Paul Krugman has been a hero of mine during the long, bleak reign of Bush the Younger, articulating arguments against Bush's philosophy and policies oh these many years. Krugman is one of the leading authorities on international trade, however, and so I was holding my breath, intellectually speaking, waiting to see what would happen when there were global economic troubles.
I can exhale, because he's revealed his Panglossian side: our current economic troubles are the result of a "global savings glut" -- that is, the U.S. is the victim of its own success. Foreigners are investing in our country because we are so wonderful, and the problem is that they got snookered into investing in scams like sub-prime mortgages.
What's this got to do with the environment? Krugman's argument, which was made first by now Fed Chairman Ben Bernanke (and the folks at the Cato Institute), distracts attention from what I think is the true problem: the decline of manufacturing. If people would understand the real problem, they might be more open to a greening of America by revving up manufacturing of renewable energy technologies, public transit, and retrofitting, to name a few.
But first let's take a look at what Krugman said:
[In a speech in 2005] Mr. Bernanke asked a good question: "Why is the United States, with the world's largest economy, borrowing heavily on international capital markets -- rather than lending, as would seem more natural?"
His answer was that the main explanation lay not here in America, but abroad. In particular, third world economies, which had been investor favorites for much of the 1990s, were shaken by a series of financial crises beginning in 1997. As a result, they abruptly switched from being destinations for capital to sources of capital, as their governments began accumulating huge precautionary hoards of overseas assets.
The result, said Mr. Bernanke, was a "global saving glut": lots of money, all dressed up with nowhere to go.
In the end, most of that money went to the United States. Why? Because, said Mr. Bernanke, of the "depth and sophistication of the country's financial markets."
Now, Krugman rightly uses this logic to argue for better regulation of said financial markets. But the problem is the answer to the question, why is the U.S. in such debt? Because the obvious answer is, the trade deficit, that is, the tidal wave of goods coming into the U.S., being offset by a much smaller wave ("swell", for you surfers out there) of exports going out.
Specifically, in 2006, we imported 1,559 billion dollars worth of nonpetroleum goods, and 302 billion dollars worth of petroleum; but we exported 1,023 billion worth of goods, yielding a trade deficit in goods of 838 billion. We exported 423 billion dollars worth of services and imported 343 billion, so our movie industry did not save us from having a huge problem: how do you make up for the 759 billion dollars of goods and services that came into the country that were not exchanged for goods and services? You give people dollars, which is a claim on the future goods and services, and assets, of the United States -- in other words, you go into debt.
So there are trillions of dollars floating around the world from our trade deficits. Much of that money comes back into the U.S. in order to buy U.S. assets and companies -- for example, Merrill Lynch and CitiGroup recently sold parts of themselves in order to stay afloat, and the dollars used to buy them came from the trade deficit. Another huge reason that people in other countries are willing to take dollars for their goods instead of our goods is that the oil countries only sell their oil in dollars. Of course, that leaves trillions of dollars in the hands of oil countries, who then can buy chunks of the U.S.
But that's the good news; if the international markets should "decide" that the dollars aren't worth much -- that is, they can't buy much with them -- then the value of the dollar will plummet and our imports will become much more expensive.
Now many economists will claim that our exports will also become much cheaper if the dollar declines, but this is where the decline of manufacturing comes in. It may be the case that our manufacturing base has become so shriveled that there aren't enough exporters left to take advantage of the cheaper dollar. Whole industries have been outsourced, so who's left to take up the slack? Indeed, who's left to build the solar panels, solar thermal farms, windmills, trains, etc. to create a sustainable economy?
The "global savings glut" is actually a global dollar swamp. The solution is to ramp up our manufacturing industries so that we can eliminate the trade deficit by making more of our own stuff at home and exporting more of it abroad, and the green economy, as Al Gore has been pointing out for decades now, is a perfect opportunity to do just that.
So next time you hear talking heads pontificate about global financial pinball machines, pay attention to the real problem, manufacturing -- or the lack thereof.
Note on data: import and export data was obtained from this Bureau of Economic Analysis web page, "U.S. Trade In Goods IDS-0008", from the zipped Excel files, IDS0008_Exports_Current.xls, and IDS0008_Imports_Current.xls, and also "U.S. International Transactions, 1960-present" (Excel file). Try it, it's fun!
