I guess I'm part of the problem

THey are selling the MP3 boxes that are palm size - big time. I feel those are the way.

Frankly I think that is so so. I want both.

I don't plan on jogging with one in my ear when the time comes.

Martin

These are valid questions, but, without making an eternal correspondance out of it, let me just point out a couple of issues that I think you're missing. Assume, first, that we're working in a system that lets the market decide what "value" is.

Those UPS drivers (making around $22.50/hr., BTW, on the average) have a union and the union is a market force. Yes, I know that flies in the face of anti-union dogma, but in one sense it is true. If UPS doesn't like it, they just take their capital and put it into another business. That's what they tell workers to do when they don't like their wages -- they're just supposed to find another job. Either one will incur very high costs by making a change, but, hey, that's the way it goes. UPS is large enough that it has a coercive power over drivers; the union is large enough that is has a countervailing coercive power over UPS. Fair enough?

So UPS operates or not with those wages, and the market accepts them or not by paying UPS's rates or not. The free market at work. Right? Everything is ducky as long as it works, and we'll leave it to academicians to decide who is distorting what.

Let's apply that principle to toolmakers. A fairly good one, with moderate experience, makes $20/hour or so in the US. An equally good one in China with the same experience makes less than $1/hour. So, if the market principle is to be applied, the US toolmaker is overpriced by $19/hour. Or the Chinese worker is underpriced by $19/hour. Which is it? Low wages tend to drive out high ones, like bad money drives out good. But if you believe in markets setting prices, you'd say that the market is severely distorted in this case, because the two equal workers can't be worth such different rates of pay. The market will work it out, some say. Either the US worker will wind up making less, or the Chinese worker will make more, or some of both. Right?

Now, which set of valuations is more "real," the one operating in China, or the one operating in the US, Europe, Canada, Australia, and Japan? Which system is more "realistic" in setting value? It can't be both, at least not now. One or the other is highly distorted, in the way an economist would use the term.

Which has the "right" set of values for jobs, goods, and services? Well, before China became such a big market force, it was the West and Japan. We dominated the world economy. We all had growth, and prosperity, and so on. It was "right" in the sense that it produced those benefits that a free market is supposed to produce. Now we have an injection of vast volumes of goods (and services, from India) that threaten to upset the basis of value. Coming out of an economic black hole, they both have wage rates that are totally unrelated to those of the developed world, and they have social and economic conditions that threaten to resist a levelling like the one that classical economics predicts. In China's terms, you might be worth $1.50/hour rather than $35/hour. What is your "real" value?

You appear to have a sense of value based on your relative contribution to the economy, and that's been the traditional basis on which people have acquired a sense of their worth in the marketplace. But it is the marketplace, at least as you accept the term, that says you were 'way, 'way overpaid.

One man's market force is another man's market distortion. It would take a book to elaborate how this relates to our discussion, but, FWIW, I accept the idea that UPS's union wages are a distortion. But so is China. At the bottom, a distortion is either a coercive force on the market (a very powerful union, or a business monopoly) or a breakdown in value that's the result of some non-systematic or non-evolutionary change. China is such a change, and it's causing a breakdown in value that's distorting constructive market forces, based on my conclusion, and that of an increasing number of others who have much more expertise. (Alan Greenspan said today that this is not true, that the market is working just fine and that China is not a problem. Paul Krugman, an equally respected economist, says that Uncle Alan is losing his marbles. Look around you, decide if low-wage competition from China is negatively affecting your industry, and then you decide who is closer to the truth -- at least, to the truth that matters most.)

I've got to cut this long-winded discussion short, which risks screwing it up completely, but here's the most important final point. Since the 1970's, there has been no way for the US, or any other developed economy, to wind up with inflated values because its workers or industries are "spoiled". Since currencies were cut free of gold and silver standards, and since they were allowed to float free on world markets, it has been those currency markets that determine relative value. If the US economy, overall, was puffed-up by wishful thinking or greed, the currency markets would cut it down to size in about 15 minutes. So your set of relative values, which all of us share to some degree deep inside, and which we might call the "high-school civics class system of valuation" , is utterly shot to pieces on the world currencies markets. They don't care what your idea of value is. They only care what the market thinks value is. And they think that our wages, relative to our production, are just about right. We won't know what they think about China unless and until China cuts its currency loose to float and to be traded freely on world markets.

