Mark McHugh of Across the Street provides a succinct summation of the problem America faces:
McHugh continues:
- From 1947 to 1974 US income per capita grew more than National debt per capita 25 times.
- In the last 30 years, National debt per capita has grown more than income per capita 24 times.
- The last time income per capita grew more than national debt per capita was 2001.
- Ben Bernanke arrived at the Federal Reserve in 2002.
So simple, even a muppet can understand what the problem is, right?
Not exactly. We know what the problem is: national incomes aren’t rising, even while we get deeper and deeper into hock trying to maintain our standard of living. We know that this pattern is totally unsustainable; unless incomes rise, that debt will become increasingly impossible to service. What is less clear is the cause of this stagnation.
So what changed between 1990 and 2005 that led the nation debt per capita to so quickly overtake national incomes per capita?
While I am mindful that correlation does not necessarily imply causation, that data fits pretty beautifully. The explanation for this trend would be that as America has become more and more consumptive, and less and less productive that more and more capital went offshore to pay for consumption, and thus less and less contributed to the national income, even as Bernanke ponied up trillions in new reserves, and even as the shadow banking system created trillions in pseudo-money.
So where’s America’s money?
Here:
So is this a criticism of free trade? Should America have been more protectionist of her industries and her domestic manufacturing? Not necessarily; what the Washingtonian elites refer to as “free trade” is heavily subsidised. The status quo that Washington has made seems to heavily favour China and disfavour America. Imports from China are subsidised by American military largesse; every dollar America pushes into its military-industrial complex pushes shipping costs like insurance a little lower. So while labour costs in the Orient are naturally cheaper (due to population density, and development level), that doesn’t necessarily mean that Chinese goods are naturally cheaper in the American market. Under a genuinely free system — where America was not subsidising shipping costs — would made-in-America be more competitive compared to Chinese goods? Would China have built up a less mountainous supply of American cash? I think so.
azizonomics 
It is astonishing to me why economists, even dissent economists like you, don’t see the problem in the increasing maldistribution of wealth in America after 1980. Those who hold decision-making power about how wealth is distributed, the managerial caste and the investor caste, have not shared their good fortune with the great mass of the American people, and without the effective demand of a people of plenty that is guaranteed by fair income distribution the US economy could not produce enough wealth to sustain itself. That has been patently obvious to anybody who has been watching the widening gap in incomes and the growth of personal debt over the past thirty years. We have just been waiting for it to crash.
The US elite calls any attempt to reduce the incomes gap, “class war.” The US House of Representatives cannot even adopt the mildest of redistribution measures, like the Buffet rule. We are having a momentous leadership crisis in America — the monied have abandoned the commonwealth.
The answer to this problem will not come from economics or economic theory but from politics. Only when the American people insist that their representatives serve the common interests in Congress and the executive will the income distributions necessary for weath creation — the redistribution of a national wealth that has been undergoing massive maldistribution for decades — occur. Perhaps political theory can help guide this process but not economic theory and certainly not the reigning neo-classical school. . .
I do see the huge problem of wealth maldistribution. I do realise that one of the problems is that the masses have little expandable income, and that with wealth concentrated in fewer and fewer hands that that will probably lead to lower national income.
I am currently preparing another post on wealth maldistribution and income inequality. What I want people to think about is the causes of wealth maldistribution, which is a topic I have already covered somewhat: https://azizonomics.com/2012/02/01/corporatism-and-income-inequality/
That is really a different problem to this one, which is the redistribution of wealth from America to China (a process which is being subsidised by the American taxpayer via military spending).
The redistribution of the wealth from the US to China is part of the issue I discussed in the previous post and it relates to consumer debt. US corporate managers are quite willing to have the products they sell in US markets made in China, as long as corporate profits and elite incomes flourish — at the cost of people who work in America and go into debt — and as long as the favorable balances the Chinese accrue are invested in Western stockmarkets, without much benefit to US main street. The problem is governmentt but a government in the hands of this greedy elite. Goverrnment alone, as a function, is a neutral subject.
