What's In A Dollar

SEARCH BLOG: CURRENCY

Are currencies being manipulated by Japan and China to support their trade policies?

With China, it's a no-brainer. The world acknowledges that is the case and China's official policy of pegging the yuan to the dollar is the mechanism.

Japan doesn't have that official policy, but look at the data:


Since 1987, the yen has fluctuated in a narrow value band versus the dollar despite tremendous growth in Japanese exports that should have raised its value versus the dollar (compare the trend prior to 1987).

Perhaps the automobile manufacturers have a good case. From Forbes.com:

U.S. automakers claim that the Japanese government is suppressing the value of the yen to an artificially low level to give its manufacturers an edge. GM’s Wagoner has complained loudest about inaction on the administration's part on this issue. Automakers believe currency exchange rates should be established in the floating market, not by government intervention.

Favorable exchange rates provide a huge profit windfall for companies like Toyota Motor (nyse: TM - news - people ), Nissan Motor (nasdaq: NSANY - news - people ) and Honda Motor (nyse: HMC - news - people ), while making it that much tougher for GM, Ford and Chrysler to compete.

"If GM, Ford and Chrysler were fully competitive with the Japanese in every other respect, the exchange rate would still put them at a crushing disadvantage," says Laurie Harbour-Felax, author of a study that analyzes Detroit's competitiveness.

The study finds that for every one-point change in the value of the yen against the U.S. dollar, Japanese automakers gain or lose $174 per vehicle. So this year's depreciation of the yen from 107 to 118 has resulted in a windfall of $10.5 billion for Japan’s Big Three automakers. GM says Toyota alone gets a $3,000 advantage on small cars and $9,000 on Lexus luxury cars. That money is plowed back into research and development, as well as new factories, including some in the U.S.

Indeed, when Toyota recently reported a 36% profit gain, to $6.7 billion, for the six months ended Sept. 30, the company said favorable currency rates accounted for an unexpected $1.6 billion gain. Japanese automakers say their companies are seeking to minimize exposure to currency swings by building plants in North America

Immigration - Legal or Not... Here We Come

SEARCH BLOG: IMMIGRATION

One of the current political hot buttons, not just in the U.S., is illegal immigration.

It may not be readily apparent to some, but mass movements of population groups have been going on for thousands of years. Of course, then they were call invasions. The concept of immigration seems to be a more modern one.

Invasion is generally regarded as a violent, chaotic process; in established nations, immigration is seen as more controlled and orderly. But the lines appear to be fading between the two.

In Europe, many eastern Europeans and Middle Easterners have taken residence in north and western Europe where economic opportunity seems greater. Some come legally; some not. Many attempt to fit into their new societies; others not only resist, but actively reject the values and traditions of their new homes. The result is increasing tension about and activism against recent immigrants.

The N.Y. Times reports that Texas lawmakers want to push through bills that "would deny public assistance and other benefits to the children of illegal immigrants, tax money transfers to Mexico and the rest of Latin America and sue the federal government for the costs of state border control." In the U.S., more than 1 of every 3 immigrants is "illegal."



It appears that while resistence to change may be unreasonable at times, resistence to chaotic change may be reasonable and necessary... especially in the eyes of those who end up paying for the chaos. There appears to be a flip side to "cheap labor." The issue is what is a reasonable and necessary response. It looks as if Texas might become a testing ground.

California (hey, dudes) Sues Automobile Manufacturers Over Climate Change

SEARCH BLOG: GLOBAL WARMING

Recently, I wrote about the uncertainties of climate change... global warming specifically.

If you didn't read that post, here is the crux of the issue. Over the course of millions of years, the earth's average temperature has gone through warming and cooling variations in a range of about 10° C. (12° - 22° C). Current estimates are 14° - 15° C and projections are for a 2° - 5° increase; the higher range being considerably less likely in the near future.

The following chart from Dr. Christopher R. Scotese shows the trend ending at the current estimated average temperature of earth (arrow is pointing to it if you can't read the chart).

