In a recent TV debate I enjoyed with a prominent member of the East Coast Internationalist establishment, the usual complacency about the continuation of low inflation (read: published indices of price rises) was combined by my opponent with high words of praise for Alan Greenspan’s sound leadership and a panegyric to the US productivity revolution. Notwithstanding what should therefore be an unqualified endorsement of the vibrancy of the American economy and of the unrivalled supremacy of its economic ‘model’, he did also allow that the fiscal position was a matter of concern and that the dollar should head lower against all Asian currencies, especially the Renminbi, in order to close the current account gap.
This worthy – who was only, after all, guilty of indulging in an uncritical rehearsal of the mainstream US position – complete with all its inherent paradoxes and logical absurdities – become quite aerated when I sought to challenge this Panglossian world view. My rebuttal started by pointing out that American householders stripped $334 billion out of the housing bubble in the year to last September via cash-outs to add to the $86 billion in extra consumer credit they contracted, while unfunded state, local and federal expenditures (including those paid for out of the so-called Social Security ‘Trust Fund’) came to just in excess of $700 billion, even as another $460 billion was borrowed and spent on real estate, to add to just under $300 billion in new credit raised by the business sector. Thus, a reported average gain of $455 billion in GDP, compared to the previous 12 months, came at the expense of nearly $1.9 trillion — c. 17% of total GDP – in new liabilities, barely two-fifths which was devoted to any form of ‘investment’ purpose (even stretching the definition to include that most unproductive of assets, residential real estate) and scarcely more than $1 in $8 of which was genuinely devoted to productive ends in the business sector, after we subtract the $48 billion in equity buybacks financed with new corporate debt.
My somewhat sardonic response to criticisms of hidebound Europe’s stuttering underperformance was that if you opened up a similar $2 trillion credit line for EU residents, there’d be little doubt that GDP would be just as flattered as a result! Paeans to productivity have, of course, been a bug-bear for some little time, but one should only note that even the BLS’ own figures (which admittedly only stretch up to 2001) show that multi-factor productivity – i.e. the calculated output generated by inputs of labour, capital and other resources combined – fell that year by the greatest amount since 1982 Even taking a longer stretch – say eight years – and the Consumer America of 1993-2001 put in a compound 0.8% increase which pales beside 1858-1966’s Producer America return of 2.9%. Nor should it be forgotten that all of this ignores the very real problem of hedonics and the BLS’s self-confessed problems of under-reported hours, that it does not deal with the probable distortive effect of ‘offshoring’ (the BEA estimates this process overstates the trade deficit by around $100 bln a year, the corollary of which is that a lot more labour is involved in goods exiting US factory gates than is generally reckoned).
Nor, again – if we switch instead to a consideration of unit labour costs – does any of this reckon with the rising burden of non-wage labour costs, such as those cited by the NAM itself, late last year, as the major source of lost business. Some miracle that represents! But again, we have no need to trade macro-economic partial fictions with anyone, just consider the simple logic. If America had lower ‘inflation’ – i.e. less steeply rising prices – than its neighbours, its goods would be gradually gaining in competitiveness and hence desirability abroad (if these were indeed goods which anyone else wanted in the first place): ergo, the trade gap would be falling.
If America were vastly more productive than its neighbours, there would be little need to talk down the currency and, moreover, its real per capita net income would be rising measurably, not barely making leeway against depreciation and the inexorable rise in the population. If America were vastly more productive, it need NOT be losing jobs, just shifting them, whatever Greenspan & Co. would like to have us believe by way of fitting poor economic data to their preconceived notions of glowing success (… ‘To a surprising degree, firms seem able to continue identifying and implementing new efficiencies in their production processes and thus have found it possible so far to meet increasing orders without stepping up hiring…’)
To see this, consider an economy where 90 men (including entrepreneur-managers and owner-capitalists) give rise to 100 lots of consumer goods, priced and sold at $1 each. These 90 are then paid (or given dividends) of $1 for their pains – which they spend on their own factory’s output - while investing the surplus $10 in employing another 10 men to make capital equipment for them; men who will, in turn, take up the extra $10 of consumer goods left on offer for their own sustenance. It is incidental to the argument, but if there are 10 owner entrepreneurs, the maths can be worked to give them a 20% operating margin, 50% of which is paid out in dividends to themselves and 50% of which is invested to provide the 10 capital goods workers’ revenues. Now, suppose the fruits of this investment, combined with entrepreneurial insight and technological innovation, allow the same 100 goods to be produced using the labour of only 45 directly employed men, alongside the same 10 suppliers of equipment. If the 100 goods are still priced at $1 each and all 55 men share equally in the spoils, they will earn $1.81 a day, rather than the previous $1. The 10 owner-entrepreneurs will now enjoy a 36% margin, out of which they keep half and re-invest half as before, while the 35 payroll employees will also see wages rise over 80%. It is worth noting will also that they will now have 2/7 of unit of incremental capital allotted to them per head versus the previous 1/8 - an increase of 129%. The beneficiaries could, of course, reflect all of this increased purchasing power by taking up all of these same goods themselves, leaving the 45 poor souls cast out on the streets to shift for themselves – a highly improbable extreme case which would just about fit the Greenspan-Bernanke hypothesis – but it is much more likely that these latter will set to and will shortly bring a whole range of new products and services to the market place, in order to try to make a living once again.
