The Effects of a Changing Chinese Labor Market

I realize that my posts to this blog tend to be focused on the merits of free trade.  I've spent time discussing price ceilings and floors, and the disincentives produced by trade quotas, tariffs, and price gouging laws.  However, it is an idea that many Americans just don't seem to grasp, or they choose not to, or are even coaxed into ignoring the facts by political pundits and opinion makers promoting their agendas. 

With that said, we are beginning to see how the growth of China is reversing the global trade dynamic.  We already benefit from cheap manufactured goods, but I believe that the world is on the verge seeing China's growth bear a different kind of fruit for the rest of us.  This sentiment is supported by an article in the July 29, 2010 issue of The Economist magazine.  The cover article explores The Rising Power of China's Workers . 

The article, at once, reveals that China's working class is pressing for better conditions, higher wages, and better benefits, while reminding Americans of our own history.  It was only a century ago that American workers were fighting for the same goals.  We reap the benefits of the struggles of our ancestors.  We are able to enjoy a high standard of living, one that allows us to purchase inexpensive manufactured foods produced in emerging markets.

But, it is our penchant for a good deal that is allowing those Chinese workers to fight for rights of their own.  What are the inevitable results?  With higher wages, Chinese-made products will become more expensive.  Traders will look for alternatives and domestic producers will seize a new opportunity to compete.  Chinese workers will use their deeper pockets to purchase products that might have been previously unattainable.  That money we spent on cheap Chinese goods will begin to make its way back to us.  

Now, conservative political leaders, and supporters of American manufacturers will continue to argue that "Buy American" is the best policy.  While it is true that type of policy can have immediate positive impact on a failing economy, the long run consequences are too much to bear.

Update: Ten Reasons to be Bullish

by Matt Malick

Since the summer of 2009, analysts and strategists of all stripes have been looking for a “correction” to the historic stock rally that started in March of 2009.  It seemed that every major player on the Street - bull and bear alike - had been predicting a 10% to 20% market adjustment.  Throughout history, short-term market declines have been commonplace during multi-year bull markets.  Unfortunately, theorizing about a normal correction and actually living through a gut-wrenching drop in stock prices are different stories altogether. 

In late April, the Standard and Poor’s 500 index hit its near-term high of over 1200.  A 10% correction from that level would put the index at 1080 and a 20% correction would take the index to around 960.  The S&P 500 presently stands at about 1125.  While there is no guarantee that we are now experiencing the much-anticipated 10% to 20% correction, these figures indicate that further short-term losses would be exactly what most market experts have been predicting.  

The added market volatility over the last several weeks is doing its job.  It is bringing intense fright  and discomfort to investors.  The confidence that was building in the market is evaporating.  The major financial news networks are tripping over themselves to line-up interviews with all of the prominent bears.  Fund managers have turned bearish, individual investors have reaffirmed their unwillingness to enter equity markets, and bullish investors have begun to second-guess their theses . . .

Remember, sentiment has historically been an effective contrarian indicator, i.e. the crowd is normally wrong.  In early 2000, everyone was heralding a new technological revolution that was going to increase productivity and send stocks to the moon.  In early 2009, the consensus held that the U.S. was on the verge of a depression and that stocks would pile-up ever greater losses.  In both of these extremes, the consensus was wrong.

Despite the endless stream of negative headlines over the past several weeks, here are ten reasons to be bullish about the intermediate-term prospects for the stock market:

1. The Standard and Poor’s 500 and the Dow Jones Industrial Average are still more than 20% below their all-time highs of October 2007
2.  The yield on the 10-year U.S. Treasury Bond is 3.46%
3. The estimated earnings yield (2010 estimated corporate earnings divided by price) on the S&P 500 is 7.25% .  The estimated 2011 earnings yield on the S&P 500 is 8.55%
4. Gold has reached another all-time high (over $1,210 per ounce), even as countless television commercials tout the opportunities available to individual investors to avail themselves of “cash for gold” (the greater the percentage of a population that is involved in a mania, the less chance it is sustainable)
5. The overwhelming consensus - from Ph.D. economists to the shoeshine man – is that government sovereign debt is the crisis du jour (you are rarely bitten by the snake that you see)
6. In April, the government reported that payrolls rose for the 4^th straight month, posting the best month for employment in 4 years
7. In the fourth quarter of 2009, U.S. GDP growth reached 5.6% and in the first quarter of 2010 U.S. GDP growth hit 3.2%
8. Well over 80% of S&P 500 companies that have reported 1^st quarter 2010 earnings have once again surpassed analysts’ earnings expectations
9. In April, U.S. retail sales climbed for the seventh straight month
10. U.S. consumer spending has increased for six straight months through March

As you well know, it is impossible to predict day-to-day stock market moves.  Right now, the “headline risk” in the market is extraordinary.  Recently, it has been difficult to find a positive report anywhere.  However, over the intermediate-term, we continue to believe that stocks are out of favor, especially when employing a buy-and-hold strategy.  The recent market turmoil is decreasing enthusiasm and will thereby likely prolong the sustainability of market gains over the next few years.

