Category Archives: China

Does immigration produce economic prosperity?

There seems to be a popular narrative that says that immigration acts as a sort of economic engine. People arrive, many without skills, and get trained. They work their way up feverishly. They use their new money to educate their children. The next generation is entirely American. They know little of their parents’ homeland and have no desire to move there. They see that they would have never have been so well off if their parents had not emigrated.

The twentieth century provides a sort of glorious history with regard to labor empowerment and enrichment as long as you can live it in fast forward by reading a textbook and avoid one critical fact.

Hordes of people arrive in the 19th century and live horrible lives in poverty and misery while robber barons become rich on the back of labor’s woes. By 1910 everyone understands that the labor glut is killing any chances for labor advancement. Teddy sets up an arbitrator to rule on the coal strike of 1910. The union/labor movement is born. 

Before we continue, allow me to inject an irritating fact:

immigration

As you can see the percent of foreign born people peaked in 1910 – at the exact same time as the labor movement was born. What allowed it to succeed was the steady decline in new cheap foreign labor – until 1970. I’d like to continue my history of economic success and upward mobility by virtue of innovation, foreign wars, government stimulus and the accumulation of skills and education by the great American workforce but, unfortunately, this chart has ruined the narrative.

All those factors put the wind at the backs of labor. When we virtually stopped immigration we saw wages grow with GDP and productivity. An economist must make a hard argument to claim that everything will be fine this time just like it eventually was for our great grandparents in 1910. They have to argue for foreign wars that kill lots of people in countries we trade with and we need a sort of reverse industrialization where labor is needed to boost production rather than machines. If you can’t see either of those two things happening then there is only one way labor recovers from the hole it’s in – we must stop immigration or at least slow it to a trickle. (Need I point out that median wages peaked in 1974?)

Immigration by Another Name

But what about all those poor desperate people who just want a shot at the American dream? (You cry.) I see examples of them every night on the news. Well, there is another answer. Foreign immigrants come into the country in another way: They trade their way in. If we have no tariffs with China then we essentially allow every Chinese peasant to work here. There are hundreds of millions of them. If you want to help a poor Guatemalan immigrant you have to stop buying goods made by that Chinese peasant. Think what the chart would look like if I added in all those Chinese peasants.

This is, of course, nothing more than an argument based on supply and demand. If you expect to have a system that will benefit US labor then you have to have less labor. If you are an open border person (such as Mayor de Blasio) then you have to live with this:

Corporate-Profit-Margins

Once again, I must point out that labor’s share peaked in the 1970’s. Maybe it was too high? It couldn’t last and it wasn’t fair that an hourly worker at Ford without any education at all could make more than a college professor. True. Foreign competition and corporate outrage broke up union power but did we want it all to be completely destroyed so we could go back to the gilded age?

When I hear Silicon Valley whining about immigration bans I have no sympathy. Let the price rise and a labor shortage ensue. Let them train people and push them up the system. Sorry Mr. Zuckerberg, your costs may rise a little and your next useless feature may get delayed. Is there a foreign competitor you are worried about? I don’t hear China whining about not being able to hire Indian programmers. They buried and replaced Google and their economic growth seems to be unaffected. The arguments that begin by decrying our prospective loss of competitiveness are absurd and self- serving. If you repeat them then you have become a dupe for CEO’s desperate to pad their own pockets.

Alas, Trump the idiot has stumbled upon the correct policy of America First = less immigration and a tax system that favors “insourcing”. Beware of malevolent morons executing good policies. The policy may end up being desecrated.

Can you please stop saying this?

Sometimes if you repeat something enough, everyone accepts it as the truth. “Obamacare is a disaster” for example. Really? How does insuring 30 million new people represent failure? If rates have gone up elsewhere because Congress failed to fund the program then that’s not the fault of the program. Here are a few more of my favorites:

Illegal Immigration is no longer an issue – after all, border crossings from Mexico have dropped to zero.

Yes, border crossing are down but does that mean that illegal immigration has declined? What if people are simply flying in as tourists and never leaving? Here’s some data from the Migration Policy Institute:

immigrants-to-us

The sum of all F1, H1B, and E8 visas granted has grown from 250,000 to 700,000 since 1992. The average is about 400,000 compared to total immigration of approximately 1 million/year. The popular revolt against massive immigration is not based on mythology. The data supports the populist argument that at the low end of the pay scale job competition is growing enormously by virtue of illegal immigration. Building a wall will not fix the problem.

