An Unlikely Economic Lesson

You have to hand it to Ford.  $5.9 BILLION quarterly loss and they refuse to grovel before Congress for bailout money.  That is not to say they won’t, just that for now, they seem to have more faith in themselves than their two domestic competitors have in themselves.  In my Free Trade essay, How Much free Trade is Free? I wrote about free trade as a whole.  The real point of that essay was that as much as free trade lowers prices, boosts stock portfolios, and lowers the cost of doing business there is a downside.  The negatives include a decrease in available domestic jobs, the destruction of domestic manufacturing, the creation of foreign jobs that pay so little that most qualify as slave-labor, and in the long-run the erosion unskilled labor rates.  The inspiration for that essay was the dire situation of the American Automobile Industry.

There is no competition in wages

Life outside the U.S. is hard for Americans to relate toI contend that free trade created an unfair competitive environment for manufacturing in the United States.  The reason being that wages in the third world and developing nations are not comparable to those for U.S. workers.  I reject the argument that U.S. companies are rendered non-competitive because American workers are greedy.  True, union labor does artificially inflate labor costs and this reduces the competitive advantage U.S. manufacturers might otherwise possess.  My statements seem contradictory, but my point is more fundamental.  If we remove the inflated union wages from the competitive formula, American manufacturers would remain disadvantaged on labor costs.  As I have pointed out before, the American standard of living is far higher than that of developing nations, thus American workers demand a higher wage.  They need the higher wage to pay for all the goods businesses offer them, from housing to transportation, from soap to silverware, from shoes to televisions and computers.  However, a worker in a developing nation such as China, does not need a car, they don’t likely have a TV, let alone a satellite service or Netflix, nor are they likely to have a 3 bedroom/2 bath air-conditioned home.

To make matters worse foreign manufacturers are more than comfortable with the idea of paying workers the absolute minimum wage possible.  In many countries there is no right to belong to a trade union or negotiate for a better wage.  In Mexico it is not uncommon for workers to be paid barely enough to pay for food, (here’s my english language source, I know it’s a Cuban news agency with an agenda, but the stats come from Mexico.)  This story is repeated in other developing nations as well, in China new labor laws are basically ignored.  Workers are beaten for demanding back wages when their bosses simply don’t pay.  This is the “fair trade” playing field.

Would the last person to leave the plant, please turn out the light

I believe greed does play a huge role in our current global economic crisis.  I also believe free trade more than housing, banking, or loose lending has created the mess we are in.  As consumers we covet low priced goods so we can have more of everything.  As entrepreneurs and business people we want to give our customers those low prices and increase our sales volume.  The only way to achieve these goals was to employ those billions of low wage workers so plentiful in the third world and developing nations.  But in 1990 realizing this required convincing the industrialized nations to drop the tariff systems that leveled the economic differences of nations.  When Bill Clinton signed NAFTA a huge hurdle was overcome.  Free Trade agreements became all the rage and we saw a continual stream of them pushed by the WTO.

Since the 1980s there has been a systematic deconstruction of the American manufacturing infrastructure.  However, the real decline has occurred in just the last decade as 3 million manufacturing jobs (nearly 17%) were lost largely to other nations. We are employing cheap labor to support our standard of living without regard to what the consequences might be.

Now that I have painted the picture I want to make a point by comparison, I think the comparison is fair if approached with an open mind.  I stated above, consumers want low prices.  We don’t care how they are achieved we simply want WalMart to continue providing us goods at low prices and we’d appreciate them lower, please.  Business owners and stockholders of corporations want to produce goods with low overhead so they can offer their goods at the lowest possible prices, (payroll is the single biggest expense for most businesses.)  Neither consumers or business owners care how this goal is achieved, they simply want it achieved.

Modern slavery

The workers are also the consumers and they express shock and anger when they are displaced but you will have a hard time finding anyone demanding higher prices in order to save those jobs.  On the contrary, as more people are displaced, demand for lower prices increases.  The fact that people working for wages that barely provide food on their tables and clothes on their backs, is not a concern for either of these groups.  A blind eye is given to these people except when the press exposes a textile factory in Bangladesh, however, the shock is quickly put behind us as we fill our shopping carts at Wal-Mart with cheap T-shirts.  A point Americans ought to be confronted with is that much of the manufacturing growth in third world and developing nations is being done through slave labor. Twelve year old children in China are pressed into labor and abuse is not uncommon.  However, as a nation we not only tolerate such slave labor but we promote it through our economic decisions.  Consumers fain shock at such facts but really we don’t want to know about it.

