The Global Economy Faces Its Fatal Flaw

February 14, 2009

This linked article reports on the same upcoming G7 meeting in Rome that I posted on yesterday.  (See “Protectionism Had Nothing to Do with The Great Depression.”)  But it boils down the whole global economic collapse with one key observation: 

Germany is warning against protectionism as a knee-jerk reaction to the crisis. Such measures would be devastating to the German economy, which is powered by exports —

This is precisely the problem with the global economy as it’s structured.  Not only is Germany utterly dependent on exports, but so too is every overpopulated nation on earth, including Japan, Korea, China, Taiwan, Israel, Malaysia, Switzerland, Denmark, Mexico, Ireland and a whole host of others.  All of these are overwhelmingly dependent on the U.S. to absorb these exports, resulting in a huge transfer of wealth from the U.S. to the rest of the world.  The U.S. has literally been bankrupted in the process.  Any attempt to restore the global economy without fixing this trade imbalance is doomed to failure.

Why are these nations so dependent on exports?  It’s because their over-crowding has badly eroded their ability to consume products.  Low per capita consumption coupled with high per capita output (or productivity) inevitably means that they have an enormous over-capacity of labor. 

For the United States, there is only one solution to our economic collapse and that is the restoration of a balance of trade, regardless of what it takes:  import quotas, tariffs or whatever.  For these other overpopulated nations, the short-term picture is grim, and their only hope for the long term is to adopt policies designed to dramatically reduce their populations. 

All will deny this truth and fight in vain to revive the corpse of their dearly departed economic model of growth and free trade.  All will be for naught.  The only question is how bad things will have to get before they face reality, if they face it at all.

Protectionism Had Nothing to Do with The Great Depression

February 13, 2009

Like other free trade shills, German Finance Minister Peer Steinbrueck, in advance of a G7 meeting in Rome, is raising the specter of The Great Depression, which he disingenuously blames on protectionism.  It’s time to set the record straight.  Protectionism had nothing to do with The Great Depression.

The free traders always begin their revisionist history of the cause and effect relationship between protectionism and the depression with the passage of the Smoot-Hawley Tariff Act, as though Smoot-Hawley represented some foolish turn away from free trade toward protectionism, triggering a global trade war that plunged the world into depression.  Nothing could be further from the truth.

First of all, at the time of passage, Smoot-Hawley was only the latest in a long history of tariff legislation successfully employed by the U.S. to maintain a balance of trade.  The previous Fordney-McCumber Tariff Act of 1922 had set the ad valorem tariff rate on a wide range of products at an average of about 38.5%.  “Ad valorem” basically means “percentage.”  Tariff rates were always set in terms of percentages.  This meant that the customs people tasked with enforcing the tariffs had to then translate these ad valorem rates into dollar amounts, starting a contentious process of determining the real value of the import so that the ad valorem rate could be translated into dollar terms.  They complained about all the hassle and pressed for legislation that would set the tariffs in dollar terms. 

This was the whole purpose of Smoot-Hawley, to merely streamline the way tariffs were set, aiming to keep the ad valorem rates about the same, but saving the customs people all of the hassle.  They did a pretty good job.  By the time that Smoot-Hawley was enacted, the average ad valorem rate on the same basket of commodities had risen to 41.1%, only 2.6% higher than under the previous Fordney-McCumber Tariff Act.  And since the dollar value was fixed, it was anticipated that inflation would slowly reduce the ad valorem rate.  What no one anticipated was the deflationary spiral of The Great Depression, something that had never before happened.  Then, since the rates were now set in fixed dollar terms, the effective ad valorem rates rose.  The main lesson to be learned from this is that tariffs should always be set in ad valorem terms. 

Free traders would also like for you to forget that Smoot-Hawley wasn’t even signed into law by Hoover until June of 1930, a full eight months after the October, ’29 stock market crash.  Now it doesn’t seem so likely that a turn toward protectionism is what caused The Great Depression, does it? 

Nor do free traders want you to know how little a decline in trade actually factored into the depression.  At the height of the depression in 1933, America’s trade balance had declined $0.67 billion, contributing only 2% to an overall decline in GDP of $33.1 billion (from its previous high of $101.4 billion in 1929).  The fact is that it was the depression that caused the decline in trade, not vice versa.  We’ve already seen this same thing in our current recession.  Our trade deficit has dropped precipitously – by a third – in the past few months, as has global trade in general.  Once again, it has been the recession that has caused a decline in trade. 

