Stephen Roach is talking about China’s Pace, America’s Angst.
Following are a few select snips:

Round II of the Strategic Economic Dialog has come and gone. In just eight months time, this carefully orchestrated consultation between senior officials from the US and China has established a robust framework of engagement between the world’s first and fourth largest economies. The good news is there is progress to report. The bad news is that the progress was predictably incremental – insufficient to defuse the political angst now bubbling over in the US Congress.

In an era of accelerating globalization, the Chinese strain of open development offers the world considerably greater opportunity than the closed approach long advocated by Japan.

The US Congress could care less. The economic pressures bearing down on Washington come straight from the American middle class. And with understandable reason: According to the US Bureau of Labor Statistics, the median real wage – inflation-adjusted wages for the worker in the middle of the pay distribution – has risen a cumulative total of just 0.9% over the seven years ending in the first quarter of 2007.

Over the past 30 years, China has been exceedingly careful to balance the pace of reforms against the risks of instability. At no point did it follow the shock-therapy approach embraced by states of the former Soviet Union. “Determined incrementalism” is the best way I would describe the character of three decades of Chinese reforms – no backtracking but steady and unrelenting progress toward private ownership and markets. This approach is very much at odds with the search for the “magic potion” that always seems to dominate the short-term problem-solving mentality of Washington politicians. The radical currency-fix option that is now on the table in Washington is very much at odds with the gradualism that has served China so well over the past 30 years.

The easy answer is to blame someone else – in this case, scapegoating China because it accounts for the largest bilateral piece of America’s record multilateral trade deficit. The tougher answer is to get to the bottom of the real wage stagnation problem – and put policies in place that could rectify this situation.

I stand by my view that there is about 60% chance that a veto-proof majority of the US Congress will pass a WTO-compliant bill by the end of 2007 that will impose broad-based trade sanctions on Chinese products sold in America.

If Roach has it correct that there is a 60% chance of massive protectionist legislation out of Congress, then I will suggest that it will be the equivalent of another Smoot Hawley Tariff Act if it passes.

Roach writes “Congress could care less“. I believe he means “Congress could NOT care less”. Congress seldom cares about anything but votes. If horrendous policies will get Congress reelected then horrendous policies we will get.

Right now there is a vested interest in protectionism all under the nonsense of “fair trade” as opposed to “free trade“. Fair of course means fair to those with a vested interest in keeping their wages high regardless of the consequences to anyone else. No one in Congress ever bothers to look at the seen and the unseen. There is simply too much political hay to be made by only concentrating on the seen. I recently talked about this in Protectionist Crackdown – Seen vs. Unseen.

Another interesting factoid is that inflation-adjusted wages for the worker in the middle of the pay distribution – has risen a cumulative total of just 0.9% over the seven years ending in the first quarter of 2007.

That is of course if one believes the CPI. I don’t. If the CPI is understated by as little as 1% then real wages are negative over the last seven years.

Business Employment Dynamics

But not only do I disbelieve the CPI, I disbelieve job stats as well and have written about it many times. Please consider Birth Death Model Fatally Flawed.

Supporting evidence is starting to roll in. The New York Times is writing Wait a Few Months Before You Believe the Numbers.

Sometimes the statistics that take the longest to arrive can provide the most important information, particularly when they point to inflection points in the economy.

So it may be with jobs data that the Bureau of Labor Statistics released this month for the third quarter of 2006. The new data calls into question the previous conclusion that employment grew at a strong rate in late 2006.

And it indicates that many small businesses, which had been leading the way in job creation, are now suffering. As is shown in the accompanying graphic, companies with fewer than 50 employees lost workers in the quarter, while larger ones kept hiring, albeit at a reduced pace.

It also appears that 8,000 more businesses closed than opened in that quarter, making it the worst quarter by that measure since the third quarter of 2001, when an economy already in recession was jolted by the Sept. 11 attacks.

The data is included in a quarterly report, titled “Business Employment Dynamics,” that comes from reviewing employment at every company in the United States that is subject to state unemployment compensation laws. By that measure, private-sector employment rose by just 19,000 jobs in the quarter.

The widely reported data from the bureau’s monthly survey of employers concluded that the quarter had a net gain in private-sector jobs of 498,000. That led economists to conclude that employment growth was holding up well even though the overall economy had slowed, growing at just a 2 percent annual rate.

A big difference was in construction employment, which the quarterly study found contracted by 77,000 jobs in the quarter, in contrast to the increase of 34,000 jobs shown by the monthly surveys.

“The data show we had two consecutive quarters of job losses in construction,” said David Talan, an economist at the bureau, noting the small decrease shown in the second quarter of last year.

One has to be nuts in the midst of this housing slump to think that we are adding construction jobs at the pace estimated by the BLS, but nonetheless, the BLS seems to be sticking to their model (without ever explaining it I might add). It is one gigantic optimistic black box that will not turn negative until it is obvious to everyone on the planet that the US is in recession.

Men’s earnings shrink

Are women to blame for shrinking mens wages?

Those in their 30s make less than dads did, a report says. Outsourcing and the advancement of women are cited.

American men in their 30s earn less than their fathers’ generation did at the same age, potentially reversing longtime assumptions that each successive generation will be better off than their predecessors, according to a study released Friday.

Family incomes of thirtysomething men have continued to rise in recent decades, but mostly because more of their wives are working, the study’s authors said. Yet even with the addition of women’s paychecks, the rate of family income growth has slowed.

Taken together with data showing more workers are earning less in comparison with the stratospheric incomes of top earners, the report suggests that a growing number of Americans “believe that the rules of the game are no longer fair,” said John E. Morton, director of the Economic Mobility Project at the Pew Charitable Trusts and one of the study’s lead authors.

In 2004, the median income for a man in his 30s was $35,010, 12% less than that of men in their 30s in 1974, adjusted for inflation, according to the study, which was based on Census Bureau data. By contrast, thirtysomething men in 1994 earned 5% more than their older counterparts.

The generational income gap highlights troubling questions, Morton said, including what happens if an increasing percentage of Americans believe the American dream “is off limits to them.”

Die-hard careerist baby boomers may partly explain the inability of thirtysomething men to move up the income ladder as quickly as their fathers. From the moment Generation Xers first set foot in the workplace, the boomers have been the “ceiling” blocking their way up the income ladder, said Peter Rose, a partner with marketing research firm Yankelovich Inc. in Los Angeles.

“The boomers stand out in defining themselves in terms of their work and have shown a disinclination to get out of the way,” he said.

Freelancer Hayslett thinks there’s another factor at play: “Honestly, it seems that women are more together,” he said.

They’re more stable and focused, he said, as compared with “a lot of guys who feel so frustrated that they tend to move around and leave.”

Let me be the first to say that any study that blames women for shrinking men’s wages is simply way off base as to cause and effect. Excuses are now running rampant.

Although China is willing to proceed on a pace that can be described as Determined Incrementalism, in typical US fashion we want action now even it it means compounding the problem by 800%. Heaven help us if Congress gets insanely protectionist.

But if unemployment was as low and jobs as plentiful as the BLS, the treasury and this administration says, then Congress should not be threatening the actions against China that are now under serious discussion. Which is it? Jobs can’t be plentiful and the economy humming along if one is looking for protectionism as the cure. You can’t have it both ways.

Mike Shedlock / Mish/