Economic Malaise, Simplified

This essay was written in response to a column by Thomas Friedman in the New York Times, edition of June 20 2012.

Friedman like so many others misses the point, I think. He has some good recommendations, but they won’t solve the economy’s long term problems.

Put simply, in simple and easy-to understand steps:
We have a surplus of workers. Half our workforce can produce all we require in goods and services. The relentless push for more efficiency has gotten just that, and efficient economic processes need fewer workers. Machines have taken the place of men.

If those workers are to be employed, then they must be employed in activities that bring in external revenue. They must serve tourists or manufacture goods for sale offshore, and in both cases what they sell must be something that others want to buy and can afford to buy. For a time, we produced commodities that people needed: oil and coal, metals, foodstuffs. Ultimately the minerals become depleted, the few remaining become too expensive to extract and sell, and other nations could extract minerals cheaper and could begin producing excess foodstuffs using the mechanization and efficiency developed here. Manufacturing, e.g. value addition, and tourism are what is left. And that need to produce competitive pricing means that our unrestrained capitalism must be controlled. Unions demand more, executives demand more, finance demands more, taxation demands more…but when the demands price the US economy out of the market, no one wins. Union workers are laid off, management sees the company decline toward bankruptcy, finance loses what it invested, there is nothing left to tax. The inflated manufacturing sector drags the economy down with it. Only by requiring readjustment of currencies (i.e., a cheaper dollar vs the euro and yen and renminbi) can this adjustment realistically be made. It’s not unilateral; those other currencies and the nations that issue them are involved, and so this is a government issue that only governments can address.  And a consideration to be factored in is that those who hold dollars will see their holdings decline in value.  Governments and banks will take major losses if there’s a decline in value of the dollar.  What helps our economy harms them.

Currency adjustment affects balance of trade. That trade cited above is the basis for a functional economy that employs those excess workers and that can support a large middle class. Our government is now controlled by a few who are positioned to exploit niches and extract riches from the status quo. But that status quo is unsustainable; it’s destroying the very economy it depends on. Those who once manufactured goods for external sale are now importers and salesmen; few goods go out, many come in. Foreign competitors have been joined by Americans who do the same thing those competitors do, compete with the domestic economy.  And money flows FROM the economy, not into it. Instead of employing our surplus labor making goods for export, we now employ foreign workers in foreign nations to do the work and bring the results of that work here. Economically, this is no different from firing American workers and replacing them in our plants with cheap foreign labor. It’s the problem that people cite when they oppose unchecked immigration; but the real job loss is not here, it’s THERE, when the job itself is exported. Exported jobs destroy the middle class.  Pressure on the middle class comes not solely from foreign competitors but also now from our own upper classes who have joined the foreigners in putting pressure on rather than sustaining that middle class.  The Walton family, despite claiming American citizenship and measuring their billions in dollars, have economically become Chinese.  Their economic activity benefits China at least as much as it benefits the US; and of course, it benefits them financially.

The other thing affecting trade balance is the concept of ‘free trade’. This type of agreement effectively removes government from trade and turns all trade decisions over to for-profit entities. In so doing, our inflated economy produces goods that foreigners can’t afford to buy and floods our markets with cheap goods that we can’t compete with on a pure price basis domestically; again, it’s that inflated economy that makes this happen. Regulation of trade is a government function; it’s done by imposing taxes or tariffs on imported goods to slow down the flood of imports that saturates the American market.  But no one in government is prepared to do anything except press for more ‘free trade’, without realizing that this means free imports without corresponding exports.  We freely buy but cannot freely sell.

Only a robust middle class can support our government. That government has been squeezed and faces further pressure. Middle class people can’t afford private schools for their children, they can’t afford to provide for themselves after they’re unable to work, they can’t afford to pay for expensive healthcare. Our middle class lifestyle actually is subsidized by the government we’ve built. That government needs income to provide these things. That income must ultimately rest on taxation. Borrowing is a short-term solution that is ultimately unsustainable. We are currently approaching that limit of sustainability.

The middle class is being squeezed ever smaller; the upperclass now controls the government that has the power to save that middle class. The mechanisms that provided education and housing and health care and retirement are being destroyed, even as the government that provided them is being destroyed. All wealth now flows not into the middle and underclasses but only to the wealthy, who become wealthier thereby.  Government policy protects that wealth.

And so we’ve rebuilt a system of nobles and serfs. The nobles profit by rents, from lands and properties occasionally, but mostly from renting out the money they’ve extracted. They live well not by producing more, but by extracting wealth from rents. They remain wealthy because they ARE wealthy.

It’s not sustainable. Never has been, never will be. The traditional solution is violence, the kind of violence that pushed the American Revolution and the later French one. At some point, the level of unsustainability will reach that tipping point. It’s not here yet, but it appears certain to come.

If I can figure this out, why can’t our elected leaders? Why are they so unwilling to act before a crisis overtakes us, a crisis that we can’t recover from?

And why do we keep putting the venal and stupid and uncaring in positions to control our lives?


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