Now, if the remaining workforce plus their upstream suppliers feel that they would rather take up exactly the same 1 lot of $1 old goods they had before, they could also each spend their 81 cents of additional income on what the displaced workers offer in exchange – whether in the form of consumer items, or as additional producer goods. That way, the first 55 men will spend an aggregate $45 dollars on these novel goods, meaning the redundant-then-self-hired 45 will earn exactly the same dollar wages as before, and that these wages will equate to a command over exactly the same quantity of old goods which they enjoyed before - i.e. that their real wages will also be unchanged in absolute terms, though - their value productivity being lower in comparison to their former colleagues - their relative real wages will certainly have justifiably declined. In this case also, the economy as a whole will have grown, not stagnated, through the benign free market interaction of entrepreneurial endeavour, capital deepening, technological advance, managerial innovation, saving and self–reliance. Many will be better off, while no-one will be the worse done by.
That this is patently NOT happening in America – on the aggregate, at least – shows that, at the level that the Fed and its eulogists operate, something is at work thwarting free markets, hampering entrepreneurial activity, precluding capital formation, discouraging thrift and disallowing the voluntary provision of a fair day’s work for a fair day’s pay. It is a supreme irony of politics that the relevant ‘something’ – or rather, those many ‘somethings’ – can largely be laid at the doors of those who are most fervent in boasting of their achievements in setting the very policies, passing the exact laws and writing the actual regulations most clearly implicated in America’s present cyclical – and all too possibly, its secular – decline.
As for the inflation charade and the supposed merits of a devaluation, or the widely-feared perils of a strengthening currency, consider that while French exports have risen to a 15-month high in Euro terms and have soared 52% in two years to a USD-denominated record, and while German companies are also sending near-record amounts of goods across the nation’s borders, the plunge in the dollar is already having that dire old J-curve effect, whereby the trade gap gets wider due to differential effects on the prices of imports and exports.
The hopelessness of an easy fix to the imbalance under prevailing conditions can be seen in the fact that the record US goods gap in December of $48.2 billion equated to fully 28% of total cross-border trade. This means that imports must drop by over a fifth and exports rise by almost two-fifths to achieve a balance – something a 25% decline in the currency has so far proved unable even to begin to effect. Thus, though a rise in export prices is helping flatter some firm’s accounts, the terms of trade have declined by an annualised 4.9% in the past quarter, as import prices have climbed faster yet (implying more pressure on margins, investment and employment at home). Indeed, the past eight months have seen finished goods import prices rise 8.3% annualised – the steepest climb since late 1995 – while the index for unfinished goods has surged 47% annualised in the past three months, topping off, for now, a 27% rise over the last two years. Thus, it appears that foreign exporters have, in fact, NOT been ‘willing to absorb some of the price decline measured in their own currencies’ and why, indeed, should they, when consumers in the UK and Australia are just as importunate for service and when Asia’s hunger for both production inputs and, increasingly, for finished consumer goods, offer them ready alternatives to the IOUs waved by America’s uncompetitive hordes of materialistic credit junkies and its free-spending Imperial treasury alike. Where will this end?
Not where Greenspan and his Myrmidons expect, that’s for sure for, as the great Walter Roepke – mentor to Ludwig Erhard, he of Germany’s post-war Wirtschaftswunder - pointed out long ago:- ‘There are cases in which the exchange value of a country are so clearly false that their correction is unavoidable… it must be pointed out that [it]…is pointless if [this] is not accompanied by the restoration of monetary and fiscal discipline at home’ When the TV producers signalled an end to the sparring, my verbal adversary concluded his case by exhorting people to find ways to invest in China, on the hardly original basis that the Renminbi would soon undergo a sharp revaluation – as if Beijing would risk domestic disruption simply to satisfy the rulers of the American Imperium in this, an election year. Well, perhaps. But this is a strategy fraught with peril.
China’s undoubted strides in directing a rapid industrialization thankfully devoid of Nazi excesses or Communist mass murder is still deeply flawed, having misdirected unquantifiable resources, through imposing political directives upon market-based allocations and through allowing a massive credit bubble to reign unchecked till now. Thus, though much of the Middle Kingdom’s progress represents a benign and wholly laudable increase in the international division of labour and is thus enriching both Asian producers and their Western suppliers, investors, and consumers, much of it also comprises a choking harvest of weeds, sprung up in the fertile soil of dishonest money.
At root, we must worry that inordinate US and Japanese monetary inflation has helped promote much of this potentially unbalanced – and, if so, ultimately unsustainable - increase, rather than genuine free market entrepreneurialism. Whisper it, but the published consumer price level has just hit a six-year high – despite the vast supply side impetus at work – and the speed of its rise since the summer - 5.7% annualised – is the most rapid for a comparable period in a decade. Already the signs are evident elsewhere, too. Korean CPI is up 4.8% annualised in the past six months; Taiwanese is up to a 2-year high of 3.5%. Hong Kong – after 7 years of a very necessary deflation – has experienced a 3.7% annualised pick-up in the past fine months, the fastest such climb since the post-Handover Boom fizzled out amid the Asian Contagion over 5 years ago. In all these countries, real short-term rates are sub-zero and an unhealthy skewing of the productive structure is evident fro those who know where to look.
Sooner or later, all of this will come to a sorry denouement and the trick will be for us sceptics to read the progress of the disease accurately enough to decide whether the patient will suffer an apoplexy brought on by hyperactivity or succumb to the lethargy of dropsy as the excess liquidity accumulates uselessly in his bodily tissues. One way or another, the great experiment which has been launched to persuade us all as individuals in the West to borrow our way back to prosperity is about to be tested and, as it is, so will the arrogant presumption of the superiority of the Military Keynesianism being practiced by the New Rome and its many client kingdoms.
