In the previous comment, Comment 28, we have pointed out a crack in the foundation of the current globalization scheme. It will take some time for such a market force induced crack to enlarge into a real threat to the scheme. Not discussed in the previous comment are various other events that will threaten the globalization scheme. One hidden threat that is the topic of this comment is the backlash of US public against the whole idea of globalization. The current globalization scheme is squarely anchored on the runaway US trade deficit, and the runaway trade deficit is in turn the result of overvalued Dollar that is created by the currency market manipulations of various governments, notably Japan, China, Taiwan, South Korea and so on with the implicit approval of both Clinton and Bush administrations. If US trade deficit shrinks noticeably, export oriented economies of Asia-Pacific rim will receive a devastated blow. On the other hand the shrinkage of US trade deficit translates into the shrinkage of US current account deficit that is equivalent to the shrinkage of foreign capital inflow into US; this shrinkage will certainly trigger a sharp economic slow down in US, too. Thus any backlash from US public to force US government to reestablish any kind of effective trade barrier to shrink US trade deficit substantially will end the current globalization scheme. The chance of the backlash from US public can be measured by the mood of US public. That is why the analysis of the current gloomy mood of US public becomes crucial in accessing this threat to the globalization scheme.
Public opinion polls after opinion polls have shown the discontent of US public against the performance of Bush administration in economic matters. This dissatisfaction is occurring with a rather strange timing. Most of the economic data heavily watched by financial analysts and observers are pointing toward a moderately robust economic expansion in US. The growth rate of real Gross Domestic Production (GDP), though has slumped sharply in the final quarter of 2005, will bounce back in the first quarter of 2006, and will hold at a respectable level, somewhat below the average of 2005, through 2006. The growth of real GDP will rebound in 2007 and probably in 2008 as well, as discussed in Update Jan. 21, 2006. The number of jobs held, from either the payroll survey or from the household survey, has finally surpassed the previous peak of 2000. Unemployment rate of US has also dropped from the peak of 6.0% in 2003 to the current 4.8% level; many economists regard the unemployment rate below 5.0% as full employment in US. Even the consumer confidence survey shows a moderately upbeat consumer sentiment. Puzzled by this curious divergence between the gloomy moods as displayed in the public opinion polls and the above-mentioned upbeat economic data, some financial analysts and observers, from desperation, have been suggesting that the public is irrational and that people cannot distinguish their own economic conditions from the disappointment related to the Iraq War. However, this kind of attitude is directly against the basic principle of free market that regards the collective wisdom of the mass as the final arbiter and rejects artificial intervention of governments and financial sages alike. In order to understand the true reason of this divergence, we need to look beneath the surface of the upbeat economic data. We do find substantial faults underneath the superficially upbeat economic data. Those findings are reported here.
Consumer confidence survey looks at the short-term sentiment, like 6 months into the future, whereas the mood expressed in the public opinion polls reflect the feeling of long-term prospect of the direction of the economic condition so the divergence of those two kinds of surveys does not point toward a contradiction. GDP measures the consumption of a society. The robust growth of real GDP means only that the real, or inflation-adjusted amount of consumption is growing briskly. However, the real disposable income of US is not keeping up with the rate of growth of real consumption. The gap between the income and consumption is filled by taking down savings and by increased borrowing, from foreigners through the runaway trade deficit. As the result the saving's rate in US is falling steadily, from around 4.3% in 1998 to negative 1.1% by the third quarter of 2005. This trend, though is ignored by the analysts and observers who are claiming that US public is irrational, does not escape the attention of the general public. When the public see their savings dwindle and interest payments on their debt rises, they are naturally alarmed by the direction of the long-term economic conditions of the country. Actually inflation adjusted household income in US is not only stagnating but is declining for the past five years. In the graph at the right hand side, household incomes of USA are plotted according to the level of affluences. The top green curve is for the households ranked at 80% from the bottom according to the affluence distribution curve. The number in the parenthesis below the rightmost number of 80% to identify this group is the ratio of 2004 income over 1967 income for the group. The top blue curve is for the households ranked as 60%, the second green curve is for the households ranked