FT.com / Asia-Pacific / China – US downturn hits Asian garment makers

Here’s a good example how a slowdown in consumer spending in the US effects manufacturers in other countries. Asian garment makers are feeling pinched not only due to less demand from American consumers, but also the weak dollar and rising costs.

“Costs are hitting us,” says Henry Tan, chief executive of Luen Thai, a large Hong Kong-based manufacturer with operations in China. “Sales to Europe are not so bad because the euro is strong, but sales to the US are very difficult.”

Chinese manufacturers have been facing double-digit annual wage increases over the past few years. More recently their headache has come from the renminbi’s appreciation, which Beijing has allowed to gather pace this year as it seeks to curb inflation.

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China Mobile: 400,000 Unlocked iPhones On Our Network (AAPL) – Silicon Alley Insider

Here’s a shocker… although not so surprising if you’ve ridden a Shanghai subway lately and seen the city’s movers and shakers fiddling with their fancy new iPhones:

China Mobile, the biggest wireless carrier in China, said there were 400,000 unlocked iPhones operating on its network at the end of 2007.If true, that represents more than 10% of the 3.7 million iPhones Apple sold last year. Market research firm In-Stat, which included the stat in an email newsletter today, said that total was four times what they had previously estimated. That helps explain where many of the “missing” iPhones have wound up.

This may seem like great news for Apple; I mean, who wouldn’t want to tap the largest cell phone market in the world? Problem is, Apple does not have a deal with either of China’s big mobile carriers, so Apple doesn’t get a cut out of users’ service plans, which account for a huge part of Apples profits in Europe and the US.

Some analysts estimate that AT&T, Apple’s exclusive U.S. carrier partner, pays Apple $15 per month, per iPhone subscriber — $360 over the length of a 2-year contract — which is pure profit.

So I wonder if the real iPhones in China outnumber the fake ones now!?

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Chinese leader offered women to U.S. in 1973 – CNN.com

China’s demographic challenges have proved difficult to overcome for much of the last century, and indeed, throughout its long history. Feeding, employing, and sheltering 1.3 billion people has recently been made less difficult thanks to China’s economy opening up since 1978, but as recently as the early 1970′s scarcity posed a serious threat to the country’s health and strength.

So how did Mao, in 1973 and elderly leader on the brink of senility, propose solving China’s population growth problem? He made visiting US Secretary of State an enticing offer:

Amid a discussion of trade in 1973, Chinese leader Mao Zedong made what Secretary of State Henry Kissinger called a novel proposition: sending tens of thousands, even 10 million, Chinese women to the United States.

“You know, China is a very poor country,” Mao said, according to a document released by the State Department’s historian office.

“We don’t have much. What we have in excess is women. So if you want them we can give a few of those to you, some tens of thousands.”

A few minutes later, Mao circled back to the offer. “Do you want our Chinese women?” he asked. “We can give you 10 million.”

After Kissinger noted Mao was “improving his offer,” the chairman said, “We have too many women. … They give birth to children and our children are too many.”

“It is such a novel proposition,” Kissinger replied in his discussion with Mao in Beijing. “We will have to study it.”

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You Are What You Spend – New York Times

Fact: The richest 20% of Americans earn 15 times the income of the bottom 20%.

Fact: The richest 20% of Americans only consumer 4 times as much as the poorest 20%.

Question: Why don’t the richest 20% consume 15 times as much as the poorest 20%?

The author of this NYT opinion piece claims that the gap between America’s rich and poor is not as stark as the income figures suggest. While before tax income of the top 20% is around $150,000, the poorest 20% earn only around $10,000. Clearly these numbers indicate an enormous income gap in America.

However, when it comes to consumption, the poor consume an average of $18,000 on everything from food to housing to entertainment to transportation. The richest 20%, on the other hand, consume an average of only $70,000, less than half their before-tax income.

So the question is, is standard of living based on our income, or on our consumption? If it’s income, then there’s certainly a huge gap in standard of living between the rich and poor. But if we believe it’s consumption, then the gap is narrowed dramatically. The author claims the latter:

To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.

