Is Trade a Plus or Minus for U.S. Growth?

Is trade a plus or minus for U.S. growth in this recovery?  This is obviously an important question, given that domestic demand is likely to be stagnant for sometime.  We’d like to see net exports becoming less negative, which would indicate that trade is a source of growth for the U.S. economy.

However, this morning’s GDP release gave an ambiguous answer to this question.  If we look at  net exports of goods and services, measured in nominal dollars,  the trade gap has increased over the past year from $379 billion in the first quarter of 2009 to $504 billion in the first quarter of 2010 (measured at annual rates).

 

But if we look at the trade gap adjusting for price changes, it’s actually shrunk over the past year, from $387 billion to $367 billion.

In other words,  the real gap is shrinking while the nominal gap is increasing.

The same pattern holds over the past ten years as well. In nominal dollars, the trade gap has increased since 2000, making it a drag on the economy.  Meanwhile in real dollars the trade gap has shrunk.

The apparent shrinkage of  the real trade gap  since 2000 is either one of the key positive facts about the U.S. economy,  or an exceedingly misleading statistical illusion.

Job Creation at Young Firms

The Kauffman blog Growthology has been running a series of very interesting posts on job creation by young firms. Basically, the idea is that young firms–less than five years old–are the most important source of net new jobs in the economy. The empirical basis is provided by a November 2009 Kauffman paper titled “Where Will the Jobs Come From?”  Here is the most compelling chart in the paper:

As the owner of a new business, I find this chart very interesting.  It includes everything from technological startups to new restaurants to cleaning firms.  But what they all have in common is that a lot of jobs are created by “founder optimism”–the willingness of someone to have faith and put resources into a business w/o guarantees.

I’m going to write more about this.

Domestic orders down, imports of durable goods up?

This morning, the Census Bureau announced that

New orders for manufactured durable goods in March decreased $2.2 billion or 1.3 percent to $176.7 billion

But the press release neglects to point out that this number only includes domestic orders (see my post from earlier this week).  That is, new orders for domestic manufacturing only.  Orders for imported goods are excluded.

Companies may very well be ordering durable goods, but they are ordering them from overseas. That’s especially true in computers and electronics and automotive (we don’t have the March import numbers yet).

That means economists and journalists are misreporting this morning’s numbers. For example, an article on wsj.com said this morning

Orders for nondefense capital goods decreased by 7.5% last month. The orders are seen as a barometer of capital spending by businesses.

Are orders a barometer? There’s no way to tell.

The Trade Deficit: Why the Financial Sector is Thriving

Tyler Cowen writes:

There’s a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running.

<snip>

If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take.

I’ll make a similar but not identical argument. I think the reason why Wall Street is thriving, even today, is that it plays a critical role in financing the trade deficit.

Right now the trade deficit is running at an annual rate of $475 billion per year, and rising. It’s up almost 40% over the past year.  Virtually all that money has to flow in through Wall Street, directly or indirectly–Treasury bonds, corporate bonds, stocks, financing for consumer purchases. 

The trade deficit cannot be financed without Wall Street, which has a crucial role as a financial intermediary.

That’s not quite the same as saying, as Tyler does, that the financial sector has a key role in financing the budget deficit. During the beginning of the decade, the federal budget was in balance, but the size of the financial sector was growing along with the trade deficit.

Take a look at this chart:

Tthe finance sector steadily grew with the expansion of the trade deficit. The two peaked together around 2005 and 2006. 

Basically, in my view,  Wall Street has been making big profits serving as an intermediary between the U.S. and the rest of the world, sometimes in complicated ways. The big losers in the Goldman Sachs fraud case were European financial institutions. But remember that 80% of John Paulson’s assets came from foreign investors as well. In essence,  Goldman enabled  non-US investors to bet against other non-US investors, on the outcome of U.S. borrowing. 

More generally, the whole subprime debacle was about creating dollar assets that foreign investors, flush with dollars, could invest in.  Assuming that I’m right, the Chinese were conservative and smart here–they put their money into Treasuries and agencies, that were fully supported by the U.S. government.  The European banks, on the other hand, wanted better returns–they took the trade mammoth surpluses that  Europe was running with the U.S. ($700 billion between 2000 and 2008), and poured them back into higher yield but supposedly safe securities.  That flow of money fueled Wall Street prosperity.

As the trade deficit expands again, the need for savvy financial institutions to connect overseas funders with U.S. borrowers increases. 

So here’s the hell of it. Wall Street provides a socially useful function, facilitating the flow of money into the country. But it’s not money that’s good for us.  

 

Are domestic durable goods orders becoming less relevant?

This Friday the Census Bureau will release the March report on durable goods new orders and shipments. Historically new orders for durable goods have been one of the best indicators of the economy’s future path.

Unfortunately, the durable goods survey only measures domestic manufacturing.  Seems quaint, doesn’t it?  But the Census Bureau is insistent on that:

This survey collects statistics on domestic manufacturing activities of companies located in the United States. Activities of foreign affiliates or subsidiaries should be excluded.

But with the increased offshoring of U.S. manufacturing,  we’re seeing signs in some industries that U.S. spending can pick up, without any gains at all.  Take computers, for example. Over the past year, new orders for domestically-produced computers have fallen by 2%. Meanwhile, imports of computers have risen by about 50%.

We’re seeing the same thing in the auto sector. New orders for motor vehicles and parts from domestic manufacturers have risen by about 2% over the past year. But imports have soared by more than 50%.

This is a sign of the continued hollowing out of the American manufacturing sector. Imports soar, while domestic production barely responds. I am going to be watching for a continuation of this trend on Friday.

