Reposted from the Campaign for America’s Future blog
*****
Dave Johnson | January 8, 2013 | Campaign for America’s Future
Does Trade Deficit Drive Inequality?
The blue line is the trade deficit, or “U.S. Trade in Goods and Services – Balance of Payments.” Down is up, meaning the line dropping further below zero is an increasing deficit. The red line is “Nonfarm Business Sector: Labor Share.” This is basically a measure of how much regular working people share in the gains made by our economy. As labor’s share drops, more and more goes to the 1% types instead. Or, as a Cleveland Fed paper by Paul Gomme and Peter Rupert puts it, “the recent strength in productivity growth has largely accrued to capital, not to labor.”
Remember, correlation is not causation, but … just sayin’. And it makes sense that this would drive wages down while increasing the already-huge fortunes of those at the top, because setting low-wage workers in China against workers in the US obviously creates tremendous pressure on working people’s wages — and not just in manufacturing. When you release millions of people into the job market everyone will accept less just to keep their job. Meanwhile as the cost of labor drops the owners of companies are able to grab a bigger share of the pie for themselves, which is exactly what happened.
PS look at how much money that trade deficit is sending out of our economy! Hundreds of billions every single year!
PPS The reason I put that big “1981″ on that chart is so I could refer to Reagan Revolution Home To Roost — In Charts. From that post:
It seems that you can look at a chart of almost anything and right around 1981 or soon after you’ll see the chart make a sharp change in direction, and probably not in a good way.
The trade deficit AND growing income inequality are both symptoms of the abandonment of patriotism by American policy-makers and by the executives of multinational corporations.
No longer do the Presidents or Congress act in the interests of the American people, nor even the larger national interest conceived as our industrial system. Instead it is private profits and private wealth accumulation that drive all economic policy.
It goes back further than Reagan, not necessarily as conscious sell-out in the beginning, but certainly as the results become more exaggerated and incontrovertible, we can only call its continuation a complete sell-out of the American people. It could be said to go back to Nixon’s era, when liberalization of trade was seen as the way for US-based multinational corporations to make maximum benefit of the rise of other countries as growing markets. Import quotas and other import controls were being abandoned in order to make diplomatic gains on other issues, such as geo-strategic alliances. The thinking underneath it was that by leading the world in this new liberalized trade policy, other countries would follow.
Well, despite the subsequent creation of the WTO and many FTAs, it hasn’t worked out that way. Instead America has a wide open market while other countries have a host of import controls and govt-business partnerships that serve their national interests. This is in stark contrast to American policy that is made by Republican and Democratic parties funded by the 1% in service of the 1%, who have staked their future with the profitability of multinational corporations rather than the fate of our nation.
And so America is flooded with cheap imports that are more profitable to the corporations, enriching the 1% at the cost to the nation of offshoring our jobs, factories, GDP, tax base, and worst of all, our ability to make wealth in the future. Now that Presidential election campaigns cost over a $billion, and Congressional campaigns can go into many tens of millions, we see that these are crumbs compared to the $Trillions accumulating at the top, even as ordinary Americans are losing jobs, houses, real wages, savings, and hope.
That same greed and sell-out of the nation by the super-rich and their political puppets in Washington explains why the wealthy have enjoyed such a tax holiday for decades (relative not only to other developed nations but also to our own past) and an underinvestment in infrastructure and science and R&D.
And of course that same greed that off-shored America’s engines of wealth creation has now exploited our resulting economic crisis to advance their permanent agenda to dismantle Social Security and all other social spending.
The trade deficits are just one more symptom of the smash-and-grab looting of America by the 1%, who pushed for and got the deregulation of the financial sector so they could make bubble economies enriching themselves on commissions and fees and then, after gambling with the money of ordinary small investors and working class mortgage payers, when their bubbles pop they get $Trillions in bailouts while crying for cuts to SS payments to the poorest Americans.
There will be no solutions until Washington DC can be made to serve the national interest instead of the 1%.
My sentiments exactly, Will.
Tom T.