I agree, but I strongly, strongly suspect (although do not have enough evidence to say that I know) that:
a) Plato was (roughly) right, and societies move through a cycle of aristocracy, timocracy, oligarchy, democracy and tyranny (though not always in that order).
b) The greater the size and greater the powers of the government, the more incentive for corrupt elites to seize control and pervert the system.
I completelly agree. America’s greedy elte are totally off the scale in first world international terms.
As for the article, it’s all fair enough, but a more nuanced view might have been a chart of the financial holdings of tax havens, especially in the Caribean,. Thats where a huge chunk of the wealth of the west has ended up, often recycled as US treasuries.
Caribbean banking centres are a speck on the horizon next to the $3 trillion of cash sitting in China.
Total assets of Caribbean banking centres estimated at $0.9 trillion (including equities, etc), while U.S.-denominated cash+treasuries in China comes to $4 trillion alone ($3 trillion cash + $1 trillion treasuries).
So Caribbean banking has some effect, but relatively minor compared to China.
Your friend Prof. K. wrote an article on the effects of China in this regard:
http://krugman.blogs.nytimes.com/2009/10/19/americas-chinese-disease-not-quite-what-you-think/
There’s a BIS paper here that seems to contradict that, but i’ve not seen any followe up.
I can’t figure out how to do the link thing, so you’ll have to cut and paste it. The graph in question is on page 16.
http://www.bis.org/publ/work346.pdf.l
$0.985 trillion in 2009… and I believe it is slightly lower now, which makes my $0.9 trillion figure roughly correct…
Plus this is U.S. securities, so does not include China’s cash hoard.
I don’t deny that the Caribbean banking centres are shall we say problematic. But I do think that the trade balance is a much bigger issue, simply because the trade balance concerns America’s flow of things as opposed to America’s flow of money.
Fair enough, but.9trillion is obviously a large amount of money, and it represents very westerners tax free holdings, plus a bit of cocaine money, I guess.
Micheal Pettis, you know, the ultra China bear, claims Chinese dollar holding are not that relevant, as they represent claims on Renimbi- Chines exporters get them, and excahnge them for local currency, which they’ve spent.
He seems to think this means they can’t be used to bail out Chines bad loans for example. I really can’t get my head around that.
Any Ideas?
Lots of people have lots of wacky ideas about China.
The bottom line is a dollar is a dollar.
And China has enough dollars to legitimately use them as a monetary base and create a fractional reserve system around them that is larger than the present US banking system .
So the hoard does not “represent claims on Renminbei” so much as it could be seen as the monetary base backing the renminbei
“So the hoard does not “represent claims on Renminbei” so much as it could be seen as the monetary base backing the renminbei ”
Yes, that makes sense.
Yes! Exactly!
I would be interested in comparing the fall of the british supremacy in world markets to the fall of the US supremacy in world markets. I can picture a Brit sitting in the 1800’s, sipping tea, complaining about those darn yanks producing more and more goods and how britain will always remain the world power.
Any links to the US of today?
late 1800’s that is, very early 1900’s of course.
Yeah. Of course, the British Empire in many ways never really died; it merged with the new power, America.
It remains to be seen (very unlikely) if America can share power with China, the new productive force.
I would say it depends- if America continues along the path it’s treading at the moment, it will end up as a plutocracy in all but name. One can easilly imagine the US elites being willing to share global power with Chines kleptocrats, as long as they don’t have to share their wealth with anyone else.
Oh, I think the American elites are open to working with China.
I think the problem is China’s (totally righteous) fury at the West over the opium dumping…
One additional point to add to the China-USA debate. If a US company wants to make a product in China, one of the prerequisites is that the US company must give its blue prints to the Chinese. The Chinese get any and all of our R&D for any product made in China.
Wondering where the next i-phone is coming from? No, you weren’t, because you already knew.
Nothing is free, nothing!
Yes this is an extremely important point, and also holds for all the military technology manufactured there.
I am of a firm opinion that WW 3 will be an economic one.