It may interest you to know that California has passed climate control legislation and is suing automobile manufacturers for having products that produce carbon dioxide and cause global warming.

I see a couple of points:

1. We are presently at the lower end of the temperature range
2. Change has happened quickly in the past without the aid of automobiles

Which leads me to conclude that while California may be politically correct, it probably is not factually correct. Of course, the retort to that is "So what?" And I have to admit that is a good retort when it comes to litigation.

Knock, Knockoff

Here's a good one: the Asians are counterfeiting the stuff the Asians legally make... but have there been any lost jobs there... or is it just the second shift?

Hard to know if its legitimate counterfeiting or illegal counterfeiting in some countries.

Judge Not! or Judge, Not!

Congressman Alcee Hastings is a former U.S. District judge that was impeached and convicted by the U.S. Senate for...

engaging in a "corrupt conspiracy" to extort a $150,000 bribe in a case before him, marking the first time a federal official has been impeached and removed from office for a crime he had been acquitted of by a jury.

He is now being considered for head of the Intelligence Committee by Nancy Pelosi.

So, the corrupt Republicans are out and the corrupt Democrats are in.

It's the unspoken law of politics:

he may be a crook, but he's our crook.

Goverment Regulation

Over at Cafe Hayek, there is a posting and comments concerning the impact of airbag regulations on driver/passenger safety... really part of a larger discussion about the role of the government. The argued position was that the Federal government acted too hastily in establishing regulations for airbags and then discovered later that smaller women and children could be injured or killed by the force of the airbag deployment.

Sam's point that a national safety requirement like air bags is particularly harmful when it turns out to produce unintended consequences (killing women and children, initially, because of the power of the airbags). If one state or one manufacturer had made air bags too powerful, we'd have learned from it and fixed it. But more people die when it's nationally mandated.

Given the choice between deploying a technology that was very good, but not perfect and no use or significantly delayed use of that technology... I would argue that many more people were benefitted than harmed by requiring airbags than making them optional.

Why? Safety equipment is expensive and if a manufacturer tried to take on the marketplace alone by installing seatbelts and airbags and safety-related sensors in its vehicles while others did not, it would incur a significant market disadvantage... perhaps a few thousand dollars per vehicle... versus vehicles that did not have those features.

So what? Those who wanted those features could pay for them. True, but the likelihood that those systems would be installed in low-to-mid-priced vehicles would be much less than higher-priced vehicles. Why? Well, just look at the resistence to seatbelt laws. It took years to increase belt usage even when belt installation was required. What did it show? A large portion of the population a) doesn't understand risks, b) doesn't care about risks, c) isn't willing to pay for risk reduction... pick one. People had to be ticketed for not using seat belts before they were willing to do the logical or reasonable thing.

So, then, why should the govenment intrude on our individual choices with regulation? Simple: the marketplace is generally cost-driven. We have been educated to look for the lowest price, not necessarily understand the whole value proposition. And when it comes to safety or the environment, most individuals seem to use the reasoning that if I am responsible and others are not, then I'm not really accomplishing anything. Besides, "what could happen to me? I'm a good driver."

Sometimes the right thing to do is not necessarily the cheapest thing to do. And sometimes, the right thing to do needs a nudge from the government.

You don't believe that? Well, how many of you have or know of someone who has a circular saw without an electric brake? How many of you have or know of someone who has a table saw and who doesn't use the blade fence because it gets in their way?

A comment from a Cafe Hayek reader:

I would not dispute that seat belts make me safer, but I hate that I can be ticketed for not wearing one. I don't even mind paying for tha added safety, but whether or not I use it is MY business.

Sure.... "Stupidity has its own rewards."

Sometimes... it makes sense to have regulations... to require improvements even when the cost per person is high and the risk per person is low.

Global Warming Proved!

Okay, I got your attention. But NASA says I'm wrong.

