Free trade, jobs, fairness and the economy are all front and center in the coming political debate. As politicians respond to polls, we are going to hear a lot more about them in the coming months. Most of what you hear will be VPG - Verbalized Political Garbage. It will demonstrate that most politicians know very little about basic economics, or else do understand and simply wish to pander to voters in order to get elected.
Today we will wade into the core of this debate, hoping to give you an understanding of what is really at stake. Polls tell me that 75% of you will not like what I write. But since this is a free letter it will not affect my renewal rates. Likewise I am not running for office and do not have to couch my terms in evasive language designed to obscure what I really mean. If we have enough time and space, I am sure I can find something to annoy the remaining 25%. So let's get started.
Let's begin with a poll by the University of Maryland's Program on International Policy Attitudes: "...the polls shows that among Americans making more than $100,000 a year, support for actively promoting more free trade collapsed from 57% to less than half that, 28%, in just the last 5 years." In general, the lower the income, the less excited about free trade a portion of the population is. The percentage of people wanting to actively slow free trade (or stop it altogether) doubled to 33%. More people want to slow free trade than who want to promote it. (USA Today)
I knew the support for free trade was waning, if from nothing else than from my readers response and questions. But I was simply amazed at the low level of support for free trade. I find it troubling, for reasons we will get into in a moment.
The old joke is that a recession is when you neighbor loses his job. When you lose yours, it is a depression. As an increasingly nervous middle class copes with international job outsourcing of higher paying service jobs, the loss of manufacturing jobs and a job-less recovery, their favorable view of free trade is clearly waning. Except, of course, for cheap products made in China and sold at Wal-Mart.
It was one thing when Joe Six-pack lost his job at the factory. That was simply a recession. Threaten my high tech, information age job or other formerly safe service job, and the benefits of free trade look a little murkier. Now we are beginning to talk depression.
Politicians rail about foreign job out-sourcing. John Kerry talks about Benedict Arnold companies who hire foreign workers and send manufacturing overseas. It is easy to bash them and play into fears for job security. It is these very fears which are eroding consumer confidence polls. The link between consumer confidence and the confidence you have about the certainty of your job is very high.
Where Have All the Jobs Gone?
I am waiting for the politician who will stand up and finger the real culprit for the loss of manufacturing jobs: worker productivity. Where are the calls for legislation demanding we do something to make the manufacturing base of this country less productive, so we will need to hire more workers?
Here are a few facts, conveniently brought to us by Martin Wolfe in the London Financial Times. First, American manufacturer employment has dropped 2.6 million jobs between March of 2001 and January of 2004. By January of 2004, employment in manufacturing was 17% below what it was in June of 2000, the peak month for manufactured output in the last cycle.
Outsourcing? Offshore manufacturing? On the surface, it seems to be the culprit. It makes for good copy, as it is easy to see a manufacturing plant closing in Wisconsin and opening in Shanghai. But it is not that simple. If we look at the numbers, I think we can find another perpetrator. There was a 17% rise in worker productivity over the same periods noted above, with just a 3% drop in production. We are producing roughly the same amount of "stuff" with a lot fewer workers. We produce almost twice as much as we did just 24 years ago.
Notes Wolf: "Trade does, as critics stress, mean painful adjustments for those affected, as well as shifts in the rewards for different workers. Yet this is just as true of productivity. Information technology destroyed the jobs of armies of clerks and raised the wages of educated workers relative to those of less educated ones. But it had no deleterious impact on unemployment."
Now this is a number which gave me pause: he further goes on "Between 7 and 8 percent of US private jobs are lost every quarter. But employment has still increased." That means the economy is creating quite between 7 and 8 percent new jobs every quarter, just to stay even. And we are doing slightly better than staying even (but only slightly).
Now, let's be clear. Jobs have been lost as US firms move manufacturing to China or other nations. Hundreds of thousand have been laid off as work moves to foreign and cheaper sources of labor. Outsourcing to India and China of information age jobs has moved hundreds of thousand of service jobs offshore. But manufacturing and service jobs have also been coming to the US. Think BMW, Honda and Toyota. Siemens alone employs tens of thousands of American workers. There are thousands of foreign companies who have opened plants in the US.