In the 19th century 16 U.S. states supported their local economies through forced labor, commonly known as slave labor.  The system afforded people in the northern states and Europe very cheap textiles and produce.  Europeans and northerners overwhelmingly turned a blind eye to the injustices and cruelties of slavery.  The fact that slaves worked for a bare subsistence of food, rags for clothing, and substandard housing was largely ignored or conveniently unknown to consumers of the time.  What was important to the average person was being able to purchase cheap food and clothing.  (For the analogy I am leaving out all the other justifications and circumstances of the times.)  In fact, as the Civil War began, the Lincoln administration was fearful that Britain might declare war on the U.S. or otherwise aid the Confederacy to protect their own continued cotton trade, even though the British were overwhelmingly appalled and opposed to slavery, (Goodwin, 2005.)

As I reflected on slavery in the Old South, another parallel came to my mind.  The slave states were not industrialized, they were agrarian societies with high unemployment and poor infrastructure.  The factories were in the North since slave labor required the deprivation of education, they were excluded from factory work.  When war came to the South, southerners found the only arms they had were those obtained from the North.  Cut off from factories, they quickly found they had little means to manufacture their basic needs.  Furthermore, lacking infrastructure to manufacture they experienced a cash drain and were forced to print money at historic rates.  Hyper-inflation was a quick reality as a single Confederate dollar was worth only a few pennies in U.S. currency.

Here’s what I’m suggesting, as we dismantle our ability to manufacture we denegrate our nation and place it in peril.  As I write we have lost the ability to make a television set, let alone make spacecraft capable of landing on and returning from the moon.  What would happen if the United States suddenly had it’s credit frozen by the likes of China and our other creditors?  What if we suddenly found ourselves isolated in a global political crisis?  How would we fare if suddenly we were forced to start making things again?

The magic bucket

I’ll stop the worst case fantasies and come back to reality.  What happens when we find our international creditors beginning to tighten their lending?  If the Obama Administration truly intends to run trillion dollar deficits this will become a reality.  They will finance their drunk spending the same way the Confederacy did, by printing money.  The result?  Hyper-inflation.

I’m all for rebuilding bridges and the like, but we need to address the real infrastructure problem, manufacturing and fair trade policies.  For most of our existence as a nation the federal government was financed from an inflow of money from other nations in the form of import tariffs.  When we made the transition to free trade policies the federal government’s financial base changed to incomes taxes from its citizens. Recently, in college economics class, I heard a professor say there is no turning back the clock on the global economy.  If true the U.S. will see a steady decline in its standard of living.Magic Self-filling Bucket

I see this shift from tariffs to income tax as a very significant event, since previously money came from outside, now it comes from inside the country.  The vision of a bucket being filled from water drawn only from inside the bucket best illustrates my thinking on this.  Meanwhile, a significant amount of consumer money flows outward as well.  As we produce less and less and consume ever more it seems increasingly unlikely the bucket can remain at the same level.

Ironic environment

I had hoped the new administration would have done more to encourage manufacturing and business.  I even hoped Obama would create real change and reverse some of the bad trade deals we’ve seen made in the past 15 years.  Instead he seems to be working against us.  Openly encouraging states to destroy the auto industry through smothering emissions regulations.  Such environmental regulations have already cost the industry billions.

1980 Toyota TercelA point none of the environmental nut jobs seems to be aware of is the self-defeating aspect of emissions controls on cars.  In 1980 I bought my first car.  Gas prices were skyrocketing and being the young hyper-money-aware person I was I bought a Toyota Tercel.  A nerd car for certain, but it got 40 miles per gallon by my own calculations.  Today you would be hard pressed to find a car that could come even close to that kind of mileage.  No, I think you could not do it (even hybrids perform worse when you include any highway useage.)  Well, it is an irony but the more emissions equipment the government places on cars the lower the fuel efficiency.

The question is why?  Obviously emission equipment is not weightless, it has mass, and that mass requires additional energy to move it. Thus with each kilo added to the weight of the car we lose gas mileage.  I want clean air but I also want to be able to afford to live the lifestyle I have become accustomed to.