I thought last year's hurricane season was the proof... Katrina and the others. But then, this year... nothing. Geez, we just can't rely on anything. And just when I was hoping we'd have a longer golfing season in Michigan.

By the way, you may want to examine the climate history of earth a little closer. The "average temperature" for earth is estimated at about 14° C. Compare that to the range over millions of years (12° to 22° C) and you'll see that the "doomsday" warnings of an increase of 2° to 5° C might be a little hyperbole. Perhaps we are just getting back to "normal?"

After all, if you want to compare it to the ice age, then I guess earth is getting hotter... but who wants to live in an ice age?

Hard Choices

Martin Kelly has some ramblings from Scotland that I read. He also has a "Political Profile" from Blogthings that I thought was neat so I tried it (see right).

I'm not too surprised by the result, although some of the questions left me straddling the fence a bit... I tend to not be an absolutist... but the evaluation required hard choices.

You might want to try it, too (use the link at the bottom of my results).

Worth Viewing

From my son's professional blog.

Social Contracts

There is a common belief (although not necessarily an accurate one) that there is an implied "social contract" that goes something like:

"The problem is to find a form of association which will defend and protect with the whole common force the person and goods of each associate, and in which each, while uniting himself with all, may still obey himself alone, and remain as free as before." This is the fundamental problem of which the Social Contract provides the solution.

If then we discard from the social compact what is not of its essence, we shall find that it reduces itself to the following terms:

"Each of us puts his person and all his power in common under the supreme direction of the general will, and, in our corporate capacity, we receive each member as an indivisible part of the whole."

by Jean Jacques Rousseau; 1762

Translated by G. D. H. Cole, public domain

These simple arguments seem to crystallize the debate that continues throughout our political and philosophical arenas.

• Is there really a "social contract" between an individual and all other individuals in a society... and if so, what are the terms and conditions... what must I do and what can I expect?
• How are my rights as an individual protected?
• What are my responsibilities as an individual toward society?
• What happens to my rights if I fail in my responsibilities?
• What are my rights if society fails in its responsibilities?
• Can my rights be more important than someone else's'?
  

One only has to look at the volume of laws and judicial opinions to see that there is no "real" answer... only efforts to balance the rights of individuals versus the demands of social membership. One has only to look at the spectrum of political rhetoric to see that there are many "possible" answers.

Michigan Voters Say No To Affirmative Action

What happens when the Law of Unintended Consequences is fulfilled?

Affirmative Action, the offspring of the 1964 Civil Rights Act, once meant efforts to help America's Black minority achieve a substantial economic footing after centuries of abuse and discrimination. Initial efforts were intended to address overt roadblocks and covert hindrances. Scholarships, jobs, loans, support programs, and the like were established to address economic problems. Black coalitions were encouraged and established to create a political presence that was effective and representative. Companies created affirmative action programs to mentor Black trainees whose background was deficient in business skills.

While there was resistance, there was acceptance. Something had to be done to redress wrongs and help a significant segment of our population to truly integrate with the rest of society.

Then some strange mutations began, most notably that women were covered by the efforts. While not a "minority" in a population sense, women were now considered an oppressed segment because they were "under-represented" in business, average income levels, education, sports, and on and on. So legal action (Title VII) addressed that. If men had it; women should have it, too. Simple enough.

But then the courts began to find a pervasive discrimination in everything everywhere. So, the only "logical" way to address that was to move beyond prohibiting discrimination to creating outright preferences for Blacks and women... a "temporary" fix until everything was the way it should be. Businesses went from discrimination to non-discriminatory hiring and mentoring to "diversity programs". Universities created different and lower admission standards to increase "diversity." Governments required "representation" in police and fire departments at the executive and supervisory levels.

And a strange thing happened: white males began to make noises about "reverse discrimination." It didn't matter if you were the best qualified; you weren't "diverse." There were statistics to fix.

But government and business and education had bought into "diversity" programs so this temporary adjustment period had to go on... even if it did hurt some white males who had all of the other advantages... even the poor, white males.

