Friday, April 16, 2010
Thursday, April 15, 2010
Poor Jobless Claims Data
Down 484,000 in the week. That is an ugly number, 60k more than expected. Is the V-shaped recovery story wildly optimistic?
Thursday, April 8, 2010
Chin Music for China
Last month, two guys known for being handy with slide-rules were trash-talking about balls and bats. Paul Krugman of Princeton University proposed policy hardball over China manipulating its currency. Stephen Roach of Morgan Stanley said that was wrong and suggested taking the bat to Krugman.
Look, I may have been the last pick of every ball team I ever played on, but I have been in Chinese business and finance since 1986 and I have some things to interject between the heavy hitters.
For years we have heard the words “currency manipulation” and “China” together so often that they sound as natural as “Mantle and Maris”. But the yuan was stable from 1994 to 2005, it rose almost 20% against the dollar in the next three years, and has been stable since then. Stability like this is not most people’s idea of “manipulation.”
Those who talk about China manipulating its currency are trying to de-legitimize its fixed exchange rate system, but it is legal and valid. The articles of agreement of the International Monetary Fund permit nations to choose fixed exchange rate systems. When the United States pressured the IMF to condemn China’s arrangements, the IMF responded with the brush-back. In 2005, Managing Director Rodrigo de Rato said there’s no evidence of manipulation for competitive gain: “There is a strong argument by the Chinese authorities that their main objective . . . is the stability of the economy.”
Still, the criticism of the Chinese returns with a regularity that it is more Groundhog Day than Opening Day. In 2004, Senator Chuck Schumer said that “many economists estimate that the yuan is now undervalued by between 15 and 40 percent.” In 2009, he said, “China’s currency remains between 21 and 40 percent undervalued against the dollar.”
What happened between 2004 and 2009? As we’ve seen, the Chinese currency appreciated against the dollar. Since the currencies of other countries appreciated about as much, it did not change the context of the US-China trading relationship. The American side can therefore keep on claiming up to 40% undervaluation of the yuan as the dollar drops.
Let's focus on that point. The US dollar has declined in this decade against other currencies in response to American economic conditions and policies that drive it down. Yet the American view is that the yuan is manipulated just because it tracks the dollar’s slide.
It’s wrong-headed, as is the implicit American view that exports will rise if we just weaken the dollar enough. If exchange rates were the key factor in trade competitiveness, then Mexican imports would have streaked ahead of Chinese in the US market at times of peso weakness and Zimbabwe would be the biggest bat in world trade.
Worse frustration is to come. Partly in response to US pressure, partly for its own good reasons, China will alter its currency peg – yet absent other major structural changes, this will not swing the trade balance.
American exporters export, whatever the exchange rate. In the most recent reported quarter, exports accounted for a big 1/3 of the value of goods produced. No one with an idle plant in Paterson NJ is basing the decision to restart production mainly on the Chinese yuan exchange rate.
However, goods production is down to just 23% of GDP. The US economy has gone post-industrial. Clearly our trading partners only buy our manufactures to the extent that we manufacture. They buy none of the output of our government sector. They buy some services, but in a recession they too have less need of services in which American business specializes.
Here’s a difference between Chinese and American business today. A Chinese entrepreneur might as well try his hand at manufacturing, but the American thinks long and hard before taking up the regulatory and tax burdens of making a product for sale.
It's one reason serviceable industrial parks hereabouts rent to ballet schools, medical offices, day care centers, basketball clinics, gymnastics facilities, skate parks, art studios, martial arts gyms, fitness centers, houses of worship, schools, and even government offices, but less and less to industry.
China's scouts might look at Japan’s play since the last time it contended, and conclude China has little to gain by playing ball with the Americans. There was a huge rise in the value of the yen from 250 to the dollar in 1985 to 90 in 2009. However, this neither stopped the US from placing trade restrictions on Japan, nor dissuaded the Japanese from investing heavily here. And after all that, America runs about the same trade deficit with Japan now as it did in 1985.
At that time, by the way, one Chinese yuan bought 75 Japanese yen. In 2009, it bought only 13, but despite that, Japan still runs a trade surplus with China.