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Here’s a comment from student Alice Su to a previous post about Washington’s $170 billion fiscal stimulus package:

It seems to me that this tax rebate is not truly addressing the problem of recession–undoubtedly, it does, as Nancy Pelosi said, “put money in the hands of hardworking Americans”, and this looks like a nice act done under a bipartisan agreement that makes lots of citizens feel better. But only in the short run. Offering a one-time tax rebate like this is like trying to stick a band-aid on a bullet wound.

So the question isn’t “Why put more medicine in now than is necessary?” but rather, “Does this medicine actually do anything to help?” It looks like all it does is temporarily reassure Americans, maybe make the recession a little more cushioned and make the government able to say “LOOK we’re cutting back on taxes! Don’t you love us?”, but it won’t actually do anything that will feasibly fight against the “vicious cycle.”

So does this mean that recessions are inevitable, that there really is nothing you can do to fight them except… wait for it to get better?

In the podcast they mentioned something about fine-tuning interest rates and such to prevent occurrences like the Great Depression. How does that actually work though? And how is the government supposed to know how they should “fine-tune” taxes and interest rates and government spending if they’re in a period of growth/peak? They won’t know what’s needed until they’ve entered the recession, and by then it seems like it’s too late to stop it and all they can do is try methods like the tax rebate in this blog post to just “slightly offset the negative effects.”

Sometimes students simply amaze me in their uncanny ability to pierce through the logical fallacies of the world in which we live. Despite the lauding rhetoric coming from politicians about how this package will help lead the economy towards a new period of expansion, the package’s true impact will probably be more of, as Alice so astutely points out, “like a band-aid on a bullet wound”.

Here’s the kind of thing you’ll hear from Washington:

Bush signs stimulus package – Feb. 11, 2008: CNNMoney.com

President Bush said Monday he is pleased with the $170 billion economic stimulus package passed by Congress last week. The White House announced that he plans to sign it Wednesday.

The government hopes the package, which will send most Americans tax rebate checks by May, will either prevent a recession or make one relatively brief…

“I really want to thank the Congress for getting this bill done,” Bush said. “It’s going to help deal with the uncertainties in this economy.”

But is it enough, asks Alice? And what about the “fine-tuning” of interest rates going on at the Fed? How are fiscal and monetary policies supposed to be employed by governments to fight recession?

These are some of the questions we’ll be discussing in the next unit of AP Macroeconomics. Stay tuned for the answers… and in the mean time, students, keep reading critically and asking those tough questions that politicians simply hope Americans are just too ignorant to think about! Great job, Alice, thanks for the insightful commentary!

FT.com / Asia-Pacific / China – China ‘on course for growth slowdown

Among many Americans today there seems to be a negative opinion towards China. It is popular to bash China (remember Red Storm Rising!?) and blame the country’s cheap labor and booming export sector for the loss of American jobs. Undeniably, however, the US depends on China as a source of cheap imports, which help keep the overall price level for American households down and relieves inflationary pressures in the face of a weakening dollar.

Likewise, China depends on the US for its own economic health. In China around 40% of GDP comes from exports (vs. less than 10% in the US); of the $1.22 trillion of exports from China last year, 21% went to the United States (source: CIA World Factbook). This means that something like 10% of China’s national income comes from US households’ demand for Chinese products. Significant, to say the least. Continue Reading »

Jessica Ng asks,

Hi Mr. Welker,
I was just wondering whether the business cycle pertains to ALL economies, including both market and command economies?

Great question, Jessica. I thought I’d put this one out there for everyone to discuss. What do you think, readers? Based on what we’ve learned about the business cycle, would you think that this pattern of economic expansion, contraction, recession and recovery would be likely to happen in a command economy, where all economic decisions are made by a central planning agency? In other words, are business cycles unique to market economies, or can an economy run by the government also experience these patterns of instability? Post your thoughts in a comment below.