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Comments
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Sean Casten Posted 5:32 am
18 Jan 2008
That observation was made 4 years ago by a speaker who's name I forget, and parts of it are not precisely true today, but much still holds. And the issue then becomes not that one party or the other will suddenly become "rational" but that (a) China finds other markets to sell to that lessen it's dependency on us or (b) we find other markets for dollars that lessen our dependency on China.
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Sean Casten Posted 5:37 am
18 Jan 2008
However, the US has maintained a good base of energy- (but not labor-) intensive manufacturing due to the historic low cost (and comparatively high reliability) of our energy supplies. Industries that are often held up as dying are actually quite the opposite. US Steel is very competitive, even in China. The lowest cost silicon manufacturer in the world is based in West Virginia. More examples abound of growth in rather unsexy industries.
But this is one really worth watching, now that energy prices are rising, in part because of the higher costs imposed by 1970s-era environmental controls which are only just now affecting the cost of power (since the pre-1970s plants all got grandfathered and it has taken this long to begin to turn over the fleet / max out the capacity of the old stuff). I'm not arguing that we should repeal those laws (although they certainly can be improved to lessen their economic consequences). But it is a big problem if those costs drive the energy-intensive manufacturers overseas to places with lax env't stds, and would hugely disrupt the economy for the reasons you outline.
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Jon Rynn Posted 5:40 am
18 Jan 2008
In truth, if the U.S. wasn't there, as you point out, the Chinese would have to increase the income of their people so that they could buy the goods being sent to the U.S., and to a lesser extent, the other countries would have to rely on policies to increase domestic consumer demand (not that that would be easy). But for now, lots of people and countries are getting rich on this particular, to me rather crazy global economy -- having one country in the center of a global economy sounds strange in its own right -- and like all kinds of other strange situations -- like constructing coal plants that lose 2/3rds of their energy to heat loss -- people just keeping going on until they can't anymore.
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Sean Casten Posted 5:46 am
18 Jan 2008
That said, it bears noting that these trends are not all bad. Lots of people are in homes today because interest rates are way lower than could have been justified without global capital flows. Lots of people have jobs because companies could get capital to borrow and grow their businesses from the same forces.
Yes, there are strange things that happen as a result, some of which are negative. But I'm not comfortable saying that global capital movement is on balance a bad thing - but it sure does make the world a more interesting, and more complicated place.
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Jon Rynn Posted 5:46 am
18 Jan 2008
So -- hopefully -- the machinery industries in particular are something that the US should be able to hold onto, as those are most human-capital-intensive. And as far as labor-intensive industries being gone for good, only if we can't figure out how to construct those industries using better equipment, not cheaper labor.
For instance, the Italians now produce machinery that can create knitwear -- thus, instead of competing with cheap labor to make knitwear, they can compete with extremely sophisticated equipment, which employs highly-paid and highly skilled employees. And in addition, machinery by itself does not take huge amounts of energy to produce. So making machinery, it seems to me, is the path the U.S. should ideally be going down.
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Jon Rynn Posted 5:53 am
18 Jan 2008
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GreenEngineer Posted 6:40 am
18 Jan 2008
But it seems like there is a very simple underlying issue here, upon which all these sophisticated discussions are ultimately just elaborations.
The issue, as I see it, is that our policymakers and many of our economics gurus seem to have forgotten a very simple thing: real wealth and economic growth is fueled by production, not consumption.
Of course, consumers who have both the money and the confidence to spend it are necessary to keep the economic cycle going. But at the end of the day, you have to remember to ask what that money actually means, and what it is actually buying.
You can't consume wealth that isn't produced, so if you have a consumer economy, you're either a producer as well, or an importer. At the end of the day, the healthiest economies are going to be the ones that produce the things that people and businesses actually need: food, shelter, clothing, capital equipment, etc.
Today's headlines, trumpeting plans for "economic stimulus" plans based on tax refunds designed to encourage consumer spending, really highlight this mental disconnect.
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Werdna Posted 6:46 am
18 Jan 2008
http://www.livableregion.ca/blog/blogs/index.php/2008/01/ ...
(I am in not any way associated with the creation of this video. I just think that it is interesting and addresses some of the issues brought up by Jon Rynn.)
