These Threats Will Not Collapse America's Economy
by Gary North: Jackson
Hole: Bernanke as a Magician
For over half
a century, I have read warnings that free trade is a threat to America.
The freer it gets, the more we are told that slave labor in Asia
is threatening the workers of America.
We hear calls
for fair trade. Who is to decide what is fair trade? Congress. Ah,
yes: Congress. The source of fairness if ever there was one. No
special interests there, putting their PAC-filled fingers on the
balance scale of justice.
The evil dragon
used to be Japan. Now it's China. India will get its turn soon enough.
Americans are supposedly out of work because of China.
The fact is,
Chinese imports are marginal to the U.S. economy. How marginal?
You tell me. (Then I will tell you.) What percentage of Americans'
personal consumer expenditures (PCE) is met by imports from China?
Take a guess.
Here was the correct answer in 2010.
goods account for 2.7% of US PCE, about one-quarter of the 11.5%
foreign share. Chinese imported goods consist mainly of furniture
and household equipment; other durables; and clothing and shoes.
In the clothing and shoes category, 35.6% of US consumer purchases
in 2010 was of items with the "Made in China" label.
if a pair of sneakers made in China costs $70 in the United States,
not all of that retail price goes to the Chinese manufacturer.
In fact, the bulk of the retail price pays for transportation
of the sneakers in the United States, rent for the store where
they are sold, profits for shareholders of the US retailer, and
the cost of marketing the sneakers. These costs include the salaries,
wages, and benefits paid to the US workers and managers who staff
guessed that this figure was much higher. Because we see "Made in
China" stickers on our clothes, we imagine that Chinese exports
are a major factor in replacing jobs in the USA. If you are employed
as a low-wage textile worker in South Carolina, you feel the pain.
But you are probably not a low-wage worker making socks.
As an aside,
why should there be a Federal law requiring "Made in China" (or
anywhere else) on products we buy? Do you think this may be the
result of special-interest legislation from some political action
committee? As a consumer, I don't care. I just want cheap socks,
so that I can save money to invest, or spend on some other service
or product, which is probably made in the USA.
ASIANS ARE GETTING RICHER
Why is urban
Asia growing richer? Mostly, because Asian governments have moved
away from the older state economic controls. They have freed up
China is the
obvious example. It has moved from Communist economics under Mao
to mercantilist economics, funded by the central bank. This is surely
better for the Chinese people than Communist economics. That system
killed at least 60 million people. It is far better for the government
to subsidize one sector of the market economy the export
sector, which is relatively small than to turn the entire
economy over to the state sector.
We think of
the export sector as small. But China has 1.3 billion people. There
are no internal regional tariffs. It is the largest free trade zone
on earth. China must feed itself, house itself, transport itself.
To imagine that the export sector is the main sector is a mistake.
It is the most innovative sector. It is where growth is transferred
from an elite to the masses. But China is a huge nation. Do not
There is something
else. For any sector of an economy to receive an operationally significant
subsidy from the government, it has to be a small sector. There
has to be a much larger sector in order to siphon off enough funds
to make the subsidized sector profitable, long-term. Put in the
form of a metaphor, a parasite needs a large, healthy host. When
the parasite gets too big, it kills the host. This is simple to
understand, but people don't make the connection to economics.
The free market
and the price system reward people who implement ideas that customers
are willing to pay for. People with good ideas have an incentive
to implement them. This benefits customers. With a population of
1.3 billion, there are a lot of people with good ideas.
Then toss in
India, with its 1.15 billion people. All those people. All those
of the sheer numbers of productive, creative people out of almost
three billion cheers me up as a customer. Of course, the same idea
depresses people with widely used products that are likely to be
replaced. But all of life is about replacement. We replace one condition
for another until the day comes when we are replaced. Dust to dust,
and all that. But, in the meantime. . . .
that all those Chinese and Indians are waiting breathlessly for
a few of us Westerners to buy something from them, is a bit silly.
Besides, one reason why we can afford to buy something from them
is because the US Treasury has sold debt to Chinese and Indian central
banks. They created the money out of thin air, bought dollars, and
then bought US government IOUs.
Yet from what
I read in some "sky is falling" websites the sky is tipping,
but not falling the United States economy is headed for a
collapse because Asian central banks are lending money to our government.
Have you heard this?
I am here to
tell you that we are facing major economic problems. A big one is
the fact that the Federal government is getting bigger, because
Asian central banks keep lending it money at cheap rates. Then the
government spends this money.
what the collapse-is-imminent sites say.
REALLY SILLY ARGUMENTS
Here are some
arguments from a site that predicts collapse. Here are some of the
politicians simply do not care that America is bleeding jobs. Amazingly,
even with rampant unemployment plaguing this nation, Obama administration
officials continue to declare that it is okay that we are losing
manufacturing jobs because a lot of cheaper products are things
that "we don't want to make in America" anyway.
talk about little else than creating jobs, as if the government
had the power to create jobs. The government has the power to reduce
business regulations, reduce taxation, and let entrepreneurs create
Yes, we are
losing manufacturing jobs. We have been losing them since 1950.
How many Americans send their kids into a factory job instead of
college. "Son, I want you to work in a factory. Forget about college."
No? I thought not. (Actually, a factory job in a high tech factory
is probably a better idea these days than a B.A. in sociology.)