In fact, it could be argued that it was an over-reliance on free trade that has triggered this recession (depression?).  Thirty-three straight years of a trade deficit that totals $9.2 trillion has literally bankrupted America, and the downward pressure on incomes resulting from the destruction of our manufacturing sector is the real root cause of the explosion in foreclosures that triggered the global financial collapse. 

Of course, nations like Germany, Japan, China, Korea and others, all beneficiaries of huge trade surpluses with the U.S. and eager to sustain the parasitic relationship they enjoy with their host, the U.S., want you to forget all of this.  Don’t be fooled.  It’s the enormous imbalances of global trade that have gotten us into this mess and it is only a return to sensible trade policy designed to restore balance that will get us out of it.

Economic Alchemy

February 12, 2009

This linked opinion piece, written by Burton G. Malkiel, a Princeton economist,  appeared in the Wall Street Journal last week as the “buy American” provision of the economic stimulus bill was being hotly debated.  I don’t disagree that plunking a “buy American” provision into the stimulus package is a poor way to enact trade policy.  It would be much better to address the overall trade problem with a simultaneous, but separate program to eliminate the trade deficit.  But the guy then lapses into the same lame defense of unfettered free trade employed by so many other of his like-minded shills of primitive, 18th century trade philosophy, and I just couldn’t let it pass without comment.

Here’s how he begins:

Suppose that we did not allow free trade between the 50 American states. Citizens like me in New Jersey would be far worse off if we could not buy pineapples from Hawaii, wine and vegetables from California, wheat from Kansas, and oil from Texas and Louisiana while we sell pharmaceuticals to the rest of the country. The specialization that trade makes possible allows all of us to live better.

Yes, people in New Jersey are much better off because of free trade with the other states.  New Jersey can’t produce pineapples, oil, wine or vegetables (at least in sufficient quantities to feed N.J.’s huge population).  But pharmaceuticals can be made anywhere.  How does the rest of the country benefit by trade with New Jersey?  They don’t.  Being the most densely populated state in the country – more densely populated than India – New Jersey has virtually nothing to offer the rest of the country except a badly bloated labor force. 

Then, like other economists, he takes the example of the U.S. and applies the twisted logic to the rest of the world:

The situation is the same with respect to world trade. Both we and the Chinese are better off if we can import inexpensive clothing from China and sell them large-scale computers and data storage equipment.

To be sure, such trade does not make everyone better off, and that is why free trade is often a tough sell, especially during times of hardship.

His comparison of clothing made in China to American made super-computers seems downright disingenuous.  If clothing was all we bought from China, he might be right, but he conveniently ignores the fact that virtually every consumer item we buy is made there – not just clothing but electronics, appliances, toys, auto parts, tools, household furnishings – everything!

Then, like the other barkers for free trade, he resorts to playing off American consumers against American workers, counting on the fact that we’ll forget that we’re actually one and the same:

If I am a textile worker whose job is lost because Chinese imports have caused my factory to close, I feel the pain far more acutely than consumers feel the benefits of cheap clothing. The pain tends to be localized while the benefits are spread broadly. No one person’s benefit can compare with the loss felt by the textile worker. But the total benefits do exceed the costs. And competitive markets have spurred the innovation revolution that has made the U.S. the economic powerhouse that it is.

He ignores the fact that those textile workers (and all of the millions of manufacturing workers that he has conveniently failed to mention), now without jobs, put downward pressure on everyone’s wages by contributing to an over-supply of labor.  Sure, everyone gets to buy their clothing at lower prices, but that benefit is more than offset by lower incomes. 

But never fear!  Economists always have an “out” to blunt your anger at losing your job.  They’ll retrain you because, until now, unlike the brilliant labor force in China, you’re too stupid and useless to function in the global economy.  But what will they retrain you to do?  Where is the huge demand for labor that is going unmet because Americans are too dumb to do the job?

The solution for the displaced worker is job retraining and adjustment assistance, and to improve the safety net available to displaced workers during the transition period. We also need to revamp our educational system so that it prepares workers for the jobs that are available today — and imparts the flexible skills that make our citizens ready for the future jobs that we cannot even imagine.

Of course!  Silly me!  I forgot about that enormous, magical source of jobs – the “future jobs that we cannot even imagine!”  And what, exactly, are “flexible skills?”  Folks, falling back on this kind of “logic” is nothing more than economic alchemy.  The other sciences abandoned this kind of thinking at the end of the middle ages.  If I were the parent of an economics student at Princeton, I’d be outraged at paying big bucks for my kid to be taught such hocus-pocus.

