Archive for December, 2013

The Affect Of China Manufacturing On The U.S. Economy

December 29, 2013

A fundamental effect on the US economy has been the rise in China manufacturing exports.  A considerable number of specific explanations regarding the US economy are misplaced, attributing things like unemployment, energy costs, and every manner of economic measure to incorrect causes.  Rather,  unemployment, employment participation, energy costs including pump prices, US federal outlays, US federal budget deficit,  public debt,  consumer credit expansion, income levels, even the global housing bubble, have some foot in the rise of manufacturing exports from China.  Some are easily demonstrated, others are secondary, the response to the shifting structure of the US economy which is significantly affected by the global markets.  Regardless, a significant number of economic changes are clearly traced back to the 1998-2000 time frames. Some of the economic effects are detailed here, specifically

The Growth of Chinese Exports:  An Examination of the Detailed Trade Data (Nov 2011)

Abstract: Over the past decade, Chinese exports have boomed, increasing far faster than GDP growth. What can account for this explosion? Our paper uses finely detailed Chinese export data (8-digit HS codes) combined with U.S. trade data to explore this question. Although exchange rate policy clearly boosted the trade surplus, and the structure of the economy, e.g. abundant cheap labor, encouraged investment, these alone cannot account for the changing composition and acceleration of exports. We find that the growth in exports is most likely a product of effective Chinese industrial policy and fortuitous timing. The detailed trade data reveal that key “new” technology goods, such as cell phones, LCD screens, and laptops played a critical role.

Finally, we use the data to examine the relationship between Chinese exports and global manufacturing, in particular U.S. manufacturing employment. We find that increased Chinese competition in both domestic and U.S. export markets likely lowered U.S. manufacturing employment between 2000 and 2007. Chinese policy is not, however, wholly responsible. Some job losses, such as in textile production, were no doubt the result of China’s natural comparative advantages, while other U.S. job losses are attributable to relatively low investment and slow GDP growth in the United States following the 2001 recession.

The Growth of Chinese Exports: An Examination of the Detailed Trade Data

http://www.federalreserve.gov/pubs/ifdp/2011/1033/default.htm

Some issues for consideration include “comparative advantage”, “absolute advantage”, global market competitiveness, and U.S. business investment in manufacturing in order to fully appreciate the breadth of China’s manufacturing boom.

All in all, six key economic factors can be shown to begin with China becoming a major manufacturer.

1. Fuel Costs Due To Increasing China Demand.

2. US Employment – Employment to Population Ratio.

3. US Median Household Income Falls beginning 2000.

4. US Federal Budget Deficit

5. HOUSING BUBBLE

6. Mortgage Backed Securities

The significant point is that of the timing of China exports began around 2000.

China Manufacturing GDP

It was this ramping up of China manufacturing that set the stage for numerous effects on the US economy.

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Fuel Costs Due To Increasing China Demand.

With regard to the increase in the cost of fuels on the global market place, what exactly occurred as a result of China manufacturing adding to the demand for fuel in the global market place is a significant question.

Seen here, at the very least, it is clear that the real dollar price of gasoline began it’s steady rise around 2000. Seen here, the real price was flat from 1988 through 2000, when it began to rise. (The sudden collapse of demand due to the recession of ’09 can be seen along with the recovery of the economy which is marked by rising demand and increasing prices.)

Retail Gasoline Price Level

We may ask ourselves what the complete set of factors underlie the price changes.  Still, it is apparent that this began in 1999 to 2000.

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US Employment – Employment to Population Ratio.

A highly significant change began in 2000 as the US labor market began changing.  In 2000, the employment to population ratio began its downward trend.

Seen here, the long upward trend that began in the ‘60s reversed.

Employment To Population Ratio

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US Median Household Income Falls beginning 2000.

US median household income began falling in 2000, as China became a major world exporter.  Median income saw a reprieve as the housing boom stimulated the economy.  This was short lived.

Median Income

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US Federal Budget Deficit

Seen here, the US federal budget deficit demonstrates a distinct change in 2000.

US Federal Budget Surplus (-Deficit)

It is notable that there is a preceding trend that began in around 1970 that deserves some explanation.  (I don’t have one.)  Never the less, while the deficit trend of 1970 was reversed during the administrations of President George Bush and President Bill Clinton, it was in 2000 that the deficit began its spiral down to a peak in response to the recession of ’09.

