Detroit, Is That You? Chicago In Big Trouble | Via Meadia

http://blogs.the-american-interest.com/wrm/2013/07/30/detroit-is-that-you-chicago-in-big-trouble/


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On vested interests and profits | FT Alphaville

http://ftalphaville.ft.com/2013/04/29/1479282/on-vested-interests-and-profits/


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Will this be a lost decade for profits?

Will this be a lost decade for profits?
http://www.macrofugue.com/will-this-be-a-lost-decade-for-profits/

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10 Psychology Tricks You Can Use To Influence People - Listverse

http://listverse.com/2013/02/03/10-psychology-tricks-you-can-use-to-influence-people/

10 Psychology Tricks You Can Use To Influence People

Humans

Gregory Myers February 3, 2013

Check out our new companion site: http://knowledgenuts.com

Before we get started, it's important to note that none of these methods fall under what we would term the dark arts of influencing people. Anything that might be harmful to someone in any way, especially to their self esteem, is not included here. These are ways to win friends and influence people using psychology without being a jerk or making someone feel bad.

Trick: Get someone to do a favor for you—also known as the Benjamin Franklin effect.

Legend has it that Benjamin Franklin once wanted to win over a man who didn't like him. He asked the man to lend him a rare book and when the book was received he thanked him graciously. As a result, this the man who had never wanted to speak to him before, became good friends with Franklin. To quote Franklin: "He that has once done you a kindness will be more ready to do you another than he whom you yourself have obliged."

Scientists decided to test this theory and found that those who were asked by the researcher for a personal favor rated the researcher much more favorably than the other groups did. It may seem counter-intuitive, but the theory is pretty sound. If someone does a favor for you, they are likely to rationalize that you must have been worth doing the favor for, and decide that therefore they must like you.

Trick: Ask for way more than you want at first then scale it back later.

This trick is sometimes known as the door in the face approach. You start by throwing a really ridiculous request at someone—a request they will most likely reject. You then come back shortly thereafter and ask for something much less ridiculous—the thing you actually wanted in the first place. This trick may also sound counter-intuitive, but the idea behind it is that the person will feel bad for refusing your first request, even though it was unreasonable, so when you ask for something reasonable they will feel obliged to help out this time.

Scientists tested this principle and found that it worked extremely well as long as the same person asked for both the bigger and smaller favor, because the person feels obliged to help you the second time and not anyone else.

Trick: Use a person's name, or their title depending on the situation.

Dale Carnegie, the author of How to Win Friends and Influence People, believed that using someone's name was incredibly important. He said that a person's name is the sweetest sound in any language for that person. A name is the core part of our identity, and so hearing it validates our existence, which makes us much more inclined to feel positively about the person who validated us.

But using a title, or form of address can also have strong effects, according to the as if principle. The idea is that if you act like a certain type of person, you will become that person, it's a bit like a self fulfilling prophecy. To use this to influence others, you can refer to them as what you want them to be, so they will start thinking of themselves this way. This can be as simple as calling an acquaintance you want to be closer to "friend," or "mate" whenever you see them, or referring to someone you want to work for as "boss." But be warned: this can come off as very corny.

Trick: Flattery will actually get you everywhere.

This one may seem obvious at first, but there are some important caveats to it. For starters it's important to note that if the flattery is not seen as sincere, it's going to do more harm than good. But researchers have studied the motivations behind peoples reaction's to flattery, and found some very important things.

To put it simply, they found that people tend to look for cognitive balance, trying to always keep their thoughts and feelings organized in a similar way. So if you flatter someone who has high self esteem, and it is seen as sincere, they will like you more, as you are validating how they feel about themselves. However, if you flatter someone who has low self esteem, there is a chance it could backfire and cause them to like you less, because it interferes with how they perceive themselves. That, of course, does not mean you should demean a person of low self-esteem!

Trick: Mirror their behavior.

Mirroring is also known as mimicry, and is something that some people do naturally. People with this skill are considered to be chameleons; they try to blend into their environment by copying other people's behaviors, mannerisms and even speech patterns. However, this skill can also be used consciously, and is a great way to make you more likable.

Researchers studied mimicry, and found that those who had been mimicked were much more likely to act favorably toward the person who had copied them. Even more interesting was their second find that those who had someone mimic their behavior were actually nicer and more agreeable to others in general—even those not involved in the situation. It is likely that the reason why this works is that mirroring someone's behavior makes them feel validated. While this validation is likely to be most positively associated with the person who validated them, they will feel greater self-esteem and thus be more confident, happier and well disposed towards others.

Trick: Ask for favors when someone is tired.

When someone is tired they are more susceptible to everything someone may say, whether it is a statement or a request. The reason for this is that when people are tired it isn't just their physical body, their mental energy levels drop as well. When you ask a request of someone who is tired, you probably won't get a definite response, but probably an "I'll do it tomorrow," because they don't want to deal with decisions at the moment. The next day, they are likely to follow through because people tend to keep their word; it's natural psychologically to want to follow through with something you said you would do.

Trick: Start with a request they can't refuse and work your way up.

This is a reverse of the door in the face technique. Instead of starting with a large request, you start with something really small. Once someone has committed to helping you, or agreeing to something, they are now more likely to agree to a bigger request. Scientists tested this phenomenon in regards to marketing.

They started by getting people to express support for the rain forests and the environment—which is a fairly simple request. Then they found that once they had gotten them to express their agreement to supporting the environment, they were much easier to convince when it came to buying products that supported rain forests and other such things. However, don't start with one request and immediately assail them with another. Psychologists found it much more effective if you wait a day or two to make the second request.

Trick: Don't correct people when they are wrong.

Carnegie also pointed out in his famous book that telling someone they are wrong is usually unnecessary and does the opposite of endearing them to you. There is actually a way to show disagreement and turn it into a polite conversation without telling someone they are wrong, which strikes to the core of their ego. This is called the Ransberger Pivot, invented by Ray Ransberger and Marshall Fritz. The idea behind it is pretty simple: instead of arguing, listen to what they have to say, and then seek to understand how they feel and why. Then you explain the common ground that you share with them, and use that as a starting point to explain your position. This makes them much more likely to listen to what you have to say, and allows you to correct them without them losing face.

Trick: Paraphrase people and repeat back to them what they just said.

One of the most positive ways to influence others is to show them that you really understand how they feel, that you have real empathy for them. One of the most effective ways to do this is by paraphrasing what they say and repeating it back to them, also known as reflective listening. Studies have shown that when therapists used reflective listening, people were likely to disclose more emotion and have a much better therapeutic relationship with the therapist.

This easily transfers over to talking to your friends. If you listen to what they say, and rephrase it as a question to confirm that you understood it, they are going to be more comfortable talking with you. They are also going to have a better friendship with you and be more likely to listen to what you have to say, because you showed that you care about them.

Trick: Nod a lot while you talk, especially when leading up to asking for a favor.

