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.