Will the inequality is once again a sympton of the unsound monetary system we have where special interests get bailed out with the printing press. Unsound money unfortunately facilitates bad human behavior like greed. As long as we have unsound money constituents will have to continue to hope that our politicians will do the right thing.
The reason I keep mentioning sound money is that it would be impossible for all the offshoring to occur like it has today. Under a sound monetary system, if the US kept running increasing trade deficits, then gold would eventually flow out causing interest rates to rise which would increase savings and thus reduce the demand for imports. Also it would force the treasury to impose tariffs on countries that were found to be currency manipulators.
Under sound money it wouldn’t have been easy to continue to fund wars either. When I mention other countries have higher savings, I mean they are investing their resources in ventures that enhances the economy’s capital structure by making it more productive. So a country with a high savings means they have resources avaliable to invest in productive ventures.
I want to mention again that when it comes to the trade deficit, its not that the trade deficit per se that is bad but the terms of trade that is the problem. The US the last two decades has been on an inflationary consumption binge which results in resources just being wasted on things like war. Thus has the effect in the aggregate of causing the US to export jobs, factories, transfer technology and ownership of US companies and real estate. Any time a country inflates faster then their trade parnters, trade defcitis results. The US dollar has only depreciated against the German Mark (Euro now)and the Yen since the 1970s, but the trade deficit has only got worse.
To mention again, the US ran current account deficits from 1850-1900 and had a growing manufacturing sector with a growing standard of living. Back when money was sounder, savings was stable which led to stable investment and a growing manufacturing sector. During this period the US incurred debt to import capital which was used to produce new goods and services to repay the debt unlike today.
It’s important to also note that trade surpluses could also be a sign of an unhealthy economy. During the great depression, the US imposed high tariffs and had trade surpluses but the economy’s capital structure deteriorated which was due in large part to bad fiscal and monetary policies.
Another example of a trade surplus being bad could be if inflationary consumption in the US continues to waste resources, manufacturing will continue to be hallowed as input prices rise and profit margins get squeezed. In a continued environment like this, more investments would be made into sectors like natural resources where the US may have an absolute advantage. Eventually the exports of natural resources could rise causing trade surpluses. But trade surpluses in this example would mean a declining living standard because the hallowing out of manufacturing would mean a decline of the country’s productive capacitiy.
Hi Mo, Have you read James Rickard’s “Currency Wars”? I just got it yesterday, and will start it formally (already did informally) when I finish Matt Taibbi’s “Griftopia.” It seems you and I are both repeating ourselves in our discussions, so I am always looking for new material to expand and/or alter my understanding. A cheap substitute for actually fixing the problems, which I think is the responsibility of the traitors and whores in Washington DC who have sold out our country to the multinational corporations and financial sector that are looting and dismantling our industries to get fabulously rich.
Hopefully Richard will help me better understand currency values and systems, but meanwhile I’ll ask you a few warm-up questions. Considering that the only reason I care about boring things like balance of trade or currency systems is not for their inherent interest but rather as instruments towards the REAL issue: how to put America back to work and make this a prosperous country again, full of opportunity and hope for ourselves and our children. That is the qualitative description of my goals, but the quantitative version would be a rise in GDP, ie, an increase in economic activity.
Not to distract us too much from the present, but I can’t help but remember that gold standard money in the late 19th century ended up being deflationary in a growing economy, which concentrated the real wealth in the eastern banks where most gold (and industry) was held, which really was a problem for the rest of the country. Ironically, like the present, that deflation was good for creditors but bad for the rest of the country, just as the inflationary “Quantitative Easing” (and all the fraud and greed and gambling by the financial sector the QE is bailing out) also helps the super-rich while leaving the rest of the country screwed. This supports my idea that there is a lot more going on in our problems than currency system, just as in the late 19th century there were a lot of other reforms originally on the table but sidelined by the Free Silver oversimplification. We can’t let that happen again in a new version, such as a seemingly miraculous Gold Bullet.
