The United States in a Global Economy

Brett BurkeyMAEEE, Summer 2008

What is the Global Economy?What is the Global Economy? An international An international marketplacemarketplace (in a very (in a very

broad sense)broad sense) Trade in Trade in GoodsGoods

• Final and intermediate Final and intermediate goodsgoods

Trade in Trade in ServicesServices• OutsourcingOutsourcing• VacationVacation

Trade in Trade in LaborLabor• Immigration …Immigration …

… … legal and illegallegal and illegal

Trade in Trade in CapitalCapital• Foreign direct investmentForeign direct investment• Financial flows: stocks, Financial flows: stocks,

bonds, currenciesbonds, currencies

Topics for TodayTopics for Today

Some facts about the global Some facts about the global economy:economy:• Trade flowsTrade flows• Financial flowsFinancial flows• Labor movementsLabor movements

Is the global economy a threat?Is the global economy a threat?• Should we worry about the trade Should we worry about the trade

deficit?deficit?• Are we becoming too indebted to the Are we becoming too indebted to the

rest of the world?rest of the world?• Are immigrants taking away jobs?Are immigrants taking away jobs?

Buying American?Buying American?

65 % made in America 90% made in America

Ford Mustang Toyota Sienna

Hard to distinguish: American vs. Foreign made goods!

Economic Background: Why are Economic Background: Why are economists in favor of free trade?economists in favor of free trade?

Should Wisconsin grow oranges? Should Wisconsin grow oranges? Should Florida make cheese?Should Florida make cheese?

No and No!No and No!• Wisconsin should Wisconsin should specializespecialize in cheese in cheese• Florida should Florida should specializespecialize in orange in orange

productionproduction• Then trade cheese for orangesThen trade cheese for oranges

Econ Lingo: Opportunity costEcon Lingo: Opportunity cost

WisconsinWisconsin FloridaFlorida

Cheese Cheese productionproduction

Low Low opportunity opportunity

costcost

High High opportunity opportunity

costcost

Orange Orange productionproduction

High High opportunity opportunity

costcost

Low Low opportunity opportunity

costcost

How much orange production does WI give up How much orange production does WI give up to produce one more unit of cheese? Very little, to produce one more unit of cheese? Very little, because oranges don’t grow well in WI.because oranges don’t grow well in WI.

How much cheese production does WI give up How much cheese production does WI give up to produce one more unit of oranges? A lot!to produce one more unit of oranges? A lot!

More Econ Lingo: More Econ Lingo: Comparative advantageComparative advantage

WisconsinWisconsin FloridaFlorida

Cheese Cheese productionproduction

Low Low opportunity opportunity

costcost

High High opportunity opportunity

costcost

Orange Orange productionproduction

High High opportunity opportunity

costcost

Low Low opportunity opportunity

costcost

The country with the The country with the lower opportunity costlower opportunity cost in producing one good has a in producing one good has a comparative comparative advantageadvantage in that good. in that good.• Wisconsin has a comparative advantage in cheese

production => specialize in cheesespecialize in cheese• Florida in orange production => specialize in orangesspecialize in oranges

Comparative advantage

Comparative advantage

Advantages:Advantages:• More total cheese and orange productionMore total cheese and orange production• Job gains among dairy farmers in WI and Job gains among dairy farmers in WI and

orange growers in FLorange growers in FL Disadvantage:Disadvantage:

• Job losses among dairy farmers in FloridaJob losses among dairy farmers in Florida• Job losses among orange growers in WisconsinJob losses among orange growers in Wisconsin

Trade is beneficial for both states as a Trade is beneficial for both states as a whole …whole …

… … though not for all residents.though not for all residents.

Economic Background: Why are Economic Background: Why are economists in favor of free trade?economists in favor of free trade?

U.S. Trade Flows (exports + imports of U.S. Trade Flows (exports + imports of goods and services) as % of GDPgoods and services) as % of GDP

Recessions in yellow

More trade is associated with

economic expansion

Trade expanded 3 times faster than GDP, since 1950

Does the trade Does the trade deficitdeficit cause unemployment? cause unemployment?