In neither situation was the exchange rate the key factor.
Look, I may have been the last pick of every ball team I ever played on, but I have been in Chinese business and finance since 1986 and I have some things to interject between the heavy hitters.
For years we have heard the words “currency manipulation” and “China” together so often that they sound as natural as “Mantle and Maris”. But the yuan was stable from 1994 to 2005, it rose almost 20% against the dollar in the next three years, and has been stable since then. Stability like this is not most people’s idea of “manipulation.”
Those who talk about China manipulating its currency are trying to de-legitimize its fixed exchange rate system, but it is legal and valid. The articles of agreement of the International Monetary Fund permit nations to choose fixed exchange rate systems. When the United States pressured the IMF to condemn China’s arrangements, the IMF responded with the brush-back. In 2005, Managing Director Rodrigo de Rato said there’s no evidence of manipulation for competitive gain: “There is a strong argument by the Chinese authorities that their main objective . . . is the stability of the economy.”
Still, the criticism of the Chinese returns with a regularity that it is more Groundhog Day than Opening Day. In 2004, Senator Chuck Schumer said that “many economists estimate that the yuan is now undervalued by between 15 and 40 percent.” In 2009, he said, “China’s currency remains between 21 and 40 percent undervalued against the dollar.”
What happened between 2004 and 2009? As we’ve seen, the Chinese currency appreciated against the dollar. Since the currencies of other countries appreciated about as much, it did not change the context of the US-China trading relationship. The American side can therefore keep on claiming up to 40% undervaluation of the yuan as the dollar drops.
Let's focus on that point. The US dollar has declined in this decade against other currencies in response to American economic conditions and policies that drive it down. Yet the American view is that the yuan is manipulated just because it tracks the dollar’s slide.
It’s wrong-headed, as is the implicit American view that exports will rise if we just weaken the dollar enough. If exchange rates were the key factor in trade competitiveness, then Mexican imports would have streaked ahead of Chinese in the US market at times of peso weakness and Zimbabwe would be the biggest bat in world trade.
Worse frustration is to come. Partly in response to US pressure, partly for its own good reasons, China will alter its currency peg – yet absent other major structural changes, this will not swing the trade balance.
American exporters export, whatever the exchange rate. In the most recent reported quarter, exports accounted for a big 1/3 of the value of goods produced. No one with an idle plant in Paterson NJ is basing the decision to restart production mainly on the Chinese yuan exchange rate.
However, goods production is down to just 23% of GDP. The US economy has gone post-industrial. Clearly our trading partners only buy our manufactures to the extent that we manufacture. They buy none of the output of our government sector. They buy some services, but in a recession they too have less need of services in which American business specializes.
Here’s a difference between Chinese and American business today. A Chinese entrepreneur might as well try his hand at manufacturing, but the American thinks long and hard before taking up the regulatory and tax burdens of making a product for sale.
It's one reason serviceable industrial parks hereabouts rent to ballet schools, medical offices, day care centers, basketball clinics, gymnastics facilities, skate parks, art studios, martial arts gyms, fitness centers, houses of worship, schools, and even government offices, but less and less to industry.
China's scouts might look at Japan’s play since the last time it contended, and conclude China has little to gain by playing ball with the Americans. There was a huge rise in the value of the yen from 250 to the dollar in 1985 to 90 in 2009. However, this neither stopped the US from placing trade restrictions on Japan, nor dissuaded the Japanese from investing heavily here. And after all that, America runs about the same trade deficit with Japan now as it did in 1985.
At that time, by the way, one Chinese yuan bought 75 Japanese yen. In 2009, it bought only 13, but despite that, Japan still runs a trade surplus with China.
In neither situation was the exchange rate the key factor.
Sunday, April 4, 2010
Working Man’s Blues: Employment Trends in Democrat States Lag
During the past winter of discontent, New Jersey Governor Chris Christie emerged as a model and example of political reform. A young Republican who routed a wealthy Democrat incumbent in a solidly blue state, Christie keeps on surprising. He is making a serious effort to rein in government expenditure, declaring that a "state of fiscal emergency exists in the State of New Jersey" and instituting deep cuts. It brings him into conflict with state workers whose lush packages are at the root of the problem, as well as the Democrat establishment whose patronage system created it. But taxpayers appreciate the governor’s position that they have already been milked dry, and seem willing to give spending discipline a try.
