Posted on 02/18/2005 9:55:18 AM PST by Willie Green
For education and discussion only. Not for commercial use.
It is difficult to decide whether the trade figures for 2004 or the Bush Administration's reaction to them indicate the greater danger to the American economy and nation. Last year's trade deficit hit $617.7 billion -- surpassing the record 2003 deficit by 24 percent. The deficit in goods was even higher, at $666.2 billion. The imbalance increased as a share of the economy to 5.3 percent of gross domestic product, up from 4.5 percent in 2003. This is a situation usually associated with underdeveloped countries on the brink of financial collapse.
The Bush Administration is ideologically opposed to doing anything about the deteriorating international situation. It is content to passively accept whatever transnational corporations and foreign governments do to shape the world economy to their advantage. Attempts at positive spin took their most unbelievable form in Treasury Secretary John Snow's testimony to the Senate Budget Committee on February 10. "What those numbers reflect is the fact that the American economy has been doing well relative to other economies," he claimed. "We are importing more from those other economies because we are creating more disposable income."
Yet, according to Commerce Department figures released in January, disposable income by the third quarter of 2004 had increased at an annual rate of 3.5 percent. How does that translate into a 24 percent hike in the trade deficit? Snow apparently assumes that Americans will spend most of any increase in income on imports rather than on American made products. Why would this be true unless American firms are being beaten out by their foreign competitors?
This pattern is not seen elsewhere. Per capita income in Europe and Japan is on a par with America. The European Union actually has a larger combined economy than does the United States, with Japan in third place. Both the EU and Japan run trade surpluses, and in fact use their large gains in the U.S. market to boost their own economic output and income.
China does the same. It is growing three times as fast as the U.S., and its American trade surplus of $162 billion, up by $38 billion from 2003, is a sign of its strength as the rising manufacturing hub of Asia. Beating out the competition in foreign markets is the real sign of successful commerce and government policy, not losing market share to overseas rivals as has been the American case for over a decade.
Here is the fundamental error that has bedeviled political economy for centuries. Is international trade essentially about cooperation or competition? Classical liberals see free trade as creating a world peacefully arraigned by a division of labor and economic integration (a concept of global unity that goes well beyond trade). The Bush administration is in this camp. Those with a more realist or conservative bent see a world based on a more fundamental economic principle, relative scarcity. The first law of economics is that there is never enough to go around; wants are unlimited while the ability to satisfy those wants is limited at any point in time (though it can be increased over time). Thus, there is always competition to gain "the lion's share" of what is available, be it jobs, raw materials, industrial capacity or the means to advance to the next level of prosperity through the accumulation of capital and technology.
Everyone agrees that capitalism is based on competition. Firms are driven to innovate and expand or be left behind by their commercial rivals. What the free traders overlook is that there are societal consequences if the nation's capitalists consistently lose to foreign competitors, or abandon the nation for operations overseas (again in response to competitive pressures).
Americans understood this national aspect of competition during the decades when the United States attained global leadership. By the dawn of the 20th century, America was the largest, most productive economy in the world. In 1902, Brooks Adams published THE NEW EMPIRE proclaiming how American had surpassed Europe as the center of the world economy. While not as well known now as his brother Henry, Brooks was a prominent member of the 4th generation of the illustrious Adams family, counting from Founding Father President John Adams. Brooks and Henry Adams were in the intellectual circle surrounding President Teddy Roosevelt.
"The world seems agreed that the United States is likely to achieve, if indeed she has not already achieved, an economic supremacy. The vortex of the cyclone is New York. No such activity prevails elsewhere; nowhere are undertakings so gigantic, nowhere is administration so perfect; nowhere are such masses of capital centralized in single hands. And as the United States becomes an imperial market, she stretches out along the trade routes which lead from foreign countries to her heart, as every empire has stretched out from the days of Sargon to our own," wrote Adams.
The former global Superpower, Great Britain, according to Adams "is gradually assuming the position of a dependency, which must rely on us as the base from which she draws her food in peace, and without which she could not stand in war," a view borne out in the two world wars of the 20th century. Because London had adopted free trade while Washington still practiced protectionism in Adams' day, American firms were able to profit greatly from their penetration of the British Empire – much as the rising (reborn) empire of China is doing in the American market today.
Indeed, at the end of Adams's interpretative world economic history, he warns that the center of gravity may continue to shift, to Asia. Japan was a rising power in his time, but he thought in the long run China would prove more formidable. "Prudence, therefore, should dictate the adoption of measures to minimize the likelihood of sudden shocks," he advises. "American supremacy has been made possible only by applied science. The labors of successive generations of scientific men have established a control over nature which has enabled the United States to construct a new industrial mechanism, with processes surpassing perfect," he argues, but "America holds its tenure of prosperity only on condition that she can undersell her rivals."
One of my favorite passages also comes near the end of the work: "Life may be destroyed as effectively by peaceful competition as by war. A nation which is undersold may perish by famine as completely as if slaughtered by a conqueror. Therefore, men thrown into acute competition by rivals must have the ingenuity to secure an equality of equipment, else they will suffer; it may be by hunger, it may be by the sword, but in either case the purpose of nature will be attained. Nature abhors the weak."