As I said, the reason these issues interest me is their bearing on the REAL issue: the need to build employment and prosperity in America, Which leads me to wonder, doesn’t a larger economy require more currency in circulation than a smaller economy? And if that is the case, how would the supply of gold grow with the need for more currency? It seems the amount of currency needed in the economy would be more elastic than the supply of gold, no? Isn’t that what the Populists got hung up on in the 1890s after they dropped so many of their reform demands and just focused on Silver, allowing the Democratic Party to steal their single plank and thus their votes? This single-mindedness around Silver in the 1890s led to abandoning all the other reform demands that, whether or not perfect solutions, at least addressed a host of real problems that were left to fester for at least another generation or two, from the Reform Era to the New Deal, when we finally got a real social contract that worked in this country until…well, we’ll get back to the 1970s-to-present in another discussion. (My first comment above, at the top of this thread, is already a first draft of the end of this story.)
Does a larger country require more currency in circulation?
The answer is definitely yes. This reality is the reason I reject the call to return to the gold standard. The dollar is used all over the world. Even more reason we must accept the actions of the Federal Reserve Board as inevitable, if not always wise. The only alternative is to get smarter people making the decisions.
Thank you, Will, for your common sense material.
Will nothing is wrong with deflation. The deflation that occurred in the late 19th century was the result of productivity. The supply of real goods and services increased faster then the money supply which led to an increased standard of living. It’s important to note that even though the dollar was backed by gold, there was only about 19% of the US money supply ever backed by gold. What gold did was to anchor exchange rates between nations and to keep the purchasing power of money relatively stable. The only time deflation is bad is when banks fail and the money supply disappears like 30% overnight which then causes businesses to have a harder time repaying debt. Monetary deflation is what occurred during the great depression.
The reason that gold accumulated in northern banks was due to the presence of the large money center banks. When the US set up the national banking system, only national banks could issue banknotes. This had the effect of causing banks around the coutnry to set up accounts with the money center banks to hold their reserves.
The reason the North probably also held more gold was due to the presence of a large manufacturing sector. During this time high tariffs protected Northern manufacturers which resulted in more funds flowing to Northern Banks. The high tariffs was a source of tension between North and South that many historians credit with contributing to the civil war.
One of the problems with the monetary system during the 19th century was that the gov’t fixed the ratio between gold and silver. The constitution originally defined the dollar as a certain weight of both gold and silver. What should have been done was to define the dollar as a certain weight of one metal like gold, and then allow other metals like silver to float against gold. Because of the fixed rate set by gov’t, only gold and silver really circulated at a time. And due to gov’t regulations, silver was eventually demonetized which thus hurt savers who held silver.
The monetary system should have ideally defined the dollar as a certain weight of gold, and then metals like silver would have had a defined weight that the mint would make into coins. Under this system, miners and anyone else who held metals like gold and silver would have been able to present them to the mint to make into coins. These coins eventually would be used to pay for goods and services that would wind up in banks. This is how the monetary system should have been setup. It should never be gov’t policy to decrease, fix or increase the money supply. The economy itself should determine the supply which would gradually increase as the value of money increases.
Will, no one has said it better. The 1% of Americans who have outsourced production are traitors to their country. The 50,000 factories that they owned and then shut down and moved to China might as well have been destroyed by enemy military action. The money they made is blood money. They should have been stopped by Government. Our “free” economy has limits. We have done this to ourselves.
Will I’ve read parts of the book “Currency Wars”. It is a good read.
I wanted to follow up about the 5 trillion of corporate cash balances on sidelines. A majority of that cash is actually reserves held by the financial sector with the FED. The only companies that really have cash is Apple and Microsoft. For other non-financial sector companies, a lot of the cash that businesses have appears to have been received through new debt issuance. So cash might have increased but liabilities have also increased. Please check out the link below and let me know your opinion on this.
Cash Cow Liquidity Comparison: Where’s the Cash and Where’s the debt
http://globaleconomicanalysis.blogspot.com/2012/05/cash-cow-liquidity-comparison-wheres.html
Nice interactive graph, making the point that debt is as prevalent as cash, even more so in many cases. I am not a financial analyst or economist, but what I have gleaned from current events reading is that when ordinary people lose jobs, their debts become their ruin, whereas when too-big-too-fail banks took giant leveraged bets using fraudulent mortgage backed securities and other complicated financial instruments, they get bailed out with $trillions and their executives continue to take home millions.
