Sunday, March 6, 2011

The real economic problem is globalization

It has been interesting and compelling to watch some of the arguing going on around the issues of jobs, wages, tax rates, the deficit and debt. In typical fashion, my friends on both the left and the right are missing the true reason the United States is falling by the wayside when it comes to economic power. In a word, it is simply, globalization.
Globalization is causing a severe lack of quality in available jobs. Since the quality of available jobs is lower than the previous jobs, the wages are lower. Insignificant, if any, benefits then come with those low quality jobs. As more and more people have no other choice but to take these lower quality jobs, they are seeing those people in the higher quality government jobs, jobs they fund and pay for through taxes, and they want changes. Unlike lopping off the pay of a CEO, which is often paid by a private company, government jobs are controlled - or, in theory, are controlled - by the people. And the people are clamoring for changes in those job structures, changes that should be implemented now.
If you ask anyone who is out of a job (or anyone who has a job and is looking) what is going on, here's what they will tell you: In order to live by a certain standard, the job seeker needs to earn $X amount of money. All of the available jobs either pay $Y amount of money (less than $X) or are part-time. The part-time jobs have no benefits, which means that while you're getting nailed economically, you have to come up with money for health care too (never mind dental too).
So why is this? Generalizing, it's easier for companies to find employees who are less expensive outside of the United States. Often, it is easier and less expensive to hire overseas employees than it is to train Americans. This means that the only jobs that are available to Americans are low-skill, low-level service sector jobs (and you need three of those full-time jobs to get where you once were).
Also, after the last economic crash, caused by the banking industry and irresponsible people who purchased homes they never should have been allowed to purchase, companies and industry are freaked out. They are hoarding capital reserves in case things go crazy again. This way, they won't need to rely on the banking industry lending them money to stay afloat, if need be. Companies are also forcing current employees to be even more productive than they ever were before even though they are all more productive than they ever were before already. The American people are freaked out too. They are spending less, paying down credit card debt, and saving whatever they can in case they get creamed again. This is good personal policy. But since 70 percent of the American economy is based on retail spending, being frugal has its drawbacks. We too are hampering the recovery.
But why is so much of the American economy based on retail spending instead of manufacturing or other sectors? Again, globalization. A big chunk of industry is no longer performed in the United States.
Take the cool iPhones I purchased for my household recently. I found it laughable that the box said "Designed by Apple in California, Assembled in China," although this is the case with all smartphones. At $300 a pop, you would think it wouldn't be that much more to assemble them in the United States. Alone, the shipping costs for millions of iPhones on a boat from China would be reduced in the wake of giving Americans, what, $10 an hour to assemble iPhones, right? So while it is great that there are designers in California working for Apple, a good chunk of the cost of the phone went right to that factory in China. This is happening across the economic spectrum, with everything, from vegetables to cars.
Many of us predicted that this was going to happen years and years ago. I wrote about and talked about this issue on my radio program extensively in the 1990s in the wake of President Bill Clinton and the Republican Congress approving the NAFTA bill which later led to the approval of GATT/WTO. And since that time, the American economy for most people outside of the CEO structure has been hollowed out.
A lot of folks, especially those on the left but also those in the middle, have been pointing to some charts put together by Mother Jones showing where and how wealth is redistributed in America: ["It's the Inequality, Stupid"].
These charts present a pretty grim picture of how wealth is distributed in the United States. And they should be used as a tool to tweak or restructure public policy. However, as a number of people noted in the Web comments, wealth isn't distributed, it's earned. Or, to be more precise, wealth is earned, inherited from others, won in the lottery, or stolen by thieves on Wall Street.
While people can argue about tax rates until the cows come home, government taking away more money from the rich isn't going to solve any problems. It just punishes the rich. We might want to have a national conversation about punishing the rich. I'd be up for that. But the down side of punishing the rich is that money gets taken out of circulation and doesn't create more wealth or jobs, as noted in this post previously: ["Let's get real about the top 2% and spending"]. As stated in the figures, if the government took everything that was earned by people making more than $500,000, it would only cover 25 percent of the FY10 federal budget. However, it would also take $1.3 trillion out of the private economy, which would harm other sectors of the economy that rely on that money being in circulation. The result will be fewer private sector jobs and more government (and we all know there is too much government now). If the government could be trusted to tax affluent people more and put that money directly to the debt, which benefits everyone, I might be in favor of higher tax rates for those people (or at least a discussion about higher tax rates). But as we have seen, this never happens. And the government and politicians cannot be trusted to do the right thing. They never do.
Wealth being redistributed to the monarchs of industry that are clearly overpaid and have set themselves up in a fancy club that ordinary Americans will never get into is indeed a real problem and unfair. But it is only a small part of the picture. A bigger problem is the massive trade deficits that are hollowing out the American middle class and building up the standard of living in other countries like Brazil, China, and India.
Here is a nice chart from 1998 to 2008 that shows some of what has happened in the wake of NAFTA and GATT/WTO (NAFTA was approved in 1993 and implemented in 1994; GATT/WTO was approved in 1994 and implemented in 1995). While looking at this graph, imagine three things:
First, there is the wealth redistribution to the rest of the world. Every trade deficit is an amount of American money that has flowed to another country for goods (this doesn't include services, just goods). It's hundreds of billions of dollars a year. This is money that would otherwise be flowing in and out of the pockets of the American people. And even if it only went into the pockets of the rich, those rich people have bank accounts, those banks lend money to people and businesses for cars and start-ups. That creates and generates business activity which creates and generates earnings and wealth. Maybe if more of this were done, we wouldn't need silly television shows where people take their cool ideas and are judged by a panel of so-called experts on whether or not a product is worthy for the marketplace. They could build a business plan, go down to the bank, get a loan, make their products, and create jobs, right here (yes, I know, how very "It's a Wonderful Life" of me to say that, but it's true).
Second, multiply any month of money by a rate amount (say 20 percent, 30 percent, or even 100 percent). That's the amount of lost tariff revenue the federal government no longer collects because we don't have tariffs on imports any more. In other words, in a month where the trade deficit is $60 billion, the federal government lost $30 billion in taxes if there was a 50% tariff on all imports. Every year, depending on the rate, that is a lot of lost tax revenue due to the "free trade" economic theory which is, in fact, a myth.
Now take this one step further and ask yourself, Did the federal government start spending less in the wake of not collecting tariffs due to globalization and the free trade myth? No, as we see in the Mother Jones charts, it taxed regular folks more while allowing deficits and debt to build. Those deficits and debts are literally owned by the affluent of our nation and other nations, and the same countries we are sending all of our money to via the trade deficits so they can lend it back to us! What kind of insanity is that?
Lastly, another fascinating thing about this chart is the petroleum part. Now most of this petroleum deficit is from Canada, our neighbor to the north, and comes in the form of home heating oil (I believe it is 60 percent if I recall correctly, based on another post I did years ago ...). So, we're subsidizing their economy and their single-payer health care program through our inability to be self-sufficient in our energy needs. And, it should be noted, that these deficits would be much worse if we didn't actually export a significant amount of our oil to other countries, which many companies do. Yes, it is their right to export oil. But the areas which are being mined by the oil companies are technically owned by us, the people of the United States. Can't the government require more of our oil to stay here as part of the deal to allow these companies to mine the oil? How about regulating the prices too while we're at it so that every time some ant of a dictator somewhere we don't get much oil from anyway decides to get all crazy, the price doesn't go up drastically? Those dictators and the speculators that are driving up the cost of oil have literally taken all my disposable income (i.e. my alcohol money) away from me at the gas pump. I don't care if it is "socialist" to regulate prices at the pump. Do it already! You're stealing what little beer money I have already from me. LOL.
The most important thing about this chart and this post is that unless the federal government and American political and economic system begin to act in the interests of the American people, it's only going to get worse. There are answers on both sides of the aisle and, frankly, only a combination of both Tea Party values and progressive values will fix the mess. If we don't do something soon, the economic standard of the rest of the world will continue to rise and our standard will continue to be lowered to their levels. Many of us predicted this would happen nearly 20 years ago and now, we're seeing it come to light. The time to act is now.


