Quote of the Week (Outsourcing edition)

My efforts to slowly work down my backlog of drafts in the queue continues with your Quote of the Week. Yes, this article is a few weeks old, but that doesn't make it any more awesome. Kudos to this guy, slow claps all around.

This week's QUOTE OF THE WEEK

"A security audit of a US critical infrastructure company last year revealed that its star developer had outsourced his own job to a Chinese subcontractor and was spending all his work time playing around on the internet. The firm's telecommunications supplier Verizon was called in after the company set up a basic VPN system with two-factor authentication so staff could work at home. The VPN traffic logs showed a regular series of logins to the company's main server from Shenyang, China, using the credentials of the firm's top programmer, 'Bob'... 

After getting permission to study Bob's computer habits, Verizon investigators found that he had hired a software consultancy in Shenyang to do his programming work for him, and had FedExed them his two-factor authentication token so they could log into his account. He was paying them a fifth of his six-figure salary to do the work and spent the rest of his time on other activities."
                                                          - Iain Thompson, The Register

That is awesome. I can't exactly blame the company for letting Bob go, especially since he exposed the fact that he was apparently being overpaid by a factor of five. But if a company can outsource a job to China, why can't the employee do it himself? That's the kind of creativity this country needs! Bravo, Bob.

 [The Register]

Concentrated benefits and dispersed costs

I know, that's the most exciting headline you've ever seen on this blog. But it's also one of the most important dynamics in American politics and economics, and it's one that dominates just about everything that comes out of Washington these days. Thanks to Alex Tabarrok of the Marginal Revolution blog, we've got a nice video that explains what it's all about, focusing on why there's corn syrup instead of sugar in our Coke bottles.



Simply put, the people (farmers) who want there to be corn syrup instead of sugar in our Coke have more to gain (or lose) than the rest of us, so they make the most noise, donate the most money, and generally spend the most time and effort making sure that the laws of the land are written in a way that benefits them, even if it's at the expense of the greater good. The rest of us tend not to have enough of a dog in the fight, so we generally won't take the time to fight back, even if we're aware of the issue at hand (which we often are not). The problem is, sooner or later these little things start to add up in a way that matters significantly to us, but only in aggregate.

This video also provides a valuable lesson on the typical behavior of large companies in response to changes in input cost structure. When one input in the product they create increases dramatically in price, these companies are typically very resourceful at finding ways to replace that input at a lower cost (but similar enough quality). That's how we end up with corn syrup in absolutely every food in the grocery store, that's how all of our manufacturing jobs get outsourced to China and Vietnam (no, it's not about "currency manipulation"), and it's also one of the primary factors holding our official "inflation rate" in check.

Inflation rates are only useful statistics if we assume that the goods we're measuring are 100% the same over time, which they rarely are. Coke is different now than it was 30 years ago (and frankly, even five years ago), and so too are cars, houses, clothing, electronics, and more. That's usually a good thing, but not always. "Low inflation" is not a win for us as consumers if it means that the quality of our products is degrading over time—unfortunately, that's exactly what's been happening right under our noses, with a huge assist from government policies.

Concentrated benefits and dispersed costs—it's great when you're the focus of the concentration, not so great when you're the one bearing the costs... and when those small dispersed costs start piling up, it starts to become a pretty big cost, doesn't it?

[Marginal Revolution]

Song of the Week(end)

For this weekend, I'm going way off the map with your Song. How far off the map? China. Ever heard of Chinese Bluegrass? Me either, but here you go...


Have a good weekend, people.

Clip of the Week

Busy couple of days, so I haven't been posting much. I've got a few ready to roll for tomorrow, so get ready for another "flurry of posts" into the weekend. Until then, it's time for Clip of the Week.

This week had a couple of fun sports-related clips, including this awesome day of soccer over in England. We also had an absurd MLB tirade (bad calls, sure, but easy fella...) and a six-year old kid turning an unassisted triple play. Sign him up.

Also, this girl made her prom dress entirely out of recycled soda tabs. So that's pretty cool, I guess.

But I like to give Clip of the Week to things that make me shake my head, and this... makes me shake my head. This is climber and daredevil Dean Potter, walking a tightrope across China's Enshi Grand Canyon. Don't look down, Dean. Don't ever look down.

Quote of the Week

Well, I was really tempted to give this week's Quote of the Week honors to Patriots' tight end Rob Gronkowski, who responded to the Pats' return trip to the Super Bowl (Gronk's first appearance in the big game) by telling an ESPN Deportes reporter, "Yo soy fiesta". Well said, Robert--you are the meathead's meathead.

But instead, I'm going to follow up on last week's Clip of the Week, in which Jon Stewart exposed some of the horrific work conditions in China that help create our iPhones (and Xboxes, and Playstations, etc...).

