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
I 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.
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.
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.
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.
A 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.