There is a limit to my interests in abstract financial theory. As I’ve said many times, my concern is with the fate of ordinary Americans, who face a real unemployment rate over 20% and stagnant or declining real wages and deep insecurity in their employment, retirements and health care. Reading magazines like Time or Bloomberg Businessweek I see the Wall Streeters continue to call practically all the shots in American politics, wealth is accumulated in America through debt and financial deals that contribute zero to production of real goods, trade and commerce in real goods is instead treated like a chip to be given away in diplomacy, as the politicians deploy military and diplomatic influence to feel like they are in control of the world even as they ignore the jobs cliff and the retirement cliff and the debt cliff of ordinary Americans. The only cliff the rich care about is pushing us over their fiscal cliff by using their offshoring of the real economy (and therefore the tax base) as an excuse to gut the social contract they don’t want to be taxed to pay for.
As a small businessman I see an economy where ordinary people are afraid to spend money, and when we do, it seems to all go to imports as family members and friends can’t find a living wage or even a crappy job. When over 1/4 of American jobs pay less than $10/hour, I see execs driving expensive imported cars and the financial class in Fairfield County renovating multimillion dollar homes they renovated only 10 years earlier. This is the same class supplying Democratic Party politicians like Jim Himes to Congress, the former Goldman Sachs VP hedge fund manager who champions more free trade whenever he gets the chance. He and his peers haven’t been this rich since the Gilded Age.
I don’t want to sound envious (I would never trade places with those criminals) but I am getting angry. There has been a complete sell-out of our country and I do not think the currency system is at the heart of it. Read Bloomberg Businessweek and see the trader advice is which third world country (latest example: Nigeria) will bring the highest returns. Not one mention of the huge unemployment and decline in our own country, zero feelings of obligation to the country or patriotism or any common fate with their countrymen. The only domestic issue they care about is their droning on about the need to “fix” Social Security, which is code word for cut.
None of the government or corporate officials ever mention the trade deficit, or the unemployment, or anything that affects the fate of the average American. They are all internationalists, getting ever richer and feeling important while having toxic effect on the people of the USA.
And thus, at risk of sounding like a preacher, I see unbridled greed and selfishness as the core of our problems, the complete abandonment of patriotism or civic spirit by those who run the government and the global corporations that buy the election campaigns of both parties and that supply the staff for all the appointed Cabinet posts and regulatory agencies. No doubt all that debt making the pink on the interactive graph you link represents many $billions in commissions and bonuses for the financial class and executives that engineered the deals incurring that debt.
Will I will check out that article. I don’t know if you have read below but these two articles linked below are very very important to read. The second link describes how the financial sector has replaced the manufacturing sector as the largest sector which is due to fiat money.
I strongly recommend reading the articles linked below:
Gold: The Protector and Creator of Jobs
http://www.goldstandardinstitute.com/Article.aspx?UniqueName=HSP20120420
To see in charts the connection between inflation and manufacturing job losses check out the document linked below starting from page 36.
http://www.fame.org/Publications/Dr.%20Lawrence%20Larry%20Parks%20-%20FAME%20-%20TESTIMONY%20BEFORE%20THE%20US%20HOUSE%20COMMITTEE%20ON%20FINANCIAL%20SERVICES%20112th%20Congress.pdf
And since we’re on the subject of debt, private as much as public, Mo you might like this one:
http://www.washingtonsblog.com/2012/09/138-years-of-economic-history-show-that-keen-and-minsky-are-right-and-all-of-the-mainstream-economists-are-wrong.html
The gist of the article is that private debts are the problem, and that the economy needs a Jubilee to be restarted. Again I must criticize the narrow focus, this time on debt. It seems that aside from this site and EIC and perhaps some other one I haven’t found, NOBODY sees the trade deficits and the offshoring of manufacturing and other high-value-added industries as the heart of the problem. I think the fact that the politicians, journalists and economists all have jobs and all have an international arena to focus on makes them as out of touch as Marie Antoinette was when she said “No bread? Let them eat cake!”
