The Economic Report of the President, 2013, released last Friday, devotes some attention to global rebalancing, a topic that I’ve addressed on a number of occasions. [1] [2]; and this paper. Exchange rate movements are critical, but so too are productivity and wage movements.
From Chapter 7:
Several recent reports have concluded that manufacturers increasingly view the United States as a favorable production location. Factors cited for this change include trends in unit labor costs, expansion of domestic energy resources such as wind and natural gas, and greater recognition of the “hidden costs” of moving production abroad.
Over the past decade, U.S. unit labor costs—the cost of labor required to produce one unit of output—have grown much more slowly than in other developed nations (Figure 7-7). U.S. hourly compensation in manufacturing has grown somewhat over the past decade, but rapid productivity growth has reduced the cost of producing a unit of manufactured output in the United States. Meanwhile, when measured in U.S. dollars, the cost of manufacturing a unit of output in key trading partners has risen, in some cases substantially.
Several recent studies by management consultants argue that these trends create the potential for a “manufacturing renaissance” in the United States and estimate that the result could be 1 million or more new manufacturing jobs by 2015 (Boston Consulting Group 2012; Inch and Dutta 2012; Simchi-Levi et al. 2011). A key assumption of most of these analyses is that U.S. manufacturing wages continue to be stagnant. Thus, while these trends provide favorable tailwinds for U.S. manufacturing, they will not by themselves lead to sustainable prosperity. In contrast, the “high road” model discussed above also yields favorably low unit labor costs—but does so by increasing productivity, rather than by reducing wages.
Here is Figure 7-7:
More discussion of competitiveness, here.
The entire ERP is here.
I have just reached a nice discovery in my research. I have found the equation for effective demand. Apparently this simple yet powerful equation has not existed until now. At least, I can’t find it anywhere. Let’s see what it can tell us.
ED = Total labor income /(cu*(1-u))
ED = real GDP* effective labor share /(cu*(1-u))
effective labor share = 0.78 * labor share: business sector, 2005=100
cu = capital utilization rate
u = unemployment rate, (1-u) = labor utilization rate
I made these graphs of Effective demand and real GDP…
https://research.stlouisfed.org/fred2/graph/?graph_id=100570&category_id=0
This is the graph for data during the crisis…
https://research.stlouisfed.org/fred2/graph/?graph_id=112459&category_id=0
Here are two graphs from my simulation model. Where the lines cross is the point of effective demand that will limit aggregate output.
https://docs.google.com/file/d/0BzqyF_-6xLVET21vNHR2cFdFYjg/edit
A full explanation of why this equation determines effective demand cannot be given here. Still, we can say a few things.
GDP does not like to be over effective demand as seen in the graphs. Keynes stated this as a feature of effective demand. However, Keynes said Effective demand was increasing with output by showing an upward sloping line. Well, the crossing point of demand and output rises with increasing output, but the demand line itself, given above, is downward sloping as a normal demand line.
If output goes over effective demand, there will be over-supply. Businesses will cut back production. Keynes said this too.
When effective demand is above output, businesses grow together. Factor utilization rates rise overall. However, when the economy sits at the crossing point of effective demand, businesses stop growing together. One business will crowd out the profits of another. Businesses don’t really like this situation unless there is investment.
When effective demand comes close to output/GDP as it is now, the economy has 4 basic paths to take.
1. have a contraction.
2. Grow through investment, because growth can no longer occur through higher utilization rates of labor and capital.
3. Develop a bubble to cover over the fact that businesses are crowding out profits from each other. If a bubble is to occur, the environment is right for it to happen now.
4. Raise labor share of income, which will allow increases in utilization rates of labor and capital.
We can also say that effective demand will grow slower now due to lower labor share rate, also seen in graph.
Why do I bring this up here? Because US competiveness has a downside. Our economy is suppressed by low unit labor costs. Moving forward, utilization rates of labor and capital will not improve according to the equation of effective demand.
Thus, to improve our economy we will eventually have to raise labor share of real GDP, which will tend to raise unit labor costs.
What do we want? An under-performing economy for its people, or an environment to attract businesses? Ultimately business investment in the US will be muted because of suppressed effective demand anyway.
This is a fascinating document, well worth a flip through. Some very interesting graphs and analysis.
Kudos to the CEA team for a great achievement and monumental effort.