The brilliant economist Thomas Sowell, writing in a Wall Street Journal op-ed this week makes this point: "Management guru Peter Drucker has pointed out that this country imports far more jobs than it exports and no one has contradicted him. Indeed those who are loudest in denouncing the exporting of jobs totally ignore the importing of jobs."
He goes on to note: "When the North American Free Trade Agreement went into effect a decade ago, there were dire predictions of 'a giant sucking sound' as American jobs were drawn away, to Mexico especially.
"In reality the number of jobs in the US increased by millions after NAFTA went into effect and the unemployment rate fell to low levels not seen in years. Behind the radically wrong predictions was a simple confusion between wage rates and labor costs.
"Wage rates per unit of time are not the same as labor costs per unit of output. When workers are paid twice as much per hour and produce three times as much per hour, the labor costs per unit of output are lower. That is why high wage countries have been exporting to low wage countries for centuries. An international study found the average productivity of the Indian economy to be 15% of that of American workers. In other words, if you paid the average Indian worker one-fifth of what you paid the average American worker, it would cost you more to get the job done in India."
It is no coincidence that manufacturing employment declined 17% while productivity rose 17%. Let me put this another way: if manufacturing productivity had not risen as much as it had, unemployment would be far worse. Why? Because more jobs would have been moved to lower cost production centers. It is only because we are becoming more productive that we keep the manufacturing base we have. But of course, being more productive means we need fewer workers for "unit of output."
As the dollar drifts lower against Asian currencies, it will help restore some balance to international labor advantages. Fewer jobs will leave the US because of lower foreign wages. But will that make us better off? No, as the products and services we buy from foreign nations will cost us more.
Think we would be better off with a little less free trade? Only ten years ago, US exports supported 7 million workers. Today US exports count for 20 million workers. (Source: WSJ) Take away those 13 million jobs and imagine the chaos in the US. Without free trade, those jobs would not exist. Further, realize this happened even as the dollar was rising dramatically in value, making our exports cost more to the world.
A rational policy would be pushing for more free trade, as it has clearly been to our national benefit, even while it causes local and individual suffering. But rational policies and politics sadly rarely mix.
"Demagoguery beats data in the making of public policy," noted my former congressman and majority leader Dick Armey. Speaking in front of a plant dependent upon export, where jobs have been growing, does not draw nearly the national media attention as touring shuttered plants which have been closed.
Politicians do not create jobs or wealth. For the last 20 minutes, I have been trying to find the one quote I read this week which showed that government regulations cost more in terms of jobs than all the outsourcing to India and China. I readily complain about the cost of government regulations in my business. Sarbanes-Oxley was a full-employment act for attorneys, not to mention the Anti-Money Laundering Act and a host of new rules, all of which add to the cost of doing business.
But whenever I gripe about my regulatory costs with friends, I get no sympathy. How much does regulation cost the medical profession, up and down the chain? Construction? Manufacturing? Education? There is no place safe from expensive regulations.
This week, Greenspan suggested that no new spending should be allowed without cuts somewhere else or new taxes. Sensible enough. On a similar note, I would suggest that we simply stop increasing the number of regulations. If Congress wants to pass a new rule, they have to cut one somewhere else. Further, they should arbitrarily cut 5% of the rules every year, as we can all agree that 5% of the rules are without purpose and harmful.
Any politician really interested in creating jobs would be demanding a decrease in the cost of regulations so that employers, and especially small employers where 80% of the new jobs come from, could have more money to hire and invest.
The simple fact is that out-sourcing is here to stay, just as is technologically driven productivity increases which reduce the demand for labor. It is like the tide. Trying to stop it is like King Canute telling the tide to stop.
Tom Peters (in a e-letter sent to me by a friend) wrote of several policies which should be implemented to help us deal with what is a very real problem for the country.
