This is the tale of a trade deficit. It is also a tale of the ignorant idea that a country can pay for imports by its citizens performing services for one another, and the government selling their future production (that doesn’t exist) abroad. I can’t see how a data-hound like Greenspan could have missed this. Did he REALLY think that this wouldn’t spell disaster, with the deficits the US was running?
The Death of US manufacturing
P.S. Some have been speculating recently whether Alan Greenspan was, in fact, Fransisco d’Anconia. I think objevtivists would strongly disagree – but you have to admit that the crisis in the US is almost to bad NOT to have been purposfully orchestrated D.S
There’s no conspiracy here. America’s manufacturing base was geared up during WWII for military manufactures and then shifted to non-military production. Our labor force was flush with returning soldiers and, for the first time, women and minorities. Our potential competitor’s industrial bases were largely destroyed by the war.
We enjoyed a couple of decades of manufacturing superiority as other countries rebuilt. We grew complacent with innovation and got too generous with wages and benefits. Management salaries got ridiculous. The paradigms of overpaid, underworked workers and management “stuck” and couldn’t be reversed.
We were surprised when “our former enemies” Germany and Japan started shipping their goods to the American market. At first, we laughed at their low quality and smallish design. Then we grew fearful as more people began to want German and Japanese goods. Oh, now we harken back to the days when Germany and Japan were the only countries we had to worry about!
China has 1.3 billion people. India has 1 billion people. Indonesia has about 300 million people. Brazil has 192 million people. Does anyone bemoaning the fall of American manufacturing think that all that foreign labor was going to remain idle forever? When developing countries get their acts together and do what we did to become great, should we be surprised we get competition? Is competition a bad thing? The last time I checked, competition was the aspect of capitalism which lowered costs, lowered prices, and produced innovation.
We hear stories about “unfair” competition, subsidies, sweatshops – the fact is that America had and did all these things to grow its economy. Americans were once willing to work sun-up to sun-down in hard jobs for low pay: as farmers, rail workers, loggers, fisherman, etc. Some people still do this – and, believe it or not, they still have jobs.
The fact is that the world is better off when we have free trade. If China wants to subsidize manufacturing as a gift to the American consumer, so be it. Our economy is still enormous despite declining manufacturing as a share of GDP. The VALUE of our manufactures has actually gone up (even after adjusting for inflation). So the number of workers we employ in manufacturing is dropping, but we’re producing more despite that. That’s a good thing…
Unless you’re an American manufacturing worker who has no skills other than making what you previously made. As we used to say in the Army, “that sounds like a personal problem to me.”
Transitions like this are good. If you earned a lot of money, you’d pay someone else to clean your toilets. That’s the symptom of a rising standard of living. We WANT hordes of Chinese making plastic dog food dishes. We WANT Indians making t-shirts. What we want are more engineers, doctors, mathematicians, computer programmers, etc. Our comparative advantage is in high tech, not high sweat. If a person can’t or won’t attain a high tech education, then they can pave roads, tar roofs, serve Big Macs and change sheets in a motel for $6 an hour.
Our trade deficit isn’t a problem. We give foreign nations pieces of green paper. They give us goods we want. The ONLY way the foreigners can benefit from those green pieces of paper is to buy OUR goods or invest in OUR economy. The dollars come back, eventually. But then we get all upset when the Japs buy Rockefeller Center and the Chinks buy Hummer. Too bad, so sad. If Americans were less interested in buying iPhones and LCD television and more interested in investing in our economy, we wouldn’t have to worry about foreign ownership of formerly American companies. The solution is to change the American mindset toward savings and work, to lower corporate taxes and capital gains taxes, and return to the fundamentals of a sound economy.
Whining about days gone by produces nothing but balloon juice.
Hmh, that was probably one of the best analysis yet.
There is only one single thing I would like to disagree with, namely that “our trade deficit isn’t a problem”. It is, because by abusing the fact that the world uses the dollar as the main trading currency, it is going to be abandoned as such. This means that interest rates will become horrific in the US, to avoid a collapsing dollar. And even if a collapsing dollar is preferred by the Federal Reserve/Government-conglomerate, the capital outflows from the US will be enormous. Not a good situation when you need to rebuild your manufacturing base to maintain your living standard.