as 40%, and the second blue curve is for the households ranked as 20% from the bottom respectively. Those four curves use the left scale with one thousand dollars as a unit. The dollar amounts are adjusted for inflation with 2004 Consumer Price Index taken as 100. The red curve is for the households ranked 95% from the bottom, considered to be at the lower boundary of top 5% richest households. The red curve uses the right hand scale the unit of which is also one thousand dollars. The ratios of 2004 income to 1967 income for various groups of households indicate that the income of poorer households has risen much less than the richer households, indicating the widening wealth gap. To relate the curves to the public mood, we need to look into the ups and downs of those curves. The dips of each curve are synchronized among all the curves, and correspond to the periods of various economic slowdowns respectively. The incomes of richer households tend to bottom out and rebound as economy bottoms out and rebounds, but for the poorer households the rebounds are delayed well after the economic rebounds take hold. However, after the most recent economic slow down in 2000 to 2001, the incomes of all household groups shown in the graph continue to fall and show no sign of rebound yet. To study the status of income further, real personal income per capita is plotted as the black curve in the graph at the left. Red curve represents real disposable personal income per capita. Both data are adjusted for inflation with 2004 Consumer Price Index set as 100. For comparison one-half of the income of 60%-household shown in the previous graph is plotted as the green curve. The disposable personal income is derived from the personal income by subtracting taxes paid. Thus the difference between the black and the red curves is due to taxes. The black and the red curves are synchronized until 2001. From 2002 to 2003, the black curve continued to drop reflecting the economic slow down of 2000 to 2001, whereas the disposable personal income of red curve started to jump from 2002. This divergence is due to the massive tax cut enacted in 2002. Real personal income per capita dropped by about 600 dollars from 2000 to 2003. On the other hand real disposable personal income per capita added 1000 dollars from 2000 to 2003, indicating that the tax cut boosted the disposable income by 1600 dollars per person in three years. The real income of middle class household, as represented by the green curve in the graph, is growing substantially slower than both real personal income per capita and disposable personal income per capita. This divergence is attributable to the reduced size of a household. However, the divergence of the household income and the disposable income per capita since 2000 is worth to be noted. This divergence means that the tax cut benefits and the benefits from the subsequent economic expansion have overwhelmingly flown to the very rich households, like the top 1% of households in the affluence scale, and are not boosting the income of middle class households very much. Facing this kind of steady erosion of real income, the gloomy mood of US public is easily understandable.
As mentioned before the unemployment rate has dropped to about 4.8% recently from the peak of 6.0% in 2003. However, this unemployment rate must be viewed with a substantial caution. In Europe, payments from unemployment insurance last semi-permanently as long as the unemployed is continuously looking for a job. This system keeps an unemployed in the active labor pool, and make the unemployed always counted as unemployed. In US payments from unemployment insurance last only for a short period. If an unemployed feels that the chance to find a job is poor, he/she will stop to look for jobs actively, and the survey will not consider the unemployed as unemployed since the person is not looking for jobs actively. Then there is the problem of young first time job seekers who are not covered by any unemployment insurance. When faced with the difficulty of finding proper jobs, many of those unemployed youngsters will quickly cease to look for jobs actively, wasting their time aimlessly, doing some odd and part-time jobs to earn some pocket money, or attend some training schools or extend their higher education into graduate school grudgingly without definite hope of landing a permanent job in the future. This kind of situations are not taken into account in the calculation of the unemployment rate, and as the consequence the unemployment rate in US is always kept artificially lower than what really is. A more significant statistics that reveals the true status of job market is the labor force participation rate; the statistics is published monthly at the same time as the publication of the unemployment rate. Labor force is defined as the sum of the number of people currently employed in civilian fields and the number of unemployed who are looking for jobs actively. Labor force participation rate is the ratio of labor force over the total non-institutional (means not in prisons) civilian population 16 years or older, expressed in percentage. Instead of discussing the importance of labor force participation rate in abstract, we will look at the historic trends of the rate and discuss the meaning of its behavior at each juncture.