Malkiel and his free trade colleagues could benefit from some remedial math so that they might understand the basics of a balance sheet, the difference between a deficit and a surplus and the consequences of an imbalance in the supply and demand equation for labor.  In the meantime, here’s a suggestion:  let’s fix our trade policy and bring back those boring old, high-paying manufacturing jobs until those wonderful jobs of the future that we can’t even imagine actually materialize.

The Octuplets

February 11, 2009
Those of you who have followed this blog for some time may be surprised at my lack of comment so far on the recent birth of octuplets to Ms. Suleman in California, a woman who already had six children and was dependent on the financial help of her mother and government food stamps. First of all, I wanted to hear more facts before commenting, which has also given me time to put aside my personal feelings on the issue and frame them in the context of the plan I proposed in Five Short Blasts for addressing overpopulation. For those not familiar, the plan leaves all people free to choose how many children they’d like to have, since any heavy-handed approach to population management that restricts that right could never receive the approval needed to become public policy. However many children any one family chooses is practically irrelevant, since the only thing that matters is the relatively small reduction in the overall birth rate needed to attain population stability. This goal would be achieved through economic incentives, like tax incentives, designed to influence the decision toward choosing slightly smaller families on average.
In spite of the extreme example of this situation, I still maintain that it’s critical for any of us who are concerned with overpopulation to continue to support the right of parents to choose to have however many children they wish, regardless of extreme and sensational cases like the birth of these octuplets. I don’t criticize Ms. Suleman for wanting to have more than six children, or even for taking the risk of ending up with twelve children (she had six embryos transferred, two of which divided to produce eight children). However, I do believe it’s irresponsible for anyone to choose to have more children than they can support, whether that’s one child or fourteen. And that’s clearly what Ms. Suleman has done.

Would my system of economic incentives have made any difference in this case? For someone like Ms. Suleman, perfectly happy to subsist at a minimum standard of living with the support of her mom and government, probably not. But it might have made a difference to the sperm donor. If the IVF (invitro fertilization) clinic was required to reveal to the government the fathers of all successful births for the purpose of taxation, it’s likely he would never have agreed to the fertilization of so many embryos. And if IVF clinics were required to ascertain the financial ability of parents to support all children delivered by this method, or otherwise be held liable for reimbursement of government expenses to support them (along with the father), no IVF clinic would ever have agreed to transplant even one more embryo into this woman, much less six, regardless of her wishes.

So, do I think that Ms. Suleman is just a bit off her rocker? Yes! Do I think she’s acted irresponsibly? Absolutely! But do I still support the right to choose to have this many children? You bet. But it’s high time that such a right be exercised within the framework of a national population management program designed to reduce the birth rate by providing economic incentives to choose smaller families.



Obama, Beware Your Economic Advisors

February 4, 2009

The photo at the top of this linked article says it all.  An evil-looking Larry Summers, Obama’s National Economic Council director, dominates the scene as a small, blurred Obama speaks in the background. 

The article goes on to report on Obama’s willingness to make some compromises on his economic stimulus plan, but that he won’t give up the key provisions.  I found this quote from Summers near the end:

Summers said Obama wants to keep his tax cuts but will consider other changes. He said “Buy American” provisions for U.S. manufacturers could “send a protectionist signal.”

President Obama, you need to be very wary of the advice coming from Summers, your Treasury Secretary, Tim Geithner, and others like Paul Volcker and Paul O’Neill.  All are on the board of the Peterson Institute for International Economics, a “think tank” whose mission is to promote global trade regardless of the effect on the American economy, and who just today came out in opposition to the “buy American” provision of your economic stimulus plan.  Here’s a partial list of other members of the board of the same organization:

When your economic team begins bashing trade measures designed to help American workers, ask yourself whose interests they’re really representing.  I know that you see our trade deficit as a huge problem and a major contributor to our financial collapse.  And I know that you believe in the concept of having a “team of rivals.”  But there seems to be little rivalry on your economic team when it comes to their attitudes about trade, the global economy, and where the American economy fits in their priorities.  Is this really a team of rivals or a team of co-conspirators whose allegiances border on treason?

Peterson Institute Bashes “Buy American” Provision of Stimulus Plan

February 4, 2009

The linked article reports on a “study” by the Peterson Institute of International Economics, one of those “think tanks” that thinks exactly what its global corporate sponsors pay it to think (and whose name should tell you everything you need to know about them), which claims to show that the “buy American” provision in Obama’s economic stimulus plan would actually end up costing American jobs. 