It is a changed day when developments in New Jersey furnish a positive example. In the December 30 2008 edition of the Wall Street Journal there was an arresting article entitled "New Jersey Is the Perfect Bad Example." In it, William McGurn showed that the government sector added 93% of all jobs created in New Jersey from 2000 to 2007.
The BLS data for the full ten years to February 2009 underscore McGurn’s findings and fill in some other unsettling information as well. The government employment growth was entirely at state and municipal employment level, and made for 91% of the increase in total NJ employment, while the federal government, the US Postal Service, and the Department of Defense all shed jobs. The goods producing sector is in a headlong free-fall, losing 138,600 jobs in the decade. One-third of manufacturing jobs disappeared. Now government workers outnumber manufacturing workers five-to-two, making a mockery of the old motto "Trenton Makes, The World Takes." One-third of Garden State workers now work for the government or in health care, which increasingly is much the same thing.
Does anyone imagine it is satisfactory or sustainable that an important state’s economy hardly generates employment outside the government sector?
McGurn’s work invited me to extend the analysis to goods-producing, service, and government employment in all states plus the District of Columbia. There is also the question of party political environment: he blamed New Jersey’s sorry state of affairs on its Democrat-dominated political culture and its high-taxing, heavily-regulating, pro-union, and anti-business ways, but does that bear up to analysis, and if so, does it apply more generally?
To try to get to grips with party politics in all states through time, I researched affiliations of the governor and two senators and the plurality of the House of Representatives delegations and the state senate and legislatures for each year since 1990. I assigned a +1 for a Republican in a year, and -1 for a Democrat, so a state that had a Republican governor in a year, with a Senator of each party, majority Democrat state senate and state legislature, and a Congressional delegation split exactly down the middle would +1 +1 -1 -1 -1 0 for a score of -1 for the year. The most solidly Democrat blue state would thus be -6 year after year, the firmest red Republican +6.
Two next door neighbors, Washington and Idaho, bracket the ranking of the 50 states plus DC by political complexion, from most Democrat to most Republican:
>> bluest: WA DC WV MA AR NJ CA MD IL HI DE
>> next: NY VT IA WI RI MI OR CT ME NC
>> middle: NM MN MT LA COPA NH ND IN TN
>> next: SD VA MS NV AL MO NE KS OK FL
>> reddest: KY OH AZ SC WY AK GA UT TX ID
The BLS employment data show that government is not just New Jersey's growth industry – it has been a growth industry in most states, blue or red. Only in a handful of places has government employment been static or falling: MA, MI, NY, DC, and RI. Yes, they are blue states. But most of them have another issue: in general, they are losing population. That is the dominant factor, not party in power.
The predominant pattern in the last ten years has been for employment in goods-producing industry to decline, in service-providing business to grow somewhat, and in government to grow fastest of the three. That pattern is seen in no fewer than thirty-seven states: AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, IL, IN, IA, KS, KY, MD, MS, MO, NE, NV, NH, NJ, NC, OH, OK, OR, PA, SD, TN, TX, UT, VT, VA, WA, WV, and WI (in MI government declined, but more slowly than other employment). Government grows at the expense of goods production. In the limit, this places fiscal drag on the economy, which reinforces the original destructive trend and makes it worse. That is New Jersey’s experience.
The states that have experienced the greatest declines in employment in goods-producing industry are (worst first): RI, MI, NJ, CT, NY, NC, OH, ME, MA, and PA. These states are mostly unionized, mostly northeastern or midwestern, and mostly Democrat. The states that have done best in growing employment in goods-producing industry are (worst first): NE, CO, NM, SD, ID, MT, UT, WY, NV, and ND. Near runners-up were TX, AZ, and OK. These states are mostly right-to-work, mostly western, and mostly Republican. Only in strongly Republican Wyoming is employment growth in goods-producing industry consistently positive and higher than either services or government.