Then something stranger happened: a young woman was denied entrance to the University of Michigan law school even though her academic credentials were superior to a Black student who was selected. Wait a minute!!!! This wasn't fair! Women were under-represented in law school, too! Well, sorry miss, a choice had to be made between oppressed groups and your group lost. Race trumped all.

Let's cut to the chase. This woman became the poster child for what was perceived as the civil wrongs of Civil Rights. A law intended to eliminate racial discrimination had become the basis for blatant racial discrimination. The law of unintended consequences was fulfilled.

A "diverse" and unlikely group became the core of an effort to get a proposal on the Michigan ballot that would direct the State to amend its Constitution to:

• Ban public institutions from using affirmative action programs that give preferential treatment to groups or individuals based on their race, gender, color, ethnicity, or national origin for public employment, education or contracting purposes. Public institutions affected by the proposal include state government, local governments, public colleges and universities, community colleges and school districts
• Prohibit public institutions from discriminating against groups or individuals due to their gender, ethnicity, race, color or national origin. (A separate provision of the state constitution already prohibits discrimination on the basis of race, color or national origin.)

The response from business, media, government and educational leaders was immediate and harsh. This was WRONG!

But when November 7 came and went, the voters... 2 to 1... said "this is right."

Two years ago I wrote to the president of the University of Michigan about their admissions program. You can read what I wrote here.

There are ways... and there are ways.

Flags of Our Fathers

Tomorrow, we celebrate Veterans Day. I'd like to suggest that, if you have the opportunity, go see the film "Flags of Our Fathers."

You might be surprised that it is not your run-of-the-mill war action film... although there is enough of that. You will walk away with at least two non-traditional views about Americans and war:

1. Americans are reluctant warriors
2. Perception is reality; facts are not

If you want comedy, don't bother with this film. Otherwise, go see it. Certainly, it is a dramatization of events, but I suspect a good representation. It is one perception and one reality... I wouldn't assume it is all "fact." And stay for the credits.

Election Results

A lot is being written about the War in Iraq as the reason why so many Democrats have been elected to formerly Republican held seats.

I think that there may be a less discussed reason: economics. Here is Michigan, people re-elected a Democrat governor despite the state having the worst economic situation in the U.S. But it's not just Michigan. The northern-tier states... those with the unhappiest economic prospects... are those who are saying that a situation that favors low-priced imports over U.S. jobs is not what they want. Especially when the jobs are being transferred to China where currency manipulation, piracy and counterfeiting of U.S. products and processes, and unethical business practices are the primary reasons for U.S. job losses in manufacturing states.

Now many economists don't believe that thinking is rational or sound. They contend that if China wants to "give" us stuff for far less than it can be made here... why we should welcome their generousity... even if millions of manufacturing jobs get flushed down the toilet. That's just the price for global trade. The real question is: what will we have to trade for those Chinese products in the next ten or fifteen years? They already have research, engineering and manufacturing capabilities that U.S. businesses developed for them. Pretty soon they will have the marketing and sales capabilities. What does that leave us, consumers? And just how do we pay for being consumers?

Simply take out more loans on your home that is losing value daily. Call it a "personal trade deficit."

I Got Mine Versus We Got Ours

I posted this as part of discussion in today's Cafe Hayek:

I think you just struck the heart of the differences:

From your point of view there are NO NATIONAL INTERESTS, only economic decisions that favor you.

From my point of view, there is a national interest in ensuring a competitive system that is not RIGGED by one of the players to irrevocably harm the other players... especially when those actions, on a global scale, weaken the ability of U.S. industries (and suppliers, and associated service industries, and associated professionals, and associated communities) to remain economically viable.

I do not believe that "I got mine" is a viable economic strategy for the members of any group, population, nation, when the rest of the group, population, nation is in jeopardy.

Addendum quote:

So far, the only player guilty of "protectionism" is China which government has been actively working to expand many of its industries through subsidies and other favorable operating conditions.