Will, I again completely agree with you.
Private debt has increased because Americans are trying to maintain a lifestyle that our trade deficit and politicians who cater to corporate interests over the public welfare has decimated.
In my own industry rampant fraud and abuse has concentrated the wealth of investors into the hands of those who control the markets. This concentration of power has allowed the 1% to buy the rules of the game for their own ends. They have the money to influence politicians and they do.
In reporting the frauds in the industry, I asked my senator, Senator Frist, and Senator Lamar Alexander to intervene in the frauds in our industry. They both seemed interested in helping until they got a visit from the plutocrats. The laws of the land were summarily dismissed by the regulating agency and I have direct evidence that this agency was more interested in protecting the interests of those paying them off than the rule of law and the ones being defrauded. Bernie Madoff made off in the same way for some time while the SEC dismissed complaints into his scheme. It was only after it blew up that action was taken.
We have a government that is following the mammon. It has created nothing less than a banana republic and politicians as a whole who rate behind head lice. At least with head lice you can get rid of them.
I am not a socialist but Bernie Sanders seems to be one of the most vocal critics of Congress’s continual sell out. I would rank him higher than republicans as a whole (though I would not if they weren’t such crooks) and most democrats. I have seen both parties sell out to the plutocrats. The Congress is almost completely controlled by just a few in leadership and they call the shots. They are rewarded for selling out to the crooks in the economy and so they continue to do so.
You are right that trade is an important factor and one of the largest factors but it isn’t the only one. If we stopped our trade deficits and continue to allow the 1% to rape the economy, we still won’t fix it. Incomes for the average American have gone down. They have made up for it in debt as they have no choice as a whole. As the economy continues to be captured by the 1%, we will continue to see these problems be exacerbated.
Our political situation is not likely to get any better because we have politicians who cater to the specific welfare of a few over the many. Even after the financial crisis, we had presidential candidates with former Senator Phil Gramm as a top economic adviser. These politicians do not run on results. It is more like a popularity contest where money buys acceptance.
Most banana republics run at low economic capacity because they have adjusted the rules to where only the cronies win and never lose. That has been our recent history.
Many say the solution is education, but until we hold politicians accountable, all the education in the world won’t solve our problems and neither will all the other solutions that are offered up to hide the workings of those gaming our system for their self interests. I truly believe there are more politicians who should be in federal prison than making policy for their puppeteers. I would assume this is the same felling in most banana republics. It is why head lice beat out Congress in polls.
http://www.csmonitor.com/USA/DC-Decoder/Decoder-Wire/2013/0109/Congress-more-unpopular-than-Donald-Trump-head-lice
Tom T.
Tom, I have posted this before, but this is a great discussion of the trade deficit with an easy to read graphic regarding US citizen debt.
http://voxday.blogspot.com/2012/06/pat-buchanan-vs-gary-north.html
Fellas,
Awesome discussions! I have to agree that the “medium of economic transactions” is less important than “discipline and self-interest” in economic transactions. Which leads to the questions- “Who’s self-interest” and “under what discipline” ?? The Constitution says, “only Congress (elected by We The People) shall coin the currency” meaning that monetary policy should be in the hands of our representatives and done for our (hopefully) long-term best interest.
“We The People” have no one to blame for the fact that this has all been hi-jacked by greedy, unpatriotic people with politicians on their payroll, because we buy the propaganda that we have no choice but to only choose from “bought-off Repulocrats” and “bought-off Demicans” (especially in the big-money Senatorial and Presidential races).
This problem has been aggravated by the fact that “we little people” have, too (just like the elites) become unpatriotic, short-sighted, and selfish in our economic transactions (read “purchases”) in that many of us (who would all b*tch if our job was sent overseas) would readily purchase something foreign-made over US-made, since it is a little cheaper (this has been bolstered by a bunch of “free trade lies” that say- essentially- that “a country consumes its way to prosperity, rather than producing its way there” along with “this saving of money spent on manufactured goods, increasing our prosperity will allow us to ‘free up’ money for ‘services we do better and/or need more’ “).