I thought Obama was going to “preserve or create” jobs.  Instead we see him actively engaged in harming the American auto industry.  An industry I consider critical to American economic strength.  I fear the Obama administration is more concerned about the environment, than any other single concern.  They have bought into the Al Gore lie and it may cost us more than we can currently imagine.

  1. Thanks for an interesting read. I think the idea with free trade, at least on the basis of Ricardo’s work is that those countries with abundance of capital (the US) will focus on capital intensive industries while those with abundance in labor (China) will focus on labor intensive industries. So the fact that labor intensive jobs is being lost to China is a natural process, and people like Martin Wolf would argue that the problem is not free trade itself, but that the world is not “free enough”.

    You should read Ha Joon Chang’s book “Kicking away the ladder”, it is an interesting read.

  2. You have developed a very thought provoking piece. I have been trying to buy American for some time, willing to spend only a little more in most cases, and enjoying the feeling that maybe it is helping someone right here. Problem finding American made is enormous. For the things we produce, we still make the best in the world and if we decided to take care of our own, explaining and educating others to do the same, we could help ourselves. Our manufactured goods have always had markets, despite being pricy because they are the best instead of the crap seen on shelves of all retailers, not just Wally World. The lines between foreign and domestic have been badly blurred so some things only seem American, but I keep trying. Unless we could somehow, lift the lifestyles world wide to gain some form of parity, the task will be uphill, but worth the fight. Great Great post.

  3. Espen, Thanks for the comment. I am aware of Ricardo’s theories, but I do not agree that concentrations of market efficiencies are necessarily a good thing. My feeling is that regardless of the impact on domestic jobs, losing industrial capacity is detrimental to a nation. I have heard the argument that the “brain” jobs will remain here. First, I don’t believe that but even if true, how is this good? Not every American is an inventor, in fact I would argue those types are few and far between. Next, I would point to 3M and others currently looking at expanding their outsourcing of R&D to developing nations such as India. I also expect that once they have optimized the export of labor jobs they will begin targeting intellectual and managerial jobs in earnest. Perhaps I seem alarmist but you made my point when you quoted Martin Wolf. I would counter by pointing out that just because the children crave more candy does not make it good for them.

    Tom, I could not agree more about the lines being blurred between domestic and foreign goods. Even Japanese cars are no longer Japanese. Mixing manufacturing sites is less troublesome to me although I think I am being inconsistent in feeling that way. My biggest concern is that when there are no more factories here there will be a decrease in the drive and inspiration to invent here and we will see more of that happening outside the U.S. I think intimate knowledge of and exposure to manufacturing processes creates inspiration for process and product improvement.

    Sorry for the long reply guys.

  4. Well, I think you’re all crazy! Now that I’ve alienated my audience I’ll make my point. We are leaving out WAAAYYYY too many variables in this equation. The biggest one for me is technology. We haven’t just lost jobs to foreign competitors, but also to automation. There are still workers on the line but they are doing the work that five or six times the people were doing just twenty years ago. Just as technological inventions have made our life better over the last twenty years, they have also made manufacturing life better for industry.

    With all due respect to you, Idiot, it is not free trade which has created the unfair competitive environment, it is tax policy and other regulations which have hamstrung corporations here so they have had no other alternative but to seek other opportunities to lower costs. If I, as a business owner, know that I have certain expenses which are fixed and others which I may be able to alter, I will do anything I can to alter my bottom line so my shareholders don’t boot me out.

    Corporate taxes here in this country are among the highest in the world. Personal income taxes are also very high, despite having come down quite a bit in the last couple of decades. It’s not just the increased standard of living here that drives wages but also the fact that we work for the first three-four months of the year for the federal government!!! We have gone from single income families being the norm and able to live well to double income families barely able to survive. That’s not just from an increased standard of living, it’s from a confiscatory tax policy.

    I totally disagree with your assessment of our current situation. You blame greed for having a large role. To quote Gordon Gekko, “Greed – for lack of a better word – is good. . .Greed, in all of its forms. . .will. . .save. . .the USA.” (You can see the full clip on You Tube) In Wall Street, Gekko was Oliver Stone’s consummate bad guy (because Stone is anti-capitalist). But the dirty little secret is – Gekko’s right! The profit margin has driven every great innovation we enjoy today.

    More to the point, greed is NOT what got us into this mess – government intervention IS, as I pointed out in my blog on the CRA (Community Redevelopment Act). We have been hoodwinked. After years of tampering with the free market by the scheisters in Congress, we are being told that the free market doesn’t work! Free markets and free trade do work and artificial constraints by outside entities like governments and unions are the real demons here.