Wphew. Sorry. That's 'way too short to be very useful, but 'way too long for this NG.

Would this apparent disparity between the the dollar value and product shelf space be a result of the Chinese stuff being so cheap? US items cost more, so a eg a US made bike equals 5 or 10 Chinese ones. Geoff

I don't know how much of that is in the mix, but my guess is that it's not much. Walmart seems to be seeking low prices across the board, gaining a competitive edge in every possible category, so it's probably using a fairly level markup rate.

More likely, I think, is that a high percentage of what it buys from China is products in low-price categories. That would mean that a higher percentage of items on the shelf are made in China, overall, than the dollar volume of their China purchases would otherwise indicate.

This is just a guess. I doubt if Walmart makes this information public.

Ed Huntress

Got it, Ed, and in the end you're telling me the same things I'm thinking, all except for the relative value as established by the market. My feelings are that they are more driven by such entities as the strong unions, but for now I think you've opened a few doors for me so I can see things in a slightly different light. Whether I agree or not will be the next challenge.

You're talking to someone that would be slow to understand some of the things that you have so patiently tried to explain, so the conversation could go on almost endlessly. You have spent a good deal of your time on just my thoughts, and for that I'm grateful.

I'll continue to read your posts and learn more. Thanks.

Harold

Well, economists are saying that the yuan is about 30% overvalued. So if it were allowed to float free, a Chinese machinist would have to be paid the equivalent of $1.30 an hour instead of $1.00 an hour to make the same amount he is now making. That's still far below the $15 an hour a US machinist demands.

Gary

Nobody knows what would happen to the yuan if it were to float. The 40% figure we hear so often came from a US Congressional commission that was evaluating China's military threat to the US. Some economists have said the real figure is 20%. Andy Xie, an highly respected economist based in Asia who works for Morgan Stanley, says it could be that the yuan is actually overvalued. Hamei said last year that the black market for yuan was slightly over 9 to the dollar, which indicates that it's overvalued.

US Congressmen and the US press have been using the 40% figure, passing it around without knowing where it actually came from, for the most part.

What matters to the Chinese is the rate at which they can accumulate foreign reserves. That's how they've set their rate.

In any case, your underlying point that a revaluation wouldn't do much to improve our trade situation certainly is true, as I also said in one of my articles for Machining about China trade.

The trouble with the fixed exchange rate, for us, is that nothing we can do to improve our own productivity, and no adjustment of the value of the US dollar, will work to level our trade situation with China as long as they have their rate pegged to ours. Improving our productivity will only raise the value of the dollar while China's edge in trade will remain unchanged; running an excessively negative current account balance that will reduce the value of the dollar will result in theirs going down along with ours, which they won't care about one way or the other.

It's a very distorting thing, in other words, although not for the reason that Phil English (R-PA) and some other Congressmen are claiming.

Ed Huntress

*Some* are saying that- it's the official line. Others are saying that it could as easily be 30% overvalued.

I think the main difference for the US if the Chinese currency was forced up in value like Japan's was (or if it floated up) would be that the Chinese could afford to buy more stuff- particularly agricultural products, which is one area where the US can compete with any other place on earth, with both price and quality.

