For the sake of simplicity imagine the world contained only 2 fictional countries:
The first country (C1) is very rich and powerful thanks to the efforts of previous generations, but it's current population loves to consume and consume and it's economy has 'evolved' away from boring repetitive manufacturing work into service based industries.
The second country (C2) is poor and it's people are hungry for success, held down by an oppressive government. One day the government of C2 decides to take its jackboot off the face of the people and said people start to manufacture things. They start with little things, trinkets and t-shirts etc. Because of their low labour costs they can sell these things much more cheaply to the people in C1 than the manufacturers in C1 can, so people being what they are, the consumers in C1 start to buy the products made in C2. Manufacturers in C1 cannot compete with the prices of the goods made in C2 and so they go out of business.
The people of C2 use the money acquired from the sales of their cheap and cheerful goods wisely and save and invest it in the capital needed to make more complex goods, such as cars, computer chips and other high value items.
Once again the manufacturers in C1 cannot compete with the low labour rates in C2 and go out of business. The government of C1 reassures the people in C1 that this loss of manufacturing capacity is not a problem, as the future lies in the 'service economy'. No-one seems to notice that, whilst the people of C1 are merrily buying up the shoes, TVs, cars and computers made by the people of C2, the people of C2 most definitely are not buying the investment and pension products from C1, nor are they bringing their cars to be serviced or themselves for a haircut. Money continues to flow out of C1 and into C2.
Meanwhile the people of C1 are getting frustrated, because whilst the manufacturing jobs they used to do provided jobs for people with a range of abilities from floor-sweeping, through engineering and design, machine operating and financial planning, the currently available jobs are sharply polarised into those requiring a brain the size of a planet, or those that require no brains at all. The average guy is frustrated - unable to be a software designer but far too smart to stack shelves.
One day - maybe 100 years later - C1 is poor and C2 is rich. Now we get to the crux of my question (sorry it took such a long time):
What happens to C1 now that it's manufacturing base has gone? Does it have to start again making t-shirts and trinkets and try and reverse the process, building up wealth and capital from scratch again? If so then it would seem incredibly, monumentally wasteful to have let the existing manufacturing base slip away and to scrap all that knowledge and effort represented in building and machinery.
When the people of C2 entered the worl economy and started producing cheap goods, would the people of C1 not have been better off accepting, say, a sharp 50% decrease in their standard of living in order to keep their manufacturing base and the accumulated knowledge and experience that goes with it, rather than simply stubbornly refusing to accept cuts in wages, letting their industry go and eventually ending up with nothing?
Am I totally on the wrong track? How can free trade work within the framework of national borders and competing governments and peoples without these cycles of impoverishment and enrichment?
Please excuse my roundabout way of replying - I get a script error when I use the quote button.
Daniel Greinke said:
"Finally, let us assume America loses its manufacturing capacity to a Chinese monopoly of industry. If the Chinese companies charge exorbitant rates for their goods, that leaves an opportunity for the resurrection of American manufacturing that would charge more reasonable rates. "
Well that was the whole gist of my original question - ie. whether the US have to lose its industrial base and start againb from scratch, or whether their could be a way of avoiding that.
"Also, there is the issue of how American demand for those Chinese goods could possibly be sustained if we are losing money to spend on those goods."
You're making the assumption that the Chinese care about sustaining American demand rather than just gaining American wealth and technical and industrial knowledge that took decades to acquire. Once they've absorbed said knowledge they can turn to their own domestic market of 1 billion-plus consumers.
Smiling Dave said:
"Then those 300 million computers, bought in China, will cost the US citizenry 150 billion dollars. They have the same computers, and an EXTRA 150 BILLION DOLLARS to spend as they wish. How do they have less money?"
This is where you've lost me, so maybe I have a massive blindspot? Let me explain how I see it and then please let me know whether I'm right or not:
Scenario 1: Imagine the US consumer spend $300 billion on American designed and made computers. That $300 billion is then slewing around the American economy to be used for saving, investment or whatever. That's all good for the American consumer.
Scenario 2: Imagine the ideal free trade scenario: the US and China both make things that consumers in the other country want - Americans buy computers from the Chinese, and the Chinese buy cars from the Americans, or whatever. Once again everybody wins.
Now on to Scenario 3 (which appears to be the reality today): Americans spend $150 billion on artificially cheap Chinese computers and $150 billion flows out of America to China, but nothing comes back. How then do Americans have 'extra' money as you put it? Computers are a decpreciating asset and when they're so much scrap plastic in a few years the American economy is $150 billion dollars down.