From that POV, we have been at war with China since 1994.
It my be hard to prove and/or not make much sense. But, if one views the world with this thought in mind, many things fall into place.
A quick example would be the Greenspan conundrum. After raising interest rates 17 times in the mid 2000’s, long term rates actually declined. This conundrum had the nasty side effect of blowing the housing bubble even bigger.
Greenspan’s analysis in hindsight? The Chinese were targeting the long end of the curve, keeping rates down.
China – 1
USA -0
Confucianism always targets the long end…
“The status quo that Washington has made seems to heavily favour China and disfavour America. Imports from China are subsidised by American military largesse; every dollar America pushes into its military-industrial complex pushes shipping costs like insurance a little lower. So while labour costs in the Orient are naturally cheaper (due to population density, and development level), that doesn’t necessarily mean that Chinese goods are naturally cheaper in the American market. Under a genuinely free system — where America was not subsidising shipping costs — would made-in-America be more competitive compared to Chinese goods? Would China have built up a less mountainous supply of American cash? I think so.”
I don’t really agree here. I think the cost of keeping shipping lanes open can’t possibly cover the gap between Chinese producers and American producers. In any case – if America wasn’t keeping trade going throught its military complex the Chinese govt would step in given the benefts that would accrue to them to do so. I frequently hear this argument re America especially as a Canadian. ie if it weren’t for us blah blah blah. Where countries have a vital interest they will step into protect it and simply because another is shouldering the burden doesn’t mean others can’t or won’t. And let’s face it – America’s militiary industrial complex hardly operates out of the goodness of its heart. By doing what it does – it helps to ensure that Coca Cola and McDonald’s are everywhere in the world. So – while benefits do accrue to other countries as a result of the present system – it goes without saying that most of the benefits accrue to the USA and her allies – otherwise they wouldn’t keep the system going.
Okay, fine: let China pay for it. The chances are, as you suggest, that would probably happen anyway. That way, America loses her industry without accruing all that debt, which would leave America in a much better position to invest in new technologies and better infrastructure. Status quo is the worst of both worlds.
You sure? 😀
Where are they going to get the money to invest in new tech and better infrastructure? China. And what does China get in return if USA is not keeping the sea lanes open. Is China supposed to both keep world trade going and lend to consumption addict USA too? Maybe a bit too much if you ask me. I think the current debt monster must be sustained – if not – whatever way it happens – America will be the biggest loser. So in a way – the status quo is the devil you know!
Yeah, the status quo is the devil we know, that’s true. Other eventualities have associated black swans.
But without all the military spending, why would we need China to support our deficits? If we ran a Ron Paul-style foreign and domestic policy since the mid-90s (or even since 2000), the evidence tends to suggest that we would actually be the running the kind of surpluses that the CBO projected back then, and thus be able to tax less, and therefore the private sector would be able to invest more in technology, and the public sector in infrastructure. The military and imperial budgets are truly humungous. Cut them in half, and we’d be well on the way to a balanced budget and surpluses.
I mean generally — if we assume that the rest of the world is kind of self-stabilising, and would manage to keep global trade going without America as world-policeman, as we are both assuming — most of the military spending since the 90s has destroyed a lot of wealth and resources, without much appreciable return. Imperialism destroys wealth. The amount of oil it takes to run a global empire puts oil and energy costs up for everyone. The amount of resources we need to run a global empire puts resource costs up for everyone.
Ok – good point. But it isn’t only that the govt is binging on debt. The household sector is too. I”m not sure but in late 90s and early 00s even when the budget was in surplus – we still ran up big trade deficits with China.
Consumer debt is much more domestic. Yes, it is a big problem, but with government debt deleveraging means shipping your money across the world to sit in the coffers of a foreign government, and thus you lose capital, and thus incomes fall. With consumer deleveraging, there will always be a problem of banks taking money offshore, but it is nothing like the problem with government debt.