"Big companies do not create jobs, and historically have not. (Big companies are not 'built to last;' they almost inexorably are 'built to decline.') ...Job creation is entrepreneurially led, especially by a small number of 'start-ups' that become growth companies (Microsoft, Amgen et al.); hence entrepreneurial incentives including low capital gains taxes, high R&D supports are a top priority...Primary and secondary education must be reformed, in particular to underscore creativity and innovation -- the mainstays of high-value added products and services. Children should be nurtured on risk-taking, with a low expectation of corporate cosseting... Research universities must be vigorously supported... National/global protection of intellectual capital is imperative...All economic progression is a matter of moving up the 'value-added chain.' (This is not 'management speak': Think farm to factory to R&D lab.) ... Worker benefits (health care, re-training credits, pensions) should be portable, to induce rather than impede labor mobility... Workers have the ultimate stake. They must 're-imagine' themselves -- take the initiative to create useful global skills, not imagine that large employers or powerful nations will protect them from the current (and future!) labor market upheavals."
More Dead Economists
All this is well and good rhetoric, but it is hard for the person to deal with who is at the end of his unemployment line, after watching his job of 30 years go to China. It is nice to quote Joseph Schumpeter, "The proper role of a healthily functioning economy is to destroy jobs and put labor to use elsewhere. Despite this truth, layoffs and firings will always sting, as if the invisible hand of enterprise has slapped workers in the face." It is also somewhat callous.
Thus, when Bush's chief economic advisor tries to explain the theories of David Ricardo (another dead economist) as to why labor movement is a good thing in the long run, it falls on deaf ears.
You can talk as long as you want about all the wonderful jobs that free trade has created in the US, and how labor movement theory says we are al going to be better off in the long run, but that does not make the person who has just lost his job feel any better. He feels, as Schumpeter noted, as if free trade has slapped him in the face. It doesn't feel good, and he wants someone to make it feel better.
Where Are the Jobs?
All of the above may in fact be true, but it still not does keep us from the fact that this economy is not producing jobs. Any time we will start to see job growth kick into gear, economists are telling us, just as they did this time last year.
Bill King sent this tidbit my way: "The Kansas City Star's Diane Stafford noticed something in a new Bureau of Labor Statistics report. "Employers initiated more mass layoff actions in January than in any previous January in the nine-year history of the U.S. Bureau of Labor Statistics' mass layoff record keeping...The higher counts were contrary to a general downward trend over the past year for both the number of mass layoff actions - defined as those affecting at least 50 workers at a single work site - and the number of initial jobless claims resulting from the actions...For January 2004, there were 2,428 mass layoff actions nationally, affecting 239,454 workers. In comparison, January 2003 recorded 2,315 actions, affecting 225,430 workers." How can this occur with that monstrous stimulus last year? Guess what happens without the juice? "Manufacturing accounted for more than one-third of the layoffs nationally - 35 percent of the events and 37 percent of the individual unemployment claims....The government sector set a five-year record for the number of workers filing for unemployment in the month. Another sector that reported a higher number of initial claimants because of mass layoffs was the temporary help sector." Two of the leading engines of job creation last year, government and temps, are now in jettison mode. No wonder consumer confidence has collapsed. As Seinfeld says, "That can't be good."
Repeat: The Fed is not Going to Raise Rates
You wonder why the Fed is willing to be patient on lowering rates? One of their mandates is to help foster employment. If you look at their predictions for GDP over the next year, they are suggesting over 4.5% annually. Yet their job growth number is not even 150,000 jobs per month, which is barely in line with the growth in population. What is unwritten in the assumptions is that it would take growth of over 5% to seriously cut into the unemployment number. And that level of growth is just not in the cards. Raising rates would slow things down and hurt job growth which would soon create a recession.
We threw everything but the kitchen sink in the form of possible stimulus at the economy last year, and we are barely over 4% today. Without job creation, we are at the limits of GDP growth.
Stephen Roach of Morgan Stanley and one of my favorite analysts, wrote an open letter today to Alan Greenspan, calling for him to immediately raise short term rates to 3%, so the Fed would have some room for rate cuts during the next downturn.
This is not going to happen. Greenspan just touted the virtues of adjustable rate mortgages this week. (I simply do not understand why he would do this, even if his logic might be impeccable. He should not be encouraging risk taking and more debt.) In any event, do you think he would do that if he were planning to raise rates anytime soon? "Hmmm, let me see, what can I do to create the most harm possible? Tell people to get into adjustable rate mortgages and then raise rates? That would cement my reputation."
