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.
I don't "condemn" Bush's economic policy totally, I do believe in tax cuts as a way to spur growth. What I do condemn, is freely trading with potential adversaries like China. We should be working to build the economy of our "allies", not tyrannical dictatorships. America's trade policy with China should equal the one we have with Cuba, but right now it's hypocritical.
Sorry. Life is tough. As John Wayne would say: "Life is tougher if you're stupid". Do you want a country that takes care of you or do you want a country that lets you do what you want as long as you don't hurt anyone? What say you?
No doubt life , but you have to give the less educated (including those with less innate intellect) at least a chance, otherwise they end up being dependent on others, if not the general society. Yes, I am doing quite well, but I come from a family of great intellect, and graduated second in my engineering class. My significant other, she's not done too well the last five years in her career options. While beautiful, she doesn't posses my mathematical skills, and she is deeply committed to religion rather than stealing the pants off of people in sales.
Her career options have dwindled, along with the base pay of those positions. She does have a degree, and was making in the $30's back in the 90's. Now the best she can find is $30K, with 60 hour weeks. Thankfully we don't need the money that badly, and she's staying at home to help me deal with my stressful job which is earning enough for us both. But if we both were going through what she's been going through, I would be quite miserable.
Well that's great, except the problem is the government can't keep giving tax cuts indefinitely, especially if the median income they are subtracting from as a percentage keeps going down. The government needs a specific amount to operate, and right now it's spending more than it's earning, hence the skyrocketing debt. I applaud Bush's goal of cutting government waste and givaways, but unless he does it faster than is being approved, the government's required income is being squeezed between a falling income base of the citizens, and the reduced percentage they can extract as taxes.
Sure it does, goods production includes manufactured goods,of course.
So has Commerce re-defined "goods production" to fit some new political imperative?
Why don't you tell me? And while you're at it, find a graph that only shows "Manufacturing".
True, but as the graph in post #239 shows, median income usually drops during and immediately after a recession. I have no doubt median income will start rising again. And aside from income, household net-worth is at a record high.
Thanks, just my own personal experiences.
Sadly, the losers in the 'economy' vote Democrat, straight ticket. That fact that the trade barriers were dropped (for the most part) during during Slick's administration will be lost on them.
Well in a way it's paid off for them, starting with welfare and FDR, although he at least made some of them dig ditches and fill them back up. As you say, they don't have the intellect to understand the issues, and Clinton triangulated them on welfare as well. Guys like Kerry and Gore are their real saviors, thank God the votes in this country kept those guys out of office. But unless the average worker in this country doesn't overcome their fear of their jobs being replaced by overseas slave labor, there could be a resurgence of complete protectionism. I don't favor that at all, my position is simply tariffs against tyranny, and unfortunately the majority of our trade inbalance right now is with communist China.
Uhhh, real income is adjusted for inflation.
Based on? The history of it being cyclical? Is that it? I hope it does, but don't have blind faith.
Thanks, as you know I'm not an economist, being a computer engineer by trade. But if you look at that chart, aren't the rising incomes aligned with times of higher inflation? Take the 80's for example.
...people with $300K incomes don't buy $9 chinese toasters, they buy $150 ones made in england from williams-sonoma that last a lifetime...
That might be true. Wealthy people do like nice things, and more power to them.
But what if I take the $141.00 dollars I saved on the Chinese toaster and invested it and received a 10% return on that investment. Assuming I could get close to that return, and the Chinese toaster lasts a year, it looks like I'm making money and toast.
You misunderstand. The chart has already taken inflation out. Inflation may have been 5%, but incomes rose more.
I understand, thanks. I'm asking could the presence of inflation have been a booster to incomes, aren't they overlapping? And now we have low inflation, and incomes are dropping. Perhaps it's more related than the specific value attributed to the "inflation" variable itself. Not being stubborn, just wanting to know why there seems to be a relationship between the two.