Scientists have found that when people nod while listening to something, they are more likely to be in agreement with it. They also have discovered that when someone is nodding a lot in front of them, it is natural for them to do the same. This is understandable because humans are well known at mimicking behaviors, especially those that they consider to have positive connotations. So if you want to be extra convincing, nod regularly throughout the conversation. The person you are talking to will find it hard not to nod themselves, and they will start to feel agreeable toward what you are saying, without even knowing it.

You can follow Gregory Myers on Twitter.

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Corporate investment: A mysterious divergence - FT.com

http://www.ft.com/intl/cms/s/0/8177af34-eb21-11e2-bfdb-00144feabdc0.html#axzz2a9WcgU7o

Corporate investment: A mysterious divergence

©Lloyd Thatcher

Robert Grant made a solid career out of Botox and breast implants. With a broad smile, he looks like Hollywood's version of a US corporate executive, perhaps because he admits to using some of the rejuvenating products he sold.

Treatments to tauten an ageing population are the quintessential – and highly profitable – products of the US economy in the 21st century. Mr Grant has flown high at some of the industry's top companies, such as Allergan and Bausch & Lomb, which have operations, together with their most ardent customers, in California's Orange County.

But Mr Grant grew frustrated, even in this healthiest of industries. "It has become less about blue skies, less about true innovation. It has become more a world about efficiency, cost-cutting and debt," he says of large US corporations. "Nobody wants to take a risk on something that could fail."

He overcame his frustration by founding Strathspey Crown, an investment company that aims to back new technologies in "lifestyle healthcare" for consumers who will pay to look better.

Mr Grant's experience reflects a broader mystery about the US economy, one that dates back to the late 1980s, but has become ever more pressing as a fifth year of sluggish recovery begins. Profits in the US are at an all-time high but, perversely, investment is stagnant.

According to GMO, the asset manager, profits and overall net investment in the US tracked each other closely until the late 1980s, with both about 9 per cent of gross domestic product. Then the relationship began to break down. After the recession, from 2009, it went haywire. Pre-tax corporate profits are now at record highs – more than 12 per cent of GDP – while net investment is barely 4 per cent of output. The pattern is similar, although less stark, when looking at corporate investment specifically.

This change is profoundly odd. Economic theory says investment is driven by profitable opportunities on one side and the cost of capital on the other. High profits suggest there are decent opportunities to make money; historic lows in interest rates and highs in the stock market mean that capital is dirt cheap. Yet investment does not follow.

"We have this strange thing that the return on capital really does seem to be high, the cost of equity capital is low, and yet we're getting a lot of share buybacks and not much investment," says Ben Inker, co-head of asset allocation at GMO. "It just feels a bit weird."

For workers, this weirdness is mirrored by a falling share of GDP for wages, so it contributes to rising inequality; for investors, if the extraordinary strength of profits turns out to be unsustainable, then the US stock market must fall; and for everyone, investment today is what leads to a better standard of living tomorrow.

Explaining the disconnect between profits and investment may help solve some of the US economy's biggest problems. Theories include everything from the financial crisis, to the hidden side effects of computer technology, and the perverse incentives of corporate executives.

The most obvious place to start is with the financial crisis and recession. Its extremity helps explain the trough in overall investment: no one built houses for five years. To an extent, it can also explain why corporations do not invest despite high profits.

"You had to recover all the ground that was lost in the dip before you needed to add more capacity," says Joseph Kasputys, founder of IHS Global Insight, which provides economic advice to US companies. "Secondly, there's the fact that the growth prospects for the future have been very anaemic and continue to be very anaemic."

The policy implication is simple: heal the economy and investment will take care of itself. Profits will fall, wages will recover. But the recession alone cannot explain why profits should reach record highs nor why their relationship with investment has changed so much over the past 25 years.

Similar objections apply to the theory – beloved of US business – that rampant regulation, taxation and political uncertainty are stifling investment. Mr Grant argues that the government's focus on controlling healthcare costs discourages innovation. He points to the 2.3 per cent tax on medical devices that helped pay for the Affordable Care Act.

"Innovation is normally only born amid freedom," he says. "In general, you're seeing – particularly in the United States – a model that is probably more regulated than it has been in the past."

Regulation may lower productivity but it is most likely to hurt investment by making it less profitable – and yet profits are up. Moreover, recent rules such as the Dodd-Frank financial reform and the Affordable Care Act cannot explain a trend that spans deregulation during the Clinton and Bush administrations.

That leaves deeper shifts in the economy and one of the most profound is the rise of information technology, which gathered pace as the pattern of investment and profits began to change in the 1980s.

IT is often cited as a cause of rising inequality because computers favour skilled employees who can use them, but Loukas Karabarbounis and Brent Neiman of the Chicago Booth business school suggest they boosted profits as well. Their argument revolves around the cheapness of computers compared with traditional investment: it costs less to raise output via a new version of Windows than a new production line.

As IT made investment cheaper, companies used computers to replace staff. That led to a rise in profits relative to wages. The cheaper investment became in a country, find Mr Karabarbounis and Mr Neiman, the more the share of profits in GDP went up.

There were times when we wanted to acquire early stage technologies but we couldn't because it would put too much burn on the P&L

- Robert Grant, former US corporate executive

But there is a problem with this theory: it predicts higher investment along with higher profits as companies plough money into computing power. "It is the case that our baseline calibrations predict more investment spending than we have typically seen," Mr Nieman says.

One possible answer is that economic statistics do not pick up all this investment. For example, they may not fully capture the falling price of computing power and investment may be shifting towards intangible assets such as research, branding and better business organisation.

According to Carol Corrado of The Conference Board, the business group, intangible investment has doubled as a share of GDP over the past 40 years. Once you account for it, investment looks stronger. "It changes the pattern enormously," she says.

If computers are the main influence then profits are sustainable, there is less fear for future growth and workers are out of luck until another technology comes along to create demand for their labour.

There are still many doubts, however, about whether intangibles really are a form of investment. If one company invests in a brand to boost profits, does that not mean another company will lose profits, with no change for the economy overall?

Paul Krugman, the Princeton economist and New York Times columnist, has a more sinister explanation for the missing investment. He suggests there has been a general increase in monopoly power. "The most significant answer, I'd suggest, is the growing importance of monopoly rents: profits that don't represent returns on investment but instead reflect the value of market dominance," he wrote.

More monopolies would explain higher profits with less investment, but there is modest evidence that monopoly power has risen, and capital expenditures are low in competitive industries as well. The share of value added by the top 20 software publishers in the US rose from 46 per cent in 1997 to 58 per cent in 2007, for example, which is noteworthy but hardly a new Standard Oil.

That leaves one more theory, which goes back to Mr Grant, and the large public companies that have fuelled rising profits in America.

Corporate America went through a revolution in the 1980s with the arrival of leveraged buyouts, shareholder value, executive stock options and their like. The nature of public companies changed.

"There's just this focus we have on Wall Street around quarterly numbers," says Mr Grant of his years working for public companies. "There were times when we wanted to acquire early stage technologies but we couldn't because it would put too much burn on the P&L.

