Neverending Trade Deficits OK?

Moneybox:

according to assentially all sources, Australia has always run a large balance of payments deficit except for one flukey year in the early '70s. At various times different politicians and investors have proclaimed this unsustainable, but it's always been sustained. And it keeps on being sustained even though Australia is currently undergoing a boom of primary commodities exports to China. What's more, despite this never ending trade deficit Australia decided about 20 years ago to stop having recessions which is pretty enviable.

So what's going on?

Two things, I think. One is that Australia is a very respectable country with a stable liberal democracy just like the United States or Germany or Japan. But the other is that Australia has a very fast-growing population. It's growing substantially faster than the American population, to say nothing of Japan or the major European countries. And if you're thinking about savings and investment in the broadest and most generic sense, that's exactly where you want to invest. A country where you can say with confidence that 20 years in the future the same political framework will be in place and there will be much more overall demand for land and goods and services due to the growing population. So because Australia is such a fundamentally sound investment opportunity, it gets to run a trade deficit. And it will always get to run a trade deficit until either it decides to sharply curtail immigration and population growth, or until India's political system strikes rich foreigners as more credible and stable.

Foreigners are willing to lend Australia money (invest in Australia) because it can credibly pay the money back partly due to the growing economy which is growing partly due to its growing population.  One of the only other rich countries that has a stable economy and a growing population is the US and we also have had a current account deficit for decades.  

American Exceptionalism

Will Oremus lists some things that are unusual about America at Slate:

As we celebrate the 236^th anniversary of America’s independence, it’s a good time to reflect on all the things that make the United States the greatest country in the world. Like, for instance … well … hmm.

We’re billed as the land of the free, but we’re actually 47^th in press freedom according to Reporters Without Borders, behind Botswana and El Salvador. We’re 10^th in economic freedom, according to the Heritage Foundation—not bad, but not quite on the level of Canada or Mauritius. We’re 51^st in math and science education, according to the World Economic Forum. We spend by far the most on health care, but can’t crack the top 20 in life expectancy. And while we remain the richest country in terms of gross domestic product, we’re anywhere from sixth to 19^th in per-capita income, depending on how you count. (Plus, no one expects us to hold off China for long when it comes to GDP.)

So what do we lead the world in? If you believe Will McAvoy, the news anchor on Aaron Sorkin’s [fictional HBO series] The Newsroom, the United States is tops in just three things: "number of incarcerated citizens per capita, number of adults who believe angels are real, and defense spending." ...

But come on—don’t we lead the world in anything we can be proud of? Indeed, we do! To celebrate July 4, here is a list of some rather obvious, some surprising, and some genuinely inspiring achievements that put the “exceptional” in “American exceptionalism."

...Legal immigrants. A whopping 35.5 million as of 2005. Our immigration system may be broken, but it’s not as broken as a lot of other countries’ immigration systems.

Generosity. What American decline? The United States jumped from fifth place to first in the U.K.-based Charity Aid Foundation’s latest World Giving Index, which grades countries on three metrics: volunteering, helping strangers, and donating money.

Patriotism. Even if the facts don't always bear us out, we’re still convinced that our country is tops. In a World Values Survey, 77 percent of Americans reported being "very proud of their nationality," more than any other country polled. Well, technically, we were tied for first with Ireland. And the survey in question is from the 1990s. But how else could you explain all those people still singing along with Lee Greenwood every Fourth of July?

Media. We have the most newspapers, radios, television broadcast stations, and hours of television watched per day. Oops, maybe that last one isn’t so inspiring. But hey, it’s a holiday. Go ahead and enjoy the fireworks on your boob tube. In the land of the 47^th-most-free, no one’s going to stop you.

Unfortuntately most of the other items on Will's list are wrong or misleading because they are simply due to the fact that the US has the largest GDP.  For example, the title of Will's article celebrates the fact that the US is the number one in cheese production, but that isn't per-capita and so it is just due to the fact that the US has more people who can afford cheese than any other country.  The US is nowhere near the top in per-capita cheese. Greeks eat over twice as much per capita as Americans and the US isn't even one of the top ten cheese exporters. France is the big cheese there.   And the US is not the most obese.  We are near the top, and the heaviest big country, but there are a few small Pacific-island countries that are even heavier, possibly in part due to their history of regular famines which killed off anyone without fat genes.  

Running a country is different from running a company.

Henry Ford wanted his workers to be able to afford his cars.  But he only sold perhaps less than one percent of his cars to his own workers.  How much of America's production is sold to America's workers?  About 87%.  Only about 13% of US GDP is exported.  And we import about 16% of GDP (meaning that foreigners lend us about 3% of GDP per year to buy more of their stuff).   

One of the ironies of globalization is that very little production is actually traded internationally.  This is mainly because people mostly buy services and real estate which rarely can be outsourced to another country.  In the future, if the global economy continues to become more service-sector oriented, we may trade even less of our production. 