This story gained some more traction over the weekend, upon the release of a long New York Times article that examined some of the issues that led to our nation's now-ravished manufacturing base. The piece is fascinating and well-written, and it's frankly a must-read for every American--especially Apple fans.

Those who have read me often know that I am far from an Apple fan--I think Apple is (or, at least, has become) an evil corporation masquerading as the consumer's "fun friend" (note their EULAs), and I don't support their manipulative and exploitative business model at all (even while I admit that many of their products are pretty cool).

That said, Apple is far from unique in its massive use of Chinese labor to create its products--they just happen to be one of the biggest companies, and therefore easiest targets. What I've chosen as this week's Quote of the Week is from the New York Times article, does involve Apple, and it's simultaneously amazing and troubling.

This week's QUOTE OF THE WEEK

"Apple had redesigned the iPhone's screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight. A foreman immediately roused 8,000 workers inside the company's dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day."
                      - New York Times

My first reaction to this anecdote was "wow". The Chinese, with their billion-plus people, simply operate on a different level of scale and speed than we do here in America. It's hard to compete with that, no matter who you are.

But the more I thought about it, the more I began to agree with Yves Smith's take on the matter--if an American company housed its own employees on-site, and was able to force its workers into an immediate 12-hour shift without notice and with nothing more than some tea and a biscuit... wouldn't we have some people complaining that those were conditions amounting to slavery?

There's definitely a problem here when it comes to worker conditions, and I think we risk ignoring the troubling legacy of the Civil War if we continue to ignore these kinds of issues. Yes, slavery is illegal here and in most countries, and it has been for some time. But slavelike working conditions are still very much alive, and we have benefited greatly from them here in the United States (as consumers, not as workers). Is that really something we want to see continue?

[New York Times]

Clip of the Week

Okay, Clip of the Week time...

Even though I really want to post video of Tom Brady's ridiculous night against the Broncos, I'm going to pass on that. I'm also going to pass on going the ESPN "Not Top 10" route by posting this not-quite-goal from U.S. national soccer team player Robbie Findley.

That's because Jon Stewart and Stephen Colbert were on fire (again) this week, checking in with a couple of wildly entertaining segments. The two teamed up to do a fantastic bit of satire in this bit (while also shining light on a horrifically broken political fund-raising system), and I highly recommend watching it.

But I thought Stewart saved his best work for this clip, and therefore it's our Clip of the Week. Ever want to know how your iPhone comes into existence? Jon Stewart lets you know...

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Fear Factory
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook

I've been on record here before saying that our "currency manipulator" tough talk with respect to China is misguided, and I stand by that. We'd be much better served if we cast our attention in the direction of worker rights, which has absolutely nothing to do with the relative value of the dollar against the yuan.

I don't believe that unfair labor practices in China are the only reason that we've lost our manufacturing base--I believe that our monetary and fiscal policy have played a giant role as well--but I do believe that they exist and that they are important to address. We shouldn't tolerate this kind of crap just so that we can have fun toys to play with (no matter how much we may have loved Steve Jobs). Bravo to Stewart for doing such a great job on this topic.

China update

I've been sitting on this one for a while, but it's a pertinent update to pass along given my past rants on the topic of China and the trade wars that our incompetent lawmakers insist on instigating. Per Mish Shedlock (citing Bloomberg),

China announced plans to impose anti-dumping duties on some vehicles imported from the U.S. after failing to block a U.S. tariff on Chinese tires. 

Punitive duties will be as high as 12.9 percent for autos from General Motors Co. (GM) and 8.8 percent for Chrysler Group LLC, China’s commerce ministry said today on its website. The U.S. units of Bayerische Motoren Werke AG (BMW) and Daimler AG (DAI) will face duties of 2 percent and 2.7 percent respectively, it said. 

“The move shows that China is always capable of intervening politically in its markets,” said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler. “The automobile industry is very dependent on China for growth, and there’s doubts about the pace of future expansion.” 

The move to increase import levies comes three months after the World Trade Organization rejected China’s appeal of a ruling backing U.S. duties on tire imports.

China has already shown us that they are more than willing to call our bluff if we insist on engaging them in a trade war, and this is the start of that process. American companies and individuals will suffer greatly from any trade war, whether instituted via direct tariffs or via wrong-headed "currency manipulator" legislation.

Let me say this one more time, with emphasis--our manufacturing industry has been outsourced to China not because of their unfair labor or currency practices, but because of massive domestic inflation caused by overly accommodative monetary policy from the Fed and fiscal policy from Congress.

When commodity and real estate prices (not to mention college tuition rates and health care costs) march inexorably higher year after year, American workers have no choice but to demand higher and higher wages from their employers. Companies therefore have a choice--cave to those demands and raise their end prices to compensate, or else take the jobs elsewhere where workers are able to work for less. They've increasingly chosen the latter, which keeps core inflation statistics down but also guts our nation's manufacturing base.

