his ex-wives
Discussing their lives,
I say, "God! What a phony old cewt!"

Monday, January 23, 2012

Metaphors for Hardness

        Starting after the middle of the 20th century, I began working with machinists and skilled construction tradesmen of all kinds.  I was impressed by the abundance of colorful metaphors they used in almost every line they spoke.   For instance, some of the expressions used to describe various kinds and degrees of hardness included:
 "Harder than a whore's heart",
  "Harder than the hubs of hell",
  "Harder than Chinese arithmetic",
  "Harder than a Nicholson file", and
  "So hard a cat couldn't scratch it."
  Only the reference to Nicholson files had any concrete reference point in the real world,  but they all served to convey the notion of really, really hard.  As a young man, I was fascinated by this style of narrative, and wish today that I had bothered to write some of it down.  Is there a modern day equivalent to this type of jargon? Do people still do this?

Friday, January 20, 2012

Interesting Gorbachev Article

                  It has been about twenty years since the demise of the Soviet Union.  The January 9/16 issue of Nation magazine marks this occasion with a set of three brief articles:  The first is by Mikhail Gorbachev, entitled “Is The World Really Safer Without The Soviet Union?”  The second is by American historian and Russian Studies expert Stephen F. Cohen, entitled, “The Soviet Union’s Afterlife.”  And the third is by American educated Russian journalist Vadim Nitikin, entitled “Back in the USSR.”  I recommend all of these articles, particularly the one by Gorbachev.

Sunday, January 15, 2012

Whole Genome Sequence for $1,000?

    According to an article in the Jan 10 issue of Wall Street Journal,  Life Technologies Corp is introducing a machine in the coming year which it claims can provide a whole genome sequence for any individual who wants one--for about $1,000.   And it can do it in a day.   A genome read out that quick and cheap could allow genetic sequencing to be used as a routine medical screening.  And as the price drops even further, such tests would be available to the entire population in most developed countries.
     The advantages would be: first, individuals could discover early in life whether they are particularly at risk for certain diseases, and take preventative action. Second, this information could guide therapists in tailoring treatments to the individual. And third, it could allow drug companies to develop specific drugs for different genetic types.  And forth, it would make it more practical for drug companies to develop drugs to mitigate the effects of certain genetic diseases, particularly those caused by a single mutation, by identifying the pool of individuals who might benefit from them.
     Of course, there could be a downside.   Once such information exists, it's only a matter of time before some of it falls into the hands of those who might use it to our disadvantage.  And eventually, such use might even be legal and institutionalized.  Have you seen the movie GATTACA?

Wednesday, January 11, 2012

Does Skyscraper Boom Predict Recession?

     According to an AP article in Jan 11, 2012 Waterloo Courier,  Barclays Capital has issued a report claiming that it has uncovered an "unhealthy correlation" between skyscraper construction and recession, that goes back 140 years. Building booms are a sign of excess credit, and skyscraper construction coincides  with easy credit, rising land prices, and excessive optimism.  But these are the same factors which produce speculative bubbles which result in a crash.  So by the time the skyscraper is finished, the economy has slipped into recession.  Right now China and India are having a skyscraper boom, which could mean their economies are heading for a crash.

Thursday, January 5, 2012

Cheap Sugar From Cellulose.

    According to the January 3 issue of Wall Street Journal,  German chemical giant BASF is investing 30 million dollars in a plant in Pennsylvania that will produce cheap sugar from hardwood cellulose.  The sugar is not intended for human consumption,  but to be used as a chemical feed stock for producing acrylic plastic.  This plastic is now made from Brazilian cane sugar.

Sunday, January 1, 2012

Quote of the Day, Jan 1, 2012

"The mind is its own place, and in itself can make a heaven of hell,  a hell of heaven."