Anyways, at this time in the history of our nation with the internet and how it allows us to circumvent the “bought and paid for” mainstream media it is- in theory- more possible for a grass-roots rebellion to oust the bought-and-paid for Republocrats and Demicans than any time ever. The difficulty is that- as people lose more and more- it’s difficult to find people with the time or “not-too-busy-just-fighting-to-survive” situation that allows one to “focus on the big picture and the long-term”, rather than falling for the latest “daily seduction” carrot which the Republocrats adn Demicans dangle in front of us (“I’m too busy workin’ 60 hours per week to be involved” or “I’m not turning on the gub’ment which just saved me with my unemployment/welfare check”).
This is DIFFICULT, but no more difficult than the plight of our ancestors who left bloody footprints in the snow at Valley Forge, fought against slavery, broke their backs plowing the fields, got up at the crack of dawn to wook twelve hour days at the Mom and Pop stores, died on the beaches of Normandy, sweated and toiled at Bethlehem Steel, worked hundreds and hundreds of hour in garage and barn “laboratories”, etc., etc. to give us the great opportunity and prosperity which we are turning our back on and squandering away.
Once again, GREAT DISCUSSIONS, FELLAS ! Let’s all keep feeding our heads and our hearts and FIGHTING to spread the word for solutions that are, truly, in the best long-term interest of “We The People” and this “grand experiment in democracy and liberty”.
A simple way to demonstrate that free trade drives inequality is to analyize how much of the consumer dollar goes to the labor force that made those socks when you buy a pair of socks made by Wigwam Mills in its unionized sock mill in Sheboygan, Wisconsin, versus how much of that consumer dollar goes to the Chinese or Honduran workers when you buy a pair of Under Armor or Gildan or other private label socks. Many liberals love to focus on how the Chinese or Honduran workers have their miserable incomes increase when U.S, companies move their manufacturing jobs to China or Honduras. But they are not looking at the big picture.
Clearly the global labor force gets a smaller piece of the manufacturing pie, under free trade as currently practised.
Very true, Jim. But even in cases like Germany, where the workforce has strong wages and solid retirements and healthcare and good conditions at work, the outflow of American consumer dollars is a leak in our ship, and we are taking on water fast! And however relatively meager the wages, it is incontrovertible that economic growth in countries like China and India in the past 2 decades genuinely has raised the living standards of hundreds of millions of people. But that is cold comfort to Americans who are watching not just jobs and factories disappear through “free trade” offshoring, but also the dismantling of our industrial commons, that larger network of industries and skills and knowledge that collectively function to make innovation and future wealth creation possible. And we are also losing the GDP and tax base that worsen the fiscal crises, so now our infrastructure and public-private cooperative institutions of science and R&D deteriorate, making our country less competitive for the long run ahead. And finally, the loss of GDP and tax base and the resulting fiscal crises are also being used by the 1% to attack Social Security and Medicare and all other forms of social spending, which is actually MORE needed as the multinational corporations use America’s free trade policies to deindustrialize our country, which is causing mass unemployment and poverty throughout our country. Trade deficits with Germany cause these toxic results in the USA as much as trade deficits with China or India.
I think when we look at Germany, we see that a large part of their economy is making equipment for the manufacturing in China and elsewhere. I have been told by a person dealing with movement of manufacturing to China, that China will often copy that manufacturing set up in order to compete with the manufacturer that set up the manufacturing base. Then China becomes the source of these products (or whatever other country) of these products competing with the original manufacturer in places like Walmart. Germany does have many rules and regulations that protect its economy from low wages as I and others have posted on here before.
The big rub is that free trade ideology works to the benefit of the Walmarts of the world (others have had to follow suit out of economic necessity) game that whole system. We end up with deflation or dollars being concentrated into the hands of the few out of what was once a vibrant economy in the U.S.
