Trade Deficit Figures Point to Diminished American Economic Future

AmericanEconomicAlert.org ^ | Wednesday, October 20, 2004 | Alan Tonelson

[Willie Green]

For education and discussion only. Not for commercial use.

If you think Pedro Martinez' numbers against the New York Yankees look bad (and they do), they're nothing compared with the government's latest monthly trade figures. Dismal as the Boston Red Sox ace's performance against the Bronx Bombers has been, he looks like a champion next to the trade numbers, which are one important measure of the U.S. economy's performance against the rest of the world.

Not that the trade surplus and deficit figures tell us everything we need to know about America's competitiveness. In particular, they compare apples and oranges – how U.S. products fare in overseas markets versus how foreign products do in U.S. markets. And even studying the trade figures industry by industry can be misleading. By definition, they can't shed light on which U.S. industries depend how heavily on exports and/or face major foreign competitors, and which U.S. industries sell mainly to the humongous U.S. market and/or face little import competition.

Still, according to mainstream economic theory, these trade balance figures say a great deal about the relative strength of America's economy, whether it is waxing or waning, and what its future composition will be. The reason?  What a country trades most successfully – where it wracks up its biggest surpluses - eventually becomes what it makes most successfully and prolifically. And what it trades least successfully – where it wracks up its biggest deficits - eventually becomes what it makes least successfully and prolifically. That, in plain English, is what comparative advantage in all its forms is all about.

The deficits also show that the United States is a country that consumes far more than it produces. Although the economic price for this profligacy has appeared minor so far, anyone expecting the situation to last forever and is blasé about its worsening must believe there really are free lunches after all.

The August, 2004 trade figures released Oct. 14 by the Census Bureau show an overall U.S. deficit in goods and services of $54.04 billion, second all-time only to June´s $55.2 billion. This year´s January-August deficit level, as a result, is more than 19 percent larger than last year´s, meaning that the annual deficit figure is on its way to smashing last year´s $421 billion record total.

Even worse, the U.S. deficits keep soaring despite the soft patch recently encountered in domestic growth, and the gradual continued weakening of the dollar. The first is supposed to keep imports down and the second is supposed to buoy exports, but little of these macroeconomic effects are being felt.

Further, the closer one examines the deficit figures, the worse they look. Remember the rule that what a country trades most successfully it will wind up making most successfully? Well, by this logic, the United States doesn´t have much of a long-term future as a manufacturer. August´s manufacturing deficit was the second highest on record, and this year´s cumulative manufacturing deficit so far is more than 21 percent higher than last year´s January to August record total of $307.45 billion.

And don´t think that the problem is concentrated in so-called dinosaur, smokestack industries – which, incidentally, create most of America´s best-paying jobs on average. The $4.5 billion August deficit in advanced technology products set a new record, too.

Of course, many supporters of current U.S. trade policies see no special value in maintaining a world-class domestic manufacturing at all. But the August trade figures should scare them, too. America´s longstanding surplus in tradable services shrank by 19 percent, to $3.2 billion – the lowest surplus since the Census Bureau began tracking this trade in 1992. Since 2001, moreover, the January-August service surplus has declined a stunning 27 percent, to $33.07 billion. Still think that we can export our way out of our enormous national trade deficits and resulting debts by speeding up our shift to a service economy? Please!

Even more worrisome, much evidence indicates that the United States is also seeing its competitive edge erode in information technology and professional services – the supposed industries of the future, for which displaced manufacturing workers are supposed to reeducate and retrain themselves, and which America´s youth should target during their schooling.

The U.S. surplus in the “other private services” category, which captures trends in these sectors, did rise from $31.44 billion in the January-August, 2001 period to $33.15 billion in January-August, 2002. Since then, however, the surplus has fallen by 4.4 percent, including a fractional decrease in August, 2004, to $3.96 billion. In August, 2003, the surplus was $4.08 billion – 2.94 percent higher.

When America began losing older industries such as textile and apparel and steel, free trade cheerleaders predicted that the forces of comparative advantage would push the nation up the technology ladder to automobiles and ships and machine tools and consumer electronics. When these industries began faltering, Americans were told not to worry, for they would be freed up to concentrate on high tech goods like computers and semiconductors and aircraft and advanced telecoms equipment. When many of these industries began migrating en masse to high-income Japan and then low-income countries like China, professional services like law, engineering, and finance, and info-tech services like software writing were then declared the new economic future.

The latest trade figures show that these sectors won´t be saviors for the vast majority of America´s workforce, either – leaving two obvious alternatives. Americans´ comparative advantage will be in sales – hawking to each other the wares of other nations. Or maybe we´ll just all go back to the farm. But the only problem with that scenario is that farming is also under intensive attack from foreign competition.      