"Well, that is to our advantage, as explained above. You realize that giving the computers away for free or charging less for them is really the same thing, of course."
How can it be? Making a reduced profit or perhaps just breaking even is not the same as giving stuff away and making a loss. I have run a small business for a number of years and whilst my lifestyle ebbs and flows from OK to a struggle depending on the profit I make, sustaining a loss for any period of time would bankrupt me.
Now please don't get me wrong - I am 100% morally behind free trade. The point of my postings here is to help me to understand whether it is possible for a nation that manipulates trade or whether they will destroy themselves doing so. I am not looking for an argument - I am looking to reinforce my knowledge so that when I argue with anti-Capitalists I can hold my own.
No why I'm pretty convinced by your argument that excessive American regulation is the cause rather than any Chinese machinations, the result is still a bad one for the American worker.
At the moment it still seems to me that, by holding their own people's living standard down, the Chinese can 'steal' American knowledge as US manufacturing knowhow offshores to China and then enrich themselves with a one way flow of capital. As far as I can see Americans are still living off the pot of wealth created by their forefathers, but eventually it must run out!
It's easy enough to imagine - let's suppose that I work hard all my life and leave a reasonable amount of money to my son. My son decides, for whatever misguided reason, that his labour is definitely worth $100 an hour and that he will not work for less than that amount. It causes him no problem initially because he has my pot of money to live off. However after, say, a decade of not working, his inherited money has been spent and he has to either join the job market or starve. Because he has no skills or experience he ends up working for what he is worth - not a lot. Meanwhile the people he spent my money with lived frugally, saving and investing it and when the time came for my son to have to start working again or starve, he found himself working for peanuts for them.
Now it was his fault and not theirs, but the result was the same - they ended up with all the money and he ended up with none.
Dear Mark,
Let me preface my answer by saying that I truly appreciate your polite and dignified style. More power to you!
OK, on to the meat and potatoes:
Let us imagine a totally different, wild scenario for a moment. The Good Lord decides for His own mysterious reasons, to make it rain, not manna, but computers, from Heaven. Miraculously, they slide right onto the desks of all 300 million people in America. Is this good or bad? Of course it's good. One less expense to worry about. Every single household is now wealthier. The $1,000 of money in ther wallet that they needed to spend on a computer can now go to food, clothing, whatever.
OK, now let's imagine a different Lord. This one says "Land of the free and home of the brave, I will give you free computers, but I want you to donate $500 to My favorite charity." Everybody looks into their wallets. They see $1,000 there. "Hmmm," they think. If I take the Lord's offer I will have a computer plus $500 to straighten my daughter's teeth. If I decline His offer, I will have a computer and an empty wallet and a daughter with crooked teeth. I wonder what I should do?"
Everyone of course, jumps at the chance. Then the Lord says "Guys, my favorite charity is China. Any objections?"
"In that case, forget it, Lord. You are ruining our economy." Hahaha. That makes no sense at all, right? OK leave out the Lord as middleman [He was getting the computers from China all along] and you have our reality.
Let's look at it from a different point of view. We'll examine your scenarios, and contrast them with my original scenario in the other post, where the computers are bought from China for $500 because the sly Chinese devalued their money on purpose.
"Scenario 1: Imagine the US consumer spend $300 billion on American designed and made computers. That $300 billion is then slewing around the American economy to be used for saving, investment or whatever. That's all good for the American consumer."
In the case of the Sly Chinese, $150 billion is in everyones wallet, slewing around as well. The other $150 billion is in the hands of the Chinese. What are they going to do with all that money? They can do ONLY ONE THING. Spend it right here, sooner or later. So that money will slew around here also. The only difference between the two scenarios is this: If the computers are bought in the USA at full price, all those daughters will have crooked teeth. If they are bought at half price, romance will flourish.
"Scenario 2: Imagine the ideal free trade scenario: the US and China both make things that consumers in the other country want - Americans buy computers from the Chinese, and the Chinese buy cars from the Americans, or whatever. Once again everybody wins."
Totally agree. The difference between this scenario and the one of the Chinese getting sly and selling us computers for half price is exactly the same. When the Chinese are sly, our daughters' teeth are straight.
"Now on to Scenario 3 (which appears to be the reality today): Americans spend $150 billion on artificially cheap Chinese computers and $150 billion flows out of America to China, but nothing comes back. How then do Americans have 'extra' money as you put it? Computers are a decpreciating asset and when they're so much scrap plastic in a few years the American economy is $150 billion dollars down."