"Over time, the pressure for earnings per share becomes so strong." That leads to a focus on cost-cutting and efficiency, rather than risky investments that take time to pay off, he says. "If you're gaining market share then you win, even if the market contracts. If you grow the market but lose share then you could lose your job."

Andrew Smithers, of London-based asset allocation adviser Smithers & Co, claims this change in the culture of large corporations can explain the divergence between investment and profits. In particular, he argues that stock options encourage executives to boost short-term profits, while curtailing investment in favour of buybacks that push up earnings per share.

. . .

The idea that a myopic stock market may lead companies to underinvest dates back to research done in the late 1980s by Jeremy Stein, then a Harvard economist and now a governor of the Federal Reserve. The question, however, is whether executive pay can have such drastic effects on the broader economy. There is no certainty – but some suggestive evidence.

In a piece of theoretical research published recently by the New York Fed, economists John Donaldson, Natalia Gershun and Marc Giannoni find that executive pay contracts may have "dramatic, adverse business cycle consequences".

But perhaps the most remarkable result comes from newly available data on private companies studied by Alexander Ljungqvist and colleagues at Harvard and New York University. They find that, keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.

Private companies are four times more responsive to new investment opportunities and, when a private company goes public, it changes its behaviour.

Mr Ljungqvist says he has not examined the effect of this difference on overall investment in the economy. Given the size of the S&P 500, however, investment might be percentage points of GDP higher if its members invested like private companies.

Each theory may hold part of the truth about profits and investment. But if corporate behaviour is to blame, there are policy levers to pull. It would be time to stop thinking about corporate governance and executive pay as matters of equity and to regard them instead as a macroeconomic problem of the first rank.

"All the discussion has been about unfairness," says Mr Smithers. "The economic damage has been totally ignored."

. . .

Amazon bucks the trend

If there is an exception that proves the rule about US corporate investment it is the internet retailer Amazon . Whenever the company has a dollar to spare, Jeff Bezos, chief executive and dominant shareholder, ploughs it into a new service.

"Our heavy investments in Prime, Kindle, digital media and customer experience in general strike some as too generous, shareholder indifferent or even at odds with being a for-profit company," wrote Mr Bezos in his shareholder letter this year.

"But I don't think so . . . Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view and the interests of customers and shareholders align."

In 2012 Amazon was one of very few US technology companies to invest more cash than it earned. It generated $4.2bn in cash from operations, spent $3.8bn on equipment and paid $745m to acquire a warehouse automation company.

Apple is more typical. It takes risks on innovations such as the iPhone but usually within existing product categories. Last year Apple managed to reinvest only about 20 per cent of its cash generation within the company and recently announced a $50bn share buyback.

Perhaps it is impossible for a company as big as Apple to invest that money. But consider Amgen, the world's biggest biotechnology company. Amgen has less capital equipment than it did in 2006 and spends only a fraction more on R&D. Last year it earned $5.9bn in cash from operations, spent $2.4bn on acquisitions and returned a net $4.4bn to shareholders via buybacks and dividends.

This need not be bad for companies or their shareholders. It is surely better to return capital than waste it. The question for the US economy, however, is this: if growth companies such as Apple and Amgen cannot or will not deploy capital, then who on earth will?

-------------------------------------------

Letter in response to this letter:

Economic policy must reflect business behaviour/ From Mr Andrew Smithers

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On vested interests and profits | FT Alphaville

http://ftalphaville.ft.com/2013/04/29/1479282/on-vested-interests-and-profits/

On vested interests and profits

Jeremy Grantham as usual is the one to grab the public's attention whenever GMO produces a note. However, it must be said, Ben Inker's accompanying thoughts in the same edition are also worth some of your time.

Of particular interest, for example, is the following observation:

There are times when the markets do not seem to be following the script properly, and we are left wondering whether we are dealing with a temporary anomaly or a more permanent problem. Today we are faced with one of these problems: the persistently high profit margins of U.S. corporations. High profit margins should not persist in a mean-reverting world, and yet profitability in the U.S. has been higher than long-term averages for most of the last 20 years, oddly pretty close to the same length of time that the U.S. market has been trading above replacement cost.

And he goes on:

At first thought, it may not seem that odd that high profitability is associated with an expensive stock market – after all, shouldn't investors be willing to pay more for assets that achieve a high return? But high valuations imply a low cost of equity capital, which should encourage corporations to issue more equity, and a high return on capital should encourage corporations to do more investing. These pressures should gradually push the cost of capital up and the return on capital down.

But in the period since the mid-1990s, stock issuance has been down and corporate investment has fallen as well, in apparent contravention of the basic rules of capitalism. A high return on capital that occurred simultaneously with a high cost of capital – that is a market selling below replacement cost – would make sense because there is no discrepancy to arbitrage. The current situation is not supposed to happen, which makes it tricky for us to understand exactly when it will end.

So what is happening?

According to Inker, the issue can't be with the profitability equation. That holds true because it is an "economic identity" derived from the Kalecki equation.

The problem is that the major driver of the ebb and flow of profits — investment — has started to break apart from its traditional relationship:

Investment used to be a good barometer for profit, the two used to be closely correlated. Since 1987, this is no longer the case. In fact, it's almost like less investment is leading to more profit.

As Inker notes:

Since 2000, investment has fallen off to levels lower than we have ever seen apart from the Great Depression, and yet profitability has risen to an all-time peak. This has been possible because other pieces from the Kalecki equation have kicked in in a way we haven't seen before.

Which raises the question of why corporations are investing less than at any point since the Great Depression.

Inker suggests it's almost as if corporations view their current profitability as a windfall rather than a permanent condition.

So does it perhaps come down to the case of vested interests? As Inker notes, the rich have been doing very well over the past 30 years, even in terms of their share of labour income. It is in some sense the rentier argument. Those who own the capital are seeing their wealth concentrate and have every interest in acting almost cartel-like.

Yet, as Inker also notes, an increasingly permanent upper class, which not only does far better in terms of labour income than the rest, but further accumulates a chunk of GDP in the form of persistently high dividends and stock buybacks, is likely to accumulate enemies.

Even if the rich avoid that, at some point this capital hoarding has to evolve into spending if profits are to stay high.

If not, there won't be any purchasing power. In that sense rising savings levels hurt corporate profits.

Of course, a lot of the wealthy like to save their income in the form of government debt — so part of the redistribution and purchasing power stimulation can come through government. But there is a problem if the government reaches a debt limit or is dissuaded from borrowing more because of austerity pressure. Which means…

If the rest of households stop dis-saving, it will require the rich to really up their spending to keep the system going. There may not actually be enough goods and services for the rich to buy to make this work, but even if it were possible, it would almost certainly increase the resentment of the have-nots until they took it out on them through the ballot box, if nothing else.

What Inker perhaps fails to recognise is that this may also be evolutionary game theory to some degree. There is now an interest in capital preservation, and the treatment of profits as a windfall, because capital itself is being compromised to some degree. More investment at this point may only lead to diminishing returns due to the general cornucopia referenced by Jeremy Grantham in his previous note.