The costliest, least productive sectors in the US are “health care”, “higher education”, and law. Want to see real “productivity” gains in the US? Force economists, doctors, lawyers, and professors to compete in the “free market” for labor with Indians, Chinese, Vietnamese, Mexicans, and Africans at 10-25% of the earnings currently received by American, Canadian, Brit, and Aussie counterparts.
The bottom 90% have had to be subjected to the “Great Leveling” over the past 40 years from US firms’ $4 trillion of investment abroad and offshoring of production and employment. Now it’s time for the next 9% above the bottom 90% to get their turn to be more “competitive” with Third World wages and to bring down dramatically the cost of “education” and “health care” for the bottom 90%.
I can’t wait to see the economic models developed by Menzie and his peers showing the social utility of promoting HUGE private and public investment flows as a share of GDP to capture productivity gains from offshoring jobs like his to China, India, and Vietnam.
Think how much we could cut from state budgets in terms of jobs, salaries, sabbaticals, and pension payouts and benefits by offshoring, automating, and virutalizing instruction!
We wouldn’t need as a society to waste all that money on university undergrad and graduate programs, tenure, endowments, stipends, grant chasing, structures, staff, etc.
Now that’s productivity and increasing competitiveness!
Why not turn Carmen’s suggestion on its head?
Instead of exporting highly educated people, why not swap some of the 47 million food stamp recipients, the obese, welfare mothers, high school drop-outs – the exact selection criteria don’t matter – for mainland Chinese?
The Chinese would naturally want an upfront payment to take these folks but the one-cost would be dwarfed by the improvement in inner city schools, local budgets, prison costs and so forth.
We would get some very determined new potential citizens. And think of the expressions on the faces of our exported ‘takers’ when they landed on the tarmac in Pudong and found out the facts of Chinese life.
If this isn’t win-win, well…
Bruce Carman ..I am stunned by the power and accuracy of our current predicament.
When 90-99 percentile get leveled I am sure even more benefits will accrue to maybe not the top 1% but the top .01%.
The last 40 years have seen immigration, automation and globalization be used as weapon by the elite against the bottom 90%..soon to be the bottom 99%.
As a progressive or even a centrist one would not want to be seen as “nativist” “luddite” or “protectionist” would you?
c thomson, yes! Let the Chinese, Indians, Vietnamese, Mexicans, Guatemalans, and El Salvadorans come here by the tens of millions, repeal the minimum wage and Davis-Bacon, and make SS and Medicare payroll taxes optional until the programs can no longer survive from being underfunded. Let the churches, synagogues, temples, shelters, and pet kennels take care of the poor, elderly, and homeless. Are there not workhouses these days? If not, tax the poor to build them already!
If Americans, including college professors, doctors, lawyers, public administrators, engineers, teachers, small businesspersons, et al., can’t compete with tens of millions of highly productive Third World wage workers rushing into the country, then fire the whiners and replace them with people who will work for nothing, appreciate it, and don’t expect to be coddled. What kind of country have we become when those relying on wages and salaries are permitted to be secure and self-satisfied? Where did this socialist thinking come from?
Then roll back Affirmative Action, child labor laws, and environmental regulations that are destroying business and competitiveness. How can we expect capitalism to thrive if we have to subject capital to the petty demands of the children of the working class, racial/ethnic minorities, and, GASP!, women?!
Eliminate taxes on corporations, too, because corporations don’t pay taxes, they only pass on or collect taxes their customers and workers pay.
gman, yes! You’re right, but how else do you expect capitalism to reach its full potential?! After all, capitalism is for the owners of capital, and it is the top 0.1% who own claims on virtually everything of economic value. The bottom 90% own nothing because they are lazy, lacking in ambition, hedonistic, and not very bright; they only borrow debt-money and circulate it for subsistence, if they’re lucky. The next 9-9.9% above the bottom 90% only own assets in subordinated form to the primary claims of the top 0.1%.
Why should anyone else benefit from capitalist ownership besides the owners of capital? Let’s not be naive here. Capitalism is for capitalists, not for those who must earn their subsistence from wage, salary, and fee income. Come on! Are you a commie? Socialist? Face it: capitalism has won; get over it.
Once we rid capitalism of all of its bottom 99% “takers”, we can finally realize the full potential of capitalist prosperity and freedom. Stop being a 99% “taker” and be a top 0.1-1% “winner”. Think like a loser and be a loser.
Buy stocks, real estate, politicians, and be rich and successful! Booyah!
http://michael-hudson.com/2013/03/banking-on-student-debt/