Trade deficit expands

Unemployment drops

Most of the expansion in the trade deficit occurred during the roaring 1990s!

Since2000

Before2000

U.S. manufacturing output hurt by imports?U.S. manufacturing output hurt by imports?

1990s: Surge in imports and manufacturing output

2000-2002: Manufacturing drops, imports slow

Since 2000: Both recovering

Manufacturing output expands despite imports

Loss of manufacturing jobs:Loss of manufacturing jobs:Only in the U.S.?Only in the U.S.?

Manufacturing jobs: 1993 normalized to 100

3m jobs lost in the U.S.

It’s a worldwide phenomenon!

The real culprit: ProductivityThe real culprit: Productivity

Output per hour in

Manufacturing

Overall Economy

How about How about outsourcingoutsourcing of service jobs? of service jobs?

Trade in Services as % of GDP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Exports

Imports

The U.S. has a persistent surplussurplus in trade of services

SurplusSurplus

How is the service industry doing?How is the service industry doing?

100

105

110

115

120

125

130

135

140

1990 1992 1994 1996 1998 2000 2002 2004 2006

21.4m new service jobs in the 1990s

6.5m new service jobs since 2000

Despite outsourcing the service industry

is expandingexpanding

Service jobs (normalized to 100 in 1990)

Are these new service jobs all low-paying

jobs?

How is the service industry doing?How is the service industry doing?

100

110

120

130

140

150

160

1990 1992 1994 1996 1998 2000 2002 2004 2006

High-paying service jobs:Information, Financial, Health,

Education, Professional and Business Services

• These high-payinghigh-paying service jobs accounted for 56% of the service job growth56% of the service job growth since 1990!• In 2006 they accounted for 41% of jobs.41% of jobs.• CompensationCompensation in these jobs grew four times four times fasterfaster than in service industry overall

High-payingTotal

Summary: Trade in goods and Summary: Trade in goods and servicesservices

Increased trade tends to coincide Increased trade tends to coincide with economic expansionwith economic expansion

Manufacturing employment is down Manufacturing employment is down in the U.S. Just like everywhere else!in the U.S. Just like everywhere else!

Service employment has grown Service employment has grown despite outsourcing.despite outsourcing.

The U.S. financial sector The U.S. financial sector in a global economy. Some facts:in a global economy. Some facts:

Int’l financial flows are the Int’l financial flows are the flip side flip side of the trade deficit:of the trade deficit: Countries that Countries that have a trade surplus with the U.S. have a trade surplus with the U.S. are are net purchasers of our assets.net purchasers of our assets.

There is a trend toward more There is a trend toward more internationalinternational financial integration.financial integration.• This This has coincided with has coincided with lessless volatility in volatility in

U.S. GDP.U.S. GDP.

U.S. International Investment PositionU.S. International Investment Position(in $b)(in $b)

1980: U.S. is a net creditor

0

100

200

300

400

500

600

700

800

Assets Liabilities

Direct Investment PortfolioBanks Other Sectors

2005: U.S. is a net debtor

0

2000

4000

6000

8000

10000

12000

14000

16000

Assets Liabilities

Direct Investment PortfolioBanks Other Sectors

$365b more assets

$2,546b more liabilities:

accumulated accumulated trade deficits!trade deficits!

27%

of

GD

P

14%

of

GD

P

92%

of

GD

P

112%

of

GD

P

Notice the difference in scale!

GDP growth (quarterly rates, annualized)

-15%

-10%

-5%

0%

5%

10%

15%

20%

1950 1960 1970 1980 1990 2000

2 times standard deviation around the mean

GDP has become less volatile since the mid 1980s.Some economists argue that international diversification has

been a contributing factor

Summary: Financial flowsSummary: Financial flows Gross financial flows increase due to Gross financial flows increase due to

more integration.more integration. Net flows: Foreigners are buying Net flows: Foreigners are buying

U.S. assets. They have to because of U.S. assets. They have to because of U.S. trade deficits.U.S. trade deficits.

More financial integration has More financial integration has coincided with less volatility in coincided with less volatility in economic growth.economic growth.• One advantage is the spreading of risk.One advantage is the spreading of risk.