The incentive for rentiers to game the system — by holding back investment — is now greater than the incentive than to add services and output. Profits in dollar terms can only be guaranteed by contracting supply, not adding to it.

To get all evolutionarily stable strategy (ESS) theory on it, vested interests currently have a greater incentive than normal to effectively engage in price-fixing behaviour. And the usual processes that insure price-fixing pacts are unsuccessful due to treachery from within (lack of cartel discipline) are lacking because the treachery has evolved, potentially towards a more collaborative non-dollar defined benefit system.

As anthropologist David Graeber notes in an equally "deep thinking" piece at the Baffler:

A renegotiated definition of productivity should make it easier to reimagine the very nature of what work is, since, among other things, it will mean that technological development will be redirected less toward creating ever more consumer products and ever more disciplined labor, and more toward eliminating those forms of labor entirely.

Related link:
Deep thoughts on civilisation from Jeremy "Hari Seldon" Grantham – FT Alphaville

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The Huma Unmentionables | National Review Online

http://m.nationalreview.com/corner/354351/huma-unmentionables-andrew-c-mccarthy

The Huma Unmentionables

Charlotte's revulsion over Huma Abedin's calculated "stand by your man" routine is surely right. Still, it is amazing, as we speculate about Ms. Abedin's political future, that the elephant in the room goes unnoticed, or at least studiously unmentioned.

Sorry to interrupt the Best Enabler of a Sociopath Award ceremony but, to recap, Ms. Abedin worked for many years at a journal that promotes Islamic-supremacist ideology that was founded by a top al-Qaeda financier, Abdullah Omar Naseef. Naseef ran the Rabita Trust, a formally designated foreign terrorist organization under American law. Ms. Abedin and Naseef overlapped at the Journal of Muslim Minority Affairs (JMMA) for at least seven years. Throughout that time (1996–2003), Ms. Abdein worked for Hillary Clinton in various capacities.

Ms. Abedin's late father, Dr. Zyed Abedin, was recruited by Naseef to run the JMMA in Saudi Arabia. The journal was operated under the management of the World Assembly of Muslim Youth, a virulently anti-Semitic and sharia-supremacist organization. When Dr. Abedin died, editorial control of the journal passed to his wife, Dr. Saleha Mahmood Abedin — Huma's mother.

Saleha Abedin is closely tied to the Muslim Brotherhood and to supporters of violent jihad. Among other things, she directs an organization – the International Islamic Committee for Woman and Child. The IICWC, through its parent entity (the International Islamic Council for Dawa and Relief), is a component of the Union for Good (also known as the Union of Good), another formally designated terrorist organization. The Union for Good is led by Sheikh Yusuf al-Qaradawi, the notorious Muslim Brotherhood jurist who has issued fatwas calling for the killing of American military and support personnel in Iraq as well as suicide bombings in Israel. (As detailed here, the Obama White House recently hosted Qaradawi's principal deputy, Sheikh Abdulla bin Bayyah, who also endorsed the fatwa calling for the killing of U.S. troops and personnel in Iraq.)

Like Sheikh Qaradawi, who helped write the charter for the IICWC, Saleha Abedin is an influential sharia activist who has, for example, published a book called Women in Islam that claims man-made laws enslave women. It reportedly provides sharia justifications for such practices as female-genital mutilation, the death penalty for apostates from Islam, the legal subordination of women, and the participation of women in violent jihad. Dr. Abedin has nevertheless been hailed in the progressive press as a "leading voice on women's rights in the Muslim world" (to quote Foreign Policy). What they never quite get around to telling you is that this means "women's rights" in the repressive sharia context.

Back to daughter Huma. In the late mid to late Nineties, while she was an intern at the Clinton White House and an assistant editor at JMMA, Ms. Abedin was a member of the executive board of the Muslim Students Association (MSA) at George Washington University, heading its "Social Committee." The MSA, which has a vast network of chapters at universities across North America, is the foundation of the Muslim Brotherhood's infrastructure in the United States. Obviously, not every Muslim student who joins the MSA graduates to the Brotherhood — many join for the same social and networking reasons that cause college students in general to join campus organizations. But the MSA does have an indoctrination program, which Sam Tadros describes as a lengthy process of study and service that leads to Brotherhood membership — a process "designed to ensure with absolute certainty that there is conformity to the movement's ideology and a clear adherence to its leadership's authority." The MSA gave birth to the Islamic Society of North America (ISNA), the largest Islamist organization in the U.S. Indeed the MSA and ISNA consider themselves the same organization. Because of its support for Hamas (a designated terrorist organization that is the Muslim Brotherhood's Palestinian branch), ISNA was named an unindicted co-conspirator in the Holy Land Foundation case, in which several Hamas operatives were convicted of providing the terrorist organization with lavish financing.

As I've recounted before, the MSA chapter to which Ms. Abedin belonged at George Washington University

has an intriguing history. In 2001 [to be clear, that is after Ms. Abedin had graduated from GWU], its spiritual guide was . . . Anwar al-Awlaki, the al-Qaeda operative who was then ministering to some of the eventual 9/11 suicide-hijackers. Awlaki himself had led the MSA chapter at Colorado State University in the early nineties. As Patrick Poole has demonstrated, Awlaki is far from the only jihadist to hone his supremacist ideology in the MSA's friendly confines. In the eighties, Wael Jalaidan ran the MSA at the University of Arizona. He would soon go on to help Osama bin Laden found al-Qaeda; he also partnered with the Abedin family's patron, Abdullah Omar Naseef, to establish the [aforementioned] Rabita Trust — formally designated as a terrorist organization under U.S. law due to its funding of al-Qaeda.

Ms. Abedin served as one of Secretary of State Clinton's top staffers and advisers at the State Department. As I've previously detailed, during that time, the State Department strongly supported abandoning the federal government's prior policy against official dealings with the Muslim Brotherhood. State, furthermore, embraced a number of Muslim Brotherhood positions that undermine both American constitutional rights and our alliance with Israel. To name just a few manifestations of this policy sea change:

• The State Department had an emissary in Egypt who trained operatives of the Brotherhood and other Islamist organizations in democracy procedures.
• The State Department announced that the Obama administration would be "satisfied" with the election of a Muslim Brotherhood–dominated government in Egypt.
• Secretary Clinton personally intervened to reverse a Bush-administration ruling that barred Tariq Ramadan, grandson of the Brotherhood's founder and son of one of its most influential early leaders, from entering the United States.
• The State Department collaborated with the Organization of Islamic Cooperation, a bloc of governments heavily influenced by the Brotherhood, in seeking to restrict American free-speech rights in deference to sharia proscriptions against negative criticism of Islam.
• The State Department excluded Israel, the world's leading target of terrorism, from its "Global Counterterrorism Forum," a group that brings the United States together with several Islamist governments, prominently including its co-chair, Turkey — which now finances Hamas and avidly supports the flotillas that seek to break Israel's blockade of Hamas. At the forum's kickoff, Secretary Clinton decried various terrorist attacks and groups; but she did not mention Hamas or attacks against Israel — in transparent deference to the Islamist governments, which echo the Brotherhood's position that Hamas is not a terrorist organization and that attacks against Israel are not terrorism.
• The State Department and the Obama administration waived congressional restrictions in order to transfer $1.5 billion dollars in aid to Egypt after the Muslim Brotherhood's victory in the parliamentary elections.
• The State Department and the Obama administration waived congressional restrictions in order to transfer millions of dollars in aid to the Palestinian territories notwithstanding that Gaza is ruled by the terrorist organization Hamas, the Muslim Brotherhood's Palestinian branch.
• The State Department and the administration hosted a contingent from Egypt's newly elected parliament that included not only Muslim Brotherhood members but a member of the Islamic Group (Gamaa al-Islamiyya), which is formally designated as a foreign terrorist organization. The State Department refused to provide Americans with information about the process by which it issued a visa to a member of a designated terrorist organization, about how the members of the Egyptian delegation were selected, or about what security procedures were followed before the delegation was allowed to enter our country.
• On a trip to Egypt, Secretary Clinton pressured General Mohamed Hussein Tantawi, head of the military junta then governing the country, to surrender power to the parliament dominated by the Muslim Brotherhood, and the then–newly elected president, Mohamed Morsi, a top Brotherhood official. She also visited with Morsi; immediately after his victory, Morsi had proclaimed that his top priorities included pressuring the United States to release the Blind Sheikh. Quite apart from the Brotherhood's self-proclaimed "grand jihad" to destroy the United States . . . the group's supreme guide, Mohammed Badie, publicly called for jihad against the United States in an October 2010 speech. After it became clear the Brotherhood would win the parliamentary election, Badie said the victory was a stepping stone to "the establishment of a just Islamic caliphate."

As more recent events remind us, this is not an exhaustive account of Obama-administration coziness with the Muslim Brotherhood. It is just some of the lowlights.

When a handful of House conservatives tried to draw the attention of the State Department's inspector general to some of these matters – wondering how on earth someone with Ms. Abdein's background could have qualified for a top-secret security clearance – they were castigated by the Obama White House and the Beltway Republican establishment. As reaffirmed in the last 24 hours, Ms. Abedin's connections to prominent Islamic-supremacist figures and groups are deemed unsuitable for public discussion – Egyptians may be able to eject the Muslim Brotherhood, but in today's Washington it is raising questions about the Muslim Brotherhood that gets you run out of town.

Naturally, what did get Washington chattering was a scandal far more typical in Clinton circles — the lucrative arrangement Ms. Abedin struck with Mrs. Clinton's State Department that allowed her, after returning from maternity leave, to draw a $135,000 State Department salary while remaining in New York, not actually working at Foggy Bottom, and moonlighting as a "strategic consultant" for an outfit called Teneo – founded by Bill Clinton's chum Doug Band.

What a racket. The marriage to Huma Abedin, a Clinton insider, enables Anthony Weiner to resurrect a debased career and deflect attention from his psychotic antics even as he continues them. The marriage to Anthony Weiner, a prominent Jewish progressive, enables Huma Abedin to deflect attention from her associations with various Islamic supremacists even as, during her tenure as a top State Department official, American policy embraces Islamic supremacists.

But let's not discuss that.

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US Energy

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EXography: 19 U.S. cities have proportionately bigger workforces than bankrupted Detroit | Mobile Washington Examiner

http://m.washingtonexaminer.com/exography-19-u.s.-cities-have-proportionately-bigger-workforces-than-bankrupted-detroit/article/2533338

EXography: 19 U.S. cities have proportionately bigger workforces than bankrupted Detroit

BY: Luke Rosiak July 22, 2013 | Modified: July 22, 2013 at 2:45 pm

1 city employee for every how many residents?

Cities have wildly varying civil servant workforces relative to their population size, from 1 city worker for every 28 residents in San Francisco to only 1 for every 219 residents in San Diego. Red circles represent cities with the most expansive beauracracies, while green represent the leanest. A full list follows.

EXography

Detroit declared bankruptcy due in no small part to $3 billion in unfunded public employee pensions owed a sprawling city workforce that kept growing even as the city's population shriveled, but a Washington Examiner analysis found that 19 major American cities have even bigger ratios of such workers to residents.

The Examiner used the Census Bureau's 2011 Annual Survey of Public Employment and Payroll to rank every U.S. city with a population of 200,000 or more.

Some of those cities managed to get along fine with comparatively few municipal employees, such as San Diego, which has 1,112 employees for 244,000 residents, or one for every 219 residents.

But others like San Francisco had a bureaucracy seven times as large, with one of every 28 of the city's 800,000 residents on the city payroll.

Remarkably, the Census Bureau excluded from these figures all teachers and education professionals, which make up the largest group of local government employees.

The figures also do not include separate government divisions that comprise significant portions of many urban public workforces, like the 1,200-employee Baltimore City Housing Authority, the 1,000-employee Philadelphia Housing Authority and the 2,300 employee Chicago Park District.

Transit systems, such as the 9,500-worker Chicago Transit Authority and New York's 7,000-person Port Authority, are also not counted.

What's more, seven of the 19 cities with larger relative workforces than Detroit paid workers more than twice as much as the Motor City did its employees.

In different places, levels of government have different cost-sharing arrangements, with the state, county and special taxation districts for services like sewage picking up part of the tab, so these figures represent somewhat less than all of the government employees for which residents of a jurisdiction support with tax dollars.

That also means that a simple comparison of city workforces -- especially between cities in different states -- doesn't always show the full picture.

Washington, D.C. ranks first in the nation, which is no surprise to residents who recall the dramatic growth of the municipal workforce in the 1980s under then-mayor Marion Barry, who created hundreds of new positions to help reduce unemployment and encourage growth of a black upper-middle class.

But D.C. also has the distinction of providing services that in many other places are often split among multiple levels of government, including state, local and county authorities.

The District's status as the national capital makes the burden on other cities all the more dramatic, cities like Baton Rouge, with one in 30 residents a city employee; Richmond, at one in 39; Denver, with one in 49; Cleveland and St. Louis, at one in 50; and Philadelphia and Atlanta with one in 51.

Philadelphia's city council president this week began pushing a plan to use part of a 1-percent sales tax hike to pay for city worker pensions, which are significantly underfunded.

Some cities such as Rochester have, like Detroit, seen dramatic population losses without commensurate reductions in the city workforce, illustrating what many see as government's tendency always to grow bigger, without ever losing wasteful or obsolete programs.

San Francisco's 28,660 workers, with an average compensation of $179,000, come in a long tail of different job categories, including 2,000 health employees -- not including city hospitals --1,843 welfare workers, 2,872 judicial and corrections officers, 1,081 parks workers, and 1,171 in "other government administration." The city by the bay's 4,266 transit workers do not include Bay Area Rapid Transit employees presently striking for a 21 percent pay increase.

The city with the leanest government is Bakersfield, Ca., which has 1,410 employees for 348,000 residents, or one for every 246. The city's population has quadrupled in the last 40 years, and its public employee workforce may have lagged behind. The city is one of California's most conservative and the largest that employs the lowest sales tax allowed by state law.