"The Deep Hole"

Update on post from February 18, 2010:


Pennsylvania Pensions: From Surplus To A Deep Hole

http://www.npr.org/templates/story/story.php?storyId=124825100&f=1002&sc=igg2

Post from 2/18/2010:

The following post is a comment on this story from NPR:

Study: States Must Fill $1 Trillion Pension Gap

Unless states like Pennsylvania pass legislation to increase retirement age, reduce retirement benefits, or significantly increase employee contributions, higher taxes or significant cuts in other government programs are the only reasonable options to the pension gap problem. Assuming state lawmakers who, most if not all, have pensions through the state's defined benefit retirement system are unlikely to pass legislation that will lower their retirement benefits to account for their failure to properly fund the system in the first place (or at least incur some of the loss in investment returns due to the recession -like almost everyone else), dramatic cuts in education, healthcare, etc. are the only likely options. Since education is one of the largest state expenditures, it is unfortunate that the likely outcome is that the current generation of students will suffer at the expense of state employees' retirement. Arguably, future tuition and fee hikes will not go to improving educational outcomes but will go to current and future retirees to offset what they lost in investment returns during the recession. Other public and private employees in defined "contribution" plans have also suffered significantly from the recent recession and will bear the full effect in their retirement years but current law requires that we make those in the state's defined benefit system whole in their retirement. I'm sure many law makers and university employees in the state retirement system haven't thought through the unintended consequences yet.

Regrettably, this is just one problem in a long list. Decades of short term thinking aimed more at maximizing votes for the next election than at long term improvements in the standard of living are strangling our economy and will very likely leave future generations progressively worse off. Don’t blame the politicians; they are playing the game we asked them to play. We will only vote for politicians who can bring home the spending and lower our taxes without thinking about the consequences on future generations.

Two interesting articles on education

The New Poor, In Hard Times, Lured Into Trade School and Debt
http://www.nytimes.com/2010/03/14/business/14schools.html?partner=rss&emc=rss


Rising College Costs: A Federal Role?
http://roomfordebate.blogs.nytimes.com/2010/02/03/rising-college-costs-a-federal-role/

Energy Tax Ads Prey on the "Economically" Challenged

Have you seen these ads:

http://www.api.org/aboutapi/ads/#TelevisionAds



Do you think the people in the American Petroleum Institute's (API) ads about the Obama administration's repeal of tax subsidies for oil and natural gas companies have any idea what the issue is really about?  You've probably seen these ads and may have even agreed with the sentiments of the "average American taxpayer" being interviewed.

I suggest reading this article from the Houston Chronicle, "Key Energy Players Pump Up the Volume."

I understand that the API is a lobby group for Exxon Mobil, Chevron, BP, Marathon Oil, Shell, Sunoco, as well as others, and that they are going to spin the argument in favor of their clients, but the amount of spin in this case is outrageous.

First, to say that the Administration's proposals will increase taxes is misleading.  Congress passed the Energy Policy Act in 2005.  The act created corporate tax deductions for the oil and natural gas industries for things like drilling expenses, paying foreign taxes, cost of inputs to recover more oil and gas out of wells, lost value of property after oil and gas reserves are removed, among others.  These tax deductions are otherwise known as subsidies that lower the costs of production.  The Obama proposal plans to eliminate these tax deductions, essentially returning their corporate profit taxes back to their pre-2005 rates.  Now if you are Exxon Mobile, a company that has reported the largest quarterly net income on the planet, the elimination of corporate profit tax deductions may seem like a tax increase especially when compared to last year, or 2008.   But the Administration is really talking about removing tax deductions, deductions that were difficulty to justify in the first place, and requiring them to pay taxes like they did prior to this act.

Second, the API claims that "raising taxes" on the oil and gas industry will cost America jobs.  It may relative to last year, but not on net.  The statement has no context unless you talk about the potential jobs lost in years 2005-2010 that resulted from other spending cuts or other tax increases necessary to offset their tax deduction.  Actually, it is more likely that the government just borrowed the money they gave to the oil and gas industry from 2005-2010.  Does it make you feel any better that we pushed the cost of their tax deductions into the future, with interest? Also, you cannot just talk about jobs lost in oil and gas without talking about job increases in nuclear power which has been earmarked for the taxes collected from oil and natural gas industry.  And what about alternative energy markets?  These markets have been at a competitive disadvantage relative to oil and gas energy as a result of the tax subsidies.  Any microeconomics student knows that when the price goes up for one good, the demand for its substitute increases.  Increased demand for alternative energy means jobs and business opportunities.

Lastly, the subsidies to oil and gas keep prices lower and some think that's great for consumers.  But this comes at the expense of the environment and our national security.  I thought most of us were on board with the idea that we wanted to get off our reliance on oil?  The tax subsidies keep prices artificially low, adding to our reliance and hurting the opportunities for products and businesses who use alternatives. Also keep in mind that the artificially lower oil and gas prices come at the expense on other tax increases, reduced government spending, or more national debt, all of which translates into a higher price we all share.  Lastly, keep in mind that those lower oil and gas prices are really helpful to the big industrial users of energy, more than residential users, and that we pay a higher price because the tax subsidies are paid with our tax dollars as individuals, not corporations, provide the bulk of government revenue.

I wonder if the people in the ads would reconsider if they just thought about the economics.