US economic power

[Adam L]

Fuchs, how exactly does the service sector not constitute economic power?

And I'm not sure what the point is of demonstrating the US is not at the top of steel or shipbuilding since they are only two sectors.

Although I am not sure if Fuchs statistics are the most relevant, he is correct. Service based industries are not significant when it comes to economic power. Also, this "service based" economy we are building (personally, I think we already have it) is a bad idea, and more dangerous to US national security than almost any other threat. Our economic stability and strength should be dealt with more tactically. Today, we barely can call ourselves an industrial nation. We have spent the last 30 years sending our industry overseas. We used to be #1 in steel production.

Apples, oranges, a clue? Fuchs you can take any comparison, redefine it after the discussion has began, constrict the evidence to only what supports your case, and even go as far as suggesting the original poster was wrong. That doesn't make it right. The term I believe is sophistry.

It's only sophistry if he redefines the terms to unreasonably and excludes evidence that is relevant. His arguments are legitimate, and it is your job, if you disagree with him, to defend what he is claiming to be incorrect or flawed. His argument does not become sophistry just because you feel it to be incorrect. To call what he has argued sophistry, would be to call any form of argumentation such.

Although I would not have structured my argument the way Fuchs has, nor used the same statistics, I do have to say he has a legitimate point.


Adam L

[Shek]

Although I am not sure if Fuchs statistics are the most relevant, he is correct. Service based industries are not significant when it comes to economic power. Also, this "service based" economy we are building (personally, I think we already have it) is a bad idea, and more dangerous to US national security than almost any other threat. Our economic stability and strength should be dealt with more tactically. Today, we barely can call ourselves an industrial nation. We have spent the last 30 years sending our industry overseas. We used to be #1 in steel production.

Adam,

The United States is still #1 in manufacturing, and our absolute level of manufacturing is at record levels. As far as steel goes, a study completed immediately following 9/11 found that the US had more than an adequate access to steel for defense purposes. Part of this is due to the fact that we have moved beyond regular steel for a fair amount of our defense related technology. Besides, if regular steel were such a concern, creating a national stockpile along the lines of the SPR would be a cheaper option.

[Schmedlap]

Two points...

1. If you owe the bank $100, then that is your problem. If you owe the bank $100 million, then that is the bank's problem. We owe trillions of dollars to the world. If something happens that makes us unable to make timely payments on that debt, then it will become the world's problem.

2. Too big to fail.
If the US ever suffered a significant depression or other economic calamity then the world would need to think of something quick, because our economy is "too big to fail." If we go down, then Japan and China are going to be holding some worthless paper, oil producers are going to see demand plummet, every country with a current account surplus is going to be living off of its reserves, Africa and the UN get no more money, South America gets the double whammy of no more aid and less demand for their illicit drugs, and Europe can try to piece it all together while supporting their welfare states.

If America is in decline, then the world is in decline.

[Shek]

Two points...

1. If you owe the bank $100, then that is your problem. If you owe the bank $100 million, then that is the bank's problem. We owe trillions of dollars to the world. If something happens that makes us unable to make timely payments on that debt, then it will become the world's problem.

2. Too big to fail.
If the US ever suffered a significant depression or other economic calamity then the world would need to think of something quick, because our economy is "too big to fail." If we go down, then Japan and China are going to be holding some worthless paper, oil producers are going to see demand plummet, every country with a current account surplus is going to be living off of its reserves, Africa and the UN get no more money, South America gets the double whammy of no more aid and less demand for their illicit drugs, and Europe can try to piece it all together while supporting their welfare states.

If America is in decline, then the world is in decline.

The financial version of mutual assured destruction (MAD).

[Schmedlap]

Browsing this old thread, I came across an earlier forecast. We are not in a depression, so I would not expect half of these to come true, but the economy is hurting and some have begun...

If the US ever suffered a significant depression or other economic calamity then the world would need to think of something quick, because our economy is "too big to fail." If we go down, then Japan and China are going to be holding some worthless paper

Japan's currency is now appreciating at a wild pace. Our currency may have begun a genuine rebound because other countries are feeling the pain that we have brought and our currency may be comparatively safer.