“Buy American” provisions under consideration in Congress as part of a huge economic stimulus bill could create only 1,000 new steel industry jobs and might cost as many as 65,000 across a number of sectors, a new study said on Tuesday.

“The negative job impact of foreign retaliation against Buy American provisions could easily outweigh the positive effect of the measures on jobs in the U.S. iron and steel sector and other industries,” Gary Hufbauer and Jeffrey Schott, senior fellows at the Peterson Institute for International Economics, said in the report.

Their logic is that other nations will retaliate by halting the importation of American goods.  Yeah, OK.  Then what?  Is that it?  Geez, thank God these guys don’t provide advice to the defense department.  Otherwise, their advice following Pearl Harbor or  9/11 would have been “we can’t attack them because they might shoot back.” 

Hey, Peterson Institute!  Hello-o-o-o-o-o!  We’re the ones with the $700 billion per year trade deficit!  We hold all the cards!  Sure, other countries might think they’re being smart by reducing the few imports they buy from us, but then it’s our move.  We stop importing Japanese, Korean and German cars, Japanese motorcycles, Japanese outboard motors, Chinese toys and electronics, Irish computer hardware, software and pharmaceuticals and … Shall I go on, or have I made my point?  Does the rest of the world really want to go down that road?  What would the net effect on American jobs be then, Peterson Institute?  Six million manufacturing jobs come back to the U.S.  Oh, you can deny that, but only by repudiating the methodology used by every nation on earth to calculate their GDP (gross domestic product), which accounts for imports as a net loss. 

It’s only natural that the parasitic economies of the world who feed on America’s market and jobs get shrill whenever they see us reaching for the flea powder.  It’s time for America to take a good, heavy dose, grow a back-bone and stand up for itself.

Go Home, Hyundai!

February 3, 2009
You’ve probably seen the Hyundai commercial with the tag line “we’re all in this together and we’ll get through it together,” suggesting they’re doing us a favor with their program that allows you to bring a car back during the first year if you lose your income. Isn’t that nice? They get the car back while avoiding the cost of the repo man. Of course, you won’t get any of your money back (didn’t mention that, did they?) and good luck avoiding hefty charges if you bring it back with a scratch.
They also like to brag that their 10-year, 100,000 mile warranty reflects the high quality of their cars when, in fact, they had to resort to that warranty program several years ago when the quality of their cars was so low that no one in their right mind would buy one without it.

We’re not “in this together,” Hyundai. Americans are “in it” in large part because of you, Korea in general and because of all overpopulated nations like yours whose economies are so stunted by over-crowding  that they’re incapable of consuming their own productive capacity. So you resort to feeding on the American market and American jobs, like tapeworms in the belly of America’s economy. You sell us 100 cars for every one that you import from us, and then act like you’re doing us a favor with your voluntary repossession program when we lose our jobs to your predatory trade practices.

I don’t often resort to such inflammatory rhetoric, Hyundai, but you drove me to it with your disingenuous “all in this together” thing, as though you’re one of us and bear no responsibility for America’s economic decline. So go home, Hyundai. We can build our own cars, thank you. And take your Kia and LG friends with you.



Decades of Population Management Foot-Dragging in India

February 3, 2009

I came across this article about population management policy in India, and thought you might be interested.  There’s not much to comment upon here, except that even in India, one of the most densely populated nations on earth – ten times as densely populated as the U.S. and 2-1/2 times as densely populated as China – their population continues to rise in spite of government policies intended to stabilize it.  The problem seems to be a lack of resolve in enforcing their policies. 

Appalled by the indifference of state governments to the implementation of the national population policy to tackle the problem posed by rapid population growth that put dwindling food stocks under strain, the Supreme Courton Monday put their chief secretaries on notice.

By the way, to save you the inconvenience of looking up the word in the dictionary, the word “crore,” a word used throughout this article but one I’d never heard before, means “ten million.” 

It seems that India recognized the need to implement a population management policy all the way back in 1976, but the policy has met with decades of foot-dragging. 

In 1976, a statement on the `National Population Policy (NPP)’ was given in Parliament linking population control to poverty reduction. But, it took another 24 years for the government to formulate and announce NPP-2000, the PIL said.

You have to wonder whether India really believes that overpopulation is a problem, or have they too been taken over by the economists and business leaders who believe that population growth is an essential ingredient for economic growth.  If that’s the case, the future for India is grim.