Employment in goods-producing industry need not be the holy grail of all economic policy. If someone leaves a job in the declining textile industry in North Carolina, retrains as a radiological technician and gets a better job in that field, no one argues that either that person or North Carolina are worse off.
The problem is when employment in the goods-producing sector as a whole is in total headlong decline. That means industry is giving up on a place. That means industry prefers to take its chances with an administration run by Chinese Communists than by Michigan Democrats.
Of course, productivity has improved the most in goods producing industry, meaning fewer workers are needed to do the same or greater work. This is good. But other things being equal, rising productivity itself should incentivize capital to form in a place and employ workers. If it is not enough, then workers are not sharing in the benefit of their productivity and other things are wrong. Politicians then must ask what else is needed to attract and retain industry. Republicans reliably ask that question. Democrats ask instead what other self-defeating social costs and regulations they can impose on job-creating enterprise, with the dismal results that are here to see.
And this is true despite meaningful regional variation: a Democrat is not the same wherever you go, and neither is a Republican. A Maine Republican is a very different animal than a Texas or Wyoming Republican; in fact, some say it is a RINO. A Mississippi Democrat in 2009 is not ever the same as a Massachusetts Democrat, nor does he necessarily resemble a Mississippi Democrat of twenty years ago.
And speaking of Massachusetts, in connection with the special election there on January 19, the Bay State was commonly referred to as "the blue t of all blue states." It turns out that this is incorrect, and not just because it put Scott Brown (R) into the Senate – Massachusetts is less blue than Washington DC, Washington state, and West Virginia.
Which way does causation run? Are the growth states of the West Republican because they are growth-oriented, or growth-oriented because they are Republican? I would like to think the effects are mutually reinforcing. It makes sense that employment grows in right-to-work states because it can, without restriction. The great Milton Friedman said, "Capital goes where it is welcome and stays where it is well treated."
This much seems clear: the high taxes, restrictive employment conditions, and regulatory activism of the Democrats are utterly failing the working man. In the Democrat fastness of the post-industrial Northeast and Midwest, workers have little to show for their long-term political investment in the party of Roosevelt and Johnson.
It is a changed day when developments in New Jersey furnish a positive example. In the December 30 2008 edition of the Wall Street Journal there was an arresting article entitled "New Jersey Is the Perfect Bad Example." In it, William McGurn showed that the government sector added 93% of all jobs created in New Jersey from 2000 to 2007.
The BLS data for the full ten years to February 2009 underscore McGurn’s findings and fill in some other unsettling information as well. The government employment growth was entirely at state and municipal employment level, and made for 91% of the increase in total NJ employment, while the federal government, the US Postal Service, and the Department of Defense all shed jobs. The goods producing sector is in a headlong free-fall, losing 138,600 jobs in the decade. One-third of manufacturing jobs disappeared. Now government workers outnumber manufacturing workers five-to-two, making a mockery of the old motto "Trenton Makes, The World Takes." One-third of Garden State workers now work for the government or in health care, which increasingly is much the same thing.
Does anyone imagine it is satisfactory or sustainable that an important state’s economy hardly generates employment outside the government sector?
McGurn’s work invited me to extend the analysis to goods-producing, service, and government employment in all states plus the District of Columbia. There is also the question of party political environment: he blamed New Jersey’s sorry state of affairs on its Democrat-dominated political culture and its high-taxing, heavily-regulating, pro-union, and anti-business ways, but does that bear up to analysis, and if so, does it apply more generally?
To try to get to grips with party politics in all states through time, I researched affiliations of the governor and two senators and the plurality of the House of Representatives delegations and the state senate and legislatures for each year since 1990. I assigned a +1 for a Republican in a year, and -1 for a Democrat, so a state that had a Republican governor in a year, with a Senator of each party, majority Democrat state senate and state legislature, and a Congressional delegation split exactly down the middle would +1 +1 -1 -1 -1 0 for a score of -1 for the year. The most solidly Democrat blue state would thus be -6 year after year, the firmest red Republican +6.