A Financial Times article noted the problem with auto loans, as there are more and more taken out for 6 and 7 years, which is good for sales today, but borrows from future sales. The article goes on to make the point that these longer period car loans mean that it takes longer for borrowers to get to "break-even" on their loans, thus longer before they can buy a new car. Rising rates would make that period even longer. There comes a point where new car sales are going to suffer from the current trend of borrowing for longer periods.
Next year, independent auto analyst David Littman projects that auto sales will start declining. "This year, he predicts, tax breaks and other political actions during the presidential election campaign will support auto sales by boosting disposable income even if interest rates rise. But next year he forecasts sales of cars and light trucks will drop to 16 million, from 16.8 million. That might not sound like much but it is the equivalent to a more than $22 billion revenue cut. 'That is the end of the world for a couple of automakers.'"
We add to that this note from the normally upbeat Dennis Gartman: "The US' economic news was anything other than stellar yesterday. Jobless claims rose to 350,000 from 344,000. Debates rage amongst those who make jobless claims the focus of their lives regarding weather and problematic seasonal adjustment factors, but we pay little heed to it. To those in that debate we say, in all dispassionate honesty, 'Get a life!' If we must pay attention we note that the 4-week moving average rose to 354,000 from 352,000 and that this is the 4th week in a row that this smoother number has risen. This, we think, is worthy of note and this we think is bothersome.
"Further, we note (disappointingly) that the sales of new homes fell 1.7% to just over 1.1 million units. That in and of itself was disappointing, but this is also the lowest level of home sales in 7 months. Worse still this slowdown in home sales is taking place even as the supply of new homes has risen to what is almost a decade long high of 370,000 units.
"Finally, January building permits here in the US were revised to 1.92 million annualized units from the previous estimate of 1.899 million. In light of an already problematic increase in the supply of new homes, this revision is not 'wanted' news."
Maybe Roach is right. Maybe raising short-term rates this year would not be the serious problem I think it would be. Maybe the economy keeps on chugging.
But I think the Fed believes that raising rates today risks slowing the economy down at a time when there are not enough jobs being created, housing is showing signs of weakness, the auto industry would get hammered, borrowing costs for business would rise and thus profits hurt, etc. etc. It is Pascal's wager. Even if one might think risks are small, do you risk the greater harm?
If Greenspan were to raise rates now and the economy began to slow, the mob would form and someone would start shouting "get a rope" as they head for the nearest tall tree.
Trade Wars and Other Disaster Scenarios
Coming full circle, the growing unpopularity and demagoguery about free trade worries me. Sometime soon, perhaps this week, the European Union is going to raise tariffs on a selected group of products because the World Trade Organization has ruled that some of our corporate tax laws create an unfair advantage. My bet is that they play hardball and select products from politically tough states for Bush - those where he needs the votes. Higher foreign tariffs mean lost jobs. Lost jobs are not good in an election year.
But caving in to "free trade" demands from Europe will not be seen as popular, and Kerry will beat him up on being weak and not "working with" foreign nations, no matter what he does.
In this matter, I think the WTO and Europe are wrong. But it could lead to calls for retaliation. Remember only a few months ago when even Republican senators were calling for a 37% tariff on Chinese goods? They were playing to their voter base.
As Zeke Ashton, who writes for the Motley Fool, noted at dinner last night, I am one of the more optimistic analysts of those who recognize the problems we are facing. Muddle Through is not exactly bearish.
But a global trade war would turn me as bearish as any analyst I read. It would precipitate a world-wide depression faster than you could say Smoot-Hawley, the ill-conceived trade legislation which caused the Great Depression.
This political season is dangerous because the temptation to play to that 72% of people who are concerned about free trade is going to be huge. Think that wise heads will prevail?
I might have thought so a few years ago. But after Bush was persuaded to impose steel tariffs (which time has now shown were not needed, as steel prices are high and rising fast) and silly tariffs on bras, I am not so sure. Given that we feel the ridiculous need to protect US sugar from foreign manufacturers, solely because of political concerns, I get even more nervous. I beat up on Clinton for many things, but give him this, he was for free trade.