People often think that 'everything is made in China', but that is because of the availability heuristic: images that are readily available when you think about a subject are emphasized more than their actual importance and Americans really do import most of our consumer goods.  But we spend most of our money on real estate, health care, education, restaurants, police protection, etc.    And America exports almost as much stuff as we import, but the kinds of goods that we export are not consumer goods.  We export airplanes, military hardware, and capital goods that foreign businesses buy.  That means that foreign business owners may think of the US as an exporting juggernaut because they picture all the things that they buy from the US, but foreign consumers (most people) do not buy much American production except for cultural goods like movies and music. 

Optimal Currency Area

Some optimal currency area theory and applications on my macro blog.

Manufacturing wages and Inequality

Perhaps the increase in inequality is partly due to the decline in manufacturing.  If manufacturing pays better and it hires fewer people, then that alone will increase inequality.  Plus, the opportunity cost of service-sector work declines as the local manufacturing jobs dry up.  The opportunity cost of being a barber in a small town in Texas was manufacturing before they closed down the factory and now the barbers get lower wages both because their opportunity cost has declined and because their customers have lower wages too. 
Moneybox:

Susan Helper, Timothy Krueger, and Howard Wial forcefully make the case for manufacturing in a Brookings paper (PDF) where one subject of interest is the seeming existence of a wage premium in the manufacturing sector. At different skill levels, manufacturerers pay more:

What I wonder when people point this out is what they think follows from this. Here's one though. In India, a very large segment of the workforce is doing extremely low wage work in the agricultural sector. And agricultural productivity is limited by the availability of land. So insofar as you're able to subsidize the creation of manufacturing work, not only do the people who get the manufacturing jobs earn higher wages—the residual agricultural population earns higher wages too. This off the farm aspect to industrialization has historically been a huge driver of prosperity and I think it's crucially important for political leaders in developing countries to think about it.

Unit Labor Costs

Unit labor costs are basically wages minus productivity. It's the price of labor's output rather than the price of labor.  This is a good measure of inflation and it tracks the CPI fairly well even though it is a very different statistic. 
The Economist: 

the OECD released their quarterly “Unit Labour Costs and Related Indicators”. ...Costs were generally rising in the second quarter, but were up sharply in Norway and Australia. Why does this matter?

Unit labour costs are the best estimate of staffing costs faced by firms. They represent the amount of money needed to pay your staff to make one unit of output, one widget. This is a function of two elements, the cost of the staff—their hourly wages—and the speed at which they make widgets, their productivity. Expressed in growth rates unit labour costs are roughly equal to growth in wages minus the growth in labour productivity, per widget. In America, in the second quarter, unit labour costs increased by 0.8%, this consisted of a 1.0% increase in wages and a 0.2% increase in labour productivity.

The rise in unit labor costs indicates the level of  inflation in America. 

Normally, and especially now, this is not a concern; a little bit of inflation is better than a little bit of deflation. [Most countries] display similar trends.
Contrast that with the situation in Norway and Australia, where rising wages and falling labour productivity are generating unit labour cost increases above 5%. This is indicative of a tight labour market; firms are forced to increase wages to hold onto workers and must occasionally employ lower skilled workers than they'd prefer, leading to decreases in average labour productivity.
So what's up with Norway and Australia? Both economies are heavily dependent on natural resources. Unlike manufacturing jobs, natural resource industries aren't susceptible to offshoring when labour costs soar. You have to mine coal where the coal is.

Menzie Chinn:

The interesting trend since 2001 has been the rise in [price markup over unit labor cost.]

Source: Economic Report of the President, 2012.From this graph, one would be hard pressed to find American business in terrible shape. Productivity has increased, labor compensation growth has been modest, so that it’s obvious where profits have come from. This also means (to me) that there is substantial space for rising wages to be absorbed without a commensurate wage-price spiral.
As I noted in this recent post, rapid productivity growth combined with slow compensation growth has improved American competitiveness. Nominal dollar depreciation over that period emphasized that improvement.

Raising Wages With Charity

The NYT discusses "Foxconn, with 1.2 million Chinese employees, [which] is one of China’s largest employers. It assembles an estimated 40 percent of the smartphones, computers and other electronic gadgets sold around the world."  Foxconn announced that, "it would raise salaries as much as 25 percent, to about $400 a month, ...after an outcry over working conditions at its factories."  The article suggests that this will only work if consumers have sufficient charity.

Plants depend on workers’ being at assembly lines six or seven days a week, often for as long as 14 hours a day. ...For that system to genuinely change, Foxconn, its competitors and their clients — which include Apple, Hewlett-Packard, Dell and the world’s other large electronics firms — must convince consumers in America and elsewhere that improving factories to benefit workers is worth the higher prices of goods.

“This is the way capitalism is supposed to work,” said David Autor, an economist at the Massachusetts Institute of Technology. “As nations develop, wages rise and life theoretically gets better for everyone.  But in China, for that change to be permanent, consumers have to be willing to bear the consequences. When people read about bad Chinese factories in the paper, they might have a moment of outrage. But then they go to Amazon and are as ruthless as ever about paying the lowest prices.”

If consumers' sentiments in favor of Chinese workers does not last, will improvements in Chinese working conditions be temporary too?
Did America develop higher wages than China because our consumers have been "willing to bear the consequences" and decided it is worth paying higher prices for US goods?