Mark de Zabaleta said...

Excellent article. I totally agree with you. The U.S. trade deficit is the ultimate cause of this crisis, and has a solution in Economic Theory: autarky. The U.S. can produce and sell all around the entire planet.
Doctor in Economics

Tony said...

Thanks Mark. It really is time to have a national conversation about all of this stuff. I wonder, how we do that, considering that you can't talk about "free trade" anywhere because it's blasphemy?

Mark de Zabaleta said...

Maybe talking about trade with special tax?


Mark de Zabaleta
Madrid (Spain/Europe) said...

That $10 an hour to assemble iPhones doesn't include the extra unemployment, soc security and other fees and employer pays and why should they when they can pay someone a dollar a day - at some point the price of oil will make it unprofitable to kill your chickens in AK and ship the carcasses to China to be processed and then sent back to the US.

Tony said...

@Jim: Good points!

Anonymous said...

Of course you would have to trust the government to do the right thing with revenues from any or poor. So use your same argument for "not taxing the wealthy corrupting skimmers" for not taxing the poor and elderly in the form of cut benefits they have paid for in increasing rates. Sure the government has pilfered these SS funds, stopping that that should be our focus. Using this as the reason for reducing taxes on the rich seems bizzare. Do you trust the government to stop bailing out mismanaged banks and constructing loopholes that give GE tax free status - even when most of their profits are from foreign manufacturing? Why not extract revenues them from the wealthy and profitable corporations? In fact the wealthy are the only people with disposable income. Corporations have huge reserves sitting on the sidelines - money not in the U.S.economy is of no use. In fact with increasing college debt(to the benefit of a global banking system), both young and old will have little disposable income for years to come. Tax cuts to the wealthy and corporations are being directed to investments in Asia, Brazil...where consumers have disposable income. Give these entities ability to repatriate the gains - it only makes them invest more in producing abroad - because it is the perfect scheme to conduct business tax free. Why manufacture here where there are no customers with money. The corporations get richer - the income disparity grows and Americans suffer. Yes globalization is the problem ... and so are people like you that put a blind eye to the issues of corporate corruption that has our political leaders looking out for global corporate interests - risking U.S. sovereignty in the process.
I say tax the wealthy and cut taxes for the middle class - at least then the money is spent here - and people can reduce their own debt if the govt can tackle theirs. Redistribution is not an evil concept if employed properly - especially given the advantage/access the elite have through our corrupt political process. If corporate money is invested here in the U.S., any excess taxes will float back to them. That's the ingredients for a functional U.S. economy. One exception on higher corporate taxes - give huge tax breaks to any corporation producing products/jobs in the U.S.. That will keep them from relocating. In no case should the savings garnered from cutting essential middle class entitlements be redistributed to corporations to build plants in China - only to enrich executives as they lobby to bring back money tax free.

I'm really tired of the mindless sheep eating from the "don't kill the job creators" trough. These people are promoting the destruction of their own people and giving more power to the crooks. Just simply cutting spending totally ignores addressing the real perpetrators - political corruption, corporate, banking, insurance, wall street oil company skimmers that continue to use the tax code to suck ordinary Americans dry, while they focus their efforts globally, extracting huge gains as we go down the tubes...and people like you are duped into pleading their case.

Economic Stability said...

@mark I agree with you products from USA are pretty famous all over the world particularly in Asian countries.