A trade war and a return to protectionism will cost more American jobs than outsourcing a phone call center to India. If Republicans cave in to pressure and start even a few steps toward trade wars, we could soon be in serious trouble. The concern I have is that they read the polls and note that 72% of the country think free trade is the problem and not the solution.
Yes, we need to be tough on our trade negotiations. Yes, we need to make sure our trade partners play by the rules. China needs to be made accountable for the huge amount of piracy they condone. If we are going to allow foreign trade into the US, "they" must allow our companies to have access to their markets as well.
But we cannot retreat from a world where trade and commerce is free. If we do, we will suffer. "They" might suffer more, but it will be of small comfort to those on the breadline.
I recognize change is a tough thing. We need to come to recognize that 3 billion people are coming into the 21st century. They are leaving the deprivations of communism and socialism, of castes and repressive governments. They have seen the promised land of freedom, dignity and capitalism. They are smart and are willing to work. This will change the world in ways we cannot even imagine today. It is surely for the better, but it is going to create a lot of change in the lives of the entire developed world, and not just the US. Fighting that change is futile, and even destructive. We must figure out how to adapt and to help all levels of our societies cope. Bashing foreign countries as the cause of labor movement might get votes, but it is not good economics.
The job of government is not to protect us from change. At most, it is to help us transition and to mitigate the effect of change. If we become a people who think government can solve the problems of the marketplace, we are indeed heading for grave disappointment.
Gold, the Stock Markets and the Dollar
On another front, and for what it's worth, a few of the more respected market technicians I read are suggesting gold may be ready to "correct." The Aden Sisters, Ian McAvity, Dennis Gartman and others have either turned medium term bearish on gold or are warning of a possible drop. I can certainly see where gold could stand to "take a breather" as it has come quite far.
That being said, I think that gold long-term still has some significant upside as I am still long term bearish on the dollar, and I would use this draw-back, if it continues, as a time to "average in."
I have written in past weeks that this may be a classic "sell in May and go away" year. After a few questions from readers, I should note that I do not think the market may not start to go down before May. It very well could. I am not picking a date (May 1). If May 1 is the top, it would be a pure coincidence. I am simply suggesting that the bull run is getting aged, market valuations seem high and a summer swoon, especially if there is any economic weakness, could be significant.
More Airports and Bull's Eye Investing
My dream of staying at home for a few weeks is starting to vanish. It looks like a few day-trips are forcing themselves upon me. And my wife returned from her getaway in Puerto Vallarta this week, reminding me that we need to get away together. She prefers places without phones and internet connections. We are moving offices in a three weeks as well, spring break is around the corner which means lots of kids, and
I am reading the "galleys" of my book this week. It will be on the press in a few weeks and in the bookstores later on in April. There are lots of details, including convincing my publisher (Wiley) and editor (Debra Englander) that we need to make some changes in the cover. But overall, I am quite pleased with the book.
As do most authors, we have been sending the manuscript out to a few friends and fellow authors and writers, hoping to get some nice comments for the back cover. I have been quite pleased with the comments. I will share a few with you over the next few weeks. The one I got yesterday still has me smiling. It is from George Gilder, who before writing on technology wrote Wealth and Poverty, which was one of the seminal books of the last century. Quoting from his email:
"Good news: I uncovered Bull's Eye Investing upon my return and have been engrossed for hours. Although as you probably guess, I think you pay too much attention to the lordly consumer (speaking of smoke and mirrors!), none the less, [here is a quote for you]:
"Bull's Eye Investing is a lucidly written, lambently cautionary, edifying and diverting must-read guide to the ways and means of hitting the gyrating target of a 'Muddle Through Economy.' Mauldin is the Ben Graham of the New Millennium, but unlike Graham he combines investment savvy with a sense of humor and a gift of style. - George Gilder"
Yes, I did have to look lambently up. It means softly bright or radiant, as lambent embers or lights at night. Next week, I will let you see what Richard Russell wrote.
Your lambently blushing analyst,