Topic: International Economics and Development

U.S. Economic Misery — or Delusion?

Opponents of trade liberalization are painting themselves into a corner. They repeat endlessly that rising imports and trade deficits are bad for the U.S. economy and American workers. Imports and the trade deficits they fuel supposedly reduce U.S. employment and wages and impoverish American households as we borrow more and more and sell off the family jewels to support consumption. And since imports and trade deficits keep expanding, our economy must be getting worse, right?

Wrong. This morning the Labor Department reported that the U.S. unemployment rate fell again last month, to 4.5 percent, which must be full employment by anybody’s definition. Almost 100,000 net jobs were added in February, despite cold weather that crimped construction. Those job gains come on top of a revised net gain of 372,000 jobs in December and January, bringing net employment growth in the past four years to 6.5 million. Today’s report also confirms that real wages continue to rise for American workers.

Adding to the favorable picture, the Federal Reserve Board reported yesterday that the net household wealth of American families in the last quarter of 2006 reached a record $55.6 trillion. And that is net wealth: what we own after subtracting mortgage, consumer and other debts. Our net wealth is up 43 percent in the past four years, driven by increases not only in home values but also stock prices.

Granted, our infinitely complex, $13.5 trillion economy will have its ups and downs, but the current reality simply does not square with the politically tainted picture of economic misery and hopelessness being portrayed by certain critics of trade.

Swedish Pension Reform

Sweden is widely considered a cradle-to-grave welfare state, but that is somewhat misleading. The burden of government is significant, to be sure, but there have been some impressive market-oriented reforms. Sweden, for instance, has eliminated its death tax and implemented school choice.

Perhaps most surprising, Sweden has partially privatized its Social Security system. The amount going into private accounts is small — just 2.5 percent of earnings, so the system is not nearly as good as Chile’s, but it is much better than the American system.

In addition to small private accounts, Sweden also has created a direct link between taxes paid and benefits received. This shift to a “notional” defined contribution system represents a significant departure from traditional Social Security systems, which are akin to defined benefit schemes containing widespread redistribution.

The Wall Street Journal reports that the Swedish reform is inspiring other nations to move in a similar direction:

By pegging public pensions to individual earnings and overall life-expectancy rates, Sweden has given its citizens incentives to be more productive and retire later — and sidestepped the political paralysis that has stymied change elsewhere.

Some Eastern European nations have already ditched their struggling post-Communist systems and gone Swedish. Steps taken in countries as diverse as Brazil and Russia boast some Swedish elements. A World Bank book based on the Swedish model has been translated into Chinese.

…[C]alculating payouts according to salaries and aging projections gives [the Swedish system] the flexibility to accommodate revenue and population shifts. If the economy does poorly, the thinking goes, future pension payments will go down. And the longer people in a particular age group are projected to live, the smaller their pension payouts will be.

…The bottom line of the Swedish model: Most people will have to work harder to reap the kinds of pensions their grandparents could take for granted. “It puts the cost of aging onto the individual, rather than onto society,” says Sarah Brooks, an Ohio State University political-science professor who has studied the plan.

Skyscraper Signals

The boldest skyscraper project the world has seen in 75 years is currently being contructed in Dubai. The Burj Dubai will apparently top 2,600 feet, which would be 56% taller than the current tallest building (in Taipei) and more than twice as tall as the Empire State Building.

The American has a good cover story this month on the current tall building boom.

And Wikipedia has some construction shots of the Dubai project.

If privately financed, skyscraper projects are an interesting indicator of business sentiment in a city or a nation and investor bullishness on growth. If you want to know what business and investors in Chicago, Paris, London, Hong Kong, or Sao Paulo think about growth prospects in those cities, check out the skyscraper construction market. You can do that at this amazing site.  

Even Ayn Rand would be impressed with the current explosion in cloud-topping building projects.

Europe is Falling Further behind the United States

Although some politicians argue that America should emulate Europe, that choice would mean lower living standards and less prosperity. A new study from Eurochambres reveals that Europe is decades behind the US in important measures of competitiveness. The study also calculates how long it would take Europe to catch up to America, but that assumes the US becomes stagnant. In reality, as the EU Observer reports, America is growing faster than Europe and the gap between the two is widening rather than shrinking:

The EU is 22 years behind the US on economic growth according to a new study, with several other economic indicators showing further gaps despite Europe’s ambitious reform agenda to be praised by leaders at this week’s summit.