While there are certainly exceptions, the majority of American companies would prefer NOT to outsource these jobs if given the choice. For a company, outsourcing manufacturing jobs to China means giving up a significant amount of control over intellectual property and quality control, while also dramatically increasing production lead times and therefore making inventory management significantly more difficult. These are NOT GOOD THINGS from a business standpoint, and businesses will therefore only do it if they feel as though it is their only choice. Increasingly, this is the feeling they receive when assessing the potential costs of hiring an entirely American labor force.

If we want to get our manufacturing base back, we need to cut the crap with our unrealistic monetary and fiscal policies. Otherwise, any trade war will have only negative impacts on our domestic economy--recession, inflation, decreased corporate profits, you name it--there is literally no good outcome if we continue to insist on engaging in trade wars with China and other nations.

The trade war has already begun--how far are we going to let it go before addressing the real problems that plague our economy?

[Bloomberg]
(h/t Mish Shedlock)

Not this crap again

Another week, another market meltdown... somebody really doesn't seem to want me to have any free time for the blog these days. But I won't give up that easily--not when an old cause of mine has somehow found a way to creep back into the news.

You'll remember from last year my ongoing tirade about currency and trade wars, and how engaging China in a game of "currency manipulator" chicken was destined to end poorly. I even wrote a letter to my Senators about it, and thought that maybe the issue would fade into the background.

No such luck. With the economy seemingly primed for another leg down, and politicians once again frantically scampering about to shift blame away from themselves, here comes the scapegoating.

After years of trying, Congress is taking another stab at retaliating against what many see as Chinese manipulation of its currency to make its exports to the United States cheaper and U.S. goods more expensive in China.

The Senate is expected to take up legislation Monday that would impose higher U.S. duties on Chinese products to offset the perceived advantage that critics say China gets by undervaluing its currency...

Beijing denies that its exchange rate is responsible for the huge trade deficit that the United States has with China, and it's not clear that U.S. lawmakers have the political will to follow through.

The Senate bill has bipartisan support and is expected to clear a procedural hurdle Monday evening. But intense lobbying against it by American-based multinational corporations and their trade associations could spell trouble for the legislation.

In addition, the Obama administration, like the Bush administration before it, doesn't like the bill, saying quiet diplomacy is a better way to influence Chinese policy and warning that overt penalties could lead to a destructive trade fight.

Sigh. As a reminder, my vicious opposition to this kind of legislation has everything to do with the fact that the loss of manufacturing jobs to China is now and has always been a two-way street. The "undervaluation" of the Yuan and the cheap labor rates that U.S. corporations have enjoyed are among the only factors that have prevented rampant inflation in the U.S. over the last two decades.

The only certain consequence of protectionist legislation like this is that prices of consumer goods will increase overnight. This will ironically do the most harm to those whom it professes to support--the unemployed and the working poor. Inflation in consumer prices is something that we simply can't afford to absorb right now, and protectionist policies like this will have the same effect of the Smoot-Hawley Act, which sent us spiraling deeper into the Great Depression.

Don't believe me? Consider this chart. Higher prices--of oil, food, consumer products, or anything else--are devastating for our economy, especially for those who have been hurt most by the recent economic downturn. For more of my thoughts on the insidious effects of inflation, read this, this, this, this, and this. Or you can just read Mish Shedlock's take on the re-emergence of this zombie bill.

The scapegoating and misdirection plays (don't look here, look over there!) that our politicians insist on utilizing are a huge part of why we're in this mess to begin with, and going back to that same ridiculous playbook isn't going to help. True leadership is not performed by standing on a platform and saying "it's all China's fault"--it's performed by standing up, looking in the mirror, and saying "we're all to blame". And if we don't start realizing it now, we're never going to solve a thing in this country. It's not China--it's you (and me).

Cut this crap out, Washington. Now.

[Yahoo Finance]  
(h/t Mish Shedlock)

China is crazy

China never ceases to amaze and confuse me--despite the fact that I've never been there, and don't plan to go any time soon. The cultural differences between China and the United States are literally too many to list, which leaves me constantly shaking my head. Last week, it was fake Apple Stores in Kunming. This week, it's professional line-standers. Take it away, NPR:

In China, waiting in line sometimes feels like a competitive sport. The overnight queue at the launch of Apple's iPad 2 pales in comparison to the epic waits for certain over-subscribed state-run services.

Earlier this month, people waited four days and three nights to register for low-income housing in the central city of Xian, while admission to a certain Beijing kindergarten in Changping last year required a week-long, round-the-clock queue, for which people set up camp beds along the pavement.

But as with most things, one pragmatic Chinese entrepreneur has found a business opportunity out of adversity.