Our politicians rate lower than head lice because they are way too dumb to actually govern our country and its economy for the general welfare as they cater to the 1% in this vast transfer of wealth. Instead, they concentrate on really stupid things like gun control or abortion or the debt crisis (which they helped create via the above scenario).
This is what happens when we have the best Congress money can buy. Congress is certainly being bought and you only have to follow the money to see who is buying it.
Our country will continue to go into debt with this process as the politicians who have wrecked the real main street and small businesses with their bought and paid for policies continue down this path. Government spending us used to soften the blow of a weak economy— one that is sold out.
Tom T.
Tom,
If they made you CEO of Walmart today, what would you do differently?
Walmart would have the same problem Warren Buffet has. I would want the rules of the game changed for the country’s sake and I would want everyone to have to play by them—no favoritism that gives an advantage to competitors and I would work towards that goal.
Of course it would probably somehow be called illegal because I wasn’t maximizing shareholder wealth in some eyes but that was the same problem Henry Ford faced when he paid his employees well.
I do realize, Bruce, that none of this is really Walmart’s fault-they are just the beneficiary. You can’t blame the other team when the ref. makes the rules that everyone has to follow are corrupt or bad. The change needed is bigger than Walmart or Warren Buffet alone can do themselves. Our economy is predicated on the fact that one maximizes profits given the set of rules (that are enforced). Our government has been a complete and utter failure as the policy ref.
In my own case, it was the same situation. I followed the power up, up, up. It was the policy of the company’s CEO that was the problem and everyone operating under them, no matter how complicit, were under his policies. What made me upset is that the regulating agency was acting more like lawyers for him than trying to enforce the law. We have to stop the 1% from controlling so much of the policy with their wealth. It is ruining the country.
Tom T
Tom T.
Tom,
Walmart would make more money if they were to switch to domestic sources for goods representing the approximately one-third of their sales that are currently produced in China. Let’s say that American made goods would cost three times as much as the Chinese equivalent. So, $150 billion in sales (one-third)becomes $450 billion, increasing Walmart’s sales by $300 billion. At 4% profit on sales, this would bring an additional $12 billion to the bottom line.
This assumes, of course, that all of Walmart’s competitors would switch to domestic suppliers for those products. If they didn’t, they would soon take that $150 billion in sales away from Walmart.
This $12 billion of new profit would allow Walmart to increase the average compensation of its 2 million employees by $6,000 per year, ($20K to $26K) which they might have to do to compete with a revitalized manufacturing base.
This would be great for the country, but many people would be hurt by it. Prices would increase for everyone. There would be more people unhappy about the price increases than there would be people benefitting from the new manufacturing jobs or higher Walmart wages.
This could become a reality if Warren Buffett’s “Balanced Trade” recommendation were adopted. Unfortunately, it will NOT be adopted because the Obama administration benefits more from having more people on food stamps than it would by having the manufacturing jobs return.
Bruce, if it is so, why isn’t Walmart supporting getting rid of trade deficits more than they are?
I am not saying your numbers are correct or incorrect and you have applied this equation before. We have need to have prices go up if it means rebuilding our industrial base. I don’t have a problem with that. I also agree that this policy field is one of the largest when it comes to regulation needing to be long term. I know all about capitalization of long term assets and uncertain policies and regulations. I could write a book on it.
I do worry a little about the Buffet plan in this way: The Buffet plan would cause an increase in prices of imports and bring back the economics of manufacturing. The one thing it would also do is allow Walmart to still play strategic games to capture all of what economists call the producer’s surplus (capture the profits of manufacturers) because they could take one item at a time and totally wreck the long term investments of U.S. manufacturing by importing those items instead of buying made in the USA. They could use their market power still to capture the profits in the lines below them as they have done while running manufacturing out of the U.S.
This is why I say labor standards and environmental standards (uncertainty for that supply chain) must still be a part of the equation. Those are standards we need anyway.
I would say that no president benefits from large numbers of people on the public dole. It is a sign that the economy is not working to employ people for whatever reason. We are working on one of those structural problems here. Others must also be worked on too. It seems they are not and those problems undermine the economy’s ability to employ people and provide goods.