This seems to be the same as the case of the Sly Chinese, but emphasising the possible disadvantages of getting a computer for half price. OK, let's look under the hood:
"Artificially cheap computers." Who cares why they are cheap? Instead of having to shell out $1,000, I only had to spend $500 FOR THE EXACT SAME COMPUTER.
"$150 billion flows out of America to China, but nothing comes back." What do you mean? Beautiful shiny computers came back in return for the $150 billion. And let's not forget, that money is going to come right back to the USA. There is nothing else to do with a dollar. Of course the truth is, we would be better off if the Chinese were foolish once again and BURNED THE MONEY OUT OF EXISTENCE. That way, we gave them paper, and got back computers. If the Chinese keep the dollars, we got computers, and will one day have to give something in return, when the Chinese bring those dollars here to go shopping.
"How then do Americans have 'extra' money as you put it?" As I explained, the American consumer has $500 extra in his wallet, because he bought the computer for $500 instead of $1,000. And as proof, look at his daughter's teeth, how straight they are now.
Now, in the back of your mind, you may be thinking something like this: If I have apples, and Jones my neighbor has oranges, and so do the Chinese, it's better for me to trade my apples for Jones' oranges, not the Chinese oranges. Because when I trade with Jones, everything stays right here in the USA instead of leaking out of the country.
But that is a huge mistake. What do you care if a Chinaman eats your apple, or an American? You got your oranges in any case.
"Ah, but my neighbor Jones, poor fellow. He will suffer. He might go bankrupt. His farm will close down, and there will be less oranges in the USA, and in the world for that matter."
Well, if he cannot sell his oranges at a competetive price, it means his land is not being used right. Maybe he should go into the avocado business.
"Computers are a decpreciating asset and when they're so much scrap plastic in a few years the American economy is $150 billion dollars down."
Ermm, wait a minute. We are assuming people WANT those computers. The only q is, should they pay $1,000 or $500 for them.
Again, I think there is some beneath the surface thought that it's better ECONOMICS to pay $1,000 for a computer to an American than to pay $500 to a Chinaman, because in the former case the money "stays inside the country." And again, this is a huge mistake. Those teeth won't get straightened just because the $500 that could have paid for them is in some other American's wallet. They have to be in YOUR wallet. And they will be, if you buy the Chinese computer.
OK on to other parts of your post. I had said that giving the computers away for free or charging less for them is really the same thing, of course.
You rightly challenged that, because I guess I wasn't clear. Certainly, as you pointed out, FOR THE CHINESE it's not the same thing. What I meant was for the Americans. Just as it is obvious [I hope] that Americans gain everything and lose nothing getting free computers [as I explained in the post], so too getting half a computer for free [i.e. paying half price for a computer] gives the Americans only advantage.
OK, next point. The knowledge drain by offshoring may be a problem. But it's not the consumer's problem. If the US companies are foolish enough to do it, it's my job as a consumer to keep on doing my thing, buying where it's cheapest. This tells everyone "Hey guys, get your act together, cause I'm buying from someone who has his act together."
As far as the Chinese enriching themselves with a one way flow of capital, this is a big mistake. What exactly do they gain from having our paper money? [Which is going to lose half its value at least in the next few years, Peter Schiff warns us.] They are enriching us, giving away their valuable goods for a song.
Your concerns for your son are legitimate, and an accurate description of what's going on. Except for one detail. He is not living off YOUR wealth now. He is living off the CHINESE wealth. They are giving us free stuff, and getting useless paper in return. After all, we have a huge trade deficit, which means they are giving us all kinds of goodies, and not asking for anything in return [yet].
But yes, we are shooting ourselves in the foot, living like this. Because one day the Chinese will say "To hell with you. Make your own computers. We are sick of giving them to you for almost free." And like you say, we don't have the capacity to do that anymore.
But the point remains, the Chinese have nothing to do with causing our factories to close. The solution is inside our boundaries, the tax laws etc, as in the earlier post.
Anyway, hope this cleared things up a bit.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Well actually then it seems that we're not that far apart at all in our take on things. Our whole 'difference of opinion' as it were hinges on what happens to the billions of dollars US consumers hand over to Chinese firms.
Am I right in saying that if they come back then that's all well and good, and if they don't, well that's bad (in the long run)?
We both agree (I think) that Chinese consumers aren't buying American goods, so (hopefully) the last question needing answering to help me fully understand is:
What are the Chinese firms doing with all those dollars they're taking in exchange for their computers and how are they making their way back into the US economy?