Labor movements: ImmigrationLabor movements: Immigration

Historical perspective of Historical perspective of immigrationimmigration

Who are the immigrants?Who are the immigrants? Why does immigration work?Why does immigration work?

History of (legal) immigrantion: Percent of total population

(10Y moving average)

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1860 1880 1900 1920 1940 1960 1980 2000

Immigration is high compared to mid-1900s, but low compared to pre WW-I era!!!

Drops after 1914

Drops again during the Great Depression

Peak demand for IT workers in the mid 1990s

A lot of immigrants came in the late 1800s, early 1900s Currently about 1m

immigrants per year (0.3% of total population)

Who are the immigrants? What’s

their age? What's their education? How much money do they make?

0%

10%

20%

30%

40%

50%

60%

70%

All Citizens Non-citizens

Age Distribution of Working Age Populationby Citizenship Status

(2004)

15-39 40-64 65+

Immigrants are young compared to the

overall population!

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Native Naturalized Non-Citizens

Educational Attainment by Citizenship Status(2004)

Less than HS High school graduateSome college or associate degree Bachelor's degreeAdvanced degree

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Native Naturalized Non-Citizens

Educational Attainment by Citizenship Status(2004)

Less than HS High school graduateSome college or associate degree Bachelor's degreeAdvanced degree

Large fraction of uneducateduneducated individuals among immigrants

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

first generation second generation third generation andhigher

All native

Income Distribution of Immigrants by Generation(2004)

$24,999 and less 25,000 to 49,999 50,000 to 74,999 75,000 and above

First generation immigrants have low income (they are younger, less educated), …

… but consequent generations catch up!

How is it possible that immigration doesn’t cause unemployment to rise?

Growth in the demand for workers Growth in the demand for workers pushes the limits of supply – pushes the limits of supply – especially for low skill jobsespecially for low skill jobs

Immigration is one way to add to Immigration is one way to add to the labor supplythe labor supply

Immigrants concentrate in high Immigrants concentrate in high growth areas of the countrygrowth areas of the country

Employment growth vs. Immigration by State(2000-2006)

0%

1%

2%

3%

4%

5%

6%

-5% 0% 5% 10% 15% 20% 25%

State Employment Growth in %

Imm

igra

tion

(20

00-2

006)

as

% o

f po

pula

tion

Trend line

States with higher employment growth also have more immigrants

How about illegal immigration?How about illegal immigration?

Illegal immigrationIllegal immigration… … but it’s against the law!but it’s against the law!

• That’s a tautologytautology• Laws of economicsLaws of economics (e.g. demand creates (e.g. demand creates

supply) appears to supply) appears to supersede U.S. immigration supersede U.S. immigration lawslaws..

Summary on ImmigrationSummary on Immigration

Large flow of immigrants, though not as Large flow of immigrants, though not as large as in the 1800s and early 1900slarge as in the 1800s and early 1900s

Immigrants tend to be young: They help Immigrants tend to be young: They help alleviate impending problems of baby alleviate impending problems of baby boomer’s retirement (but can’t solve the boomer’s retirement (but can’t solve the problem either)problem either)

Immigrants become more economically Immigrants become more economically like the native population over timelike the native population over time

Immigration helps the economy balance Immigration helps the economy balance growth in labor demand with supplygrowth in labor demand with supply

ConclusionConclusion Global Economy – Trade in the international Global Economy – Trade in the international

marketplacemarketplace Trade in goods increases during economic Trade in goods increases during economic

expansionsexpansions• Trade deficits have not caused unemployment to Trade deficits have not caused unemployment to

rise.rise.• Outsourcing has not caused declines in service Outsourcing has not caused declines in service

employment.employment. Financial flows:Financial flows:

• Large increases in gross and net flows.Large increases in gross and net flows.• More financial integration has coincided with More financial integration has coincided with

more stable growth.more stable growth. Immigration:Immigration:

• Fills a demand gapFills a demand gap

I am looking forward to I am looking forward to your questions and your questions and

comments.comments.