For the past two years, Li Qicai, 28, has made a career out of waiting in line. What's more, he now outsources the waiting to others. He employs four full-time queuers and a host of freelancers, who, for a cost of about $3 an hour, will do the waiting for you.

"I'm just selling my time for money," says Li. "You don't need any skills, except the ability to suffer. For some jobs, you need to look good. If you want to buy things for rich people, you can't look like a farmer or they'll think you're a scalper."

These are the paotui: literally, the "running legs," or runners. Their job: everything from a 26-hour wait for a limited-edition handbag to something as mundane as making an appointment with a famous doctor.

Paotui companies are springing up across China, fueled by what the Chinese media calls a landuo jingji, or an economy driven by laziness. One factor is China's low labor costs, which are driving China's convenience culture, where even fast-food outlets like McDonald's and neighborhood convenience stores deliver to people's homes.

"An economy driven by laziness"? Why, that sounds positively American!

Awesome. You know, maybe this is the answer to all of our nation's debt and unemployment problems. Since Republicans are apparently entirely unwilling to allow any tax increases on the wealthy, maybe we can just kindly ask our nation's wealthiest to instead hire the poorest of the poor to do menial tasks for them--standing in line, waiting on hold on the phone, sitting in traffic... hey, getting paid just to stand around? It's the American way!

Of course, this time, we'd just be stealing China's idea... but they're making fake Apple Stores, so fair is fair, right? Good talk. Hey, I've got a few extra bucks... anyone wanna go take my car to get inspected? I really don't feel like waiting for that to be done.

[NPR]
(h/t Freakonomics)

Fake Apple stores? Fake Apple stores.

Many months ago, I wrote a post (and a series of follow-up posts) about the "unintended consequences of globalization", focusing at times on the budding trade war/currency war with China over "unfair" trade practices. While the harsh political rhetoric toward China that dominated the headlines last fall may have subsided (to be replaced by harsh rhetoric surrounding debt ceilings--how quickly we move on), the underlying issues most certainly have not.

One of the issues with globalization that I did not write much about--but that is no less important--is the issue of counterfeiting. CNBC recently aired a long piece on the issue of counterfeit goods, estimating that nearly 7% of all global trade was comprised of counterfeit products. Simply put, when companies outsource their production overseas, they lose a certain amount of oversight and take a significant risk of losing their intellectual property rights--IP may be well protected here in the US, but it's the Wild West over in China.

For evidence of the Wild West, look no further than Kunming, China:

The Western news media is replete with pithy descriptions of the rapid changes taking place in China: China has the world’s fastest growing economy. China is undergoing remarkable and rapid change. This represents a unique moment for a society changing as quickly as China.

You probably read such things in the paper every day – but if you have never been to China, I’m not sure you know quite what this means on a mundane level. As I’ve mentioned elsewhere on this blog, in the 2+ years that RP and I have been in our apartment, much of the area around us has been torn down, rebuilt, or gutted and renovated – in some cases, several times over...

So when we strolled down a street a few blocks from our house a couple weeks ago, I was only sort of surprised to see this new place, one that any American of my generation can probably recognize instantaneously:

It’s an Apple store!

Or is it?

RP and I went inside and poked around. They looked like Apple products. It looked like an Apple store. It had the classic Apple store winding staircase and weird upstairs sitting area. The employees were even wearing those blue t-shirts with the chunky Apple name tags around their necks.

We proceeded to place a bet on whether or not this was a genuine Apple store or just the best ripoff we had ever seen – and to be sporting, I bet that it was real...

You have already guessed the punchline, of course: this was a total Apple store ripoff. A beautiful ripoff – a brilliant one – the best ripoff store we had ever seen (and we see them every day). But some things were just not right: the stairs were poorly made. The walls hadn’t been painted properly.

Apple never writes “Apple Store” on it’s signs – it just puts up the glowing, iconic fruit.

The name tags around the necks of the friendly salespeople didn’t actually have names on them – just an Apple logo and the anonymous designation “Staff”. And of course, Apple’s own website will tell you that they only have a few stores in Beijing and Shanghai, opened only recently; Apple famously opens new stores painstakingly, presumably to assure impeccable standards and lots of customer demand.

Is this store a copy of one of those in Beijing? A copy of a copy in another Chinese city? A copy of a copy of a copy?! While you’re pondering that, bear in mind: this is a near-perfect ripoff of a store selling products that were almost unknown when we first came to China. My white MacBook was likely to draw only blank stares or furrowed brows as I sat gnashing my teeth trying in vain to get a piece of Chinese software to run on it.

Wow. I've heard plenty about counterfeit goods (and, if we're being honest, even purchased some of them on street corners in Manhattan), but this is the first I've heard of an entire counterfeit store. That takes a whole new level of dedication, of research, and most importantly, of boldness. Check out some more of these pictures from the blog:

Crazy stuff.