Andrew Eisenberg
The gateway project is wrong---http://www.livableregion.ca
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Jon Rynn Posted 6:48 am
18 Jan 2008
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Sean Casten Posted 6:58 am
18 Jan 2008
I'd highly recommend the book In Praise of Hard Industries which rather articulately makes this production point, all from the rather interesting observation that if you map industrialized countries on a plot with the size of their welfare state on one hand (which includes costs of prisons, on the basis that this is the bottom of the welfare system) and the % of the economy dedicated to manufacturing on the other, you find a rather tight relationship. He shows that this is basically because the pro-trade vs. anti-trade argument is too simplistic. If you prop up your manufacturers through subsidies you tend to have a smaller welfare state. So do you want manufacturing (albeit with a bloated subsidy) or welfare (but no mfg). The reason is because a manufacturing intensive economy creates good-paying jobs for high school drop outs, graduates, college graduates and PhDs... but a service economy really only good paying jobs for the top of the education ladder. The rest works at Wal Mart. Ergo, less mfg = more welfare. Fascinating book, and in keeping with your production vs. consumption idea. BUT...
Having said that, I'm not sure I agree with your thesis that it's one or the other. Ultimately, economic growth is a function of both. Yes, you've got to produce stuff to have something to consume, but you also need consumers. The reason why baby boomer retirement is such a big deal for planning purposes isn't because the boomers are going to stop producing, but because as they move from big homes into small homes into nursing homes into cemeteries, they will consume less and less. Economic growth is historically predicted to a surprising extent by demographics, where baby booms tend to cause economic booms ~ 40 years later when those babies hit their peak earning (and hence, consuming) years. Look at how many big industrials went bankrupt to get out of their pension funds... which are essentially ponzi schemes that work only so long as there are more people feeding the bottom of the pyramid. Social security is ultimately on the same trajectory as population growth slows. Is that a consumption or production issue? I think you'd have to say both, no? AND FINALLY...
Keep in mind that producing services is still producing stuff. I'll grant you that doesn't create quite as many follow on jobs (e.g., building a business to provide legal services doesn't create as many jobs as building a business to create widgets), but it is still producing something useful, creating jobs, creating wealth and growing the economy.
Anyhow, interesting conversation.
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Sean Casten Posted 7:03 am
18 Jan 2008
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sunflower Posted 7:10 am
18 Jan 2008
The main manufacturing component is glass, an unbelievable amount of glass. Just as residential and commercial consumption of glass implodes - solar thermal glass (low-iron glass mirror) explodes. It take my breath away. This glass will be exported around the world. It promises to become the fastest growing largest energy industry on Earth, and cheaper than coal. The acceleration is just incredible.
Cheap dollars make our imported oil expensive and domestic solar glass cheap. The installation of glass is local labor, lots of jobs.
It is absolutely wonderful. Exciting times.
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Jon Rynn Posted 7:16 am
18 Jan 2008
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Charles Barton Posted 9:28 am
18 Jan 2008
If there is no fundamental change in the pattern, the nation is headed for default on its international debt. Default is another word for bankruptcy. Investments in the United States cannot be repatriated.
There is a long history of foreigners investing in fraudulent or poorly planned investment schemes in the United States.
Charles Barton
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GreenMom Posted 2:52 am
19 Jan 2008
...energy prices are rising, in part because of the higher costs imposed by 1970s-era environmental controls which are only just now affecting the cost of power (since the pre-1970s plants all got grandfathered and it has taken this long to begin to turn over the fleet / max out the capacity of the old stuff). I'm not arguing that we should repeal those laws (although they certainly can be improved to lessen their economic consequences). But it is a big problem if those costs drive the energy-intensive manufacturers overseas to places with lax env't stds, and would hugely disrupt the economy for the reasons you outline.
I doubt I understand the economics of this as well as you do, but I'm not sure I get why those control costs could would all of sudden now be affecting the cost of power. Yeah, a lot of power plants got grandfathered...but since the early 1990s an awful lot of those plants have put on scrubbers and SCRs in response to the acid rain program and some state laws. The price of my home power hasn't gone up appreciably, even as Duke Power has put on controls all over my state.
Are you saying that the power companies have both put on controls AND wrung out all the efficiency they can get from their coal plants (and demand-side programs) -- so now they're finally having to build new plants? Even so, are new plants with scrubbers and SCRs really that much more expensive than they were 5 years ago, given that coal is still relatively cheap? At least in my state, in 2002 the governor cut a deal with the power companies to pass control costs from new state rules on to consumers -- and still, our bills are not THAT much higher.
Thanks.
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