Two next door neighbors, Washington and Idaho, bracket the ranking of the 50 states plus DC by political complexion, from most Democrat to most Republican:
>> bluest: WA DC WV MA AR NJ CA MD IL HI DE
>> next: NY VT IA WI RI MI OR CT ME NC
>> middle: NM MN MT LA COPA NH ND IN TN
>> next: SD VA MS NV AL MO NE KS OK FL
>> reddest: KY OH AZ SC WY AK GA UT TX ID
The BLS employment data show that government is not just New Jersey's growth industry – it has been a growth industry in most states, blue or red. Only in a handful of places has government employment been static or falling: MA, MI, NY, DC, and RI. Yes, they are blue states. But most of them have another issue: in general, they are losing population. That is the dominant factor, not party in power.
The predominant pattern in the last ten years has been for employment in goods-producing industry to decline, in service-providing business to grow somewhat, and in government to grow fastest of the three. That pattern is seen in no fewer than thirty-seven states: AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, IL, IN, IA, KS, KY, MD, MS, MO, NE, NV, NH, NJ, NC, OH, OK, OR, PA, SD, TN, TX, UT, VT, VA, WA, WV, and WI (in MI government declined, but more slowly than other employment). Government grows at the expense of goods production. In the limit, this places fiscal drag on the economy, which reinforces the original destructive trend and makes it worse. That is New Jersey’s experience.
The states that have experienced the greatest declines in employment in goods-producing industry are (worst first): RI, MI, NJ, CT, NY, NC, OH, ME, MA, and PA. These states are mostly unionized, mostly northeastern or midwestern, and mostly Democrat. The states that have done best in growing employment in goods-producing industry are (worst first): NE, CO, NM, SD, ID, MT, UT, WY, NV, and ND. Near runners-up were TX, AZ, and OK. These states are mostly right-to-work, mostly western, and mostly Republican. Only in strongly Republican Wyoming is employment growth in goods-producing industry consistently positive and higher than either services or government.
Employment in goods-producing industry need not be the holy grail of all economic policy. If someone leaves a job in the declining textile industry in North Carolina, retrains as a radiological technician and gets a better job in that field, no one argues that either that person or North Carolina are worse off.
The problem is when employment in the goods-producing sector as a whole is in total headlong decline. That means industry is giving up on a place. That means industry prefers to take its chances with an administration run by Chinese Communists than by Michigan Democrats.
Of course, productivity has improved the most in goods producing industry, meaning fewer workers are needed to do the same or greater work. This is good. But other things being equal, rising productivity itself should incentivize capital to form in a place and employ workers. If it is not enough, then workers are not sharing in the benefit of their productivity and other things are wrong. Politicians then must ask what else is needed to attract and retain industry. Republicans reliably ask that question. Democrats ask instead what other self-defeating social costs and regulations they can impose on job-creating enterprise, with the dismal results that are here to see.
And this is true despite meaningful regional variation: a Democrat is not the same wherever you go, and neither is a Republican. A Maine Republican is a very different animal than a Texas or Wyoming Republican; in fact, some say it is a RINO. A Mississippi Democrat in 2009 is not ever the same as a Massachusetts Democrat, nor does he necessarily resemble a Mississippi Democrat of twenty years ago.
And speaking of Massachusetts, in connection with the special election there on January 19, the Bay State was commonly referred to as "the blue t of all blue states." It turns out that this is incorrect, and not just because it put Scott Brown (R) into the Senate – Massachusetts is less blue than Washington DC, Washington state, and West Virginia.
Which way does causation run? Are the growth states of the West Republican because they are growth-oriented, or growth-oriented because they are Republican? I would like to think the effects are mutually reinforcing. It makes sense that employment grows in right-to-work states because it can, without restriction. The great Milton Friedman said, "Capital goes where it is welcome and stays where it is well treated."
This much seems clear: the high taxes, restrictive employment conditions, and regulatory activism of the Democrats are utterly failing the working man. In the Democrat fastness of the post-industrial Northeast and Midwest, workers have little to show for their long-term political investment in the party of Roosevelt and Johnson.
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