I’ll take advantage of this article to once again flog my favourite hobby-horse: Yes, America (and the rest of the West) should indeed have been more protectionist. The uncritical praise of free trade has become so widespread that it’s almost taboo to say anything against it; but as I have no reputation whatsoever to lose, I’ll say it anyway. 🙂
One big reason why the Chinese can produce stuff so cheaply is because they allow themselves shortcuts, in terms of an oppressed workforce and a ravaged environment, that we in the West have spent the last 200 years progressing away from. Instead of giving up all we’ve gained and trying to compete on their terms, let them sell their goods here on our terms.
For every abuse of workers’ rights and for every bit of unbridled pollution that’s gone into a product, add an import tariff calculated to exactly compensate for the unfair price advantage gained. Base the tariff on the labour laws and environmental protection laws of the producing country. Then, the Chinese and others are welcome to compete in our markets on equal terms, through better quality or more efficient production. If we can’t hold our own then, it’s our own fault.
This would mean that it would no longer pay off to use brutal business practices, which should be a good thing for just about everybody. And since all companies both foreign and domestic would compete on the same terms, and since the tariff wouldn’t be based on what political block or trade zone the producing country belonged to, it wouldn’t strictly speaking be protectionism either.
Yes, the west has cut it’s own throat in being too pro-free trade over the last couple of decades, first with Japan and then China. Britain made presciselly the same mistake in the late 19th century.
For the sake of 10% cheaper computers and cars etc we’ve hollowed out our industries, along with the earnings of the skilled working and middle classes. The Japanese won’t even sell cheap foreign rice.It’s still difficult to sell western high tech in the east, unless the Chinese buy it to copy it.
Free trafde only works for the common good if it’s reciprical.
That’s one reason. There are other reasons, of course like industrial agglomeration and military subsidisation.
This is the problem with our consumptive economy, and our relative dependency on China: in the short-to-medium term this would hurt our level of GDP, and (and this is why such an option will never be taken) convince these productive nations to quit buying our treasuries. Of course, in the long term it would shock us back to productivity and reindustrialisation, which would be a good thing.
This is an important point. The present system of free trade isn’t really free, and to some extent, a system with tariffs to compensate for these irregularities might in fact be more free.
I don’t know. My first focus will always be on reducing foreign expansionism and seeing what effect that has.
That bit about “buying our treasuries” is mainly a US perspective, isn’t it? They need the Chinese to keep supporting the famous American “exorbitant privilege”, i.e. the US license to consume massively more than they produce and pay for it with money they can create out of thin air. Europe, on the other hand, has a trade surplus to the rest of the world, doesn’t it? Or maybe it was more specifically the eurozone. I know I read something on those lines anyway.
Of course tariffs like the ones I outlined would increase the price of consumer goods, which makes it a difficult sell politically. (Though not impossible, I think, since the advantages are fairly obvious.) As for GDP, the sooner we stop using that worthless measurement, the better.
Btw, kudos for always promptly answering any comments you get. That’s a highly laudable blogging practice!
Correct. Europe is in a much better position to try to implement such measures. Of course, it is the United States, and not Europe, that has a problem with its trade balance.
Thanks. I want my site to succeed. The more conversations we all have, the better.
Yes, as Europeans we have slightly less to lose than the US in terms of free trade vis a vis the Chinese. Furthermore, we’re not politically as dominated by the interests of the very rich corporocrats. Even here in the UK.
However, i’m not seeing a lot of protectionist ideas on anyone’s agenda.
“One big reason why the Chinese can produce stuff so cheaply is because they allow themselves shortcuts, in terms of an oppressed workforce and a ravaged environment, that we in the West have spent the last 200 years progressing away from. Instead of giving up all we’ve gained and trying to compete on their terms, let them sell their goods here on our terms.
For every abuse of workers’ rights and for every bit of unbridled pollution that’s gone into a product, add an import tariff calculated to exactly compensate for the unfair price advantage gained. Base the tariff on the labour laws and environmental protection laws of the producing country. Then, the Chinese and others are welcome to compete in our markets on equal terms, through better quality or more efficient production. If we can’t hold our own then, it’s our own fault.”