Quarterly averages of labor force participation rate, from the first quarter of 1947 to the fourth quarter of 2005, are plotted as black dots in the graph at the right; the portion from the first quarter of 1947 to the fourth quarter of 1960 is plotted in the insert at the lower right-hand corner of the graph. The scale of the rate is plotted at the left-hand edge of the graph as percentages. The blue dots are quarterly values of 2000-chained real GDP; real GDP of each quarter is expressed in units of billion dollars and then its conventional logarithmic (log-10) value is plotted with its scales expressed at the right-hand edge of the graph. When a large number of soldiers retire from military service and rejoin the civilian life, the rate will be pushed down for a while. When a large number of youngsters extend the years of schooling, similar drop of the rate will occur. On the other hand if a large number of women leave home and enter the labor market, the rate will rise. The ups and downs of the ratio need to be judged in combination with household incomes to give us a correct picture of why the rate gyrates. Though data of household income are only available after 1967, the synchronized nature of the middle class household income with the real personal income per capita in the period from 1967 to 2000 allows us to make the reasonable assumption that the synchronization between middle class household income and real personal income per capita persisted also through the period from 1950 to 1967. Labor force participation rate oscillated around the average value of 59.2% from 1950 to 1965. The ups and downs of the rate during that period were not necessarily synchronized with the performance of real GDP. The behavior of labor force participation rate from 1951 to the end of 1954 was synchronized with two economic slowdowns, the one from 1951 to 1952 and the second one from 1953 to 1954, and so were the ups and downs of real personal income per capita during that period. The significant slump of labor force participation rate at the two economic downturns during the period was probably reinforced by the soldiers returning from Korean War and enrolled in colleges with the help of G. I. Bill. As real GDP rose anew in 1954, the labor force participation rate also rose sharply, probably helped by the entrance into the labor force of Korea War veterans who had finished higher education with government help around that time. As real GDP stagnated from 1955 to 1958, the labor force participation rate peaked and then dropped, bringing down the real personal income per capita as well. The rebound of real GDP from 1958 to the first quarter of 1960 only pushed up labor force participation rate for 2 quarters and then it slumped sharply from the third quarter of 1958. The rate rose again in 1960 when real GDP entered the phase of stagnation in 1960. This divergence probably can be attributed to the panic after the launch of Russian Sputnik1, the first manmade satellite, and the mad rush of US students into the field of science and technology under the urge of the society. However, as real GDP slumped in 1960, and the personal income stagnated, many members of households entered the labor market to shore up the income and thus boosted the labor force participation rate. Real GDP bounced back strongly in 1961, but the labor force participation rate dropped sharply instead and lingered around the bottom through 1965. This slump of the rate happened at the time of a strong growth in real personal income per capita. The low labor force participation rate in the first half of 1960's was due to the government encouragement of young students to enter the field of science and technology to counter the perceived Soviet supremacy, and then the trend was reinforced by the desire of young boys to avoid military draft by enrolling in colleges as Vietnam War intensified. As US economy grew further into the latter half of 1960's under the policy of both "gun and butter" of Johnson administration, the demand of workers grew and so was the labor force participation rate. The decade of 1970's was the decade of inflation and energy crisis. As the real consumption power eroded by the inflation, many women left home and entered the labor market to supplement household income. Thus labor force participation rate rose sharply during the decade. Though interrupted several times by the economic slowdowns, this rising trend continued until 2000. From 2000 labor force participation rate has plunged by more than 1%, and has not rebounded yet. This fall of labor force participation rate has occurred while real household incomes are dropping. The falling labor force participation rate since 2000 is caused by the lack of entry-level jobs for youngsters, forcing them to extend the time spent in schools involuntarily. Seeing the difficulties of younger generation in finding decent jobs, it is natural that the public mood turns gloomy and the backlash against the globalization scheme strengthens since the lack of decent entry-level jobs is the result of jobs flowing to developing worlds like China and India.