[Toddsterpatriot]

I think only few people can pay $20,000 cash for a car

I paid cash for my latest car. So, what's the percentage of car loans that are 6 year? Must be close to 90%-95%. Don't you think?

[1rudeboy]

. . . I see many cars from the 70's still on the road.

OMG. LOL. Do you travel much, say, to places where it snows?

[FITZ]

No --- but maybe in those places the plastic cars will last longer.

[1rudeboy]

Here's a list of standard interior features on the '64 Beetle, oops, I mean a Ford Focus:

Sport bucket with adjustable head restraints and passenger side tip/slide feature and single passenger side map pocket

60/40 split-fold rear seatbacks with flip-up rear seat cushion

Rear seat heat ducts

Instrument cluster: black-surround appliqué w/black faced gauges

Warning lights: airbag readiness, fasten safety belt, door ajar, charging system, low engine oil pressure, brake system/parking brake, check engine, overdrive off (automatic transmission), anti-lock brake system (optional), fuel filler door, low fuel and loose fuel cap.

Battery Saver feature

Rear window defroster

Rear window wiper/washer

Visor mirrors — driver and passenger side with flap closings

Center floor console with dual front cupholders and storage area/rear cupholder

12-Volt powerpoint

Overhead assist handles, 1st row (2), 2nd row (2)

Front floor mats, color keyed carpeted with driver retention hook

Instrument panel: climate and radio controls in center stack position, center stack storage bin, 6-CD (in cases) storage bin — driver side, 12-volt powerpoint, interior lights-off delay, low fuel warning light

[Toddsterpatriot]

I don't understand the grasping for straws on the protectionist side.

Incomes are dropping; jobs are being lost forever. No they're not. Well, car loan terms are increasing, same thing.

LOL. Sounds like Havoc logic.

[1rudeboy]

I'm being overly cynical, but it's almost as if the only reason there's argument on this thread is to keep the negative title at the head bumped. I simply must come-up with an acronym for this feeling I get. (And I don't mind bumping these threads one bit). You can hardly call it a dominant strategy: in order to persuade one or two people to vote one's way, one reinforces one's sheer ignorance of economics. Do you think they'll surpass 0.5% of the popular vote?

[FITZ]

Okay --- we now have cars with cupholders---- but the 70's cars usually came with those --- and the visor mirrors too --- and the parking brakes. What was the level of government spending compared with now --- it's not just huge trade deficits. How many people have become very reliant on the government --- Medicaid, Medicare, TANF, EITC, food stamps, WIC, SSDI, HUD housing, CHIPS, Headstart, NAFTA-TAA, and all the rest? How does this compare with the 60s? How do we ever wean the dependent off the government if there can be no jobs for them? Why do other countries like China and India and Mexico consider jobs important but we don't?

[1rudeboy]

Okay --- we now have cars with cupholders---- but the 70's cars usually came with those --- and the visor mirrors too --- and the parking brakes.

I demonstrated that a Ford Focus has about as much in common with a '64 VW Beetle as it does with a coconut. Enough of your nit-picking.

And frankly, I don't give a darn about your federal transfer payment argument (that you attempted earlier, in case you fail to remember), unless you are arguing with a straight face that a consumer enjoys a rear window defogger on his car because he qualifies for the Earned Income Tax Credit. Give me a break.

[Toddsterpatriot]

What was the level of government spending compared with now --- it's not just huge trade deficits.

Government spending and deficits wouldn't be so bad if we paid our cars off in 4 years.

[1rudeboy]

NAFTA made me reliant on the government.

[XBob]

The base price of a 64 Beetle was about $1800. The base price of a 2004 Beetle is about $17,000

So, unless the average disposable income has increased proportionately, the price of a minimal, basic transportation car has gone up simlarly.

So, if the average salary was $5000 (say for example for a starting college graduate - entering teaching in Florida - which it was, I remember), then the average starting salary for a teacher today would be 46,000, which it isnt.

In fact: "According to the Florida Education Association, during the 2002-03 school year, teachers in Union County are paid the lowest at $24,204 for first-year teachers with a bachelors degree. The highest salary for first-year educators with a bachelors degree was in Miami-Dade County, where first-year teachers earn $33,275. The state average for starting teachers was $27,850"

http://www.lakecityreporter.com/articles/2003/11/08/news/top_story/news01.txt

[Toddsterpatriot]

The base price of a 64 Beetle was about $1800. The base price of a 2004 Beetle is about $17,000

So, unless the average disposable income has increased proportionately, the price of a minimal, basic transportation car has gone up simlarly.