Manufacturing plants will never be built in, or return to, the United States.

The New York Times did an excellent feature on the huge list of subsidies China offers to Foxconn so it can make and export iPhones. Is it unreasonable to believe that we can compete on an even playing field? US workers rank third in global productivity behind Luxembourg and Norway which are not exactly normal cases. We are three times more productive that Mexican workers for example. Comparisons to Chinese workers is hard because the data includes parts that are outsourced and local subsidies such as the ones mentioned by the NY Times. The reality is that manufacturing plants are being opened (and closed) all the time in the United States. I don’t expect a new iPhone plant in the US to look anything like its Chinese counterpart. Automation would be a much bigger component but higher wage jobs would be created as would jobs for security guards, sanitation workers, and hair cutters. Did I mention that R&D follows plant location?

The question we must ask is what would an iPhone cost without all those subsidies? We must have an industrial strategy to beat those foreign mercantilists who are already doing everything they can to destroy our industrial base. Then we can compare costs.

Israel is one of our closest allies.

What does it mean to be a close ally exactly? Israel advocated for our invasion of Iran. It chose to talk to the political opposition rather than President Obama. Does it support our diplomatic efforts in the Middle East?  Israel says that simply being a democracy is enough to earn love and everlasting aid. Is it? Being a close ally means doing something for us that does not help them or may be contrary to their interests. I seem to have missed those actions. Maybe they just have a terrible (American)  public relations department. Maybe there’s no such thing as close allies in such a Realpolitik world.

Germany needs Muslim immigrants since they have no population growth.

This is repeated right after it is mentioned that allowing in oceans of people from Syria and Eritrea was an act of mercy. Yes Germany has a very old population but are there no unemployed people in the Balkans or Spain? Wouldn’t it be easier to provide German lessons to Italians than to illiterate Syrians? What would it cost Germany to go on a worker hunt among the PIIGS where they offered transportation, subsidized housing, worker training and language courses? I’m sure it would be less than what they will pay to inhale a vast collection of Eritreans and Afghani’s. Did I mention that the unemployment rate in the PIIGS for 20-30 year-olds is above 25%? Bringing in culturally insoluble people to lower your average age is a multi-generational error.

 

 

 

The Death of Capitalism

The last time capitalism was under attack was during the Great Depression. Without proper bank regulation and government stabilizers like unemployment insurance, people began to question its efficacy. Postwar growth ended the conversation. The failure of the Soviet Union discredited Marxism. It is hard to see central planning as a viable alternative to free markets. It’s not so hard to see an economy with more government involvement. The major death blow to capitalism is globalism. We were told that it would deliver four things

  1. Additional foreign capital for investment
  2. Additional technology and innovation
  3. Additional consumers to buy (our) goods
  4. Additional workers to produce all these new things.

All we got was #4.  It turns out we didn’t really need more capital. We have more than enough available to us through our own capital markets. New technology and innovation seem to largely come from Silicon Valley rather than from Shanghai Or Mumbai.  All the new consumers turned out to have virtually no money [relatively speaking] so they couldn’t afford to buy anything that was made in America. That left us with all those additional workers who were eager to make goods for us –  at a much lower wage.

If you add new capacity with new workers but no new demand then there is no reason to invest in new plant and equipment, especially in the United States [or any other developed  country] . Excess corporate cash is used instead to either buy out competitors or to buy back stock.  The result is an ever greater amount of concentration in virtually every industry in the United States from energy to finance.

Every economics textbook has been rendered quaint. How do professors discuss “perfect competition” when there is none. How do they discuss free trade when none of it is free? The rise of populism and the growing absurdity of policies born from theoretical economics is not just a coincidence.

If Thomas Friedman is right and there is no going back then we shall descend into one common global living standard. There will be no difference between a laborer’s standard of living in Delhi and that of a worker in London or Cincinnati. Education will add less value over time as robotics renders it pointless. Owners of capital will roam the earth avoiding taxes like golden Gods. All the luxury condos in Dubai will sell out.

