On the Economy and the Role of International Trade

Something that’s being missed in the discussion of national status:

I’ve come to believe that larger nations, that do a lot of international trading, have in reality been in a depression for some time. I use ‘depression’ rather than recession because I don’t believe the true amount of shrinkage in economies has been realized. Borrowing props up economies and makes it seem that the situation is less dire than it is. The situation has now reached a point of non-sustainability.

Here’s the way I see it: The key to economic well being is trade. If you only manufacture and sell products domestically, then there’s a finite market and so a finite manufacturing base. Oversupply doesn’t necessarily create more domestic trade due to a saturated market; it only forces prices down. So external trade is the key to a growing economy and more real wealth for all citizens. Adam Smith realized this.

But at the same time, ‘free trade’ can’t be totally free. It must fall within limits. Smith didn’t write in a world with easy, fast, safe communication and shipping. He didn’t write in a world where trade could become worldwide, where economic entities could be multinational and import products cheaper than they could manufacture them.

A part of this has to do with unions and their activities. Trade unions were absolutely necessary in the early days. But employees are safer now at work, and they get more of the economic rewards of their efforts. Unions now demand ever more of those economic rewards for workers; managers want to keep the rewards for themselves. As one union strikes and receives more pay, another union sees this and demands more itself. This situation ratchets up across the economy, and eventually prices go up, inflation happens, a new stasis is reached. What unions gain, they lose in inflated currency. Plus now they’ve also lost some of the value of any savings. Across the world, other nations which didn’t undergo this spiral have deflated currencies (relatively speaking), so they’re at an advantage if production is based solely on price.

But trade must be balanced in order to be sustainable. Large nations that do a lot of importing see money go out, money that isn’t spent domestically, and goods come in, goods that saturate an existing market. This can’t be indefinitely sustained. Funds from trade imbalance can be borrowed and put back into the domestic market, but this creates the double problem of eventual repayment plus interest.

The fact that some of the smaller North European nations didn’t need to do so much borrowing has more to do with the status of their trade than it does with intrinsic wisdom of their leaders. I note that Saab, once an exporter, is now in bankruptcy. No one is exempt. The Chinese may buy Saab’s assets. China will at some point begin manufacturing automobiles; the US General Motors operates one or more manufacturing plants in China, so their work force is being trained and all they need are the machines, such as the ones Saab will be selling off.

Free trade and the WTO are ideals; they aren’t followed by many. China, for example, has never lived up to trade agreements but instead subsidizes industries and uses protectionism. Their currency is also maintained at an artificial low level.

So at some point this idealistic situation must change. I advocate a tax on imports, floating at a level that adjusts prices to parity and removes cost as the sole trade incentive. If you make a better widget, you can still sell it competitively; you just can’t flood the market because it’s cheap.

If you don’t think of this as realistic, consider what I’ve said: the current situation can’t be sustained indefinitely. Postponing the finding of a solution simply makes the inevitable fall worse.

A lot of attention goes to the problem of immigration. This isn’t the problem, it’s only a symptom. In a shrinking job supply, any source of competition is demonized.

There are also local incidences of unrest. People who live where good jobs can be had, even if those jobs require more in commitment and education, understand that with effort they can get good jobs. They can plan for the future. They have some confidence that the future will be better than the past. When those jobs aren’t available, hope is lost, desperation lurks under the surface, people will lose respect for law and understand that really they have little to lose. Crime, possible incarceration, is not the fearsome thing it is to you and me, who have jobs, who have education, who are relatively content with life.

The assumption in the US was that if you had a job in a manufacturing plant, that job would continue. You would work hard for years, but you could buy a home, send your kids to a good school, afford a car, enjoy life. The home would be paid for in slightly-inflated dollars, so the effect of interest payments was slightly mitigated. Bankers would loan money with the expectation that if the borrower couldn’t repay, they could take back the house and sell it to someone else.

And then the bottom fell out.

The good jobs went away. Manufacturers became merchants, buying instead of making, selling at inflated prices because ant people* in China would work for less than unionized Western workers. It was the ultimate escape from unions, the triumph of the managerial elites over production. Now they could keep all the profits without sharing them beyond marketing staffs and management. But they also expected to keep marketing in North America and Europe. With layoffs, with loss of houses because some of the predatory loans (and some were ridiculously predatory, targeted not at the White middle class but at Blacks; a recent fine of some $350 million was assessed for this) couldn’t be repaid, so job loss became loss of the home, the middle-class’ investment of all their previous labor.

Politicians should have seen this situation developing and taken action. But as a class, politicians aren’t ready to lead a citizenry in hard decisions if there’s any possible other course. They can lose elections that way, a fate to them worse than death. Doesn’t happen. We believed they were smarter, better informed, had the nation’s best interests at heart. They weren’t, they didn’t.

So now we’re in the political cycle of elections.  We get demagogues and platitudes, not solutions.  We get a stopgap bill for a disfunctional Congress to argue over.  We find that unemployed people, poor people, old sick people are being held hostage by ideologues to whom a political advantage is much more important than any considerations of people and their misery.  Platitudes; never solutions.  Solutions might lose votes.  Hold people hostage to the occasional sense-of-responsibility of the Democrats.  Add a goodie to the temporary extension bill that favors Big Oil, and plan on using that for political advantage during 2012 to force Obama to make an unpopular decision, to approve a pipeline that citizens don’t want, or refuse it and end up in a political fight with Big Oil’s client politicians.  Lots of distraction, no real solution to trade imbalance and job loss.

But if I can realize where the problem lies, why can’t our elected leaders?  With few exceptions (Sen. Bernie Sanders seems to be one), they are firmly in the grasp of special interests who come bearing money by fistfuls.  Bagfuls.  Unashamed, they hold out their hands for more.  Corporations donate millions to political ads, and no one wonders why stockholders aren’t really consulted about the loss of their money in this way.  Boards of Directors authorize this, CEO’s spend the money, if you’re a small stockholder you lose and never have that corporate ‘voice’ that a silly Supreme Court has decided they have.



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