Another Call for America to Reinvent Itself

http://blogs.reuters.com/great-debate/2011/08/30/reinventing-america-from-the-bottom-up/#comment-36981

Just thought you’d be interested in reading my response to this op-ed piece that appeared on Reuters yesterday – yet another call for America to “reinvent” itself.  (It’s the third of the comments that appears at the end of the piece.)  To make it easy, here it is:

The problem with our economy is not anything that the American people are doing wrong. The problem is that our economic policies are guided by economists. Economists don’t have a clue as to what’s happening to our economy because they steadfastly refuse to consider the effects of the parameter that most dominates our economy today – population growth. They don’t understand the inverse relationship between population density and per capita consumption and the role played by population density disparities in driving global trade imbalances. They continue to lean on population growth as a crutch to prop up macroeconomic growth, which only makes matters worse.

They make proclamations about the cause of our massive trade deficit without ever bothering to verify their claims. They blame it on currency valuations without ever explaining why, in spite of a 300% rise in the value of the yen over the past three decades, our trade deficit with Japan exploded instead of shrinking, or why, in spite of a big rise in the value of the yuan in past few years, our trade deficit with China has done the same thing. Or they blame our trade deficit on low wages without explaining why our biggest trade deficits, in per capita terms, are with wealthy nations like Japan, Germany and a host of others.

And they never explain why America, the most productive nation on earth, seems unable to “compete” with low productivity nations like China. They can’t explain it because they don’t understand what happens when a low population density/high per capita consumption nation like America attempts to combine its economy (through “free” trade) with a high population density/low per capita consumption nation like China (or Japan, or Germany or …). The work of manufacturing is spread evenly across the combined labor force while the disparity in consumption remains. The result is an automatic trade deficit and loss of jobs for America. It’s impossible to “compete” our way out of such a situation.

We don’t need to reinvent ourselves. We need to recognize that we were bamboozled by well-intentioned but badly mistaken “economists” way back in 1947 when they convinced us to sign the Global Agreement on Tariffs and Trade. Prior to that date, the smart use of tariffs built us into the world’s pre-eminent industrial power. But, soon after, our trade surplus began to erode. Since 1975, the last year of a trade surplus, our cumulative trade deficit is approaching $11 trillion.

Our economy will never, ever improve until we take back the right to manage trade in our own best interest, the right that we ceded to the World Trade Organization back in 1947. (By the way, the stated mission of the WTO is not to promote free trade, as many believe, but to enforce protectionist policies in favor of undeveloped and developing countries, nearly two thirds of its member states, to the detriment of America. Don’t believe me? Check their web site.)

Pete Murphy
Author, “Five Short Blasts”