1. The United States in a Global Economy Brett Burkey MAEEE, Summer 2008

2. What is the Global Economy? An international marketplace (in a very broad sense) Trade in Goods Trade in Goods Final and intermediate goodsFinal and intermediate goods Trade in Services Trade in Services OutsourcingOutsourcing VacationVacation Trade in Labor Trade in Labor Immigration …Immigration … … legal and illegal Trade in Capital Trade in Capital Foreign direct investmentForeign direct investment Financial flows: stocks, bonds, currenciesFinancial flows: stocks, bonds, currencies

3. Topics for Today Some facts about the global economy: Some facts about the global economy: Trade flowsTrade flows Financial flowsFinancial flows Labor movementsLabor movements Is the global economy a threat? Is the global economy a threat? Should we worry about the trade deficit?Should we worry about the trade deficit? Are we becoming too indebted to the rest of the world?Are we becoming too indebted to the rest of the world? Are immigrants taking away jobs?Are immigrants taking away jobs?

4. Buying American? 65 % made in America90% made in America Ford MustangToyota Sienna Hard to distinguish: American vs. Foreign made goods!

5. Economic Background: Why are economists in favor of free trade? Should Wisconsin grow oranges? Should Florida make cheese? Should Wisconsin grow oranges? Should Florida make cheese? No and No! No and No! Wisconsin should specialize in cheeseWisconsin should specialize in cheese Florida should specialize in orange productionFlorida should specialize in orange production Then trade cheese for orangesThen trade cheese for oranges

6. Econ Lingo: Opportunity cost WisconsinFlorida Cheese production Low opportunity cost High opportunity cost Orange production High opportunity cost Low 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 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! How much cheese production does WI give up to produce one more unit of oranges? A lot!

7. More Econ Lingo: Comparative advantage More Econ Lingo: Comparative advantageWisconsinFlorida Cheese production Low opportunity cost High opportunity cost Orange production High opportunity cost Low opportunity cost The country with the lower opportunity cost in producing one good has a comparative advantage in that good. The country with the lower opportunity cost in producing one good has a comparative advantage in that good. specialize in cheeseWisconsin has a comparative advantage in cheese production => specialize in cheese specialize in orangesFlorida in orange production => specialize in oranges Comparative advantage

8. Advantages: Advantages: More total cheese and orange productionMore total cheese and orange production Job gains among dairy farmers in WI and orange growers in FLJob gains among dairy farmers in WI and orange growers in FL Disadvantage: Disadvantage: Job losses among dairy farmers in FloridaJob losses among dairy farmers in Florida Job losses among orange growers in WisconsinJob losses among orange growers in Wisconsin Trade is beneficial for both states as a whole … Trade is beneficial for both states as a whole … … though not for all residents. Economic Background: Why are economists in favor of free trade?

9. 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

10. Does the trade deficit cause unemployment? Trade deficit expands Unemployment drops Most of the expansion in the trade deficit occurred during the roaring 1990s! Since 2000 Before 2000

11. U.S. manufacturing output hurt by imports? 1990s: Surge in imports and manufacturing output 2000-2002: Manufacturing drops, imports slow Since 2000: Both recovering Manufacturing output expands despite imports

12. 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!

13. The real culprit: Productivity Output per hour in Manufacturing Overall Economy

14. How about outsourcing of service jobs? Exports Imports surplus The U.S. has a persistent surplus in trade of services Surplus

15. How is the service industry doing? 21.4m new service jobs in the 1990s 6.5m new service jobs since 2000 expanding Despite outsourcing the service industry is expanding Service jobs (normalized to 100 in 1990)

16. Are these new service jobs all low-paying jobs?

17. How is the service industry doing? High-paying service jobs: Information, Financial, Health, Education, Professional and Business Services high-paying 56% of the service job growth These high-paying service jobs accounted for 56% of the service job growth since 1990! 41% of jobs. In 2006 they accounted for 41% of jobs. Compensationfour times faster Compensation in these jobs grew four times faster than in service industry overall High-paying Total

18. Summary: Trade in goods and services Increased trade tends to coincide with economic expansion Increased trade tends to coincide with economic expansion Manufacturing employment is down in the U.S. Just like everywhere else! Manufacturing employment is down in the U.S. Just like everywhere else! Service employment has grown despite outsourcing. Service employment has grown despite outsourcing.

19. 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. 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. There is a trend toward more international financial integration. This has coincided with less volatility in U.S. GDP.This has coincided with less volatility in U.S. GDP.

20. U.S. International Investment Position (in $b) $365b more assets accumulated trade deficits! $2,546b more liabilities: accumulated trade deficits! 27% of GDP 14% of GDP 92% of GDP 112% of GDP Notice the difference in scale!

21. 2 times standard deviation around the mean GDP has become less volatile since the mid 1980s. Some economists argue that international diversification has been a contributing factor

22. Summary: Financial flows Gross financial flows increase due to more integration. 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. 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. More financial integration has coincided with less volatility in economic growth. One advantage is the spreading of risk.One advantage is the spreading of risk.

23. Labor movements: Immigration Historical perspective of immigration Historical perspective of immigration Who are the immigrants? Who are the immigrants? Why does immigration work? Why does immigration work?

24. Immigration is high compared to mid-1900s, but low compared to pre WW-I era!!! Drops after 1914 Drops again during the Great Depression Peak demand for IT workers in the mid 1990s A lot of immigrants came in the late 1800s, early 1900s Currently about 1m immigrants per year (0.3% of total population)

25. Who are the immigrants? What’s their age? What's their education? How much money do they make?

26. Immigrants are young compared to the overall population!

28. uneducated Large fraction of uneducated individuals among immigrants

29. First generation immigrants have low income (they are younger, less educated), … … but consequent generations catch up!

30. 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 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 Immigration is one way to add to the labor supply Immigrants concentrate in high growth areas of the country Immigrants concentrate in high growth areas of the country

31. Trend line States with higher employment growth also have more immigrants

32. How about illegal immigration?

33. Illegal immigration … but it’s against the law! tautologyThat’s a tautology Laws of economics (e.g. demand creates supply) appears to supersede U.S. immigration laws.Laws of economics (e.g. demand creates supply) appears to supersede U.S. immigration laws.

34. Summary on Immigration Large flow of immigrants, though not as large as in the 1800s and early 1900s 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 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 Immigrants become more economically like the native population over time Immigration helps the economy balance growth in labor demand with supply Immigration helps the economy balance growth in labor demand with supply

35. Conclusion Global Economy – Trade in the international marketplace Global Economy – Trade in the international marketplace Trade in goods increases during economic expansions Trade in goods increases during economic expansions Trade deficits have not caused unemployment to rise.Trade deficits have not caused unemployment to rise. Outsourcing has not caused declines in service employment.Outsourcing has not caused declines in service employment. Financial flows: Financial flows: Large increases in gross and net flows.Large increases in gross and net flows. More financial integration has coincided with more stable growth.More financial integration has coincided with more stable growth. Immigration: Immigration: Fills a demand gapFills a demand gap

36. I am looking forward to your questions and comments.