The United States in a Global Economy

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The United States in a Global Economy Tom
Cunningham, Ph.D. Federal Reserve Bank of Atlanta
March 20, 2008
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• Disclaimer The views expressed here are not
  necessarily those of the Federal Reserve Bank of
  Atlanta or the Federal Reserve System.

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What is the Global Economy? An international
marketplace (in a very broad sense)

• Trade in Goods
• Final and intermediate goods
• Trade in Services
• Outsourcing
• Vacation
• Trade in Labor
• Immigration
• legal and illegal
• Trade in Capital
• Foreign direct investment
• Financial flows stocks, bonds, currencies

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Topics for Today

• Some facts about the global economy
• Trade flows
• Financial flows
• Labor movements
• Is the global economy a threat?
• Should we worry about the trade deficit?
• Are we becoming too indebted to the rest of the
  world?
• Are immigrants taking away jobs?

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Buying American?
65 made in America
90 made in America
Ford Mustang
Toyota Sienna
Hard to distinguish American vs. Foreign made
goods!
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Economic Background Why are economists in favor
of free trade?

• Should Wisconsin grow oranges? Should Florida
  make cheese?
• No and No!
• Wisconsin should specialize in cheese
• Florida should specialize in orange production
• Then trade cheese for oranges

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Econ Lingo Opportunity cost

• How much orange production does WI give up to
  produce one more unit of cheese? Very little,
  because oranges dont grow well in WI.
• How much cheese production does WI give up to
  produce one more unit of oranges? A lot!

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More Econ Lingo Comparative advantage

• The country with the lower opportunity cost in
  producing one good has a comparative advantage in
  that good.
• Wisconsin has a comparative advantage in cheese
  production gt specialize in cheese
• Florida in orange production gt specialize in
  oranges

Comparative advantage
Comparative advantage
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Economic Background Why are economists in favor
of free trade?

• Advantages
• More total cheese and orange production
• Job gains among dairy farmers in WI and orange
  growers in FL
• Disadvantage
• Job losses among dairy farmers in Florida
• Job losses among orange growers in Wisconsin
• Trade is beneficial for both states as a whole
• though not for all residents.

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U.S. Trade Flows (exports imports of goods and
services) as of GDP
Recessions in yellow
More trade is associated with economic expansion
Trade expanded 3 times faster than GDP, by a
factor of 150(!) since 1950
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Does the trade deficit cause unemployment?
Most of the expansion in the trade deficit
occurred during the roaring 1990s!
Unemployment drops
Since 2000
Trade deficit expands
Before 2000
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U.S. manufacturing output hurt by imports?
Manufacturing output expands despite imports
Since 2000 Both recovering
1990s Surge in imports and manufacturing output
2000-2002 Manufacturing drops, imports slow
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Loss of manufacturing jobsOnly in the U.S.?
Manufacturing jobs 1993 normalized to 100
3m jobs lost in the U.S.
Its a worldwide phenomenon!
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The real culprit Productivity
Output per hour in Manufacturing
Overall Economy
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How about outsourcing of service jobs?
The U.S. has a persistent surplus in trade of
services
Surplus
Exports
Imports
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How is the service industry doing?
Despite outsourcing the service industry is
expanding
6.5m new service jobs since 2000
21.4m new service jobs in the 1990s
Service jobs (normalized to 100 in 1990)
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Are these new service jobs all low-paying jobs?
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How is the service industry doing?
High-paying service jobs Information, Financial,
Health, Education, Professional and Business
Services

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

High-paying
Total
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Summary Trade in goods and services

• Increased trade tends to coincide with economic
  expansion
• Manufacturing employment is down in the U.S. Just
  like everywhere else!
• Service employment has grown despite outsourcing.

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

• Intl financial flows are the flip side of the
  trade deficit Countries that have a trade
  surplus with the U.S. are net purchasers of our
  assets.
• There is a trend toward more international
  financial integration.
• This has coincided with less volatility in U.S.
  GDP.

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U.S. International Investment Position(in b)
Notice the difference in scale!
2,546b more liabilities accumulated trade
deficits!
365b more assets
112 of GDP
27 of GDP
92 of GDP
14 of GDP
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GDP has become less volatile since the mid
1980s. Some economists argue that international
diversification has been a contributing factor
2 times standard deviation around the mean
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Summary Financial flows

• Gross financial flows increase due to more
  integration.
• Net flows Foreigners are buying U.S. assets.
  They have to because of U.S. trade deficits.
• More financial integration has coincided with
  less volatility in economic growth.
• One advantage is the spreading of risk.

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Labor movements Immigration

• Historical perspective of immigration
• Who are the immigrants?
• Why does immigration work?

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Immigration is high compared to mid-1900s, but
low compared to pre WW-I era!!!
A lot of immigrants came in the late 1800s, early
1900s
Currently about 1m immigrants per year (0.3 of
total population)
Drops after 1914
Peak demand for IT workers in the mid 1990s
Drops again during the Great Depression
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Who are the immigrants? Whats their age? What's
their education? How much money do they make?
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Immigrants are young compared to the overall
population!
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(No Transcript)
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Large fraction of uneducated individuals among
immigrants
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First generation immigrants have low income (they
are younger, less educated),
but consequent generations catch up!
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How is it possible that immigration doesnt cause
unemployment to rise?

• Growth in the demand for workers pushes the
  limits of supply especially for low skill jobs
• Immigration is one way to add to the labor supply
• Immigrants concentrate in high growth areas of
  the country

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States with higher employment growth also have
more immigrants
Trend line
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How about illegal immigration?
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Illegal immigration

• but its against the law!
• Thats a tautology
• Laws of economics (e.g. demand creates supply)
  appears to supersede U.S. immigration laws.

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Summary on Immigration

• Large flow of immigrants, though not as large as
  in the 1800s and early 1900s
• Immigrants tend to be young They help alleviate
  impending problems of baby boomers retirement
  (but cant solve the problem either)
• Immigrants become more economically like the
  native population over time
• Immigration helps the economy balance growth in
  labor demand with supply

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Conclusion

• Global Economy Trade in the international
  marketplace
• Trade in goods increases during economic
  expansions
• Trade deficits has not caused unemployment to
  rise.
• Outsourcing has not caused declines in service
  employment.
• Financial flows
• Large increases in gross and net flows.
• More financial integration has coincided with
  more stable growth.
• Immigration
• Fills a demand gap