The evolution of US high tech computer science industry provides a vivid example of how the globalization scheme is chipping and shipping away an important US industry into developing worlds. During the high times of high tech computer science industry, that is, until 2000, the labor force of the industry forms a pyramid shape. At the broad base of the pyramid are large numbers of workers occupying entry-level jobs and jobs requiring lower level computer science skills. From this base spring up higher skilled talents, with the number of such talents decreasing as the level of skills rises. When the economic slowdown of 2000-2001 arrived, the loss of jobs hit the whole pyramid. Mired with rising competition and urged by Wall Street to take advantage of the globalization scheme the industry has taken an easy way to cope with the declining earnings, that is, to ship the entry-level and lower skill level jobs to developing countries like China and India. This practice denied many newly graduating college students in the fields of computer science the chance to enter the industry. The bad news has spread like wildfire down to younger high school students, causing them to avoid the field of computer science like plague. Thus the base of the pyramid is deliberately destroyed. As the base of the pyramid disappears, the source to derive higher skilled talents dries up, too. Now the industry is facing the shortage of higher skilled talents. On the other hand the bases of pyramids are forming in China and India as US entry-level and lower skilled jobs flow to those places. From those bases of pyramids higher skilled talents are springing up in foreign lands, and US high tech computer industry is trying desperately to hire those foreign talents to compensate the disrupted supply of domestic talents. As the pyramids in China and India builds up toward their tops, US high tech computer industry will discover that it is more economical and natural to move its core operations to China and India, instead of fighting US public every year for the increased quota of H1 visas to bring in more and more higher skilled talents from China and India. Gradually the familiar names of big US high tech computer science related firms will disappear from the landscape of USA with only some sales offices left, and the famous valley in USA will be transformed into a monument valley. US public is intuitively feeling the threat of this transformation and is increasingly angry against the whole idea of globalization that has brought on this kind of disaster.
Another major component that irritates US public is the price of gasoline. An average car driven in USA adds like 15,000 miles per year. Assuming the mileage per gallon of an average car is 20 gallons per mile, an average car in US will consume 750 gallons of gasoline a year. The increase of gasoline price by 1 dollar per gallon will increase the operating cost of the car by 750 dollars a year. With two cars in average, a middleclass US household will face an increased gasoline bill of $1,500 a year, a non-negligible amount. Through the collective wisdom, US public seems to understand intuitively the root cause of the ever-rising oil price. The logical chain goes as follows: The current globalization scheme causes run away US trade deficit. US trade deficit has enabled China to rise rapidly. The rapidly rising China consumes more and more oil, and pushes oil price higher and higher with no end in sight. Thus the rising oil and gasoline prices are again reinforcing the gloomy mood and the animosity against the globalization scheme and its real supporter, US big businesses.