... oil producers are going to see demand plummet...

Price is down more than 50% off its peak just a few months ago, dropping into the low $60's per barrel even after the announced cut in production.

... every country with a current account surplus is going to be living off of its reserves...

Japan has just announced it's first trade deficit in 26 years.

... Africa and the UN get no more money...

Well, it probably will require a depression for that to ever occur.

... South America gets the double whammy of no more aid and less demand for their illicit drugs

No data on this, but I have seen reports in business publications that strippers and prostitutes are seeing significant (double-digit percentage) declines in their revenues. If that is the case, it seems likely that a similar decline in drug consumption is also occuring.

[slapout9]

No data on this, but I have seen reports in business publications that strippers and prostitutes are seeing significant (double-digit percentage) declines in their revenues. If that is the case, it seems likely that a similar decline in drug consumption is also occuring.

People laugh at this stuff but what street prostitutes are paid/or not paid is one of the most reliable economic indicators I have ever seen. Also the number of NEW prostitutes is a very good indicator. Drug demand/price is not so accurate as far as decline because theft/burglaries ususally go up to cover the cost of drugs (which is happening and not being reported much in the media IMO) also puts more presssure on Hospital ER systems as people try to quit.

[Schmedlap]

People laugh at this stuff but what street prostitutes are paid/or not paid is one of the most reliable economic indicators I have ever seen.

I definitely agree.

Drug demand/price is not so accurate as far as decline because theft/burglaries ususally go up to cover the cost of drugs (which is happening and not being reported much in the media IMO) also puts more presssure on Hospital ER systems as people try to quit.

If memory serves me right, this is kind of your area of expertise (the analysis, not the drug use). Here is one thought that I had on the topic - I'm curious as to your reaction... I can't see this as compensating completely for the loss in disposable/smokable cash, since the burglaries take time and are not always successful - there must still be some significant downward pressure on the price. If nothing else, the junkie can plead with his dealer, "everybody in this fricken neighborhood has got ADT, a shotgun, or both! I need more time or a more reasonable price!" If every one of his customers is pleading that way, the dealer needs to realize that it's a rough economy and face the unpleasant fact that he needs to lower his price.

Your thoughts?

When the downturn starts hitting the smut peddlers, you know that these are tough times. Last week I had to settle for an iPod Nano instead of the 160GB, full-sized iPod. Why isn't my Congressman doing something about this? I'm in law school right now and almost all of my classmates are worried about their student loans. After they drink a few hundred dollars per week at the bar and go out for dinner at a restaurant five or six times per week, they hardly have enough left over to pay the interest on their loans. I think that I can finally relate to what my grandparents endured in the 1930s.

[slapout9]

Schmedlap, hard drug use is what economist call inelastic demand. It is a physical need not a want as the softer drugs are. So there is tremendous pressure on the user to get the money no matter what. Dealers do not usually negotiate with anyone if they sell hard drugs, soft drugs yes. That is why I said this activity is not as good an indicator as prostitution but it does have merit , just not as much.

You are in law school? check out the number of students who are turning to escorting as a way to make ends meet! I would do this in a very non-threatening way or they won't tell you. You will probably be shocked at the underground activity going on in this area. I new several strippers who put themselves through school that way. They worked 2 days a week(sometimes less), the rest of the time they concentrated on their studies to get very high GPA's.

[Fuchs]

Adam,

The United States is still #1 in manufacturing...

Statistics...
You're right for official exchange rates (but everybody knows that the Renminbi is too cheap). But you're wrong at purchasing power parity exchange rates.

USA:
GDP = USD 13.84 trillion
industry: 20.5% share of GDP
2.837 trillion industrial value added, USD

PR China:
GDPppp = USD 6.991 trillion
GDP = USD 3.251 trillion
industry: 48.6% share of GDP
3.398 trillion industrial value added, USDppp
1.580 trillion industrial value added, USD

As I said before, money is just an illusion. The offiial exchange rates are a wrong illusion.
PPP exchange rates are a less incorrect illusion.