Of course, like counterfeit goods, some counterfeit stores are better than others. The authors of the piece found several fake Apple Stores in their neighborhood, including this one with a careless typo:

It's hard to imagine that this is what Apple had in mind when it started shipping its production overseas, but this is one of the unseen costs of offshoring jobs (and, of course, yet another unintended consequence of globalization).

No word yet on whether the industrious (and morally relativist) Chinese have begun work on a ripoff of Manhattan's famous 59th Street Apple Store. Stay tuned...

[BirdAbroad]

Update on an old theme

If you've been reading me for a while, you might remember my long-running diatribe against the various calls from Washington to brand China as a currency manipulator and to impose trade sanctions as punishment. That line of news went quiet for a while, in large part because the Treasury Department delayed its expected announcement on the matter indefinitely.

This past Friday, quietly, the Treasury finally made its long-awaited (long-forgotten?) statement, as Bloomberg notes.

The U.S. declined to brand China a currency manipulator while saying its No. 2 trading partner has made “insufficient” progress on allowing the yuan to rise.

China should follow through on President Hu Jintao’s commitments to allow more exchange-rate flexibility and boost domestic demand, the Treasury Department said in a report to Congress yesterday on foreign-exchange markets.

The yuan “remains substantially undervalued,” according to the report, which was originally due in October and says no major trading partner meets the legal standard of improperly manipulating its currency. “It is in China’s interest to allow the nominal exchange rate to appreciate more rapidly.”

Not surprisingly, some of the windbags in Washington still weren't convinced or satisfied.

Senator Charles Schumer, Democrat from New York, said Congress needs to take bolder action. “It’s as plain as the nose on your face that China manipulates its currency,” he said after the report was released. “It’s just as plain that the only way to address this problem is for Congress to act....

Senator Sherrod Brown, an Ohio Democrat who has been among the lawmakers pushing for a tougher U.S. stance on the yuan, said the currency’s progress is “inadequate.” Senator Max Baucus criticized the “failure” of Treasury to label China a manipulator. Both senators called for Congress to act this year.

Of course, someone should probably remind Sen. Schumer that it's also as plain as the nose on his face that the House and the Senate are not, in fact, their own branches of the federal government--but I digress.

Treasury Secretary Timothy Geithner has certainly had his failings--on this issue and others--and I don't typically approve of much that he has done since taking his current position in January 2009. But on this topic, he certainly understands the dynamics at play much better than our cantankerous friends in the Senate, and he therefore recognizes the need to tread lightly. He has taken a measured approach with regard to China and its currency, which is the only rational course. Acting brashly and pounding our chest will only end in economic pain for our country one way or another, something that our Senators are still devastatingly slow to realize. Hopefully they will come around.

[Bloomberg]

Quote of the Week

Man, it is a SLOW news day (and week)... so I'm just gonna go ahead and fast-forward right to the Quote of the Week. Maybe there will be some news worth writing about later today, maybe we're just done with news until 2011. I don't know.

So, enjoy your QOTW anyway, just in case... it comes courtesy of Pennsylvania Governor Ed Rendell, who--like our friends at Deadspin--wasn't too happy about the NFL's decision to postpone Sunday night's Eagles-Vikings game until tonight due to the weekend blizzard (which was bad, I guess, but nowhere near the worst I've seen around here... it wasn't really that much worse than the weather I endured at the Pats-Bears game in Chicago earlier this month. But I digress).

This week's QUOTE OF THE WEEK

"We've become a nation of wusses. The Chinese are kicking our butt in everything. If this was in China do you think the Chinese would have called off the game? People would have been marching down to the stadium, they would have walked and they would have been doing calculus on the way down."
                        - Pennsylvania Gov. Ed Rendell

This is fantastic. I love the concept of Chinese people "marching" to a football game while doing calculus and solving world hunger.

For me, I just hope this two-day delay doesn't mean that Brett Favre decides to have another "miraculous recovery" and play tonight. That man needs to disappear. Oh, so does LeBron. That is all.


[ESPN.com]

Quote of the Week

Though I already awarded Scott Adams with an honorary (and well-deserved) "Quote of the Week" yesterday, I didn't want to let a Tuesday pass without an official Quote of the Week.

If you've been reading me consistently, you'll remember my rant against the Fed last Thursday. Didn't wanna do it... felt I... owed it to them.

At any rate, it seems like a few people around the world have agreed with my rant, and chimed in as well. The Germans always do a great job of cutting through the B.S., so I thought I'd give them the honor of this week's semi-self-congratulatory Quote of the Week.

This week's QUOTE OF THE WEEK

"With all due respect, U.S. policy is clueless." -German Finance Minister Wolfgang Schäuble

To be fair, some translations of Schäuble's comments ("Bei allem Respekt, mein Eindruck ist, die Vereinigten Staaten von Amerika sind ratlos") are a bit more charitable. The key word, "ratlos", could more directly be construed to mean "helpless", "at a loss", or "stumped".