And that really seems to be working for them. The strategy is relatively simple: create an artificial imbalance that will temporarily benefit some portion of a competitor's industries while gradually eliminating others. Once competition in one sector has been crippled, target another. That way, while the targeted industry is being crippled, the other industries remain silent because they are temporarily benefitted.

It's classic divide and conquer.

But don't worry... you got yours... for now.

The Eve of Destruction

Back in the 1960s, there was a popular anti-war song entitled Eve of Destruction by Barry McGuire.

Paul Craig Roberts writes:

The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a super-economy that is “the envy of the world.” Communications equipment lost 43% of its workforce. Semiconductors and electronic components lost 37% of its workforce. The workforce in computers and electronic products declined 30%. Electrical equipment and appliances lost 25% of its employees. The workforce in motor vehicles and parts declined 12%. Furniture and related products lost 17% of its jobs. Apparel manufacturers lost almost half of the work force. Employment in textile mills declined 43%. Paper and paper products lost one-fifth of its jobs. The work force in plastics and rubber products declined by 15%. Even manufacturers of beverages and tobacco products experienced a 7% shrinkage in jobs.

The knowledge jobs that were supposed to take the place of lost manufacturing jobs in the globalized “new economy” never appeared. The information sector lost 17% of its jobs, with the telecommunications work force declining by 25%. Even wholesale and retail trade lost jobs. Despite massive new accounting burdens imposed by Sarbanes-Oxley, accounting and bookkeeping employment shrank by 4%. Computer systems design and related lost 9% of its jobs. Today there are 209,000 fewer managerial and supervisory jobs than 5 years ago.

No sane economist can possibly maintain that a deplorable record of merely 1,054,000 net new private sector jobs over five years is an indication of a healthy economy. The total number of private sector jobs created over the five year period is 500,000 jobs less than one year’s legal and illegal immigration! (In a December 2005 Center for Immigration Studies report based on the Census Bureau’s March 2005 Current Population Survey, Steven Camarota writes that there were 7.9 million new immigrants between January 2000 and March 2005.)

The economics profession has failed America. It touts a meaningless number while joblessness soars. Lazy journalists at the New York Times simply rewrite the Bush administration’s press releases.

Mr. Roberts resume:

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: paulcraigroberts@yahoo.com. This article originally appeared at counterpunch.org and is published in the Baltimore Chronicle with permission of the author.

Tip of the hat to Martin Kelly.

..

Updated Blog

I spent a good part of today revising the look and content of this blog to, hopefully, make it a little more readable and organized using the new "Blogger beta" version.

One of the really nice features that had been missing previously are "labels" (categories) for each posting. You might want to explore them. One of my favorites is "Futurescape."

How Economists Think

From Cafe Hayek:

Bruce, if all of us are better off by trading with China, where are the victims? Are you saying that at some time in the future, China is going to say "Okay, we now know how to make your products without you. Now go away and we will continue to sell into the US."? If they're going to steal IP, they don't really need anybody's help. Reverse-engineering is a fairly well-developed art. And if it's legal for China to sell something into the US, then it's legal for Iowa to sell it into New York. Are you going to suggest that New York needs to put up protectionist barriers against Iowa?

Posted by: Russell Nelson | Oct 28, 2006 1:59:24 AM

My response:

Russell,

I don't believe I ever made the case that we are all better off dealing with China... others have stated that as their belief.

My position is clear: China represents an economic threat to the U.S. because it is a wholly unethical trader.

If I steal something that you make and then sell it back to you for less than you can make it, does that make it a bargain for you? If you believe so, then we should do a lot of business. I can make you very pleased with those new economics.

The fact that China provides cheap labor in the short run does not offset the economic harm done to businesses that have their products and processes usurped by China. It does not make up for the costs of research and development that are lost as a result of counterfeiters not only destroying the market opportunities in China of those whose products or processes were taken, but also undermining those companies in the U.S. by becoming "competitors" as they sell their knock-offs in the U.S. You might actually read some of the examples I cited earlier rather than giving totally hypothetical examples of how we benefit by being undermined.