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How Do You Measure a Technological Revolution?

http://www.gcbpp.org/files/Academic_Papers/AP_Corrado_Measuring_052010AER.pdf


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Knowledge Based Capital

http://www.oecd.org/sti/ind/5.2%20Hulten.pdf


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America's best educated kids don't go to school - phillyburbs.com: Oped

http://m.phillyburbs.com/content/tncms/live/

America's best educated kids don't go to school

Brian Ray, president of the National Home Education Research Institute, compared home schoolers and public school students on the results of three standardized tests — the California Achievement Test, the Iowa Test of Basic Skills and the Stanford Achievement Test — for the 2007-2008 academic year. With public school students at the 50th percentile, home schoolers were at the 89th percentile in reading, the 86th percentile in science, the 84th percentile in language, math, and social studies.

Socio-economic factors may have a lot to do with why home schoolers do so much better. Virtually all have a mother and a father who are living together. Nearly two thirds of fathers and 62 percent of mothers have a bachelor's degree or higher.

The explosive growth in home schooling has been fueled by dissatisfaction with public schools.

We spend more per pupil than any other country, but among industrialized nations, American students rank near the bottom in science and math. Only 13 percent of high school seniors knew what high school seniors should know about American history, says the National Assessment of Education Progress. Half of 18 to 24 year olds in a National Geographic Society survey couldn't locate New York state on a map.

The United States is only major country where young people will not know more than their parents, the education expert for the Organization of Economic Cooperation and Development told the BBC last year.

About 2 million children are home schooled. Since 1999, the number being home schooled has increased 7 percent a year. Enrollment in public schools fell 5 percent between 2005 and 2010.

The first students to leave public schools tend to be the better ones, because their parents care more about education, said University of Tennessee law professor Glenn Reynolds. "When they leave, the overall quality of the remaining students, and thus the schools, will drop."

When enrollment declines, funding is cut. Because teacher unions are so powerful, first on the chopping block are music, art and athletic programs. (In Buffalo, N.Y., where teachers get free cosmetic surgery, music programs may be eliminated in half the schools.) These cuts make public schools less attractive, accelerating departures.

Teacher unions have made it all but impossible to fire bad teachers. Colleges of education are an "industry of mediocrity" that churns out ill prepared and underqualified teachers, the National Council on Teacher Quality said last month.

So much for the argument children learn more from the "credentialed professionals" in public schools. "Many parents these days have just as much education as teachers if not more," notes Bard College professor Walter Russell Mead.

Also false is the claim children schooled at home are poorly socialized. According to a 2006 study, 71 percent of home school graduates, but just 37 percent of all adults of similar age, participate in community service. Eighty eight percent of home schoolers, but just 50 percent of all adults, belong to a church, civic or professional group.

Parents who home school spend about $600 a year on educational materials. This doesn't include their labor, but contrasts vividly with the $10,560 per pupil spent in public schools in 2011.

Home schooling is a viable option primarily for two parent families. But we can all benefit if we grasp the significance of this fascinating fact: Variation in the income and education of parents makes little difference in the superior performance of home schooled students.

Children with parents who have an income of $49,000 or less scored in the 86th percentile in core studies (reading, language, math), Dr. Ray found. Children whose parents had an income of more than $70,000 scored in the 89th percentile.

In families where neither parent was a college graduate, home schoolers scored in the 83rd percentile. If one parent had a college degree, the 86th percentile. If both, the 90th percentile.

Home schooling succeeds because its focus is on children, and because home schooling programs are flexible.

Public schools fail mostly because they're run for the benefit of administrators and teachers, not students, but also because they are so rigid. As long as we have teacher unions, public schools will stink. But if we relax rules and de-emphasize credentials, they wouldn't stink as much.

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True

Truth

How Technology Is Destroying Jobs | MIT Technology Review

http://www.technologyreview.com/featuredstory/515926/how-technology-is-destroying-jobs/


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Racial Profiling

'Nothing works here': Reality on the streets of a broken Motor City - Americas - World - The Independent

http://www.independent.co.uk/news/world/americas/nothing-works-here-reality-on-the-streets-of-a-broken-motor-city-8721302.html

"Has anyone liked the Detroit of five years ago, of 10 years ago, of 15 years ago?" Michigan's governor asked yesterday as the city began to come to terms with the sorry result of decades of economic decline and financial mismanagement: bankruptcy.

"Has anyone liked the Detroit of five years ago, of 10 years ago, of 15 years ago?" Michigan's governor asked yesterday as the city began to come to terms with the sorry result of decades of economic decline and financial mismanagement: bankruptcy.

Rick Snyder's question underscored a reality residents have been familiar with for years. Officially, Detroit filed for bankruptcy protection on Thursday after Kevyn Orr, the emergency manager charged with overseeing its finances, failed to hammer out agreements with creditors to whom the city owes at least $18bn – and possibly up to $20bn in the long term.

While that filing was the subject of a legal dispute yesterday, the fact remains that Detroit has long been a broken city – a metropolis where buses seldom show up on time, police take an hour to respond to emergency calls and 78,000 properties lie abandoned.

About 60 years ago, nearly two million people lived in a manufacturing behemoth known as the car-making capital of the world. Everyone from Ransom Olds to the Packard brothers and, of course, Henry Ford, had come to Detroit. But today, the giant Packard plant on the city's east side is slowly wasting away – a sad, rusting reminder of better times – and there are only two car factories within the city limits. One of those is partly in the neighbouring city of Hamtramck. Detroit's population, meanwhile, now stands at around 700,000, the lowest it has been since 1910.

Financial mismanagement has made the city's problems worse. Public services are near collapse because of repeated budget cuts. Crime has been at elevated levels for a prolonged  period. Recent figures show that about 40 per cent of street lights do not work. Only a third of ambulances are in service because maintenance funds have been slashed.

"Nothing – nothing works in this city," said Sheila Cockrel, who spent 16 years serving on Detroit City Council. Since stepping down in 2009, she has been teaching at Wayne State University. "It takes 58 minutes for a police car to come if they accept your call," she added. "The only calls they accept are if there's a gun and they believe you're not lying when you say it. In my middle-income neighbourhood, we pay a private security service ... Once I was in my house at three o'clock in the afternoon and three young men tried to break in. The first call I made? Threat Management."

Ms Cockrel is referring to Threat Management Centre, a private security company which operates from a black building near the Detroit River waterfront. It is among the many private firms that some residents have  resorted to as the city struggles to provide adequate services. Founded in the mid-1990s by Dale Brown, known to his staff as "Commander Brown", Threat Management's client roster has 1,000 homes and 500 businesses.