    (And I’m not sorry for the long reply! LOL)

  5. Reed, Sorry but I must stick to my point on this one. Regardless of tax policy (corporate taxes are second highest only to Japan) Companies could not and would not run overseas if they had to pay import tariffs to balance out the cost of under priced slave labor. Other nations would be forced to raise wages in their own countries or pay the difference on import. As for technology, I eluded to that and I don’t have a problem with technology as technology always creates new jobs to go with it. We are not yet in the “Terminator” so I guess I’m not griping about that yet.

    Greed is not good when it is blind to the suffering of others. Greed causes managers in China and Vietnam to beat workers, greed causes corporation to subject employees to harmful & potentially lethal materials, greed allows dangerous bacterias to be shipped in food products eaten primarily by children, greed causes companies to ship millions of jobs to foreign nations where slaves can be employed. Need I go on? You can retract the comment, “Greed, in all of its forms…” now.

    Now to address your last comment. Greed was at the heart of CRA. Those Democrats discovered ways to make money on social engineering. They were engineering more power and huge profits for themselves and their friends. Greed in this case came in the form of power greed as well as monetary greed.

    We need some greed tempered by responsibly and patriotism. Greed that can benefit the nation and not our enemies and a few well positioned businessmen.

    • reedkeys
    • February 3rd, 2009

    Blogging War, Blogging War! I call Blogging War!!! Ok, so you’re answer to rampant government intervention is MORE government intervention. C’mon, you know that doesn’t work. So we tax their exports and they tax our exports and they tell two friends then we tell two friends and so on and so on. Soon no one can afford to sell anything to anyone. But with the reduction of artificial constraints, suddenly everyone can get on board and eventually everyone can buy from everyone.

    If you don’t remember the clip from “Wall Street,” I encourage you to check it out. He gives a great economics lesson. I stand by my quote. Evil men will find any excuse to do evil things, even in the name of greed. But why are we still investigating new cures for diseases? Is it purely for humanitarian reasons? Or is it just as likely for greed. Whoever cures cancer will be rich beyond his wildest dreams!

    It may be possible to say that greed for power was at the heart of the CRA scandal, but that was much more about entrenching Democrats in power by appeasing the poor and generating revenues which ended up in Democrat campaign coffers.

    • I understand the tariff war argument. Tariffs were the standard leveling device employed worldwide for hundreds of years. That said, I feel tariffs should only be used to level the field. Where an unfair or injurious situation exists. And yes, as a Christian and moral citizen I do whole-heartedly advocate tariffs to punish nations and companies that employ slave labor, which includes situations where employees are paid barely enough to buy food – read Mexico, Bangladesh… It would not be popular especially with Democrats, but I would oppose tariffs against industrialized nations that are already on or close to our lifestyle. I oppose the poor treatment of workers worldwide and how that abuse affects trade.

    • reedkeys
    • February 4th, 2009

    You have to do whatever you can to try and bring these despotic regimes into the mainstream. If that means doing business with them, in some cases, it makes sense both for our bottom line and their standard of living. In the case of Mexico, if that economy collapses, we will have millions streaming over our unprotected borders. More recently, this is not an unlikely event. It makes sense to send some jobs down there to help their economy so they don’t ruin ours.

    The bottom line for me is this: there’s no such thing as a little bit of freedom. Either you are free or you are not. Once the genie is out of the bottle, it’s hard to get it back in. The same is true for free markets. Capitalism is the engine that drives democracy. Once you start to free the markets, it’s only a matter of time before the rest of society starts to stretch its wings. Look at what happened to the Soviet Union. They decided to allow a limited amount of private ownership and soon everyone was demanding it. The same thing is going on in China right now. We will see if it works there as well.

    • Your thinking in this is the problem. The idea that you can reform a culture of slavery by tolerating it and supporting it economically is doomed to failure. I think that thinking is merely justification to continue profiting from it. England certainly did not end slavery in the US by becoming a major importer of cotton from Georgia. I think we’ll have to agree to disagree on Free Trade, as it seems you may have confused liberty with tariffs designed to create fair trading relationships and encourage personal liberties abroad.

  6. You have made some decent points there. I looked on the
    internet for more information about the issue annd found most individuals will go along with
    you views on this site.

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