It turns out that globalism ate away at the ability of a state to control the  excesses of capitalism. Worker protections, pollution limits, and minimum wages are only possible if we reconstruct state sovereignty. That’s possible with protectionism and isolationism. Western populist movements seem to have stumbled on these policies without seeing the wicked invisible pile of unwritten import restrictions on Chinese imports, and the absurdity of the Ricardian trade model. They are lashing out and liberals feel their pain but defend their targets. Every tortured liberal economist who celebrates the rise of China also  laments the horrible job prospects of his children. They must pick a side.

Adam Smith knew all about the flaws of capitalism. The current crop of defenders sound more like plutocrat sycophants. Everyone knows it has major problems but few seem willing to accept the obvious cures. Must the populist revolts from below become violent before our policy makers accept that changes need to be made? The people of Europe seem to understand that the Euro is a failure better than their governments. Rural Tennessee voters understand that trade with China is deleterious while the entire Democratic party has its head in the sand. We have allowed the idea that “capitalism is a perfect model”  to spread because we love the theoretical model.

Unfortunately the model and our reality are completely unrelated.

How to Fix Economic Stagnation -Right Now

The economic data are becoming clearer:

  • Productivity growth has completely stalled (much of it was based on fictional benefits from import substitution).
  • Population growth is diminimus.
  • Government stimulus is static. The budget deficit is sitting at $600bn – is that OK?
  • Private and public sector investments are dead. Corporations are just buying back stock and governments are scared to raise taxes to pay for bridge and road repair.

We can now ask – Are we happy with the status quo? There shall be no raises for Millennials, no new jobs for aging baby boomers. We can’t afford Medicare or Social Security.

In Europe the central bank is buying every bond in sight so all yields are at zero. They have produced a lost generation by virtue of the absurd levels of youth unemployment. Outside of Germany everyone has deficits in excess of EU limits. Do we want to talk about income distribution and the coming demographic nightmare?

So what are policy makers and politicians on both sides of the Atlantic offering as solutions? The Repubs typically suggest a reduction in the corporate tax rate as though new repatriated $ would be used to increase production facilities in the US. They have all the capacity they need offshore. Please find me one company that says it is dying to build a plant if only they had some repatriated profits. Just one? The Dems have absolutely no ideas at all beyond raising the maximum tax rate by some tiny amount. The Federal Reserve board seems to be most agitated by this stagnation but it’s clear to everyone that monetary policy is making no difference.

I can fix it all – today, with just one new policy:

In China, if you want to set up a company you have to have a domestic partner and most if not all the stuff you make must be targeted for export. All we have to do is copy their rules:

All Chinese/Asian/Multinational companies importing anything must have domestic partners and at least 40% of the content of these imports must be produced locally by those partners. If China wants to send TV’s to Greece, 40% of the TV must be made in Greece. If Apple wants to sell iPads in Texas, 40% of the product must be made in the USA. Otherwise there will be a 40% duty charged on these imports.

If Greece can’t figure out how to make enough of the product then they’ll have to do without new flat screen TV’s. The simple truth is that they can’t afford to buy these imports anyway so the sudden austerity hit would be good policy.

The US would have to figure how to make at least a portion of a lot of of stuff. Let Foxconn show us how, just like IBM showed Lenovo. Am I destroying “free trade”? Absolutely not, because it was never free unless you consider all these same rules in China to be within the boundaries of free. Everyone can still import and export as much as they like, but if they refuse to meet my 40% requirement then all those goods must be sold outside the US.

I guarantee that there would be a burst of growth in the west like we haven’t seen since the Marshall Plan. SEO experts making $22k/yr would be offered huge raises to do something of value. They might actually make enough to get married and buy a house, something Millennials have virtually never done. Export trolls like China, Singapore, and Korea would have to generate growth by new domestic stimulation policies, Yes, we would be wrecking a chunk of the Chinese exporting economy … but then, I was never a fan.

(For a short explanation of how to properly use NAFTA to achieve this go HERE)

What is comparative advantage in an internet world?