What you've basically said is that since the Chinese are going to steal from us, we might as well buy from them to make up for it. Wow, that is really obtuse! Just because a corrupt government in China looks the other way doesn't mean that we should. Or is all fair in economics and war?

I lose your analogy to Iowa and New York completely. Are the Iowa farmers ripping off the research and development and processes and products of the New York businessmen?

Posted by: Bruce Hall | Oct 28, 2006 10:46:14 AM

How China Competes

I have written about how China uses currency manipulation to create a "low-cost labor" image around the world. But there is a more insideous side of China's economic policy: theft.

For those who argue it is simply "free trade" and "good economics" to source in China, perhaps they might want to read the following:

• Inc. Magazine

China's national industrial policy facilitates forced technology transfer to Chinese industries. One new mechanism is the so-called CCC safety certification. Every electronic component or piece of equipment to be sold in China must be submitted to the Chinese government body overseeing the CCC certification. The process requires the foreign manufacturer to give Chinese officials full access to engineering drawings and schematics and to provide a complete finished product for evaluation. In addition, the applicant companies must pay for Chinese officials to visit and inspect their factories outside of China.

• Voice of America
• U.S. State Department
  
• U.S. State Department (2)
• Public Broadcasting System

I'm not sure if those economists are ignoring this issue because it is inconvenient to fit it into their "free trade" philosophy or because they view it as unimportant. Either way, this is an example of how China steals jobs, business, and profits from the world... especially the U.S.

Diesel Power

There was an article about a new turbo-diesel powered car from Honda in The Detroit News today. That was hailed as a breakthrough because Honda has always focused on gasoline-powered cars.

There was also an article about a new, turbo-diesel Mercedes in that same paper. The engine was praised for its power, economy and cleanliness.

The reason I bring this up is two-fold: 1) I had brought up the issue of turbo-diesels as a lower-cost, better performing, more durable alternative to ethanol (E-85) in a discussion yesterday and 2) I have written about this a couple of times in this weblog:

• July 2006
• June 2005

It's not that big of a stretch to understand why. Turbo-diesels offer better mileage and performance than most alternatives and the technology and fuel are readily available. There is also a potential environmental advantage over hybrids: no expensive battery packs to dispose of after they fail.

Sure, diesel fuel is oil based. But diesel engines can cut consumption significantly and be produced in large numbers by all manufactureres. That Mercedes is rated at 26 mpg city/37 mpg highway. Not bad for a larger car considering the numbers for that same car with a gasoline engine is 19/26. That's better than a 1/3 improvement in fuel economy... or a lot of barrels of oil.

And the key word here is clean.

Striking a Nerve

Today was a bit chilly and windy, but I got together with some friends and played golf. Surprisingly, keeping a winter golf hat and gloves on kept me comfortable enough to play and I did reasonably well striking the ball. About an hour into the round, I got a call from home with a message that the BBC (yes, those people in London) wanted me to participate in a discussion panel at a Detroit radio station that would be linked up to their broadcast in England. Apparently, the BBC had gotten wind of my previous post which was also forwarded to the Detroit Free Press which publish an abbreviated version of it. Unfortunately, they only gave me a couple hours notice, so I had to pass on the opportunity.

The subject was the whole cultural conflict between the West and Muslim (read Arab) world as symbolized by the reaction to women wearing a veil during meetings and trials and other public events where a discussion or dialog was supposed to take place "face to face."

It seems trivial, on the surface, for a veil to cause so much concern. But apparently, the veil is striking a nerve in the West as a symbol of what seems to be irreconcilable differences between cultures. Unfortunately, what is perceived as Muslim culture is only the culture, religion and politics as practiced by some Muslims... but that point is a little too subtle for too many. Some is too many, it seems.