While it is fashionable to dismiss works of that period as "social Darwinism," labels do not change how the world works, which is in ways just as intense now as ever. Brooks warned against the classical economists dogma of free trade. "Now men are apt to lecture on political economy as if it were a dogma, much as the nominalists and realists lectured in medieval schools. But a priori theories can avail little in matters which are determined by experiment....No one can say a priori what will succeed; the criterion is success." By this standard, U.S. trade policy is a failure, no matter how many academic economists claim it should be working in theory.
The dangerous situation in America today is no longer just one of particular industries being battered by foreign competition. The declining dollar indicates an impending financial meltdown, which would be a clear indicator of the nation's economic defeat in the global arena, and the coming end of its world leadership. America may no longer be a "new empire" but it would be tragic if its leaders allowed foreign rivals to push the country into a retirement home prematurely.
So we should be so lucky to have it like it was in the '70s and we will be better off to have the lifestyles that the Chinese, Japanese, and German economies afford their citizens? No thanks. If having a balanced trade means earning less, higher taxes, and paying more for home-grown goods (like EU), I'll pass. Hasn't exactly worked out so well for them, since they can't even afford their own goods.
Nevertheless, economic conditions in Japan have become so difficult that Japanese babies have become rare and Japan's population is decreasing.
Could it be that young Japanese see that their parents and grand-parents, who had hoped to live on the interest earned by their savings, are being cheated by the government's low interest rate policies?
BTW, on my last trip to Japan, I saw many of Japan's "invisible" unemployed sleeping in parks in Tokyo. I wonder if Japan's unemployment rate be higher if unemployment benefits were offered in Japan.
Free trade bump!
"Let London manufacture those fine fabrics of hers to her heart's content; let Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocade, Italy and Flanders their linens...so long as our capital can enjoy them; the only thing it proves is that all nations train their journeymen for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody."
(Prominent Spanish official - Alfonso Nunez de Castro in 1675)
"Let London manufacture those fine fabrics of hers to her heart's content; let Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocade, Italy and Flanders their linens...so long as our capital can enjoy them; the only thing it proves is that all nations train their journeymen for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody."
(Prominent Spanish official - Alfonso Nunez de Castro in 1675)
This is the common argument for dealing with Chinese tyrants. (ie. Yes, we are making the tyrants richer by buying more Chinese goods but eventually, the slaves will free themselves.)
When does that happen?
Making tyranny more profitable to a tyrant ends the tyranny?
International trade is as old as man yet globalization remains a scare tactic for the far right and far left, who are as ejamacated as titmice when you combine the intelligence http://www.freerepublic.com/focus/f-news/1345344/posts
And how do you propose we do this? Is oil use going up, or down? And WE don't own the oil, mostly the Arabs do, since we searched it out for them, built the refineries, and then let them nationalize it. Who's to say the Chinese won't nationalize our stakes in their factories over there? They already are majority owner in them.
"and can afford imported goods"
That's about all we can afford. Without Chinese and Vietnamese imports, many Americans couldn't afford nearly as much 'stuff' as they can now.
FYI median income in the US has been down the last several years...
As America writes off more and more industries and stops competing with foreign companies, we lose not only the maufacturing side of it but also engineer, scientists and tech people who would have worked in Reasearch and Development for those products/industries.
That is one of the big negatives.
I do see something positive about the huge trade deficit:
All the blue collar, undereducated class may finally get off their lazy asses and start taking night school courses to get certified (or get a degree) in a high tech profession that is more insulated from our manufacturing base going overseas.
Also, the damn schools may be forced to start teaching more math and science and computer courses in the high schools to better prepare our studnets to work in the 21st century.
Let London manufacture those fine fabrics of hers to her heart's content; let Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocade, Italy and Flanders their linens...so long as our capital can enjoy them; the only thing it proves is that all nations train their journeymen for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody."
(Prominent Spanish official - Alfonso Nunez de Castro in 1675)
Good grief you're a worry wart. Calm down. A trade deficit means a lot of things good and bad but the reason we have one is because we are so rich and we like to buy things from overseas.
I'm a worry wart because I posted a fact that US median income is going down on a yearly basis? Please explain how that is a "worry free" scenario. Thx.
I'm sorry to be joining this thread late and I didn't see your post about median income. Please refer me to the post number and I will respond to it specifically.
Of course median income has gone down in the last few years, we just came off of a bubble. In the late nineties computer geeks were strutting around like gods. They were being hired by companies who needed them for not much more than window dressing as the companies took themselves public with no earnings and no prospect of earnings. BUBBLE. We have them about every twenty or thirty years.
I remember meeting a lot of them at the smoking patio of our building. "Ohhhh, yessss, the Y2K is a biiiggggg, thing. It could destroy the country."
So, in my capacity as a financial planner and investment manger I would ask them: Are you participating in your employer's retirement plan.
Oh hell no. I'm not staying here. I have bigger fish to fry.
Bottom line, these were the guys who were making all the money in the late nineties. They were so full of themselves that they thought the world couldn't function without them. Guess what.
If you refute the data, provide a better source.
Didn't say anything was wrong with the data. Just love it when protectionists on this site post from lefty sources.
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