Mr Brown's men and women are  kitted out in military-style trousers, black T-shirts, protective vests and badges. The "Commander", who began by training locals to protect themselves before founding his company, drives around in a black Hummer 4x4. Threat Management Centre's personnel are known as "Vipers", an acronym, Mr Brown told The Independent, for "Violence Intervention Protective Emergency Response System". Some, but not all, are armed, often at clients' request, although the entire force will shift to non-lethal weaponry by the end of this year. Mr Brown said that when his team respond to calls from clients such as Ms Cockrel, they are under instructions to call the police, even though residents often don't bother. "It is an organisation that is driven by the mission, not the money. If there was no money, would [we] still do this? Yes, there would just be less of us, less often," he said, sitting in an office decorated with framed testimonials and photos of Vipers in action.

But the breakdown of Detroit's public services is not simply a result of  neglect. For years, it has been marred by what locals say is mismanagement in department after department. The police force, for example, has been under federal oversight since 2003 following allegations of brutality and other claims.

Earlier this year, more revelations about police conduct once again turned the spotlight on the force. In April, the Michigan branch of the American Civil Liberties Union (ACLU) wrote to the police and filed a complaint with the US Justice Department over allegations about the illegal "dumping" of homeless people.

The ACLU claimed that, over the years, officers in Greektown, a busy commercial area of downtown Detroit that contains casinos, restaurants and bars, would approach homeless men, tell them they were not allowed to be there, order them into their vans and then drive them to a remote area before abandoning them.

Charles "E", 58, is among those who allege such mistreatment. He says he was picked up with his brother and driven to south-west Detroit. "[We were] sitting in the van maybe 20 minutes and then they finally let us off on the freeway, not on the street," he said. "When they let us off, they pat us down, take all the money ... so we couldn't get back on the bus. So I ask the female  [officer], 'How are we going to get back?' She said, 'The best way you can', and they got in the van and took off."

For many, the poor state of Detroit's police force was emblematic of the city's terminal decline. The same is true for other public services. Unfortunately for residents, those services are likely to worsen before they get better. Bankruptcy could mean laying off employees, selling off assets, raising fees and scaling back further on things like refuse collection and snow-ploughing, which have already been slashed.

But, though fraught with risks, the bankruptcy protection filing could help to solve the problem of shrinking budgets and the attendant woes by putting the city on a path to becoming debt-free. At least that is the hope.

As Mr Orr put it yesterday: "Does  anybody think it's OK to have 40-year-old trees [growing] through dilapidated houses? Does anybody think our children should walk home from school through dark streets at night in October? Does anybody think they should call the police and [officers] not be able to come on time because they are already out on calls?"

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Chicago Blues: Tenured Teachers Laid Off | Via Meadia

http://blogs.the-american-interest.com/wrm/2013/07/19/chicago-blues-tenured-teachers-laid-off/

Chicago Blues: Tenured Teachers Laid Off

Having closed 11 percent of the city's public schools in May, Chicago Public Schools (CPS) has now been forced to fire 2,000 employees, including 1,000 teachers—half of whom were tenured. The Chicago Tribune reports:

"We're not going to be able to cut our way out of this crisis," [CPS Spokeswoman Becky] Carroll said. "Our revenues are simply not keeping in line with our spending increases." […]

The district again blamed the lack of pension reform for many of its fiscal woes, noting that pension payments are growing this fiscal year by an additional $400 million.

The Chicago Teachers Union president blamed the school district's duplicity for the layoffs:

"Once again, CPS has lied to parents, employees and the public about keeping the new school-based budget cuts away from the classroom," [Karen] Lewis said.

It's an interesting web the union has spun for itself: its power to negotiate lavish pensions for teachers has helped bankrupt the city, which is now forced to sack teachers. And with Chicago's budget deficit at $1 billion and revenue declining, there's no end in sight, and no tenure and no pension is safe. How teachers react to the declining ability of unions to secure their interests in one of America's great blue cities will tell us a lot about the blue model's current bill of health.

The immediate impact on children and families of Chicago's fiscal failure is obvious enough, but the long-term impact is perhaps even more grim. The city's budget cuts, harrowing crime rate, and broken politics are forcing people out: Chicago's population has declined to numbers not seen since before the 1920s, with the black population falling by almost a fifth in the past decade alone.

This trend means even less revenue for the city, even fewer children to fill the classrooms, and even more talent and potential lost. Chicago is failing its poor, and hope for improvement is in short supply.

[Image of Chicago teachers strike courtesy of Shutterstock]

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Value-Added Data Recast the U.S.–China Trade Deficit - Dallas Fed

http://www.dallasfed.org/research/eclett/2013/el1305.cfm

Value-Added Data Recast the U.S.–China Trade Deficit

Research Publications
Economic Letter

by Michael Sposi and Janet Koech
Vol. 8, No. 5, July 2013

China accounts for a larger share of the overall United States trade deficit than any other country, an imbalance that has gained increasing prominence. The deficit has surged in recent years, growing by more than $200 billion since 2000 and amounting to almost 2 percent of U.S. gross domestic product (GDP), up from about 0.5 percent of GDP in 2000.

Although some view this widening gap as symptomatic of a large and growing interdependence between the two countries, these data paint an incomplete picture and don't fully take into account that production networks span multiple countries. In the past, most goods were manufactured from start to finish within a country's borders. Today, the production of a single good, such as a mobile phone or computer, typically occurs across several countries, with each specializing in a particular phase or component of the final product.

When trade flows are recorded, they reflect the value of goods at each border crossing, as noted in customs reports. The full value of a good is assigned to the last link in the production chain, even if the contribution of that last country is minimal. Accounting for trade in this manner fails to identify the contribution of different countries in the intermediate production of the final good and is not representative of actual interdependence.

China, often dubbed the "factory of the world," is a key link in international production chains. Although its participation is mostly toward the final stages of production, its contribution to the final value of a product is often small. Conventional trade statistics attribute all the value to China, even though the product embodies inputs from around the world. As a result, Chinese exports are inflated, impacting the size of bilateral trade balances.

Rather than assign the full value of a good to the last country from which it was shipped, trade data should ideally also track the value and source of each production step and allocate the share of value accordingly. That is, instead of a "Made in China" label, a finished good assembled in China with inputs from different countries might bear a label saying, "Made 15 percent in Canada, 20 percent in Korea, 25 percent in Japan, 30 percent in the U.S. and 10 percent in China."

In practice, tracking every country's share in the value of each good would be next to impossible. However, using recently released data, economists have applied new methods of measuring each country's contribution to the value of final items. These methods involve combining available trade flow figures with value-added data and trade composition data.[1]

Defining Value Added

Value added refers to the amount by which the value of a good or service increases at a specific step in a production process. Inputs (computer chips and bare circuit boards) are converted into outputs (assembled circuit boards). These are then combined with other inputs (processor, an operating system, memory and a hard drive) to become a computer. The value of total (gross) output from every stage of production can be decomposed into two parts: the value of intermediate inputs and the value added during production. The value added at each step of production is computed by taking the gross value of the output and subtracting the value of all intermediate inputs. Equivalently, value added is defined as the value of output that compensates for the factors of production (such as labor and physical capital) that transform the intermediate inputs into output.