As the mood of US public becomes gloomy and public anger builds against the globalization, a series of notable incidents have occurred. The first was the outcry against the takeover of IBM PC business by a Chinese Government affiliated company, Lenovo. In that case US government moved quickly to approve the deal and diffused the issue before it became out of control. The second case was the attempt of a Chinese oil company to buy UNOCAL, a US oil company that owns substantial oil productions within US and around Southeast Asia. Public outcry against the deal eventually forced the Chinese oil company to back out of the deal. The third incident was the backlash against the Dubai Port deal. Dubai Port World is a company controlled by Dubai government, a member state of The United Arab Emirates. Dubai Port World has acquired a UK port operator that controls many port operations in the east coast of USA. Angered by this "foreign" takeover (UK does not sound so foreign to US public), US public lashed against the deal under the excuse of port security. This anger forced US Congress to move against big businesses and US administration that supported the deal. Eventually Dubai Port World was forced to back down and promised to divest all US port operations into an independent US affiliated company. Then there is the eruption of the long simmering issue of illegal immigrants from Mexico. US public generally view the flood of illegal immigrants from Mexico as lowering the wage scale in US and hurting household income, especially the poorer households. The public demands US government to secure the border between US and Mexico to reduce the flow of illegal immigrants from Mexico. US businesses are against such a move since the draining of illegal immigrants will boost wages and hurt their profitability. Bush administration wants an immigration bill that combines the secured border to prevent the influx of illegal immigrants, the defacto amnesty toward a portion of the illegal immigrants already within USA, and a temporary guest worker program to ensure the ample supply of cheap immigrant labor. Oponents point toward the 1986 amnesty of 3 million illegal immigrants under the lead of Reagan administration; in the 1986 law border security has been combined with the amnesty. However, successive administrations and US Congress alike have sabotaged the border security part of the law, and illegal immigrants have continued to flood in with the total number of illegal immigrants within USA now estimated to be 12 to 20 millions. Under the public pressure, US House has passed a border enforcement only bill. Supported by the massive demonstrations of illegal immigrants and the mixed feeling of middle calss households that are loath to lose cheap illegal labors tending their gardens and construction works, the allies of Bush administration in US Senate have joined force with liberal Democrats and have tried to pass a bill that combines border security, defacto amnesty and the guest worker program. Now US Congress has been back from Easter recession, and this battle of immigration issue will resume. This immigration issue is not an isolated political event, but is a link of the fight based on the public anger against the globalization on one hand and the hesitation to lose a cheap source of labor on the other hand. The final outcome of this battle with many cross currents should be watched closely as a barometer to assess the threat to the globalization scheme from public anger.
As public resentment against globalization rises, China, as the leading source of US trade deficit and the destination of many jobs flown out of US, naturally is viewed as the symbol of the evil globalization. The rising military power of China is compounding the public unease toward China. However, US public seems to view the rise of China as the consequence of the globalization, not as the root cause of the evil that they associate with the globalization. We list here two on-screen opinion polls that seem to support such an analysis. The first is the poll conducted on "Kudlow & Company" of CNBC TV, related to the recent visit of Chinese President Hu. CNBC TV broadcasts stock and financial markets from early morning until evening every weekday. The "Kudlow & Company" show is a part of this day-long coverage. The viewers are mostly investors and Wall Street people who are friendly to businesses. The host of the show, Lawrence Kudlow, is a former economic adviser of Reagan administration. The show concentrates on macroeconomic policy issues. Lawrence Kudlow is a strong advocate of free markets, except the issue of the valuation of Chinese Yuan. He seems to favor the current managed Yuan-Dollar exchange rate regime of Chinese government, and criticizes the pressures put on Chinese government to revaluate Yuan at a faster rate. The show put a poll on screen, asking viewers whether they consider China as a "friend" or a "foe". 25% of the vote went to "friend" and 75% considered China as a "foe". The second on-screen poll of our concern was conducted by the popular "Lou Dobbs Tonight" show of CNN in the time slot from 6:00 pm to 7:00 pm eastern standard time. Lou Dobbs is strongly against the globalization, and claims that the globalization backed by business interests is destroying American middle class. Lou Dobbs has been against the Lenovo-IBM deal, the UNOCAL takeover by a Chinese oil company and the Dubai Port deal. He is credited for igniting the public outcry against the Dubai Port deal. He is also a long time advocate against illegal immigration, and is an important force shaping the current bitter debate about the border security and illegal immigrants. The show put up an on-screen poll at the eve of President Hu's visit to Washington, D. C., asking who is responsible for the 200 billion US trade deficit with China, President Hu or President Bush. 97% of respondents said President Bush and only 3% picked President Hu.
The gloomy mood of US public is clearly fanning the anti-globalization fever. Unless the steady decline of household income of middle class families and the shortage of entrance-level jobs for youngsters are reversed soon, the anti-globalization feeling will intensify and will eventually lead to a strong public backlash to force US Congress to reestablish trade barriers to crack down on US trade deficit and the accompanying job outflow, and thus the current globalization scheme will be destroyed. Apparently we need to pay a close attention to the developments along this line.