What the handwringers
never mention is that the USA is the largest manufacturing nation
on earth, with 20% of the world's total manufacturing output. Wikipedia
reports: "The United States is the world's largest manufacturer,
with a 2007 industrial output of US$2.69 trillion. In 2008, its
manufacturing output was greater than that of the manufacturing
output of China, India, and Brazil combined, despite manufacturing
being a very small portion of the entire US economy as compared
to most other countries."
also do not tell you that the
percentage of all Western nations devoted to manufacturing has
fallen since 1980 on average from 23% of GDP to about 17%. The USA
is about 13%. In other words, this has been a steady decline for
three decades. Collapse? I don't think so.
these days comes mainly in the construction sector. This is not
a sector threatened by imports. What has hurt this sector is Federal
Reserve policy, which created a housing bubble and then popped it.
is another reason.
and local governments all over the country are dead broke, and an
atmosphere of austerity is sweeping the nation. Right now state
and local governments are slashing jobs at an unprecedented rate.
is bad? The states are firing people? This means less bureaucracy.
I see this as one of the greatest developments in my lifetime. The
states' payrolls are shrinking.
the past, government jobs were considered to be very secure and
they definitely paid a lot higher than average. But now that era
is coming to an end, at least on the state and local government
to the Center on Budget and Policy Priorities, state and local
governments have eliminated more than half a million jobs since
August 2008. UBS Investment Research is projecting that state
and local governments in the US will cut 450,000 more jobs by
the end of 2012.
Or, as another
commentator remarked in a different context, "Free at last! Free
at last. Thank God almighty, we're free at last!"
Then we are
informed about the following:
As I have
written about so many times before, the "global economy" is really
bad for American workers. When we merged our economy with the
economies of nations where it is legal to pay slave labor wages,
we made it inevitable that we would start losing massive amounts
I have heard
this for 50 years. Slave wages. Folks, slave wages are paid to unproductive
people. It was what Communist governments paid workers. Those economies
exported raw materials and tanks. So, with the end of Communist
control over China, people are being paid free market wages. The
result: exports. Yet we are told that slave wages are being paid.
I see. Freedom is slavery.
If this is
bad for American workers, let American workers quit buying imports.
What's that? You say they won't stop buying imports? You say they
need to be told by men with badges and guns not to buy imports?
You say that America's workers need the government to enforce what's
good for Americans? I see. Slavery is freedom.
trade is absolutely killing our economy. It would be one thing if
the US was running a massive trade deficit solely because we were
incompetent. But the truth is that a big factor is that a number
of our "trade partners" are economic predators that are purposely
trying to prey on us. . . .
subsidizes their biggest corporations, they brazenly steal technology
from anyone that they can, they openly manipulate exchange rates
and they allow their workers to be paid slave labor wages.
government subsidizes which corporations? The ones that are export-driven?
Or the state-owned factories that don't produce anything worth exporting?
What percentage of the export sector is subsidized? By how much?
What does it
matter? With only 2.7% of consumer expenditures going for Chinese-made
goods, what does it matter how much of a subsidy corporations get?
States government subsidizes all sorts of projects. The Chinese
government has learned this from the USA, where Keynesianism reigns
and where agriculture is regulated. I see the pot calling the kettle
we spend about 4 dollars on imports from China for every 1 dollar
that China spends on imports from us. China now even makes more
beer than we do. Even the new Martin Luther King, Jr. Memorial on
the National Mall was made in China.
So what? They
produce what they are good at. We produce what we are good at. We
can't compete in certain areas. You can't compete in most areas.
You do a few things well enough to be employed. So do I.
Do you care
what percentage of goods people in your state sell to people in
some other state, vs. how much they buy from people in your state?
Of course not. Then why should you care about China? What difference
does an invisible judicial line make regarding the profitability
of your trade with someone else? Why do you care whether the other
guy is named Wong or Brown? UPS will still deliver. So will FedEx.
our politicians start insisting on a level playing field, all of
this is going to continue.
Yes, I see!
We need more regulations! We need more people with guns and badges
making things fair for us. Slavery is freedom.
businesses are traditionally one of the primary engines of job growth
in this country. But right now, small businesses all over America
are having a really hard time getting anyone to loan them money.
A big reason for this is that the Federal Reserve is actually paying
banks not to make loans. Unfortunately, if small businesses can't
get the money that they need, then they can't hire people.
fails to mention interest rates. The Federal Reserve pays a maximum
of 0.25% on excess reserves. Businesses borrow at 7% or more. So,
this guy thinks that 0.25% is a more powerful incentive than 7%.
I see. Loss is profit.
small businesses are not borrowing because they don't want to borrow.
This is the report, month after month, of the National Federation
of Independent Business, a lobbying group for small businesses.
percent reported financing as their #1 business problem, so for
the overwhelming majority, "credit supply" is not a problem. Ninety-two
(92) percent reported that all their credit needs were met or that
they were not interested in borrowing. Eight percent reported that
not all of their credit needs were satisfied, and 51 percent said
they did not want a loan. . . .
is not China. It is not India. It is not imports. The problem is
the endless call from each special-interest group for the government
to Do Something to Save America. The problem is that the government
has done way to much for too long, all in the name of Doing Something
to Save America.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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