What Did Obama Really Say to S. Korean President?

February 3, 2009

My heart sank a little when I read the headline of this Reuters story:

Obama and S. Korea’s Lee Vow to Fight Protectionism

But upon reading the article, I could find no direct quote of anything said by Obama to Lee, Korea’s president, in this reported phone conversation.  Then I realized that the story, written by an Asian correspondent, emanated from Seoul and only reports on Lee’s spokesman’s “take” on the conversation, obviously intended for consumption by his S. Korean constituents. 

South Korean President Lee Myung-bak and U.S. President Barack Obama agreed on Tuesday to fight against trade protectionism, as legislatures in both countries prepare to battle over a bilateral free trade deal.

South Korea and the United States reached the trade deal in 2007, which studies said is expected to boost their $78 billion annual trade by as much as $20 billion.

The bill has not been approved by legislatures in either country but is expected to come up for a vote in the coming weeks in South Korea.

Obama was quoted as telling Lee that trading states should fight the temptation to revert to protectionism, in the two leaders’ first telephone conversation since Obama took office, Lee’s spokesman said.

“A rise in protectionism can only delay the recovery of the global economy,” Lee was quoted as saying.

That’s a direct quote of Lee, but notice that there’s no direct quote of anything from Obama expressing agreement.  The only quote in the article attributed to an American source, Secretary of State Clinton, stands in stark contrast to Lee’s spokesman’s quotes:

Obama is opposed to the bilateral trade deal in its current form because it gives South Korean carmakers “untrammelled access to the U.S. market,” U.S. Secretary of State Hillary Clinton said.

I like the Reuters web site because its reporting seems to be more broad-based than what you get with a lot of the American media, but articles like this demonstrate that you have to take some of it with a grain of salt and keep in mind the writer and the intended audience.

It’s going to be fascinating to watch the economic collapse play out in Korea, one of the most heavily export-dependent economies on earth and a nation whose people are prone to violent demonstrations – no wonder in a country fifteen times as densely populated as the U.S.  It’s being reported that their exports have declined by a third in recent months, and 70% of Korea’s work force is employed in manuacturing for export.  That means that their unemployment has suddenly soared to at least 20%. 

We could be witnessing the early stages of the disintegration of the S. Korean society.  Just imagine their reaction when the U.S. not only rejects this new trade deal, but then goes further and imposes tariffs on their exports!  But, ultimately, S. Korea has zero power to do anything about our trade policy.  Any bluster and protest can be instantly thwarted by one simple statement from the U.S.:  “Maybe it’s time to rethink our troop deployments in S. Korea.”

Dallas Fed President Fisher – Is This Guy Serious?!?!

February 2, 2009

I couldn’t resist this one!

Dallas Federal Reserve President Richard Fisher warned on Monday against “Buy America” provisions in a proposed fiscal stimulus law and said it could lead to devastating protectionism.

“Protectionism is the crack cocaine of economics,” Fisher told C-Span television in an interview for its “Washington Journal” program.

“It provides an immediate high that leads to economic death. We cannot afford to go down that route,” said Fisher, who is not a voting member of the Fed’s policy-setting committee this year.

It’s hard to believe someone would say something like this.  Is he talking about the same kind of protectionism employed by the U.S. for the first 171 years of our nation’s history to build ourselves into the world’s preeminent industrial power – the wealthiest nation on earth?  Is he talking about the same protectionism that has been employed by the WTO  (World Trade Organization) in favor of two thirds of its member states, including China, in order to pump up their economies at America’s expense?  Is he seriously suggesting that a move toward a balance of trade would lead to “economic death?”  How does that wash when one compares the results of China’s economy, which has been growing at a double-digit rate, to America’s long decline?  “Economic death?!?!”  Has this guy read the papers or peeked out the window of his penthouse office lately to see that we’re already there?  You have to wonder if the guy’s experience with crack cocaine is something beyond the metaphorical. 

And I love the last paragraph:

“The job of the Federal Reserve is to … maintain price stability while we engender growth and employment in the United States,” Fisher said.

Can you believe this guy has the nerve to end by admitting that his job is to “engender growth and employment?”  I think it’s time for a performance review, don’t you?  And not just him.  Let’s have one for his boss, Bernanke, the Chairman of the Federal Reserve, too.  Not once since taking over from Greenspan has he ever uttered a word of warning about federal budget deficits or trade deficits. 

It’s no wonder that our whole financial system is in a state of collapse when it’s run by people who can’t even understand the basics of a balance sheet.