As evening news programs carried the opening remarks by President Obama and Treasury Secretary Tim Geithner at the U.S.-China talks that began in Washington, D.C. yesterday, it became clear how the administration envisions that the “fundamental changes” in our economy, in which Americans will save more, will somehow create jobs. As I said in my post yesterday, saving money has never created a single job. Only spending money creates jobs.
It seems that the plan is for the spending to take place in China. The U.S. will save more, buying fewer goods from China, while China will boost its own economy to a level where their consumers will buy more American-made products. When you think it through, you realize that this plan can only work if Chinese manufacturers take it upon themselves to move their operations from China to the U.S., and then ship the products back to China.
I’m sure that the Obama administration, looking into the audience of 150 delegates from China and seeing the puzzled looks on their faces, concluded that they were wrestling with the language barrier and translation issues. Instead, what they were really seeing was probably bewilderment and disbelief. The Chinese were surely thinking to themselves, “are these guys nuts?” “We have a labor force that’s twice the size of their entire population and we’re supposed to buy products from them? We can’t even employ our own people!”
So let me get this straight. We buy all of the products we need from China. And China will buy some of what they need from us. Does any of this make any sense whatsoever, especially when you consider how much all of this shipping will increase carbon emissions from ships transiting the Pacific at the very same time that we’re trying to cut carbon emissions? Wouldn’t it make a hell of a lot more sense, for both the U.S. and China, to just manufacture everything domestically?
Of course it does. The problem is that the Obama administration has already disavowed any measure that would provide real impetus to shift manufacturing back to the U.S., because any measure that tended to do that would be considered “protectionist.” So how is this going to work? Is WalMart going to tell China “no thanks, we’ve decided to make our own stuff here in the states.” Will they just let their shelves run empty, waiting for American suppliers to materialize out of thin air? Even if they did, wouldn’t those new suppliers more likely be in India, Bangladesh, or some other place that’s bursting at the seams with excess labor capacity? What good does it do to focus on China alone when, relative to size, our trade deficit with other nations is even worse?
With each passing day, woefully defective economic theory guides the shaping of the global economy in an ever-more convoluted and dysfunctional direction. Political leaders and economists alike don’t understand the relationship between population density, per capita consumption and unemployment. They don’t see the role played by population density disparities in setting up persistent trade imbalances. All they need to do is look to the example of trade between the U.S. and Japan to see that economic development has absolutely no hope of improving a trade imbalance between two nations grossly different in population density.
It all comes down to this: trade policy based on flawed economic theory can never be anything but bad trade policy, and can never yield anything but bad results. The Obama administration is making the same mistake as previous administrations when it tries to correct for that policy by asking other nations to act in our interest instead of theirs. As proven by a cumulative trade deficit of $9.4 trillion amassed over thirty-three consecutive years, that approach is naive and doomed to failure.