The US public debt and federal outlay trends are simply tied by accounting and need no detailing here.

The fact that the initial driver of the US deficit was driven by China’s manufacturing boom is apparent in the data.  It is a reaction to the declining US manufacturing base, declining employment to population ration, and efforts to maintain GDP.

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HOUSING BUBBLE

Seen in the graphic below, the most recent housing bubble began no later than 2002, following shortly on the heels of China’s increase in manufacturing export boom.

Housing Bubble

The causal link between the change in the global market and the housing bubble is indirect.  The loss of declining US manufacturing necessitated alternative mechanisms to facilitate economic growth.  One was in the housing market, driven by a housing bubble.

Additional effects, such as the rise in mortgage backed securities and credit default swaps, also followed.  Not directly driven, like the housing boom itself, they filled the vacuum left by China becoming competitive in the global economy.

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Mortgage Backed Securities

As well, the onset of mortgage backed securities was delayed, showing it’s larger growth beginning in the 2003-2004 time frame. It was driven by multiple mechanisms, not the least was the housing bubble which presented the opportunity for MBS supply. While the causal factors are links down the chain, the stage was initially set by the boom in China manufacturing and the reaction of the markets to the loss of a US manufacturing base with no alternative replacement.

Mortgage Backed Securities

Mortgage Backed Securities Volume

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Conclusion:

There are a few more economic effects that deserve attention, such as unemployment, consumer credit expansion, income levels, which have some foot in the rise of manufacturing exports from China.

There is the curious fact that, while employment and wages fell from 2000 through 2009, GDP did not reflect these trends.  The small recession of 2001 was offset by housing and financial markets.

Never the less, it is clear that the single driving force that eventually led to the recession of 2009 began in 2000.

References

Board of Governors of the Federal Reserve System International Finance Discussion Papers Number 1033 November 2011 The Growth of Chinese Exports: An Examination of the Detailed Trade Data Brett Berger Robert F. Martin

[url=http://www.federalreserve.gov/pubs/ifdp/2011/1033/default.htm]FRB: The Growth of Chinese Exports: An Examination of the Detailed Trade Data[/url]

[url]www.federalreserve.gov/pubs/ifdp/2011/1033/ifdp1033.pdf[/url]

[url=http://www.eia.gov/todayinenergy/detail.cfm?id=5550]Gasoline prices rise due to increased crude oil costs – Today in Energy – U.S. Energy Information Administration (EIA)[/url]

[url=http://research.stlouisfed.org/fred2/graph/?id=EMRATIO]Graph: Civilian Employment-Population Ratio (EMRATIO) – FRED – St. Louis Fed[/url]

http://en.wikipedia.org/wiki/File:Median_US_household_income.png

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MacroEconomic Models

December 17, 2013

I found a good free macro econ text. It is Intoductory Macroeconomics, by Povey, and is available at users.ox.ac.uk/~sedm1375/book.pdf‎.

For me, what makes it excellent is that it presents the macro economic models in their succinct mathematical formulation. The classical and Keysian are there, the first being long run and the second being short run.

As long run economics goes, there is no imbalance or market inefficiencies. The First Theorem of Welfare Economics holds, perfect cometition. The labor, money, and financial markets all clear.

The basics of this Classical Economic model allows for the equation of exchange, MV=PQ which is also GDP=C+I+G+NX.

A consequence of the equation of exchange is that at long term equilibrium and efficiency afforded by the Classical model, prices are a function of the supply of money, specifically the countable supply in circulation. MV=PQ is an identity. All money spent on Q, accounted for by P, is all money in M. It is also all income spent on Q. As such, prices are always a function of the money supply, given that Q is set. This is what accounts for inflation, an increase in the money supply without a corresponding increase in production.

Another consequence of the money supply on prices is that only after-tax, disposable income, has any effect on prices. In the long run, equilibrium to equilibrium, the tax level has no effect on the standard of living. Standard of living, Q/l, quanity of goods per person or labor hour, is a function the labor employeed and the efficiency of that production.

This should be readily apparent. All that increases and decreases in taxes do directly is change the money supply in the equation of exchange. There are Keynsian implications of changes in taxes, but these are short run impulses and not a consequence of the classical economic equilibrium model.