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The United States in a Global Economy 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 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? 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 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 Econ Lingo: Opportunity cost How much orange production does WI give up to produce one more unit of cheese? Very little, because oranges don’t grow well in WI. How much cheese production does WI give up to produce one more unit of oranges? A lot! Wisconsin Florida Cheese production Low opportunity cost High opportunity cost Orange production High opportunity cost Low opportunity cost 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 => specialize in cheese • Florida in orange production => specialize in oranges Cheese production Orange production Wisconsin Florida Low Comparative opportunity advantage cost High opportunity cost High Low Comparative opportunity opportunity advantage cost cost 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. 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, since 1950 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 U.S. manufacturing output hurt by imports? Manufacturing output expands despite imports 1990s: Surge in imports and manufacturing output Since 2000: Both recovering 2000-2002: Manufacturing drops, imports slow Loss of manufacturing jobs: 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: Productivity Output per hour in Manufacturing Overall Economy How about outsourcing of service jobs? Trade in Services % of GDP The U.S. has aaspersistent surplus in trade of services 4.0% 3.5% 3.0% Surplus Exports 2.5% Imports 2.0% 1.5% 1.0% 0.5% 0.0% 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 How is the service industry doing? 140 135 130 Despite outsourcing the service industry is expanding 6.5m new service jobs since 2000 125 120 115 21.4m new service jobs in the 1990s Service jobs (normalized to 100 in 1990) 110 105 100 1990 1992 1994 1996 1998 2000 2002 2004 2006 Are these new service jobs all low-paying jobs? How is the service industry doing? 160 150 140 High-paying service jobs: Information, Financial, Health, • These high-paying service jobs accounted for Education, Professional and 56% of theServices service job growth since 1990! Business • In 2006 they accounted for 41% of jobs. • Compensation in these jobs grew four times faster than in service industry overall 130 High-paying Total 120 110 100 1990 1992 1994 1996 1998 2000 2002 2004 2006 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. The U.S. financial sector in a global economy. Some facts: Int’l 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. U.S. International Investment Position 16000 700 $365b more assets 400 300 200 100 12000 10000 8000 14% of GDP 500 27% of GDP 600 14000 0 6000 4000 $2,546b more liabilities: accumulated trade deficits! 112% of GDP 800 92% of GDP 1980: U.S. is a net creditor (in $b) Notice the difference in scale! 2005: U.S. is a net debtor 2000 0 Assets Direct Investment Banks Liabilities Portfolio Other Sectors Assets Direct Investment Banks Liabilities Portfolio Other Sectors GDP GDP has growth become (quarterly less volatilerates, sinceannualized) the mid 1980s. Some economists argue that international has 2 timesdiversification standard deviation 20% been a contributing factor around the mean 15% 10% 5% 0% -5% -10% -15% 1950 1960 1970 1980 1990 2000 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. Labor movements: Immigration Historical perspective of immigration Who are the immigrants? Why does immigration work? History of (legal) immigrantion: Percent of total population Immigration is high compared to mid-1900s, (10Y moving average) but low compared to pre WW-I era!!! 1.2% A lot of immigrants came in the late 1800s, early 1900s Currently about 1m immigrants per year (0.3% of total population) 1.0% Drops after 1914 0.8% 0.6% Peak demand for IT workers in the mid 1990s 0.4% Drops again during the Great Depression 0.2% 0.0% 1860 1880 1900 1920 1940 1960 1980 2000 Who are the immigrants? What’s their age? What's their education? How much money do they make? Age Distribution of Working Age Population by Citizenship Status (2004) Immigrants are young compared to the overall population! 70% 60% 50% 40% 30% 20% 10% 0% All Citizens 15-39 40-64 Non-citizens 65+ Educational Attainment by Citizenship Status (2004) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Native Naturalized Less than HS Some college or associate degree Advanced degree Non-Citizens High school graduate Bachelor's degree Educational Attainment by Citizenship Status (2004) Large fraction of uneducated individuals among immigrants 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Native Naturalized Less than HS Some college or associate degree Advanced degree Non-Citizens High school graduate Bachelor's degree Income Distribution of Immigrants by Generation First generation immigrants have low(2004) income (they are younger, less educated), … 45% … but consequent generations catch up! 40% 35% 30% 25% 20% 15% 10% 5% 0% first generation $24,999 and less second generation 25,000 to 49,999 third generation and higher All native 50,000 to 74,999 75,000 and above How is it possible that immigration doesn’t 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 Employment growth vs. Immigration by State (2000-2006) Immigration (2000-2006) as % of population 6% 5% States with higher employment growth also have more immigrants 4% 3% Trend line 2% 1% 0% -5% 0% 5% 10% 15% State Employment Growth in % 20% 25% How about illegal immigration? Illegal immigration … but it’s against the law! • That’s a tautology • Laws of economics (e.g. demand creates supply) appears to supersede U.S. immigration laws. 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 boomer’s retirement (but can’t 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 Conclusion Global Economy – Trade in the international marketplace Trade in goods increases during economic expansions • Trade deficits have 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