With my background in German, I'll agree that the popular translation is a little shaky, and definitely more direct and damning than Schäuble's untranslated phrase. But nevertheless, his remarks in combination with China's perturbed response (and this morning's downgrade of U.S. sovereign debt by a prominent Chinese rating agency) makes it clear that the world is not exactly on board with Mr. Bernanke's experimental policies.

Remember, the whole world owns U.S. debt, and they won't stand idly by as we try to inflate our way out of it. What began as mild annoyance among the global community this week could easily morph into something entirely different and much more damaging. I hate to be the bearer of bad news, but this is decidedly bad news.


[CNBC]

Senator Webb responds

In the name of journalistic fairness, I am posting Jim Webb's response (via e-mail) to my letter from two weeks ago regarding China and currency policy. While I don't agree with everything he says (I actually do agree with several of his big-picture views, but there are VERY important departures which lead us to dramatically different conclusions), I appreciate that he (or someone in his office) took the time to respond. No word yet from Mark Warner, but I'll similarly post his response if and when I receive one.

Dear Mr. Powers: 

Thank you for contacting my office regarding international trade. I appreciate your taking the time to share your specific views and concerns with me. 

Since entering the Senate, I have worked to ensure U.S. trade policy prioritizes workers' rights at home and abroad, and advances the geopolitical and economic interests of the United States.  I believe that properly constructed trade agreements benefit our country and our workers.  Trade agreements that truly focus on fair trade-as well as free trade-provide consumers with goods and services at more affordable prices, make our exports easier to sell abroad, and promote important foreign policy objectives. 

For example, I have called for a prompt resolution of outstanding issues related to the U.S.-Korea Free Trade Agreement. Passing this agreement will help industries in Virginia and will be a strong affirmation to our ally, the Republic of Korea, and the world of the U.S. commitment to security and prosperity in the Asia Pacific region, open markets, and the rules-based trading system. 

I also strongly support the enforcement of trade laws to combat unfair practices by our nation's trading partners. I have encouraged the U.S. Department of Commerce and the U.S. International Trade Commission to maintain tariffs on imports that are sold at prices that violate trade rules or are unfairly subsidized, damaging industries in Virginia and across the country. I have urged the Office of the U.S. Trade Representative to aggressively defend U.S. economic interests before the World Trade Organization. 

In addition, I am an original cosponsor of the Currency Exchange Rate Oversight Reform Act of 2010 (S. 3134), which provides for meaningful sanctions to be applied to countries, such as China, that manipulate their currency. China's currency is significantly undervalued, severely limiting U.S. exports to China and, most importantly, causing job losses here at home. Experts estimate that an increase in China's currency of 20 percent would decrease the U.S. trade deficit by $50 billion to $120 billion. 

To help workers in Virginia who have lost their jobs due to trade, I have supported petitions for assistance through the Trade Adjustment Assistance program, which provides worker training and other valuable assistance. 

As the U.S. Senate continues to address trade issues, please be assured that your views will be helpful to me and my staff.  I hope that you will continue to share your views with us in the years ahead. 

I would also invite you to visit my website at www.webb.senate.gov for regular updates about my activities and positions on matters that are important to Virginia and our nation. 

Thank you once again for contacting my office. 

Sincerely, 

Jim Webb

United States Senator

The more I read it, the more it comes across as a bit of a form letter, regurgitating his talking points on the catch-all issue of "international trade" without specifically addressing any of my concerns. But so be it. A response is a response, and I'm more than willing to post it here without directly arguing with his points. I'll save that for a different post.

Celebrating 100 posts in style...

This is my 100th post on this blog, since I started it two months ago. The previous 99 posts total over 42,000 words. That's a lot. I have too much time on my hands.

At any rate, just for kicks, I went to Wordle and ran through the text of all my previous posts to create a word cloud. Apparently I like to talk about the market, the government, and China. And debt. Good talk, thanks for reading.

Hooray sanity!

As I keep on pounding the drum for us to ease up on the political rhetoric surrounding China, today it seems that someone agrees with me that this is a sensitive issue. Per Reuters,

The Obama administration plans to delay a decision on whether to label China a currency manipulator, a move long demanded by many U.S. lawmakers but also a potentially big wrench in an important relationship. 

A Senate aide told Reuters the Treasury Department would hold off releasing its semi-annual report on the currency practices of U.S. trading partners. 

It was not immediately clear how long the delay would be. Industry sources had said they expected the report to be unveiled at 1 p.m. EDT Friday.

Thank God. That's a good first step. The next step is killing this bill. This is an incredibly delicate situation with serious implications across a variety of economic issues. Right now we need very careful diplomacy, not reckless political grandstanding. Hopefully today's decision hints at a recognition of that need for diplomacy.