Data reveal that China engages in low value-added production, while the U.S. engages in high value-added activities. At the most aggregate level, the share of value added in gross output in China was 34 percent in 2005, compared with the U.S. at 53 percent.[2] Meanwhile, the average proportion for the rest of the world—Organization for Economic Cooperation and Development (OECD) countries plus some non-OECD countries and excluding the U.S. and China—was 47 percent (Chart 1).[3] These numbers mean that for every dollar of gross output produced in China, only 34 cents is value created by Chinese factors of production, while each dollar of U.S. output attributes 53 cents of value to U.S. factors of production.

Trade Compositions

Another aspect of China's role in global production chains is explained by the composition of its trade. More than 75 percent of China's imports are intermediate goods, compared with 50 percent in the U.S. and an average of 60 percent for the rest of the world.[4] Final goods account for only about 25 percent of China's imports compared with 50 percent for the U.S. and an average of 40 percent for the rest of the world (Chart 2).

The composition of exports also varies across countries. While intermediate goods account for only 40 percent of China's exports, the share is much higher elsewhere, including in the U.S. where the average share is about 55 percent. Conversely, final goods account for 60 percent of China's total exports versus 45 percent for the U.S.

Looking at the direct trade flows between the U.S. and China reveals that intermediate goods account for 70 percent of U.S. exports to China. In the other direction, final goods account for 75 percent of Chinese exports to the U.S. China's sizeable imports of intermediate goods and exports of final goods suggest its role as an assembly hub of imported inputs into end products—it is typically at the end of the value chain in global production networks.

Understanding the Data

Combining value-added data with the trade composition figures paints an interesting picture. The U.S. engages in high value-added activities in early stages of production resulting in intermediate goods. Early stages of production of such high-tech items as computer central processing units often entail extensive use of resources on research and development and design. Production of these components requires a large share of highly skilled workers and sophisticated equipment, so the proportion of value added is high. These intermediate goods are then exported to countries such as China, where intermediate goods from various sources are combined and converted into final goods for export. However, the assembly process involves a small share of value added. The asymmetries between the U.S. and China in value-added shares and in trade composition have distinct implications for interpreting the interdependence between the two countries vis-à-vis trade statistics.

Measuring Value-Added Trade

To illustrate, suppose that computer components worth $350 are produced in Japan and exported to China, and a monitor assembly worth $100 is exported by the U.S. to China. Now, assume that China puts together and packages the monitor and other computer components into a final computer, which it exports to the U.S. for $500. Under conventional trade measures, customs data will record the transaction as a U.S. import from China valued at $500, even though most of the value was created in Japan. The contribution to the bilateral trade balance between the U.S. and China will be a deficit of $400 for the U.S.

However, not all the value of the computer should be attributed to China since it imported $450 worth of intermediate components to build the computer. Its value added in the computer was only $50, not $500. Using value-added trade measures, the transaction would be split to show trade from the U.S. perspective as an import of $350 from Japan and only $50 from China—a picture very different from the one represented in customs data. In fact, when measured in value-added terms, the contribution to the bilateral trade balance between the U.S. and China will be a $50 surplus for the U.S. (Chart 3).

This example, while illustrating the main idea behind measuring value-added trade, masks some important details and underscores the need for further analysis. For instance, the $350 in computer components produced in Japan may incorporate parts from Germany and Korea, which may also be made from inputs from other countries, including the U.S. and China.

The World Trade Organization (WTO) and the OECD provide estimates of value-added trade based on methodology proposed by economists Robert Johnson and Guillermo Noguera.[5] These data decompose the value of a final good in a given country into the individual values contributed by all other countries. Rather than allocating the total value of a good to the last link in the production chain, as is done in customs data, value-added trade estimates the contribution of each country in the production process to the overall value of the final good.

Reinterpreting the Trade Gap

When trade is expressed in value-added terms, the U.S. trade deficit with China is far less than it would be when measured in gross terms. In 2009, U.S. imports from China were $89 billion larger in gross terms than in value-added terms. On the other hand, U.S. exports to China were only $26 billion larger in gross terms than in value-added terms. Taken together, the U.S.–China trade deficit, computed as U.S. imports from China minus U.S. exports to China, is $63 billion larger using gross rather than value-added calculations.

Enlarge

Measuring trade in value-added terms lowers the deficit in 2009 by 33 percent, to $126 billion from $189 billion. These data also show that the U.S. is less trade dependent on China than conventionally thought. The U.S.–China trade deficit as a percentage of U.S. GDP falls to 0.9 percent from 1.4 percent in 2009 using value-added instead of gross trade (Chart 4). Put another way, since 2000, China's share in the overall U.S. trade deficit on average is more than 25 percent larger when measured in gross terms rather than value-added terms.

The difference between the two measures of U.S.–China trade has clearly widened since 2000, partly because the share of value added in gross output in China has declined by a larger amount than in the U.S. and most other countries.

The disconnect between bilateral gross and value-added trade deficits is not confined to U.S.–China trade. In fact, there are instances of bilateral U.S. trade deficits that are actually larger in value-added terms than in gross terms. This happens when U.S. exports to a country are overstated by a smaller margin than are U.S. imports from that country.[6]

Complementary Measure

Conventional measures of international trade fail to capture the impact of global supply chains; thus they paint an incomplete picture of bilateral interdependence when multiple countries are involved in the production of a final good. Value-added trade data provide a needed complementary measure to conventional compilations to aid in the understanding of bilateral interdependence, the underlying factors affecting it, and the business and policy implications.

The U.S. bilateral trade deficit with China is reduced by 33 percent when trade is recalculated on a value-added basis, meaning that the two countries are less trade dependent than commonly thought.

Notes

 

1. This analysis focuses on 2009, the most recent year for which data are available for most measures of activity discussed.
2. 2005 is the latest year for which value-added shares are available for a large set of countries.
3. The non-OECD countries cited are those with data reported in the OECD input-output database: Brazil, China, Cyprus, India, Indonesia, Latvia, Lithuania, Malta, Romania, South Africa, Taiwan and Thailand.
4. Countries that make up the "rest of world" include OECD countries (excluding the United States) and the following non-OECD countries: Albania, Argentina, Bosnia and Herzegovina, Brazil, Bulgaria, Cambodia, Croatia, Cyprus, Hong Kong, India, Indonesia, Latvia, Lithuania, Macedonia, Malaysia, Malta, Moldova, Montenegro, Philippines, Romania, Russia, Saudi Arabia, Serbia, Singapore, South Africa, Taiwan, Thailand and Vietnam.
5. See the OECD–WTO Trade in Value Added (TiVA) database and "Accounting for Intermediates: Production Sharing and Trade in Value Added," by Robert C. Johnson and Guillermo Noguera, Journal of International Economics, vol. 86, no. 2, 2012, pp. 224–36.
6. One case is the U.S.–Germany trade deficit. In 2009, the U.S. ran a bilateral gross trade deficit of $24 billion with Germany (0.17 percent of GDP). However, when measured in value-added terms, that deficit becomes $32 billion (0.23 percent of GDP).

About the Authors

Sposi is a research economist and Koech is an assistant economist in the Research Department at the Federal Reserve Bank of Dallas.

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