Views on Goldman Sachs case

Simon Johnson wrote:

John Paulson obviously knew what he was doing in helping to create the “designed to fail” securities – and the consequences this would have.  If he cannot be convicted of conspiracy to commit fraud, then the law in this regard needs to be tightened significantly.

<snip>

Senator Ted Kaufman was right.  Just a few weeks ago, he argued strongly from the Senate floor that there is fraud at the heart of Wall Street.  Even some people who are generally sympathetic to his critique of modern financial practices thought perhaps that this specific notion was pushing the frontier.  But now they get it – and today Ted Kaufman is more than mainstream; he is the public figure who made everything crystal clear.

Megan McArdle writes:

I suspect this case will get a lot of public traction.  At this point, what galls people is not so much the stupid behavior that led to the bailouts, but the blatant self-dealing that seems to have gone on.  Unfortnately, much of that self-dealing is not actually illegal . . . so when we find an example that is legally actionable, the public and the court system are bound to jump on it with both feet.

Yves Smith of Naked Capitalism writes:

A number of journalists and commentators (yours truly included) have taken issue with the fact that some dealers (most notably Goldman and DeutscheBank) had programs of heavily subprime synthetic collateralized debt obligations which they used to take short positions. Needless to say, the firms have been presumed to have designed these CDOs so that their short would pay off, meaning that they designed the CDOs to fail. The reason this is problematic is that most investors would assume that a dealer selling a product it had underwritte was acting as a middleman, intermediating between the views of short and long investors.

She also points out an important part of the SEC complaint that I hadn’t seen mentioned elsewhere:

It is also interesting that the SEC is suing Goldman and one of its employees, and not the collateral manager, ACA Management:

Fabrice Tourre [a Goldman employee who is a party to the SEC suit] also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting

In the end, transparency will turn out to be essential.

Coming Posts

These are the posts that I’m thinking about. Any preferences? Or suggest your own:

1)  Growth and government/private debt:  The arithmetic of how long-term growth affects our ability to pay off our private and public debt

2) Multinationals and exports:  Are multinationals more or less likely to export from the U.S.?

3)  Goldman Sachs and side bets:  If you are making a side bet on the economy, do you care who you are betting against?

4)  Credit ratings and growth:  Did the credit ratings issued by S&P and Moody’s implicitly depend on long-term growth expectations?

5) What can journalists learn from the financial crisis?

Wrong Headline

A headline in a story in today’s NYT:

“Imports Rose in February, Building Hope for Recovery”

The headline should have read:

“Imports Rose in February, America Borrow More From Overseas”

or

“Imports Rose in February, America Sinks Deeper into Debt”

or

“Imports Rose in February, No Wonder Americans Are Having a Tough Time Finding Jobs”

A Bad Decade: 10-Year Private Income Growth Goes Negative

Each month the BEA releases figures for personal income and disposable personal income. These figures are a mix of private sector income and money received by individuals from the government. These government payments take the form of wages paid to government employees, and social benefits such as Medicare and Medicaid.

So I decided to take a shot at calculating ‘private’ personal income. From personal income I removed government social benefits (about $2.1 trillion in 2009) and wages paid to government employees (about $1.2 trillion). Then I added back in contributions for government social insurance, such as Social Security and Medicare payroll taxes (just under $1 trillion). Finally, I adjusted for inflation and population size to get a figure for real ‘private’ personal income per capita.

Here’s a chart of  the 10-year growth rate of real private personal income per capita (the first quarter figure for 2010 is based on the average of January and February).  

Over the past decade, real private personal income per capita has fallen at a 0.2% annual pace, the first time that has happened since the Great Depression.

Let’s compare this with the usual figure quoted by economists, real disposable income per capita. Real disposable income per capita–which includes government wages and social benefits, and adjusts for tax changes–rose at a 1.2% rate over the past ten years. In other words, when we add in government spending increases and tax cuts, real incomes per capita rose rather than fell.

The logical conclusion is that the private sector has been crapped out for the past ten years. Even before the crisis hit, the main thing that  kept the economy afloat was the succession of Bush tax cuts and the expansion of federal spending which boosted benefits,  particularly in healthcare. 

This was a bad bad decade.

 

Average U.S. tax burden at 40-year low

I finished up my tax return this weekend.  I did it myself, using Turbo Tax,  and ran it by our new accountant (because I left BusinessWeek in 2009 and started a new business, the return is more complicated than in previous years).

Now that’s done, I can take a look at the bigger tax picture. Just for fun,  I calculated total taxes paid by Americans as a share of national income.  Total taxes includes federal, state, and local income taxes, corporate income taxes, property taxes, sales taxes, social security and medicare taxes, and every other kind of tax (except for the estate tax). 

The top red line tracks total taxes as a share of national income–in effect, the average tax burden for the whole economy. In the fourth quarter of 2009, the average tax burden for the whole economy was 27.5%–the lowest since 1966. That shows the combined effects of the Great Recession and the tax cuts. If we leave out social insurance taxes, the trend is even stronger–the average tax burden, omitting social insurance taxes, is the lowest in the post-war era.

These calculations are similar to the ones done by the Tax Foundation in its calculation of Tax Freedom Day, the day where Americans have “earned enough money to pay this year’s tax obligations at the federal, state and local levels”. Take a look at the Tax Foundation’s chart.    

In fact, Tax Freedom Day is earlier now than it’s been in the past forty years, suggesting that the burden of taxes is lower.  

The question, then, is why is there so much opposition to tax increases.  Part of it is the distributional question–the average tax burden and Tax Freedom Day both measure the average over the whole economy, rather than for any individual.

But more important, I think, is the pervasive weakness in the private economy, which makes the burden of taxes feel heavier. I’m going to write more about this.

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