Saturday, March 10, 2012

Peter Schiff Wrong On Manufacturing & Trade Deficit

Commenting on yesterday's U.S. economic numbers, which showed an increase in employment but also in the trade deficit, Peter Schiff more or less correctly wrote that this showed that the upswing had an unsound basis. To the extent he means that the increase in the trade deficit is a symptom showing that it is driven by the 9.6%  gain in money supply and a 12.2% increase in commercial & industrial loans , increases that are unsustainable, he is right.

However, after that he makes false assertion about manufacturing and trade:

Despite some marginal improvement in manufacturing employment, new hires have been overwhelmingly in the service sector. We need a shrinking service sector and a shrinking trade deficit. As it is, newly employed Americans are spending money on imported products that America should be producing.
The trade figures are evidence that our spending has increased while our economy has not. It is also shocking to consider that we are importing more with 8.3% unemployment than we were five years ago when unemployment was near 5%. I can only imagine how large the deficit would be if we had even more service sector jobs.

This is wrong in so many ways. A shrinking service sector would be a really bad thing because services constitute wealth, just like goods production. And secondly, there is no connection between the sectoral structure of the economy.There are a lot of services that can be and are in fact exported to a large extent, and there is nothing that says that income generated from services sold to domestic customers must be used on imports rather than domestically produced goods to any greater extent than income generated from domestic manufacturing

One example of this is Hong Kong. Hong Kong is one of the most, if not the most, service oriented economies in the world with 93% of its economy being in the service sector and only 1.8% in manufacturing (the rest is almost all construction and utility (electricity etc.) production, only 0.1% is fishing and agriculture) as almost all Hong Kong manufacturers have moved their production to mainland China. By contrast, the service sector is only about 65% of GDP in the United States. If Schiff's trade deficit theory was correct, then Hong Kong would have an enormous trade deficit.

But while Hong Kong does indeed have an enormous  trade deficit in goods, HK$436 billion (US$56 billion), roughly 23% of GDP it has an ever greater surplus in services, HK$507 billion, slightly less than 27% of GDP. Its overall trade surplus of nearly 4% of GDP is almost as large proportionally as America's deficit.


Post a Comment

<< Home