A report by Eurochambers, the Brussels-based business lobby, published on Monday (5 March) argues that the US reached the current EU rate of GDP per capita in 1985 and its levels in employment and research investment almost 30 years ago.

…according to the Eurochambers study, the EU time lag behind the US has expanded further since 2003 when the group published its first report comparing the economic indicators on both sides of the Atlantic. …Authors of the study point out that if calculations included the latest newcomers of Bulgaria and Romania, the gap between the EU and US would be even larger… in a bid to start catching up with the US on key Lisbon indicators, Europe would have to perform better than the States, according to the Eurochambers study, while the latest results show the opposite: in 2006, the US registered an average GDP growth of 3.3 percent and the EU about 2.9 percent, the highest since 2000.

Russia Examining Corporate Tax Rate Reduction

Lower tax rates are not a solution to all Russia’s problems, but tax policy is moving in the right direction. Tax-news.com reports that the government wants to reduce the corporate tax rate to 20 percent. Even more impressive, policy makers seemingly understand that lower corporate tax rates will have a larger supply-side effect than a reduction in the value-added tax, demonstrating a better grasp of economics than nine-tenths of the US Congress. The story also notes that Russia has taken other positive steps, though it does not mention the 13 percent flat tax implemented in 2001: 

Russia may cut its corporate profit tax rate to 20% from 24% as part of a three-year tax policy plan, Deputy Finance Minister Sergei Shatalov stated last week. The government had previously been considering a further reduction in value added tax, currently 18%, to as low as 13%, but Shatalov said that a cut in corporate profit tax would be more likely to stimulate economic growth and boost levels of investment. …Putin has stated many times that while the government remains committed both to simplifying tax legislation and reducing the tax burden, tax reform must be balanced against needs of business, which requires certainty in the tax code. Since 2002, the Putin administration has reduced or abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax. According to Putin, in 2005 Russia’s tax burden eased to 27.4% of GDP, from 28.7% in 2004.

When Common Sense Just Isn’t Enough

The National Association of Manufacturers has been in Washington long enough to know that sometimes, if you make that last appeal, that last argument, compliment the right person, then things might just go your way. 

In an unusual (to me, at least) letter expressing opposition to an utterly inane amendment sponsored by Sen. Charles Schumer that would required ALL inbound cargo at U.S. ports to be screened (an impossibility without bringing international trade to a halt), NAM’s Jay Timmons urges the Senate to oppose the amendment. In the letter, Timmons describes the impracticability of the idea and describes how such measures would actually make the ports less secure.

But, to be sure, to cover his bases, and to appeal to that special sense of honor and duty reserved only for politicians, Timmons concludes with this gem:

The NAM’s Key Vote Advisory Committee has indicated that votes on the Schumer amendment will be considered for designation as Key Manufacturing Votes in the NAM voting record for the 110th Congress.  Eligibility for the NAM Award for Manufacturing Legislative Excellence will be based on a member’s record on Key Manufacturing Votes.

That could be the clincher!

U.S. Treasury Secretary Challenges Protectionists

Hearing Washington officials speak sense on international trade has become a rare event these days. So a speech today by U.S. Treasury Secretary Henry Paulson was like a fresh spring breeze after a long dreary winter.

Speaking to the Economic Club of Washington, Secretary Paulson delivered an important address on the huge benefits Americans realize every day from our growing trade and investment ties with the rest of the world.

The secretary touted America’s booming exports, including a 32 percent jump in exports to China in 2006. More importantly, he focused on the benefits of imports, the real payoff from trade:

Trade fosters the environment of competition, innovation, research, and investment that leads to better goods and services at lower prices. Some people speak about trade as if its benefits come only from exports, ignoring the positive contributions of imports. Data show that internationally trade products tend to experience lower inflation rates—even real price declines—while non-traded goods tend to rise in price. Trade thus helps Americans provide for their families. When special interests seek protection in the name of low-wage workers, we should acknowledge that limitations on imports do not benefit the vast majority of Americas. They deny people the freedom to choose from a broader array of goods and services, and impose a cruel tax on people who rely on low prices to stretch their family budgets. The cost of protectionism falls most heavily on those who are least able to afford it—the poor and the elderly.

The speech is packed with other sound thinking and useful numbers on the hot trade topics of the day, including China, the trade deficit, manufacturing, foreign investment and adjustment-assistance programs.

Secretary Paulson’s speech is an antidote to the economic snake oil that is being hawked on what seems to be every street corner of Washington these days.