[Reuters]

Clip of the Week

Alright, time to end this Thursday on the proper note...with a cartoon. Yup, it's Clip of the Week time, and this time around it's not Jon Stewart or Stephen Colbert. I know you're shocked.

I gave some serious thought to posting the entire "It's a Jersey Thing" episode of South Park from last night (an instant classic), but I'm going to stick to my guns and post my original choice. Given my obsession with China lately, I think it's particularly apt.

The Simpsons enlisted the help of underground street artist Banksy to draw up this week's couch gag. It was dark, incisive, and basically amazing. I give credit to Fox and the producers of The Simpsons for airing it (it's not exactly friendly to them), and credit to Banksy for awesomeness. Bravo.

The letter I wrote to my senators

It's been years since I wrote a letter (or even an e-mail) to one of my elected representatives. In fact, the last time I did so had very little to do with government or politics--it was a letter to Sen. Ted Kennedy telling him how disappointed I was that he had caved to political pressure and severed ties with my beloved Owl Club.

So it's no small matter that I chose to break my silence this week, writing a letter to both Virginia senators urging them to vote against legislation aimed at pressuring China to revalue its currency. With the Senate apparently "poised to act" on this bill (I had previously expected them to wait until after the election), I felt that sending both a letter and an e-mail was absolutely vital and urgent.

This bill is government at its worst. It is pure political grandstanding, and it will have incredibly dangerous consequences. My letter honestly could have stretched to 4 or 5 pages with all the complexity of our current relationship with China (and the power that they hold), but I kept it short for our apparently mentally-challenged members of the Senate.

If you've been reading my posts for a while, you already know where I stand. But I think this is one of the most dangerous pieces of legislation to move through our government in many years, and that's saying a lot.

Dear Senator (Webb/Warner),

I am writing to you today to express my strong opposition to current legislation aimed at pressuring China to revalue its currency. The legislation is drawn up on false premises, caters to the whim of the xenophobic, and threatens our nation's economy at a time when it is at its most vulnerable. This bill represents government at its very worst--scapegoating foreign governments for our own problems, to the benefit of politics alone. This political grandstanding is extraordinarily dangerous, and as a result you must vote against passage of these proposed currency sanctions against China.

First, as to the issue of "false premises" mentioned above, I direct you to economist and investment advisor Mish Shedlock, who summarizes the key issues in an admirably accessible manner. He writes, 

"What would happen if China raised prices 20% across the board via an export tax or revaluation of the Yuan, starting tomorrow?

For starters, the Chinese economy would implode overnight along with collapsing exports. U.S. importers such as Wal-Mart, Target, Best Buy, and Kohl's would seek new supply chains from Vietnam, Korea, Singapore, or India, but that would take time. In the meantime, U.S. stores would run out of some goods. U.S. consumers would go on strike until the supply chains were restored. Hundreds of small businesses would go bankrupt. Finally, businesses going bankrupt would pressure the banking system."

This is what we risk so that we can supposedly "save" manufacturing jobs. But this premise is faulty. Manufacturing jobs will return to the United States ONLY IF there is no cheaper alternative. Vietnam, India, and even Germany are currently still better options for our corporations (even despite our rapidly declining dollar), and they will turn there first for their manufacturing labor.

Even if those jobs eventually do return to the United States, it will serve only to increase those corporations' input costs, forcing them to raise consumer prices and feed the inflation that our weak dollar policy has already begun to cause (see the recent rapid increase in commodity prices, from crude oil to corn to oats to gold). For various reasons, inflation always hurts the poorest Americans most, as increases in food costs directly hit their bottom line. Unlike richer Americans, they don't have the option to trade steak for hamburger or organic milk for non-organic milk---they already have done so.

In addition, these "saved" manufacturing jobs will come only at the cost of dock workers unloading ships and truckers hauling goods from the west coast throughout the nation, not to mention the harm done to employees of Wal-Mart, our nation's largest non-government employer. Any projections of a positive jobs impact from this currency revaluation are grossly overoptimistic.

Therefore, AT BEST, the inflation caused by this legislation will perversely do the most harm to the very workers whom it is purporting to help. At worst, this turn toward protectionism will spark an international trade war reminiscent of the Smoot-Hawley Act, which sent the world spiraling deeper into the Great Depression. This is a price that should be deemed far too high to pay for the political "win" that Washington politicians may be seeking during this election season. This legislation must not pass. We must learn the lessons from past generations and refuse to repeat the sins of Smoot-Hawley.

Sincerely,

Evan J. Powers

Hopefully my words will not fall on deaf ears. But either way, I urge you to do something similar. This legislation is just that dangerous. I've also posted below all of my previous rants on the topic. This is not a good situation.

