Economics: There Are Other Countries Out There

The lack of jobs will surely be a big issue in the next national election. Right now, a lot of people are out of work; many of them have been out of work for a long time; and many other people are working for significantly less than they earned in previous jobs. The current President’s re-election may well depend on what he does to promote job growth and how successful he is. Mr. Obama recently proposed continuing and expanding payroll tax cuts, spending more on infrastructure, providing tax credits for hiring the unemployed, and subsidizing salaries for teachers, police, and firefighters. He’s also promoting more spending for education. He recently made much of some new trade treaties; these are expected to improve our balance of payments.

What can the president do, can he do more, and, if he can’t why is that? Traditional explanations of the business cycle are based on the notion of lumps and bumps in the way the economy works. Here’s a typical example. Because things are booming, manufacturers ramp up and create too much inventory; when they realize there is too much, they cut back production, putting people out of work; eventually, the excess inventory goes away and hiring resumes. There are limited ways the federal government can smooth the flow: by altering the quantities of money and credit in the economy, monetary policy can encourage or discourage investment; fiscal policy, the way the government spends and taxes, can directly alter the demand for goods, services, and labor; tax policy can also provide incentives for behaviors considered desirable. While the current recession is somewhat different from those we’ve experienced in the past, the government doesn’t have new and different means for fighting back

The problem with these ideas and with many other ideas we’ve been hearing is the hidden assumption that the US economy is a closed system. This was never the case, and now, it is even less so than it ever was. We are now part of a global economy.  (I have already discussed some aspects of this in my recent blog, Manufacturing: Where the Jobs Aren’t.) In 2010, our trade balance with the rest of the world was roughly minus 500 billion dollars. That’s -$500,000,000,000.00. In other words, we as a nation have been spending this much more than we earn year in and year out for quite a while. This is only about 3 1/2% of our Gross National Income each year, but over the years it adds up; it amounts to 3 trillion dollars or $3,000,000,000,000.00 over the last five years. In 2010, while conducting business with China, we bought 270 billion dollars worth more than we sold; the difference with Mexico was 66 billion dollars; the difference with Japan was 60 billion dollars; the difference with Germany was 34 billion dollars; the difference with Canada was 28 billion dollars. Why is this? In some cases, another country has some resource we need and don’t have; oil and rare earths are good examples of this. In these cases, we might go without, develop substitutes, develop our own supplies, or make sure we sell enough other things globally to make up the difference. In many other cases, the reason is that production costs are lower somewhere else than they are here. The most commonly cited reason for this is that people in so-called developing countries will work for less money. Capitalism being what it is, manufacturers choose to build facilities overseas, retailers choose to purchase from companies that manufacture overseas, and consumers choose to purchase things that cost less. The result is that someone in another country has a job while someone in the United States does not. It isn’t always the case that people elsewhere will work for less; sometimes another country is more efficient or the products are of higher quality. Whatever the underlying explanation, we haven’t been doing a very good job of competing in the global marketplace.

There have been and continue to be calls for tariffs and trade barriers. These probably wouldn’t work; people are ingenious when it comes to getting around, over, and under walls between countries. We’d also have to completely withdraw from the World Trade Organization and other international bodies and that is no longer practical. For a long time, many people said  it is fine to allow manufacturing to move away as long as we retain our creative edge and win in design and innovation. You don’t hear that so often these days. It isn’t working out for us because we still lose a lot of jobs and because we aren’t maintaining our edge. Traditional economic theory says that as we import more and export less, the trade imbalance will cause our dollars to become worth less, making foreign goods more expensive for us and our goods cheaper overseas with the result that the situation will magically self-correct. So far that hasn’t been working for us either and we might not like it if it did because all the stuff we buy would be more expensive. It also appears that other countries, notably China, have become more adept than we at managing currency values.

What can be done? We need to continue to address the imbalances in the way the international money system works. We need trade agreements that make sure we have a fair opportunity to market our goods and services internationally. We need to become more competitive; we can do this by becoming more efficient. There are several things we can look at, such as unproductive regulations, inefficient work practices, and automation. We should, as people like Newt Gingrich suggest, carefully evaluate all of our regulations and eliminate those that make our goods and services more expensive without adding value. We do, however, have to appreciate that just as we need laws and police, we need regulations and enforcement agencies to prevent excessive pollution, unfair practices, and  consumer deception. Unfortunately, this can place us at an economic disadvantage if our competitors save money by polluting  and ignoring worker safety. We have to find ways to compete without descending to their level. Union work rules are frequently and with some justification cited as impediments to efficient production. Employers have been combating this by situating new facilities in states with strong right to work laws. Unions and management are beginning to understand that they need to work together in finding ways to be more competitive; this must continue. The problem with these approaches is that they frequently result in lower wages for workers and they may also result in poorer working conditions. We know that things we buy at bargain prices are made in sweatshops by poorly compensated workers. Our challenge is to find ways to compete while maintaining the high standard of living we’ve been used to. Can we do this? We’ve already noted that improving productivity through automation has a downside as well as an upside. There are no quick and simple solutions here.

The balance of payments, of course, is not the only reason a lot of folks can’t find jobs. Another reason is that consumers in the US haven’t been spending as much. Why is this? Obviously, the folks without jobs are spending less. Others are spending less because they are afraid of losing their jobs. Others are spending less because they don’t feel very rich; the bursting of the housing bubble left them with property that is worth a lot less than it had been, mortgage payments they can’t afford, and possibly foreclosure notices; the stock market crash also left many with fewer resources and less inclination to spend. And, don’t forget that our financial institutions, and our stock and bond values are very much affected by the European financial crisis, something our President has little control over.

So, what’s the point of all this? It’s pretty simple. At least part of our jobs problem is the result of things that have happened and are happening in other countries – things that we and our President do not directly control. Some of the proposed solutions we’ve been hearing are simple minded and will have little effect. So, what can be done? In the short run, the biggest thing the government could do to create jobs is to pump more money into the economy. Here, we bump against a little thing called the deficit. Many people believe, with some justification, that the government just can’t spend any more money unless there are either corresponding spending cuts elsewhere or corresponding tax increases somewhere.  In the long run, we need to step up to some major changes in the ways we do things. As we’ve already noted, we need more cooperation between labor and management. We need motivated workers with the education and training to operate in a high technology world; it’s common knowledge that we are falling behind in science and math, but reforming our educational system is a tough job. We need less hedging and speculation in financial markets and more investment in productive capacity. We need to reduce expenses by reigning in the runaway costs of health care. Each of these topics is worthy of its own article. The next time you encounter a sound bite claiming to solve all our problems in a single blow, ask if any of the real problems are being addressed.

© Charlie Wertz, November 2011

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