(source: CIA World Factbook, everything 2007 estimates)

Two points...
2. Too big to fail.
If the US ever suffered a significant depression or other economic calamity then the world would need to think of something quick, because our economy is "too big to fail." If we go down, then Japan and China are going to be holding some worthless paper, oil producers are going to see demand plummet, every country with a current account surplus is going to be living off of its reserves, Africa and the UN get no more money, South America gets the double whammy of no more aid and less demand for their illicit drugs, and Europe can try to piece it all together while supporting their welfare states.

If America is in decline, then the world is in decline.

You overestimate the relevance of the USA.
It's correct that the somewhat close economic ties can export U.S. economic troubles to most of the world. But that's only a short-term effect. Few per cent of the German GDP are related to trade with the U.S., for example - and the trade is a drain on its resources, not a push to its economy.
All countries that have a positive trade balance with the U.S. are actually feeding it - they could consume their own goods or export to other nations instead. The economic should would just cause short-term adaption costs.
Nobody really depends on working for Americans for promises to pay sometime in return.

Africa and the UN actually get a lot of money from other countries than the US.

European trade with the USA is actually not so overwhelmingly large as many people suppose. Its exports are diverse, so it would be possible to consume much of it in Europe or elsewhere.
And the reference to welfare state - well, that reminds me of a stereotypic misunderstanding by Americans. We pay to steer the society a bit and to keep the poor less poor. That's actually not more expensive than to have a higher crime rate and 0.75% of the countries' population in jail.

[Ken White]

You overestimate the relevance of the USA.

Always reliably countered by your understating it...

And the reference to welfare state - well, that reminds me of a stereotypic misunderstanding by Americans. We pay to steer the society a bit and to keep the poor less poor. That's actually not more expensive than to have a higher crime rate and 0.75% of the countries' population in jail.

Not more expensive but less likely to increase our already bad but not quite as bad as yours culture of dependency on the government.

[Schmedlap]

Few per cent of the German GDP are related to trade with the U.S., for example - and the trade is a drain on its resources, not a push to its economy.

And notice that I did not imply any direct harm to Europe.

All countries that have a positive trade balance with the U.S. are actually feeding it - they could consume their own goods or export to other nations instead. The economic should would just cause short-term adaption costs.

International Trade Theory 101: The US is a large importing country for many goods. If we no longer purchase those goods, then it creates surplus supply in the exporting country, prices plummet, profits plummet, and the incentive to continue producing plummets. So, no, those countries would not consume their own goods. They would respond by dramatically scaling back production in the short term and closing down businesses over the long term.
And if the US economy took a dump, then other countries would suffer economic downturns and have less disposable income as well.

Africa and the UN actually get a lot of money from other countries than the US.

See above regarding disposable income.

You know, Schmedlap, Fuchs is right

Impossible.

[Fuchs]

International Trade Theory 101: The US is a large importing country for many goods. If we no longer purchase those goods, then it creates surplus supply in the exporting country, prices plummet, profits plummet, and the incentive to continue producing plummets. So, no, those countries would not consume their own goods. They would respond by dramatically scaling back production in the short term and closing down businesses over the long term.
And if the US economy took a dump, then other countries would suffer economic downturns and have less disposable income as well.

This is a complex issue (central banks use models with 2,000+ variables to simulate this), and it's off-topic so I don't want to elaborate much.
You simply didn't think around enough edges. A goods trade balance deficit equals a capital transfer deficit and lower prices broaden the base of customers. Finally, production can be changed to different goods to meet demand elsewhere.

Guess what? The American trade balance deficit isn't being paid for by Americans. If the Americans suddenly stopped buying, they would also stop lending. The money would stay outside, the goods would stay outside - and people would simply buy more stuff with their own money after a short (2 years at most) phase of adaption.