Here's the opinion of a guy suggests we're both wide of the mark. This very long and very interesting article was flagged by Gary North in an piece on lewrockwell.com and in a nutshell suggests the demise of the gold standard was the most significant cause of the loss of manufacturing capacity rather than the 'free market' as suggested by Paul Craig Roberts (an economist whose opinion pieces I otherwise generally like). So perhaps in the end the true answer is even more Austrian than the ones you gave me!!! :-). This is a small snippet. The first few paragraphs are the most pertinent to our discussion :
http://www.minyanville.com/businessmarkets/articles/washington-mcdonalds-walmart-costco-fedex-usps/4/20/2010/id/27886
This review of the interstices of the nonfarm jobs report shows that, in fact, we’re edging steadily closer to becoming a tree planting economy -- a trend that raises profound questions about sustainability and whether corporate earnings should continue to be valued at traditional multiples. There are two main indicators of this trend. The first of these explains why Goods Producing jobs will continue to shrink, while the second shows that behind the comforting façade of massive gains in service-economy employment, there was really not much going on except the economic equivalent of tree-planting.
The first indicator is the composition of valued-added. In the late 1940s about 47% of the nation’s value-added was accounted for by manufacturing, agriculture, mining, and construction. In other words, half the economy made “things,” some of which could be sold on the world market to pay our import bills, while the other half provided necessary services like transport, warehousing, retail, professional services, haircuts, and government. By 1990, the Goods Producing economy (including agriculture) was down to 25% of value-added and today it’s less than 19%. Scratch a Wall Street economist, of course, and he’ll urge not to fret, reminding how Adam Smith explained 230 years ago that “its comparative advantage, stupid!” But that was under the old-time financialreligion when nations sooner rather than later settled their debts in specie. So, today’s financial troglodyte might well repost that “it’s not stupid, its fiat money!” Stated differently, in classic times a leading nation entering its economic senescence couldn’t have tooled on for decades issuing $5 trillion of its own currencyto comparative upstarts the likes of China, Russia, Japan, India, and Brazil in order to keep on buying “things” it no longer bothered to make. Instead, it would have been stripped of its gold reserves -- good and hard and not before long. Thus, finding the financing spigot for goods bought on credit from aboard shut-off, it would have reined in its appetites for current gratifications, and gotten back to the business of earning its keep. Yet the demise of the barbarous relic didn’t repeal the laws of economics, it only transmuted their effects. Thus, in the classic scheme a nation that issued too many notes on the short-term money marketswould soon face the dreaded gold drain. There’s no mechanism to periodically clear paper debts under the dollar reserve currency form of fiat money, of course, but there’s nevertheless still an economic drain. It involves the export not of gold bullion, but of jobs and value-added from the Goods Producing industries, and so far it’s dreaded mainly by the AFL-CIO chieftains and their former members who now pour coffee at the McDonald’s (MCD) rather than steel at the mill. Ironically, the only real cure for this on-going drain of value-added and jobs from Goods Producing are a good stiff increase in interest rates. That would cause a sharp rise in consumer savings and a commensurate decline in the current purchase of goods and services. In the bye and bye, the nation’s uncompetitive wage structure would be deflated and, on the margin, some goods production would return home.