How is an oppressed workforce a shortcut? And a ravaged environment? What does that have to with the West – if the populace of China wants to sacrifice their freedoms and their environment to earn income/profits – who are you to tell them not to? And more importantly how can you possibly calculate a price that would become an import tariff on this basis. I cringe when I hear suggestions of this nature. The key here is to focus on your industries and companies and make them as competitive as possible while refusing to be a dumping ground for others’ products and demanding that they open up their markets. Clean up your own house and then demand reciprocity with regard to market access.
.” The key here is to focus on your industries and companies and make them as competitive as possible while refusing to be a dumping ground for others’ products and demanding that they open up their markets. Clean up your own house and then demand reciprocity with regard to market access.”
Thats easier said than done. How does a smaller power insist a stronger one plays fair with it? Try being a rice exporter and selling to Japan, or an African state preventing the US or Europe dumping it’s agricultural surpluses.
Europe, and the west in general, doesn’t have long before we become weaker than the Chinese, and unless we grow some balls pretty quick, and are willing to take a short term hit or two, we’ll have missed the boat.
How is an oppressed workforce a shortcut? And a ravaged environment?
Easy profits. Isn’t that obvious? When you have people plagued with myopia, that only care about making more money, the environment and workers get trounced.
@Borjesson “For every abuse of workers’ rights and for every bit of unbridled pollution that’s gone into a product, add an import tariff calculated to exactly compensate for the unfair price advantage gained”
Agreed. We don’t calcu;ate the true cost of cheap Chinese goods at the checkout. China’s citizens and enviroment is paying the price, for our cheaper consumer goods.
I bought Australian made, Australian grown cotton TShirts (Well my motherdid 🙂 ) when I was young. The Australian TShirt industry collapsed in the 80-90’s from imported TShirts (Sold at Target our Walmart) The Chinese TShirts are inferior.
I bought an Australian Made Australian Grown Cotton T Shirt at a Artisans market the other day. I had forgotton how soft TShirts can feel and how well made they can be. Sure I paid 20 dollars more, but it is my favourite TShirt. I helped an Australian farming family and a local Artisan, employing local labour. When I think about it the extra $20 gave me and my counrtrymen a boost. $20 well spent. This “Feel good factor” is not recorded in traditional finance systems, so the economic model does not capture it. But it makes sense.
If Australia has a trade dispute with China, at least I know where I can get mt TShirt! Who knows the sowing person might be able to make me other garments because the skill of sowing and cotton growing is not lost.
But but but…. What about cheap electronics!? 😉
“Those who fail to learn the lessons of history are doomed to repeat them”
This problem with China accumulating too large a share of the planets wealth has occurred before.
The last time it was the concentration of silver, which led to the British retaliating by encouraging the use of opium in China, which led to the Opium Wars, the effects of which we are still attempting to deal with to this day.
Once again China has accumulated a significant and imbalanced store of wealth, this cycle in the form of dollars and other currencies. How this cycle will play out I have no idea, but if the last cycle was any indication the repercussions will reverberate down to generations yet unborn.
It should also be noted that the Chinese Government has been encouraging citizens to save in the form of precious metals for some time now. Couple this with the government reticence to fully disclose precious metal reserve holdings and the establishment of an Asian Gold Exchange in competition with the London and New York markets and we begin to see the first stated problem re-emerge.
Will the Chinese begin to demand settlement in precious metals? Time will tell. Will the Chinese demand that the imbalances being carried on their books be balanced by transfer of precious metal reserves? Looking more and more likely with every cycle of the inflationary printing press.
Does this bode well for the average citizen of Europe or America? You be the judge.
Thanks Public Citizen. You got me thinking. I guess from a Chinese persons view they rely heavily on their own history to guide their decisions.
I hope all that Afghan Heroin is not making it to the streets if Beijing, Hong Kong or other major cities in the Chinese realm. That would bode poorly for the Chinese economy.
Communist Chinese don’t have religion, so they need another Opiate!