----------------------------------

Some statistics that show the moderate relevance of the USA for Europe:

Germany (a country with extreme trade emphasis) has only 7.5% of its export trade (about USD 100 billion) and 4.5% of its import trade (about USD 49 billion) with the U.S..
A total embargo of the USA would only cause a dent (about a quarter) in the German trade balance surplus.
(Let's keep the calculations simple like this; this is not a doctor's thesis, after all.)

EU as a whole: 23.3% (USD 310 billion) / 13.8%. (USD 202 billion) - intra-EU trade excluded.
The difference is about USD 108 billion - less than a per cent of EU GNP and even the exports are less than 2 % of the EU GNP.

The perception of extreme interdependence comes solely from the financial markets, which have illusions as their business model. The real trade & hardware interdependence is marginal - most U.S. products have perfect or close substitutes in the EU.


Most of these were 2005/06/07 figures, CIA World Factbook.

[Schmedlap]

A goods trade balance deficit equals a capital transfer deficit and lower prices broaden the base of customers.

The first part of that is correct. The second half is false. Demand is not created by an abudance of supply.

Finally, production can be changed to different goods to meet demand elsewhere.

A severe economic downturn in the US in all likelihood translates into a dramatic global economic downturn, as well, impacting the disposable income of the people who live elsewhere.

If the Americans suddenly stopped buying, they would also stop lending. The money would stay outside, the goods would stay outside - and people would simply buy more stuff with their own money after a short (2 years at most) phase of adaption.

I presume that by "they would also step lending" that you mean foreign gov'ts would stop lending us money. The issue is not whether they would buy more of our paper, but rather they would be stuck with buckets of paper that we will still owe money on. Even if we never issued another T-bill, we still owe billions in interest every year on paper that we have already sold.

Thanks for the elaboration regarding Europe, but keep in mind that that we already agreed on that in the first place, so you are preaching to the choir.

[Fuchs]

The first part of that is correct. The second half is false. Demand is not created by an abudance of supply.

You seem to misunderstand either me or the concept of demand. Demand is dependent on price level. Excess supply = lower prices = broadened base of customers.
Let's say Americans don't buy Sony Playstation xy from China anymore. Sony cannot sell their Playstations as before and reduces the price. Lots of other customers can suddenly afford the Playstation xy.
Now add that the money isn't transferred to the USA as loan, but remains outside. In the end, Sony might even sell its Playstation xy for the old/same price to new customers.

A severe economic downturn in the US in all likelihood translates into a dramatic global economic downturn, as well, impacting the disposable income of the people who live elsewhere.

Yeah, yeah. That's the mantra of the TV reports about financial markets.
It's a short-term phenomenon, might last for probably two years, maybe as few as six months.
The USA simply has no such lever to ruin the real markets global economy.

[Schmedlap]

I'm considering selling my crystal ball on eBay.

If you owe the bank $100, then that is your problem. If you owe the bank $100 million, then that is the bank's problem. We owe trillions of dollars to the world. If something happens that makes us unable to make timely payments on that debt, then it will become the world's problem.

Update:

The U.S. sought to ease Chinese Premier Wen Jiabao's concern about the security of his country’s investments in U.S. government debt... China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said... the nation should seek guarantees that its Treasury holdings won’t be eroded by “reckless policies” ... “China won’t sell the U.S. debt now as that will only drive down Treasury prices, hurting not only the U.S. but also the value of its own investments,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., an investment bank partly owned by Morgan Stanley.
- via Bloomberg

And...

The US is a large importing country for many goods. If we no longer purchase those goods, then it creates surplus supply in the exporting country, prices plummet, profits plummet, and the incentive to continue producing plummets. So, no, those countries would not consume their own goods. They would respond by dramatically scaling back production in the short term and closing down businesses over the long term.

