The $1.4 Trillion Question

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. But because of political tensions in both countries, and because of the huge and growing size of the imbalance, the arrangement now shows signs of cracking apart.

The $1.4 Trillion Question (James Fallows, The Atlantic)

Stagflation on the way?

I've been one of those on the stagflation bandwagon, deeply concerned about the weakness of the dollar, the likelihood of the Fed continuing to reduce rates in the face of locked-up credit markets, rising food and energy prices and persistent and rising deficits. This is a toxic macroeconomic cocktail I've written about and which has been the source of much worry. And to add insult to injury, a rash of economic statistics were released last week that generated articles this weekend that only served to reinforce my Droopy Dog attitude towards the US economic landscape. So I'm here to share the pain.

Information Arbitrage: My Gloomy Thesis Is Playing Out (18 Dec 2007)

Jim Webb on "Class Struggle"

The most important--and unfortunately the least debated--issue in politics today is our society's steady drift toward a class-based system, the likes of which we have not seen since the 19th century. America's top tier has grown infinitely richer and more removed over the past 25 years. It is not unfair to say that they are literally living in a different country. Few among them send their children to public schools; fewer still send their loved ones to fight our wars. They own most of our stocks, making the stock market an unreliable indicator of the economic health of working people. The top 1% now takes in an astounding 16% of national income, up from 8% in 1980. The tax codes protect them, just as they protect corporate America, through a vast system of loopholes.

Incestuous corporate boards regularly approve compensation packages for chief executives and others that are out of logic's range. As this newspaper [The Wall Street Journal - bc] has reported, the average CEO of a sizeable corporation makes more than $10 million a year, while the minimum wage for workers amounts to about $10,000 a year, and has not been raised in nearly a decade. When I graduated from college in the 1960s, the average CEO made 20 times what the average worker made. Today, that CEO makes 400 times as much.

In the age of globalization and outsourcing, and with a vast underground labor pool from illegal immigration, the average American worker is seeing a different life and a troubling future. Trickle-down economics didn't happen. Despite the vaunted all-time highs of the stock market, wages and salaries are at all-time lows as a percentage of the national wealth. At the same time, medical costs have risen 73% in the last six years alone. Half of that increase comes from wage-earners' pockets rather than from insurance, and 47 million Americans have no medical insurance at all.

Manufacturing jobs are disappearing. Many earned pension programs have collapsed in the wake of corporate "reorganization." And workers' ability to negotiate their futures has been eviscerated by the twin threats of modern corporate America: If they complain too loudly, their jobs might either be outsourced overseas or given to illegal immigrants.

"Class Struggle"; Senator-Elect Jim Webb (D-VA), writing in The Wall Street Journal, November 15, 2006

Capitalism's next stage

The rise of big business is one of the seminal events in American history, and if you want to think about it intelligently, you consult historian Alfred D. Chandler Jr., its preeminent chronicler. At 88, Chandler has retired from the Harvard Business School but is still churning out books and articles. It is an apt moment to revisit his ideas, because the present upheavals in business are second only to those of a century ago.

Until Chandler, the emergence of big business was all about titans. The Rockefellers, Carnegies and Fords were either "robber barons" whose greed and ruthlessness allowed them to smother competitors and establish monopolistic empires. Or they were "captains of industry" whose genius and ambition laid the industrial foundations for modern prosperity. But when Chandler meticulously examined business records, he uncovered a more subtle story. New technologies (the railroad, telegraph and steam power) favored the creation of massive businesses that needed -- and in turn gave rise to -- superstructures of professional managers: engineers, accountants and supervisors.

Capitalism's Next Stage - Robert Samuelson, The Washington Post, October 26, 2006

Samuelson thinks that we may be at the end of "managerial capitalism."

I think he's onto something. To quote Alfred Chandler, "All I know is that the commercializing of the Internet is transforming the world."