This idea of devaluing the USD by 30% or so with respect to major trading partners (already most of the way there vis a vis the Canadian dollar and the Euro) seems more like a short term gain, long term pain strategy to stimulate the economy quickly, and damn the consequences. Together with the policy of "getting tough" with trading partners (breaching the parts of negotiated agreements that are deemed disadvantageous, especially to special interests, while taking full advantage of those that are to the US advantage) and massive domestic deficit spending it forms a kind of strategy. There are a couple of things wrong with it- it is a game of chicken that assumes that the trading partners have the sanity not to retaliate fully and start a trade war (or that they are weak and prepared to eat the losses) and secondly, if it doesn't work, there's not a lot more that can be done, the levers the government has available are already at their stops. There are also long-term consequences to making Americans 1/3 poorer that will take some time to show up- such as in resource prices. The failed Cancun round of trade talks show that even the poorest of countries can gang up on the rest of us.

Here's one take on the trade war strategy from a Bloomberg columnist:

and another

China, which seldom has a need to visibly flex her muscles much these days, with growing regional clout, has not responded as passively or patiently as European and Canadian targets. They immediately cancelled a massive buying mission to the US (for "technical" reasons), and are considering reducing their purchases of US debt instruments. As the second largest lender to the US (after Japan) that could have negative consequences- a dollar spiraling ever-lower is not in anybody's interests. This is in addition to retaliation for the illegal steel tariffs if they are not removed and the foreign sales corporation subsidy (also ruled to breach the WTO agreement). Probably they have made an accurate assessment that strength is the only thing that will be respected, and weakness will be "provocative", to use Rumsfeld's term.

If there's a big boom in the US economy real soon, all this stuff will probably go away.. but if there is isn't, something is going to have to give soon (probably more than one thing). Maybe some painful changes in US domestic spending to reduce dependency on foreigners, and more managed trade and managed exchange rates.

Best regards, Spehro Pefhany

But what is the buying power of that $1.00 as opposed to the US machinists $15?

Gunner

Antiquis temporibus, nati tibi similes in rupibus ventosissimis exponebantur ad necem.

It varies. Vegetables are quite cheap, meat is maybe 1/2 US price levels per unit weight (at rather lower quality- chicken is almost always tough and stringy, pork may come with skin and sometimes hair). Anything that is just labor (eg. a shoeshine, haircut or manicure) it buys about 8-10 times as much. Gasoline, I think about the same price, give or take. An overnight first class train ticket (sleeper) of about

20 hours is around $80 US, or about 1/4 of that in "hard seat" second class. Road tolls are about at US levels, cheaper than Europe. Airfares are about the same as discount US fares, but the price is pretty much fixed (you might get -10% by buying it directly from the office with cash). A 25 minute taxi ride is only about $5-6. Major appliances are about half the price retail and inferior/smaller than their powerful North American cousins. Cars are roughly the same price, I think. Housing costs are generally low for the majority of people, but you can pay a small fortune for a nice place. Because energy is relatively expensive, streets are dimly lit. They'd rather post a security guard in an underpass ("subway") than put cameras and bright lighting in place. Prices are higher in big booming cities and cheaper in smaller places.

One rule of thumb I use for what's affordable there is to multiply the price by about 8. If it would still seem reasonable at my income, then they are probably buying it. For example, a $250 US clothes washer- would it be worth $2000 to me to not have to wash clothes by hand? Having tried the latter, once, in China with their crummy washing powder, I say YES!

The overall feel is that of a place with a heck of a lot of cheap labor (poor working people) and with prices for energy and good about what you'd expect given that. It's not like former Eastern Europe with grossly distorted prices (15 cents for a pack of cigarettes), nor is it like Mexico was a few years ago where everything felt overpriced considering quality etc. (before the peso collapsed).

Best regards, Spehro Pefhany

Great post, Ed! Not too long at all. Your points were very well made and supported by believable examples.

constructive

Well that's a good point that never seems to get addressed, food, for instance, in the US cost more then anywhere else in the world except the artic, I suppose. You go to a typical store in the US and its $3/pound for lousy tomatoes or almost a dollar each for those big apples or $4 for a box of cold cereal that has 12 cents worth of corn/sugar in it. $1/hour isn't that bad when you can buy a bushel of apples for 32 cents.

float free, a Chinese machinist would have to

I think basic food is pretty cheap in the US and Canada. Many people can afford to pay a lot for "premium" products so you get yer perfect unblemished hothou$e tomatoes, beatifully packaged basmati rice, prepared entrees in 4-color boxes and so on, but if you want to fill up on potatoes, regular rice, garbanzo beans, root vegetables and bread, pork and chicken, it's pretty dirt cheap. I can't *ship* stuff for what potatoes sell for per pound.