Well, let's all hope that things improve. Going from ~$34,000 to $43,318 in 36 years is about $250 per year, or less than 1% per year growth in household income -- and this during a period where many households were shifting into two income families -- is in my book not very good.
| Year | Civilian Age Population (14 years and older) | Employed | Percentage |
|---|---|---|---|
| 1980 | 167,745 | 106,940 | 63.8 |
| 1981 | 170,130 | 108,670 | 63.9 |
| 1982 | 172,271 | 110,204 | 64.0 |
| 1983 | 174,215 | 111,550 | 64.0 |
| 1984 | 176,383 | 113,544 | 64.4 |
| 1985 | 178,206 | 115,461 | 64.8 |
| 1986 | 180,587 | 117,834 | 65.3 |
| 1987 | 182,753 | 119,865 | 65.6 |
| 1988 | 184,613 | 121,669 | 65.9 |
| 1989 | 186,393 | 123,869 | 66.5 |
| 1990 | 189,164 | 125,840 | 66.5 |
| 1991 | 190,925 | 126,346 | 66.2 |
| 1992 | 192,805 | 128,105 | 66.4 |
| 1993 | 194,838 | 129,200 | 66.3 |
| 1994 | 196,814 | 131,056 | 66.6 |
| 1995 | 198,584 | 132,304 | 66.6 |
| 1996 | 200,591 | 133,943 | 66.8 |
| 1997 | 203,133 | 136,297 | 67.1 |
| 1998 | 205,220 | 137,673 | 67.1 |
| 1999 | 207,753 | 139,368 | 67.1 |
| 2000 | 212,577 | 142,583 | 67.1 |
| 2001 | 215,092 | 143,734 | 66.8 |
| 2002 | 217,570 | 144,863 | 66.6 |
| 2003 | 221,168 | 146,510 | 66.2 |
| 2004 | 223,357 | 147,401 | 66.0 |
My own guess is that we will see a reversal for 2005 -- I certainly hope so. If the participation rate slips down in the early 1980s range without seeing some real growth in wages, then that's not going to be good for our tax base at all -- or individual Americans.
But we are seeing good growth in some key areas: production of durables did quite respectably last year, our exports of goods set a record, with capital goods making a good showing.
And on the legislative side, I have hopes that we will see good repatriation of foreign profits this year as well as seeing some improvement due to tort reform.
But the trade deficit is worrisome. As good as exports have been, the blowout numbers on the import of goods are worse. And I don't like to see us losing good industries such as textiles and furniture.
That doesn't sound like much. And you are correct, there are many more 2 income households now, but the average household also is smaller than it used to be.
Inflation erodes income unless you have a contract that adjusts for it, and that is a small % of the population. The important thing is productivity increases. They allow companies to increase profits and salaries without raising prices.
And now we have low inflation, and incomes are dropping.
We've had low inflation for a long while. Incomes are dropping recently because of the recession we just had. And the bursting of the telecom bubble.
This unhealthy societal development is a radical departure from the past American norm where it was commonplace that the man of the household worked while the wife stayed home and took care of the kids (instead of dumping them off to the nearest Day Care Center). By including the other spouse in this graph, it neatly covers up the fact that for families today to make ends meet requires that both spouses have to work.
If this graph only included the primary breadwinner of each household the income trend would be most certainly down. But of course that would highlight the truth that per capita incomes and especially after-tax purchasing power have been declining in America for decades now...and that little ditty is something our political leaders don't like to advertise.
"We have imports going through the roof but still nobody would consider putting any tariffs on these products. Even a measly one or two percent tariff on selected goods would bring in billions to the Federal Treasury. Let's make some money on this trade deficit!!"
I have a much better idea. What about adopting a National Retail Sales Tax (in the form of HR 25, the FairTax bill) and start taxing imports the exact same way that we tax domestic production. When we add a 23% sales tax on to imports, that will be much more effective than a 2% tariff and the WTO and our trading partners couldn't say anything, since we would be taxing imports the same way that we tax our own production.
Most Americans don't even realize that the current tax system provides a bias in favor of foreign producers in our own system. No wonder we have a huge trade surplus!!
"The inherent disadvantage of tariffs over an income tax is that tariffs will bring on retaliatory tariffs from our trading partners."
I was wondering when someone would make that point. The other problem is WTO sanctions.
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