Update:

The global financial crisis has finally and dramatically caught up with China... Exports in February slid by 25.7 per cent from a year earlier... imports dropped 24.1 per cent... The fallout may be felt across the Chinese economy, with the possibility of acceleration in the increase in unemployment and yet more slowing of consumption, despite a $600 billion stimulus package that the Government hopes will cushion the blow... Communist leaders worry that more job losses could spark unrest and are promising to spend heavily to create employment... Isaac Meng, an economist with BNP Paribas in Beijing, said ...“... It will have a pretty big impact on Chinese domestic demand. Probably 60 million to 70 million workers directly work in these export sectors, so there will be secondary impacts on capital expenditure, employment and consumption.”
- via UK Times

“I don’t think that in the short term domestic consumption can make up for the loss of exports,” says Xiang Songzuo, an independent economist. “Exports have fallen quickly and consumption will grow more slowly”...
There are some signs that increased consumption might cushion the blow, however...
“It won’t be possible to make up for all our international losses, but we can compensate a little” through domestic sales, Ms. Qian says...The Beijing Department of Commerce arranged the same sort of meetings for Liu with retailers in the capital as it has done for all the companies at the fair. Three stores have expressed interest in his goods, he says, and “if things go well I think I can make up my losses.
“Still,” he adds wistfully, “I am looking forward to an economic recovery in the US.”
- via CS Monitor

[Shek]

Statistics...
You're right for official exchange rates (but everybody knows that the Renminbi is too cheap). But you're wrong at purchasing power parity exchange rates.

USA:
GDP = USD 13.84 trillion
industry: 20.5% share of GDP
2.837 trillion industrial value added, USD

PR China:
GDPppp = USD 6.991 trillion
GDP = USD 3.251 trillion
industry: 48.6% share of GDP
3.398 trillion industrial value added, USDppp
1.580 trillion industrial value added, USD

As I said before, money is just an illusion. The offiial exchange rates are a wrong illusion.
PPP exchange rates are a less incorrect illusion.

(source: CIA World Factbook, everything 2007 estimates)

Fuchs,
Good point about PPP - I hadn't realized that the stats didn't incorporate PPP. Once you adjust the UNIDO statistics quoted in the piece based on the recent PPP revision from the World Bank, I still come up with the US being #1. We could spin around whether CIA estimates are better than UN/World Bank statistics, but we'll just obfuscate the larger point I was making that the US is by no means a faltering manufacturing state (and instead, remains either #1 or at worse, a very close #2). We could also look at the composition of the US manufacturing sector and decide that it tends to be at the higher end, making it well suited for the type of technology required to equip the national security apparatus of the United States.

You overestimate the relevance of the USA.
It's correct that the somewhat close economic ties can export U.S. economic troubles to most of the world. But that's only a short-term effect. Few per cent of the German GDP are related to trade with the U.S., for example - and the trade is a drain on its resources, not a push to its economy.
All countries that have a positive trade balance with the U.S. are actually feeding it - they could consume their own goods or export to other nations instead. The economic should would just cause short-term adaption costs.
Nobody really depends on working for Americans for promises to pay sometime in return.

Africa and the UN actually get a lot of money from other countries than the US.

European trade with the USA is actually not so overwhelmingly large as many people suppose. Its exports are diverse, so it would be possible to consume much of it in Europe or elsewhere.
And the reference to welfare state - well, that reminds me of a stereotypic misunderstanding by Americans. We pay to steer the society a bit and to keep the poor less poor. That's actually not more expensive than to have a higher crime rate and 0.75% of the countries' population in jail.

I understand that this was directed at Schmedlap, but once again, if you dive down into the weeds of bilateral trade stats, you miss the overarching point that Steve Blair simply put - the global economy is interdependent and so no matter what you quote from bilateral trade stats, a decline in an economic powerhouse (US, EU, etc.) is going to have a ripple effect that hits all. Whether the impact is direct to the EU or indirect through impacts on China, etc., is irrelevant. The fact that the ECB coordinated with the Fed this past spring to inject huge amounts of liquidity into the financial markets demonstrates this interdependence.

[Fuchs]

I use CIA World Factbook for convenience (it's really a nice collection of data) and because it's generally less prone to be challenged as source in an English-speaking environment.

The ECB is responsible for inflation, not for growth. And central banks have a well-deserved reputation for being in love with stability.