So, how did those 64 Beetle airbags and CD players work for you?

[FITZ]

The base price of a 64 Beetle was about $1800. The base price of a 2004 Beetle is about $17,000

It's hard to explain the huge cost increases ---- wouldn't Beetles also be made with cheaper labor than Germans now? Like in Mexico? Yet when they were made in a middle class country they were cheaper. Now that cars are made with $0.30 an hour wages they're much more expensive --- obviously cheap labor benefits someone --- but the savings aren't being passed down to the consumer.

[Toddsterpatriot]

So, if the average salary was $5000 (say for example for a starting college graduate - entering teaching in Florida - which it was, I remember), then the average starting salary for a teacher today would be 46,000, which it isnt.

In fact: "According to the Florida Education Association, during the 2002-03 school year, teachers in Union County are paid the lowest at $24,204 for first-year teachers with a bachelors degree.

Doing a little research, I found the single teacher making $5,000 in 1964 paid $880.50 in Soc Sec and income taxes. 17.61%

The same teacher making $24,204 in 2004 paid $5783.81 in Soc Sec and income taxes. 23.90%.

I wonder if that has anything to do with the unaffordability of new cars?

http://taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=45&Topic2id=50

http://www.ustreas.gov/offices/tax-policy/library/ota81.pdf

http://www.irs.gov/pub/irs-soi/02inpetr.pdf

http://www.irs.gov/pub/irs-soi/03inta.xls

[1rudeboy]

Now that cars are made with $0.30 an hour wages they're much more expensive --- obviously cheap labor benefits someone --- but the savings aren't being passed down to the consumer.

Have you ever priced a '64 Beetle with airbag readiness, fasten safety belt, door ajar, charging system, low engine oil pressure, brake system/parking brake, check engine, overdrive off (automatic transmission), anti-lock brake system (optional), fuel filler door, low fuel and loose fuel cap warning lights?

[1rudeboy]

So, if the average salary was $5000 (say for example for a starting college graduate - entering teaching in Florida - which it was, I remember), then the average starting salary for a teacher today would be 46,000, which it isnt.

OMG. LOL. Look what a Google search turned-up:

The 2002-03 average teacher salary was $45,771, up 3.3 percent from the previous year, and average beginning teacher salaries rose 3.2 percent to $29,564 for the same period.

Source

[XBob]

172 - "So, how did those 64 Beetle airbags and CD players work for you?"

They weren't available, so, how much is a 2004 VW without those extras?

How much is a new 1964 VW today?

In otherwrods, a minimal car is a minmal car - they both haul 4 people, economically. You can't buy a cheaper new VW beatle, whether you want to or not, whether you want the additional equipment or not, whether it is of greater value to you or not, or even of any value.

Like a small man getting a large shirt - he gets more shirt for his money, but the 'extra' shirt may be of no value to him.

[XBob]

174 - "Doing a little research, I found the single teacher making $5,000 in 1964 paid $880.50 in Soc Sec and income taxes. 17.61%
The same teacher making $24,204 in 2004 paid $5783.81 in Soc Sec and income taxes. 23.90%.
I wonder if that has anything to do with the unaffordability of new cars?"

===

So, with after tax incomes, 1964 = 4119 and 2004 = 18419, a person could buy 2.3 minimal 1964 VW's or 1.1 minimal 2004 VW's.

Or put another way, in after tax income, it took working .44 years to buy a VW in 1964, and in 2004 it takes .92 years to buy a new beetle.

Now, applying the same 1964 tax rate to the price/salary,
today, a person could buy 1.17 new VW's or in other words work .85 years.

So, while taxes have gone up, the effective cost of the car has gone up markedly, in fact you now have to work about twice as long to afford essentially the same minimal class/type of car.

[XBob]

175 = "Have you ever priced a '64 Beetle with airbag readiness, fasten safety belt, door ajar, charging system, low engine oil pressure, brake system/parking brake, check engine, overdrive off (automatic transmission), anti-lock brake system (optional), fuel filler door, low fuel and loose fuel cap warning lights?"

How much is a 2004 VW Beetle without those items?

[XBob]

176 - "The 2002-03 average teacher salary was $45,771"

What does that have to with the average beginning teacher's salary in Florida, which I already posted above? Quote "The state average for starting teachers was $27,850"

What's the average price of apartments in NYC have to do with the price of minimal apartments in Florida? NOTHING !! No more comparison than average teachers salaries in the US, and beginning teacher's salaries in Florida.