Today's Opinions, Tomorrow's Reality
Solving the Unsolvable
By David G. Young
Washington, DC, December 11, 2012 --
Several of America's seemingly unsolvable problems are suddenly getting better.
When Apple CEO Tim Cook announced that the company would shift some production from Asia to the United States, it signaled the end of an era. For over three decades, Americans have struggled with the intractable problems of the decline of U.S. industry, a large trade deficit, the inability of Americans and their government to live within their means and a shifting wealth to foreign competitors. Now, times are finally changing for the better on multiple fronts, offering America the opportunity to sweep these persistent problems away.
The biggest source for change has been the rise in incomes in East Asia and Latin America. Thirty years ago, American workers couldn't compete with low wages in Japan, China, Mexico and other countries. In 1992, presidential candidate Ross Perot decried the "giant sucking sound" that would shift jobs to Mexico after the implementation of a free trade agreement between Mexico and the United States.
Some jobs did shift, lifting incomes in Mexico, where most people now consider themselves middle class. Today, Mexico's pool of cheap labor is drying up. More people are moving back to Mexico than coming to America, with the number of illegal Mexican immigrants in the U.S. dropping by nearly a million since 2007.1 The incoming president of Mexico's national oil company joked that Mexico's growing economy needs a fence to keep workers in, saying "we are going to need all the workers we can get."2
Wages are growing even faster in China, at a rate of 15-20 percent per year.3 This is partly behind the plans of Apple to shift some production back to the United States for the first time since it jumped on the China bandwagon in the mid-1990s. Apple's shift is too minuscule to rebuild America's manufacturing infrastructure, but other similar anecdotes might indicate that U.S. manufacturing has bottomed out. And end to decades decline is itself a game-changing phenomenon.
This is good news for America's trade deficit, a measure of the piles of cash Americans have been shipping overseas to buy stuff for a generation. America's balance of trade had its worst year in 2006, with a deficit of over $800 billion.4 The financial crisis finally reigned in America's credit-driven spending, and the trade deficit plummeted to $400 billion in 20095. While the deficit has gotten slowly worse since then, this is entirely due to the rise in the price of oil. Oil went from $59 per barrel in 2006 to over $100 per barrel in 20116, adding $160 billion to the annual trade deficit.7,8 This is not a new phenomenon -- oil imports have been weighing down America's balance of trade for a generation, especially when prices go up.
But here again, there is good news. The hydraulic fracking and horizontal drilling technologies that have wildly increased natural gas production are now being applied in America's oil industry. Amazingly, the International Energy Agency estimates that America will overtake Saudi Arabia as the largest oil producer in the world by 2020, and the North American region could actually become an oil exporter by 2030.9 For a country that has long fretted about oil, the prospect of a return to energy independence is like a fantastic dream. But the biggest statistical beneficiary would be to the trade deficit. Instead of hundreds of billions of dollars going to foreign oil producers, much of this money would shift to domestic and Canadian producers. After decades of blowing its money on foreign products, allowing foreigners buy up iconic real estate in America, the tide is finally poised to turn.
A similar tidal change may soon come with government spending. Except for 1997 to 2001, America's government has spent far more than it takes in, with deficit spending going almost completely unchecked over the past decade. These statistics have not turned around -- by all accounts, things are as bad as ever, with the government blowing its budget by over a trillion dollars for each of the past four years.10
But the highly contentious debate over the "fiscal cliff" indicates that America's politicians are finally taking the issue seriously. This may not sound like much, but it is a sea change from Dick Cheney's "deficits don't matter" declaration. Given the automatic cuts and tax increases set to take place in the event of inaction, odds are pretty good for progress in 2013.
Of course, there are many caveats to these improving trends. America's politicians could still conspire to put off overdue cuts in government spending. The implementation of these cuts or accompanying draconian tax increases could hurt the global economy enough to slow or even temporarily reverse some of these positive trends. Rising American petroleum production could be stunted by new regulations. And in the very long term, domestic oil production will certainly run out, forcing and the country to resume massive oil imports without an alternative energy source.
Clearly, there are risks. And the solution to one problem often begets another. But the existence of new challenges should in no way damper America's optimism. There is no question that simultaneous improvement on several of the country's long-standing problems is very, very good news.
1. Washington Post, Incoming Mexican President Pena Nieto Looks to Reshape Dialogue With U.S, Nov 30, 2012
3. Associated Press, Apple to Produce Line of Macs in the US Next Year, December 7, 2012
4. Bureau of Economic Analysis, U.S. International Transactions, 1960-Present, September 16, 2012
6. US Energy Information Administration, Short-Term Energy Outlook Real and Nominal Prices, November 2012 (Imported crude oil prices 2009: $59, 2011: $100)
7. US Energy Information Administration, U.S. Imports of Crude Oil and Petroleum Products, September 27, 2012 (Approximately 4 billion barrels imported in 2009-20011)
8. Author's calculation: ($100/barrel-$59/barrel) x 4 billion barrels = $164 billion
9. International Energy Agency, IEA World Energy Outlook 2012, November 2012
10. Marketwatch, U.S. deficit stays above $1 trillion in 2012, October 12, 2012