About demand - I'm tired to discuss first week economic studies content anymore:
http://en.wikipedia.org/wiki/Demand

About Non-Americans having less money at hand when they stop exporting to the USA: Would be true if the U.S. bought its surplus imports with anything else than loans.
If in the current situation the USA would cut its imports and keep exports stable, the rest of the world would have MORE money for consumption/investment at hand (simply because the USA would not lend it to pay for the imports).


B2topic; Sure, the U.S. economy is large, even its small industrial part. It's just like that it doesn't resemble the economy of the 40's to 70's that some people still think about when they think of U.S. economic power and how well the military is being backed up by that.
I disliked the original picture because it was suitable to reinforce the idea of an extreme superiority that's simply not true for some critical branches and quite the opposite for some as well.

[Shek]

The ECB is responsible for inflation, not for growth. And central banks have a well-deserved reputation for being in love with stability.

Not true. The primary objective is price stability with a much more rigid requirement than the Fed. However, the reason that price stability is a goal of both institutions is precisely because price stability provides the conditions for firms and individuals to make longer-term decisions that are more productive for the economy, i.e., greater price stability = greater rates of growth.

http://www.ecb.eu/press/key/date/199...0610_1.en.html

I should like to draw your attention first to the word "objectives" in plural. The ECB certainly has a primary objective: "price stability". However, Article 105.1 of the Maastricht Treaty adds that "without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2."

Among other objectives, Article 2 states that the Community shall promote a "sustainable and non-inflationary growth" and "a high level of employment and social protection".

About demand - I'm tired to discuss first week economic studies content anymore:
http://en.wikipedia.org/wiki/Demand

About Non-Americans having less money at hand when they stop exporting to the USA: Would be true if the U.S. bought its surplus imports with anything else than loans.
If in the current situation the USA would cut its imports and keep exports stable, the rest of the world would have MORE money for consumption/investment at hand (simply because the USA would not lend it to pay for the imports).

The reason that the money is available for Americans to borrow against is because people find that the US provides the greatest returns on their money all things considered (default risk, exchange rate risk, etc.). Thus, a decreased appetite for imports would mean less demand for loanable funds, pushing returns on loanable funds down, meaning that the funds that other countries put into the loan markets in the US would simply move elsewhere and face lower returns. Personal investment (I assume that you are referring to investments from a personal finance perspective) amounts don't change, they've just moved geograhpically and just become less productive all things considered. Thus, consumption/investments cannot increase since the loaned funds are already "investments". It is a zero-sum game as you've presented it.

B2topic; Sure, the U.S. economy is large, even its small industrial part. It's just like that it doesn't resemble the economy of the 40's to 70's that some people still think about when they think of U.S. economic power and how well the military is being backed up by that.
I disliked the original picture because it was suitable to reinforce the idea of an extreme superiority that's simply not true for some critical branches and quite the opposite for some as well.

I think that you're taking the graphic a little too seriously.

However, don't get too wed to the military instrument of national power. Since the majority of the global economy has a foundation that is information-based, the fact that the US economy (and the EU) has a strong information component to it means that we both have means that can be used to good effect when implementing grand strategy. The squeeze on Iranian assets through the information-based financial networks was effective in bringing Iran to the bargaining table and got North Korea to sign an agreement (actual outcomes is another issue, but it shows that the military stick isn't the only possible stick out there). As with any change, it brings new capabilities to yield and potential weaknesses to defend against.

[Fuchs]

There's no discussion about ECB priorities. Whenever there's a conflict between inflation and growth, it is obliged to opt for the inflation control target 2% p.a.. Period.

"Thus, consumption/investments cannot increase since the loaned funds are already "investments". It is a zero-sum game as you've presented it."

You confuse world and non-U.S. world here.
When the non-U.S. world reduces its lending of money to the USA, the non-U.S. world would have more money left for consumption/investment. Simple fact.
That's what you denied (instead, you claimed they'd have less money to spend). I did never write about increased world-wide demand here.

And the present situation of assumed good ROI in the U.S. is a present situation, one that would not persist in the scenario we were talking about; an economic crisis in the U.S. that shrinks its huge imports.