Free traders will all tell you that the reason it is so powerful is because we make the stuff we are best at making and our partners make what they make best. Sounds perfect. Their proof for why this works is the 1970’s. We had severe restrictions on car imports so when they started to trickle in around 1981 we woke up and realized what an inferior product Detroit was offering. Everyone wanted a new Japanese import with its superior gas efficiency and quality. Then, after new Japanese plants were opened in the US, we had a choice. Detroit was forced to catch up. Everyone knows how bad consumer goods became behind the iron curtain.

Trade however is only one factor. The other is information. If I am living in China and I want to build a new search engine or eBook (computer) I can figure out the best technology online and make a descent copy.  It’s easy to find out what is selling best in other countries and then adapt. You don’t have to relocate or hire those specialized foreign workers. I can make anything anywhere, within reason. All I need is a decent transportation system, cheap labor (or good robots), and a few software engineers. China copies everything – that’s what it’s famous for. Have you ever bought a product created and engineered in China? Yet they don’t suffer from backward infrastructure, out of date cars, computers, or clothes. They import almost none of those things so we can’t argue that their efficiency comes from foreign import competition. They replaced all Microsoft and Google products with no friction at all.

Trade is no longer the primary factor that determines whether a product is any good. I don’t need to see the cool imported car my neighbor just bought, to know that it exists. I can see it on YouTube. My tastes and my demand will be affected accordingly. My local Ford dealer knows all about Tesla’s new cheaper 3 model. So does BMW in Munich. Technological competition begins on the web long before it exists in a store or showroom. Inferior products usually don’t even make it to a store.

The only people who don’t seem to know this are economists.

Should we cushion the blow from trade-driven job losses?

The New York Times came out recently with an essay supporting the role of government to pay people money if they get displaced by offshoring. The idea is catching on. This sounds compassionate but it’s like the guy spreading the plague offering you a band aid for your bleeding boils. The government’s trade policy has created an employment/wage nightmare and no one should suggest that they be let off the hook by extending your unemployment insurance and food stamps. (- not to mention that it’s a budgetary lose lose)

The problem is that Chinese exports are massively subsidized. The knowledge that (virtually) free labor exists in China infects the mindset of all executives and US workers. We have to equally subsidize our exports to them. If they block our exports then, , we have to shut it down – unless we enjoy sinking into a permanent downward wage spiral. Does anyone still think that laid off workers will someday move on to other high paying jobs after some modest transition period?

The political class has been sold the idea that China is marvelous because multinationals can make cheap stuff for US consumers over there. They thought the whole thing would be a win win – lots of multinational campaign contributions and happy voters who can get really cheap flat screens. Clearly part two is over (as Donald Trump has discovered) and a part of the multinational dream is fading. “We” thought that all those Chinese plants would allow us to sell “our” stuff in China, to the 300 million Chinese who make more than $10/hour.  How’s that turning out?

I wrote in July 2014 that Apple must know that they would never be allowed to sell their stuff in China. There are many companies who have been shut down before them (Google, AMD, IBM, Microsoft, Cisco) . Apple was living on borrowed time. Here’s how the NY Times put it:

Apple Services Shut Down in China in Startling About-Face

Startling?

 

Words Matter

It’s time to abandon certain words that have become pervasive for no good reason:

  1. Folks – all people/voters/ISIS members/NPR listeners are not “folks”. Folks are ” simple, unaffected, unsophisticated” people (Dictionary.com) . Please consider replacing it with simpletons in the future, then if it still fits – go ahead.
  2. On the ground – allow me to assume that all international reporters and army men are on the ground. If they happen to be floating in the air then I expect you to mention it.
  3. Free Trade .. all evidence from the past 20 years has exposed that most trade is anything but free. Trade deals are thousands of pages long (even NAFTA) . Goods may travel on the open seas freely but there are surcharges, subsidies, and quotas everywhere and they are very unevenly distributed. If you can show me a trade deal where the US runs a (larger) surplus after the deal then we can use this ridiculous term – otherwise, its use must be restricted to the pages of economics text books.

 

The Apple Window is Closing

I’ve described the Apple Computer method of generating extraordinary profits:

  1. Make everything in the third world.
  2. Sell everything you can in the first world.
  3. Depend on other entities to pay those buyers first world wages.
  4. Pay your own first world workers as little as possible, regardless of profitability.