[9/17/10: The Unintended Consequences of Globalization]
[9/23/10: Globalization Issues Heat Up]
[9/30/10: Begun the Trade Wars Have]
[9/30/10: Uh oh... (more from Mish on the trade wars)]
[10/8/10: A Great Summation of the Budding Currency War]

A great summation of the budding currency war

Things are beginning to get a bit strange over in the currency world, as I've been mentioning for a while now. There hasn't been a lot new to report besides government posturing, but I ran across a piece this morning that summed things up very well.

In a post at benzinga.com, investment strategist J.S. Kim wrote that (emphasis his):

US Secretary Treasury Tim Geithner effectively blamed China for the world's monetary crisis when he recently stated, of China's strong yuan policy and resistance to devaluing the yuan: “it's unfair to countries that were already running more flexible regimes and let their currencies appreciate.” ...

You are 100% wrong Tim. It's unfair to blame other countries for the attacks on American people's wealth instigated by the US Federal Reserve. What people fail to understand about currency exchange rates is the theory of currency relativity. To say that other countries like Japan “let their currencies appreciate” is a total distortion of facts. Japan's yen has increased a mind-boggling 51% from about 124 yen to the dollar to just 82 yen to the dollar in three years is primarily due to the US Federal Reserve's destruction of the US dollar. The Thai baht has massively appreciated nearly 41% from 42 baht to the US dollar to 29.85 baht to the US dollar in just 6 years not because the Thai economy is booming but because the US dollar has been crashing.

To say that countries have “let their currencies appreciate” is comparable to saying that British colonists “let Africans ride their ships” to America during the slave trade.

This analysis is dead on, and the last line is particularly incisive. The Fed has been doing everything it can do debase the dollar, dragging other nations kicking and screaming into relative currency appreciation. It's all been done in a transparent attempt to make American goods look more competitive in global markets, and to close the massive trade gap that we have ignored (and benefited from) for decades.

Now other governments are fighting back, and America is crying foul. It's fair to ask here...who's the real "currency manipulator" in this high-stakes game of currency chicken?

[Benzinga.com]

Uh oh... (more from Mish on the trade wars)

I heavily excerpted a Mish Shedlock blog post in my last post, so that I wouldn't personally have to go ballistic in a full-on rant against ill-advised tariffs on Chinese goods and the trade war they will create (I might yet, stay tuned).

In a separate blog post, Mish points to a Bloomberg article that hints at a potentially insidious side effect of our posturing against China. Per Bloomberg,

A generation after Chinese leader Deng Xiaoping made mastering neodymium and 16 other elements known as rare earths a priority, China dominates the market, with far-reaching effects ranging from global trade friction to U.S. job losses and threats to national security.

The U.S. handed its main economic rival power to dictate access to these building blocks of modern weapons by ceding control of prices and supply, according to dozens of interviews with industry executives, congressional leaders and policy experts. China in July reduced rare-earth export quotas for the rest of the year by 72 percent, sending prices up more than sixfold for some elements.

Military officials are only now conducting an inventory of where and how U.S. suppliers use the obscure but essential substances -- including those that silence the whoosh of Boeing Co. helicopter blades, direct Raytheon Co. missiles and target guns in General Dynamics Corp. tanks.

“The Pentagon has been incredibly negligent,” said Peter Leitner, who was a senior strategic trade adviser at the Defense Department from 1986 to 2007. “There are plenty of early warning signs that China will use its leverage over these materials as a weapon.”

Great. Now not only does the trade war with China pose significant risks to our fragile economy, it also compromises our national security. These rare earth elements, in addition to guiding laser-guided missiles, are also critical components in solar panels and motors for hybrid cars, meaning that the impact of a trade war on our economy could be even more far-reaching than we may appreciate.

Seriously, folks, before initiating a trade war with China on shaky economic grounds, think very long and hard about the long-term consequences. We don't have NEARLY the amount of leverage with China that we think we have. Or, as "Tyler Durden" over at the Zero Hedge blog so diplomatically said,

Somehow, because [the tariffs bill] was framed as a "jobs issue", everyone in Congress went full retard and confirmed they have not the first clue about how Economics actually works. But yes, please revalue the Yuan: the next thing will be exploding prices at Wal Mart, which have so far successfully masked the fact that the US has been exporting staple product inflation. We wonder how those same "workers" on whose behalf this law was allegedly passed will feel when their bill anywhere is double what it used to be... Not to mention that their currently unemployed status will certainly not have changed.

Couldn't have ranted better myself. Posture against China, force corporations to export all our labor to the next cheapest alternative like Vietnam or Germany (because it sure as hell isn't the U.S.), create price inflation without actually creating or saving any jobs, and compromise national security in the process. That's amazing work, really it is. That's why we pay you the big bucks, D.C.

[Bloomberg]
[Zero Hedge]