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Can the stimulus save us? – from CNNMoney

Today the US Congress approved a $170 billion stimulus package that will consist of rebate checks to be mailed to 117 million low and middle-income households. The details of the package are as follows:

Tax rebates to 137 million people. A rebate of up to $600 would go to single filers making less than $75,000. Couples making less than $150,000 would receive rebates of up to $1,200. In addition, parents would receive $300 rebates per child.

Tax filers who do not owe income taxes but have at least $3,000 in income would get a $300 rebate.

The IRS will start sending out checks in early May, said Treasury Secretary Henry Paulson.

“Payments will be largely completed this summer, putting cash in the hands of millions of Americans at a time when our economy is experiencing slower growth,” Paulson said in a statement.

Business tax breaks. The bill would temporarily provide more generous expensing provisions for small businesses in 2008 and let large businesses deduct 50% more of their assets if purchased and put into use this year.

Housing provisions. The bill calls for the caps on the size of loans that may be purchased by Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) to be temporarily raised from the current level of $417,000 to nearly $730,000 in the highest cost housing markets.

It also calls for an increase in the size of loans that would be eligible to be insured by the Federal Housing Administration.

Politicians from both parties joined forces on this act of expansionary fiscal policy. The hope, of course, is that with more money in their pockets, Americans will start spending again, firms will start investing, and these increases in expenditures will shift the US economy towards a path of expansion, increasing employment and output.

But what will the impact of this “stimulus package” be? Will Americans spend their rebate checks in the way Congress hopes they do? Some fear that low and middle-income households will take their newfound income right to Wal-Mart and buy Chinese imports, or put a large proportion of it into savings, or pay off existing credit card debt, three actions which would represent “leakages” from the circular flow, leading to no new income or output. Savings and spending on imports would do nothing to stimulate the US economy, therefore, before concluding that the tax rebates will help fend off a US recession, economists must consider the American peoples’ marginal propensities to save and to import. Only new spending on American goods and services will contribute to aggregate demand.

The provision of the stimulus package more likely to result in increased spending in the US is the business tax deduction for spending on new capital. Capital goods such as heavy machinery tend to be made in America by American workers, so encouraging firms to invest in new capital is likely to have a positive demand-side effect on US income and employment. Furthermore, more capital for US businesses is likely to increase productivity of workers in those firms which have invested, leading to greater income and output: this is the desired “supply-side” effect of stimulating business investment. When aggregate demand and aggregate supply increase simultaneously, economic growth is the result.

Unfortunately, the provisions aimed at encouraging business investment represent only around one third of the total stimulus package. Most of the $170 billion will end up in the hands of households, which I suppose should come as no surprise in this election year, when both the Democratic and Republican parties want to appear as the benevolent parties that helped make the average American household a little bit richer in 2008!

For some informative insight from Harvard economist Martin Feldstein, who is president of the National Bureau of Economic Research, click here.

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Motivated by a Tax, Irish Spurn Plastic Bags – New York Times

Here’s a textbook example of how government can use taxes to correct a market failure.

In 2002, Ireland passed a tax on plastic bags; customers who want them must now pay 33 cents per bag at the register. There was an advertising awareness campaign. And then something happened that was bigger than the sum of these parts.

Within weeks, plastic bag use dropped 94 percent. Within a year, nearly everyone had bought reusable cloth bags, keeping them in offices and in the backs of cars. Plastic bags were not outlawed, but carrying them became socially unacceptable — on a par with wearing a fur coat or not cleaning up after one’s dog.

A market failure existed; too many plastic bags were being used and discarded, creating negative externalities for society. A responsible government minister made it his mission to correct this market failure, and in the face of strong opposition from retailers. But guess what, it worked. Not only have they practically disappeared from the country’s retail stores, but their use has become a social taboo.

Why don’t more developed countries, where citizens can afford to care about the environment, place corrective taxes on plastic bags? Heck, why not use taxes to correct other market failures, too? How about a gas tax, for goodness sake?

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