This has worked like a dream and was adopted by everyone from IBM to Walmart. Eventually though the strategy only works if most firms don’t use it. After all we need somebody to pay the first world consumers well enough so they can afford cars and smartphones. If no one does then we depend on governments to do so but their subsidies (unemployment insurance, food-stamps etc) are too meager to sustain the game.

As they watch it all come to an end they tell shareholders that lost revenue will be made up by sales to Chinese peasants and the third world elite. Economists marvel at the ever increasing skew in income distribution and propose tax changes to fix things. Raising the taxes of Apple computer will not make them change their strategy! Raising any CEO’s taxes won’t make him hire a first world worker. Tax policy treats the symptoms, not the problem. We have a global (peasant) labor glut and Chinese wages are spreading like a plague.

We have a chance to get two ugly outcomes at the same time:

  1. A profit slump as first world consumers run out of money.
  2. A permanent decline in wages as they march down toward third world poverty levels – crushing budget deficits and GDP growth along the way.

The Chinese slowdown that comes from all this allows them to devalue their currency locking in a self reinforcing mechanism for the further destruction of wages and (first world) industrial competitiveness. The race to the bottom is accelerating and theFed can’t save us this time because rates are already at zero. The fix is simple. We must cut off the blood sucking parasite attached to our neck.

We have paid for enough skyscrapers in Shanghai.

What is the stock market so afraid of?

So we hear that our giant blood inflated parasite has a cold or it may be worse – a disease based on corruption. Will any of this reduce its need to suck our (economic) blood – hardly. If anything it makes China scared so it devalues its currency, thereby opening up the vein a little more.

If you are Brazil or Australia then this is of some concern since you sell stuff to this leech, but in our case – what’s a little worsening of the trade balance? Ah but (you say), that means Australia and Brazil won’t buy more American goods since they are selling less to China – really? Do you actually think that our exports to such places amount to something consequential?

So you tell me it’s stock market contagion brought about first by the decline in their stock market. OK – so what is the correlation between theirs and ours?:

us china stock mkt corr

You can see the correlation is around zero. So how does their market do as a proxy for the Chinese economy (which is supposedly growing at 7%/year?:

China stock mkt vs GNP

So we have a silly index, indicative of nothing, owned by almost no one, going down, sparking worldwide fear of another ’08 (thanks Mr. Soros).

If this is all that’s going on then mark me down as a bull. There is far more to fear from $25 oil than from Chinese stocks.  The global banking system lent money to every country and company drilling for natural gas in North Dakota and Russia. All those loans are based on $100 oil and the Saudi’s are blowing the entire system away (it has nothing to do with global or Chinese demand). We must now hope that lower oil prices generates sufficient higher disposable income to offset these loan defaults. We can also hope that the banks hedged some of this exposure (their record in the past shouldn’t give us much confidence).

A ton of investors are counting on banks and oil retailers’ dividends to make up for horrible bond yields so they take implicit long positions in oil – scary. The oil dividend we would expect from such price declines is generating investor panic. My guess is Chinese stocks are a symptom not a cause.

If they really are to blame then sell your house and buy (US) stocks.

Where are the climate talk denunciations?

The Paris climate talks ended with no agreement of any kind – none. The “deal” is to allow every country to set its own happy level of CO2 emissions. Isn’t that friendly? Go ahead China, India, America – knock yourself out. Pollute away. There are voluntary guidelines and NO penalties.

This is of course no different from all the other talks which sometimes came up with unenforceable targets set way into the future. At least those meetings ended with benchmarks that we could point to and say – “You (or We)  failed”. Yet the conclusions by the press are all benign – there is apparently good and bad news. I just can’t find the good news. When the press which is in favor of attacking global climate change, won’t call out the attendees of these ridiculous conferences then there is no chance that countries or  politicians will pay any penalty for pollution run-a-muck.

 

Conference attendees celebrate?!
Conference attendees celebrate?!

Obama has no reason to defend himself against criticism because there isn’t any. We shall go on reading about Chinese restaurants charging for clean air as though it’s just who they are – those little rascals. Where are the protesters like we used to see at WTO talks? Our millennial generation is too worried about political correctness to apparently care about trivial things like the end of the planet.

Doesn’t this video from one week ago tell us everything we need to know?

Apparently not.

(If you can’t see the video then go here.)