Tom T.
Tom,
You say that “no president benefits from large numbers of people on the public dole.”
However, under Obama, 14.7 million more Americans began using the food-stamp program than had been using it under Bush. That’s a whopping increase of 46%, from 31.9 million users in 2009 to 46.6 million today.
Obama got reelected. Am I missing something?
Bruce, most people, myself included, believe that the president’s policies were better than the alternative austerity pushed by republicans. I think we need to pay down the debt when the economy is booming, not when it is in a recession. I have never been on food stamps but I don’t have a problem of other people being on them because the government policies have helped ruin the economy. One of which is our open trade.
I don’t, however, think that Obama has done the best job. Maybe it is the best he could do with a crazy Congress that won’t do anything but play politics.
I am tired of voting for a party that claims to be conservative but really is the furthest from it. I am tired of D.C. catering to the big money instead of the general welfare. I do believe that the economy should employ more people as that is one of the functions of an economy. It isn’t just to enrich the wealthy but to enrich all of us. You may believe what you want but I intend for my vote to be a swing vote in every election and not be a party person. Republicans have to come up with better alternatives than they have and better economists than the Phil Gramms they have had that have helped ruin the economy. They are not there yet. Perhaps they need to get back to principles instead of principals.
I will also remind you that during Roosevelt’s terms in office, he didn’t want everyone on the public dole but worked to get an economy that would actually employ people after the economy was tied up in the hands of the few and leveraged to the hilt. He did put people to work to get through the disaster of the Great Depression.
The structural issues have to be addressed (I am not saying Obama is doing the best job at this but the alternatives have been worse). I am not on this group to argue politics with you. I think we both have the goal of fixing our trade problems, possible for different reasons, but nonetheless, we agree on that issue. Fixing the trade problem is one of the structural problems that will help the economy. There are others.
Walmart is complicit in the deindustrialization of America because they have said virtually noting about our huge trade deficits causing massive unemployment, ongoing destruction of our industrial base, and transfer of trillions of dollars of national wealth to other countries, especially to China. Instead, the company continues to enrich the Walton family by being the single biggest instrument of this destruction.
A patriotic Walmart CEO would warn the nation of the terrible consequences of free trade policies and loudly call for a Balanced Trade policy from Congress so all retailers could participate in the revitalization of American prosperity. They could do it by making displays in their stores calling for a Balanced Trade law so they would not be put at a disadvantage if they try to sell US-made goods. No other retailer has the clout, Walmart could be the force for meaningful change but instead they offer 1.5% change.
Will,
If Walmart were to switch to domestic suppliers for the products they now import from China, the cost of those items would (at least) triple. This additional cost might be construed as a tax, paid by Walmart customers, to subsidize American manufacturers. This would be the ugly side of “Balanced Trade.”
Note: I am totally in favor of Balanced Trade.
The other problem would be in convincing American entrepreneurs to invest in plant and equipment, plus engineering, plus endless compliance expenses, to get back into a game that might fall apart at any time. You can’t approach a Walmart or a Target with one toaster. You must have a complete line of related products to become a supplier at that level. The cost of filling that pipeline, as well as the risk, would be mind-boggling.
One of the overlooked problems is that our industrial infrastructure is GONE. To make as simple toaster requires tooling. Where are the machine shops with veteran toolmakers? Where are the companies that design and install material handling systems, computer systems, finishing systems, robotics, automatic spotwelders, dedicated automation, etc.?
Reducing imports from China is only part of the solution. We would have to create a scenario where the government is fully supportive of manufacturing-not adversarial as it has been for decades. I don’t see this happening.
Personally, I believe that the Obama administration would prefer that the manufacturing jobs NOT come back. They benefit more from the millions of new food-stamp recipients than they would from having the people fully employed in high value-added commerce.
Hi Bruce, What is to be done?
Will,
Edmund Burke said, “Don’t despair, but if you do, work on in despair.”
When our grandchildren are cursing us for the mess we are leaving them, I want to be able to say, “We did everything that we could.”
Bruce