Admittedly, not in this lifetime will the nation’s faint-hearted politicians fall in line for the deflation cure. Just the same, their propensity to cower leads in exactly the opposite direction, to further exacerbation of the jobsdrain. The whole lot of the nation’s policy-makers, led by the pusillanimous math teacher who heads the Fed, is just plain petrified of a Wall Street hissy fit. So they keep dispensing the ZIRP juice -- thereby causing the nation to keep under-saving, over-spending and importing its way to economic stagnation and worse. This consideration leads to the second indicator that the American economy is on a hard-scrabble jobless path rather than entering the jobful nirvana imagined by Wall Street. It’s never been explained how the boundary case of the present drift -- a 100% service economy -- would actually work
. Conceivably, when the East Asian factories someday cancel their vendor-financing plans, we could fund our imports of shoes and shampoo with earnings from the “invisibles.” But a scenario in which the rest of the world’s peoples come to the United States for all of their banking, tourism, cinematic, and dentistry needs is just not in the cards. In fact, a look behind the screen of the so-called services economy shows that most of the jobs and incomerecorded there stem from American families taking in each other’s laundry, not from selling credit cardsand root canals to foreigners. Specifically, the March report shows that 68.6 million jobs, or 53% of the nonfarm total, are in a category that might be described as “Core Private Business Services.” This is the BLS “services” category excluding those parts of the job market mainly dependent on the broken Government Fisc -- that is, the HES Complex and Government Operations. The fundamental takeaway from this data is that the much-celebrated growth of service jobsin recent times has occurred entirely in the HES Complex and Government Operations. In fact, the March headline number for Core Private Business Services was 300,000 jobs smaller than it was in January 2000. There has thus been no net job growth for the entire past decade throughout this vast expanse, which includes retail and wholesale trade, transit and warehousing, FIRE, media and information, professional and business services, leisure and hospitality, and shoe repair and pet grooming. Nor is the current figure artificially depressed by the mythical post-Lehman firing spree. A revealing place to start is with the portion of Core Private Business Services, which encompasses the movement and distribution of goods, people, documents, media, and power. There were 28.1 million payrolls posted here in March or more than 40% of the private business services category. These aren’t buggy whip industries by any means, as the totals include shopping malls, FedEx (FDX), airlines, movie-making, the Internet, and the whole array of telecom services. The astonishing fact, however, is that this sub-grouping of business services has lost 2.46 million jobs since January 2000, or about 8% of the starting total. Obviously, there are winners and losers underneath this wide umbrella, but these are the traditional activities thought of as business services, and the result has been an average 22,000 monthly job loss during the entire past decade. Moreover, the prospect for significant job recalls or trend gains is quite dim. The reason is that this category includes industries that are in deep secular decline, industries where productivity growth fully absorbs output gains, and sectors that got over-expanded during the Boom and suffered permanent liquidation of jobs during the Slump.
Here's someone suggesting an even more Austrian reason for the loss of manufacturing capacity (the demise of the gold standard). His take meshes very nicely with your to perhaps give an more complete view than either of you offered separately:
Admittedly, not in this lifetime will the nation’s faint-hearted politicians fall in line for the deflation cure. Just the same, their propensity to cower leads in exactly the opposite direction, to further exacerbation of the jobsdrain. The whole lot of the nation’s policy-makers, led by the pusillanimous math teacher who heads the Fed, is just plain petrified of a Wall Street hissy fit. So they keep dispensing the ZIRP juice -- thereby causing the nation to keep under-saving, over-spending and importing its way to economic stagnation and worse.
I don't see it that way. Just the opposite, in fact. The real world situation is that we are taking their goodies, and giving them paper dollars. Now a paper dollar in the hand of a Chinaman is really an IOU, a right to buy American stuff. So if they just keep all that money buried underground for the next thousand years, that means they will never take anything in exchange for all the stuff they already gave us. So we got it for free. Great for us, bad for them.
If they do show up here with a big wad of bills, we may be in trouble. Because we don't have anything to give them, no plasma TVs etc, because they make that stuff themselves, they don't need ours. Besides, we have stopped making stuff, to a large extent. The only thing they could want to buy with their trillions of dollars is OWNERSHIP OF ALL OUR COMPANIES. They just go the stock exchanges and buy up Microsoft and everything else.
Now I suspect you may be thinking "If all those trillions are buried underground in China, won't our USA economy be missing something? Isn't all that money the Chinese have buried needed to invest and make the country grow?" The answer is "Of course not." The lazy version of the answer is "There's plenty more where that come from." All we have to do is print more and more paper money, as much as we need.
But that's not the real answer. Printing more money is ALWAYS bad. No matter what. if the Chinese bury their dollars underground, or burn it, we won't be missing anything at all. This is the unlazy answer. I have to be unlazy and type up the words "Read What Has Govt Done to Our Money, by Rothbard, Chapter 10 and 11." You have to be unlazy and download the book for free from this site and read those chapters.
I'm no expert, but I think they are lending the dollars right back to the US govt. It's called buying Treasury Bills. Here once again, they are being really foolish, because they will NEVER get that money back. We can't afford to repay them by any means.
Here's someone suggesting an even more Austrian reason for the loss of manufacturing capacity (the demise of the gold standard). His take meshes very nicely with your to perhaps give an more complete view than either of you offered separately: http://www.minyanville.com/businessmarkets/articles/washington-mcdonalds-walmart-costco-fedex-usps/4/20/2010/id/27886
I totally agree with him, almost. The death of the gold standard did indeed make it all possible, as he explains so well.
The only quibble I have is that he talks about a "job drain" caused by paper money. We had paper money in the 80's and were doing very well. It's the taxes and unions and regulations that are to blame for the job drain. Hey, Texas has the same paper money as the rest of the country, and they are doing great.