Apples ("pinguo") are not particularly cheap in China. If you're willing to eat congee (rice gruel) and steamed bread... cold rice with a bit of rat err... well, you know what I mean.

Best regards, Spehro Pefhany

float free, a Chinese machinist would have to

It may feel that way, but, actually, we're among the cheapest of the developed countries. However, if you count meat pies and if you don't ask which part of the animal kingdom it came from, there are a few places that have the edge.

Ed Huntress

float free, a Chinese machinist would have to

Those hothouse things are not tomatoes. They are a styrofoam facsimile with some sort of acidic liquid added, along with some red dye. They do not belong in a food store, but rather someplace that gag gifts are sold.

michael

Its all happened so many times over, over the last couple of centuries. When the industrial revolution started, here in Britain, we had the world as our market, We imported some raw materials, those that we didn't have naturally here, and sold to everyone. It wasn't long before all our customers caught up, and started making the things for themmselves, and at rates well below our own, as their costs of living were much lower. We then bought from them. In their turn, the same happened, and again and again. Post war, its been the turn of Japan, then Korea, then India and China. Since nearly all our companies reckon that they are "global" and not "national" they see no reason not to shift labour intensive work to wherever its cheapest at the moment. The accountants hold the sway, and claim its all for the shareholders' benefit, which is probably true, since if a company falls behind its competitors, it loses their market and soon folds. They have little option.

Dave. UK

That's all true, but there are two issues that bother many of us in the US with the present circumstances. One is the huge volume and acceleration of capacity we're seeing from those two enormously populous countries. Our standard ways of adapting to increased imports may not be able to cope with them except by suffering some severe displacements in our economy -- ones that many of us feel can have a permanent deleterious effect.

The second is that it's true that our multinationals have no option, but the options are determined by the rules of the game. And they've been writing all of the rules.

Ed Huntress

A US dollar is a US dollar. It has the same buying power no matter who holds it. That's why such things as wages and prices in different places are converted to dollars before comparisons are made.

In other words, Chinese vegetables cost the same for the Chinese machinist as they'd cost for the US machinist (plus shipping, of course). And conversely, US vegetables cost the same for the US machinist as they'd cost for the Chinese machinist (plus shipping of course). Same for Korean TVs, Tiawanese computers, US cars, etc, etc, etc.

In other words, if they're buying the *same* products from the *same* suppliers, the only difference is shipping costs. Where it gets complicated is when they're buying different products from different suppliers. That's where a lack of free trade can make large differences.

For example, the US machinist is paying a 30% premium for steel, and US products made from steel, thanks to the illegal tariffs imposed by the US government. The Chinese machinist is paying a nearly 400% premium on gasoline compared to the US machinist, thanks to a punitive tax on gasoline in China. Etc.

In very general terms, for a market basket of Chinese domestic goods, the Chinese worker is getting about 4.7 times as much for his dollar as the US machinist is for a similar (but not identical) market basket of US domestic goods.

Gary

Unh, where do you get that number from Gary? Prices I've seen right at the pumps are not much different than in the US or Canada.

This is bad news for us, BTW, because it means that Chinese will be using lots of gas (and competing with us on world markets to buy the stuff) just as soon as they can afford to. Europeans could afford to pay a lot more for gas, but their governments tax it heavily- if they ever slashed those taxes, the same would happen.

China also has fairly hefty tariffs on some items (30-40%), unlike Hong Kong SAR which is basically a free port (for most things, but not booze, smokes, and cars), so the price for a Japanese-made Sony Walkman in China is more expensive than in New York, despite the low cost of the Chinese store clerk.

Best regards, Spehro Pefhany