Is the US ready for the fundamental shift that has to take place? No more government deficits – no more borrowing – no more spending? It seems to me that the US debt ceiling has been reached – and the time to start paying back has arrived. Btw, I hope you don’t mind me republishing your entire comment as a post – it was a very nice summary of the status quoe.
Absolutely you can republish that. But I don’t pretend to be an expert in International Economics. My fields are Microeconomics and Public Economics with rudimentary education in Intl. Econ. If someone with a better understanding has a good counter-argument, I’d love to hear it.
I’m no Paul Krugman, but then again who would want to be? He’s a pre-conceived conclusion is search of supporting evidence.
One does not need to be an “expert” to draw conclusions of what is going on. I have no official education in economics, yet I get by pretty well (not to say I don’t study economics – it’s what I spend almost all of my spare time doing). And you should be glad you are not Paul Krugman – I predict they will roll him in tar and feathers for all his advice and predictions……
I’ll buy some of that HPX83. Certainly there will be some necessary structural adjustments to trade flows if and when the currency reserve changes. If all exchange rates were floating, though, these should adjust rather swiftly.
Before you scream bloody murder about the potential harm which could come to the US from such a rapid divestment of dollars, think about what would happen to the Chinese. While it is often said we “depend” upon the Chinese for cheap consumption goods and supply of debt to fund it, they “depend” on us MORE to maintain production and employment. The worst that happens to us is we go through withdrawal pains of forced savings. The worst thing that happens to them is a 10% reduction in GDP.
The dollar is a piece of paper. The renminbi and the euro are pieces of paper. It hardly matters what the currency reserve is as long as the flows of trade continue unabated. The Chinese manipulate the value of the renminbi through purchases of US dollar denominated securities. If they want to continue running a trade surplus with us, they must continue that policy. So changing the reserve currency would cut off their nose to spite their face. They have no interest in weakening their top customer. However, both we and the Chinese know this balance of trade cannot continue indefinitely. The stories you hear of drastic policy changes are exaggerations of an intended and necessary mild and gradual shift over time.
Our deficits and debt service are shocking. The US government needs many years of painful austerity, something we won’t get from Democrats. They will, at best, do what Clinton did and decimate our military – opening us up to reap the rewards of another “peace dividend.”
POW, I think you have it backwards. The worst that happens to the Chinese is that they have the re-adjustment of production from export towards production for domestic consumption. Just because an exporter goes out of biz does not mean his factory and his workers disappear – they’ll quickly re-align towards producing something else. The US however, have been shutting down factories for decades, which means that re-alignment must go from “service sector” (i.e. white collar, retail, government etc. jobs) to production jobs – and there is not capital base! The capital base needed for efficient production needs to come from real savings, which means that the average american citizen is going to have to accept lower wages, and if he wants higher wages the entire US population will have to start saving to build a capital base that supports more efficient production.
I can’t see how China is worse off in this situation. I’ll agree however that the chinese have themselves to blame for not being wealthier – subsidizing the US consumer was their choice. Probably something they did to maintain political stability (a lot of jobs for a lot of workers in ever-more modern factories makes for a happy middle-class forming, not young revolutionaries).
The US military, as such, will probably be scaled back to border-defense. That’s what it should do anyways.
The Chinese are already consuming quite a bit domestically. That’s why oil and food prices jumped so high last summer. I ate in a Chinese restaurant today. The owner told me that a (big) bag of rice rose from $18.35 to $52 last year. That’s all from Chinese consumption outstripping market supply.
As their population gets wealthier, they will buy more “luxury” goods that we take for granted: like cars and houses. Guess who sold the most cars in China in the past year: General Motors.
They’ve had a MASSIVE stimulus program of domestic construction. That’s why they stockpiled millions of tons of iron ore this summer and are importing lots of construction equipment. Their growth is based on government spending too!
The US is producing MORE manufacturing output than it was in previous decades. We’re just doing it with less labor. We still make lots of stuff other countries want: aircraft, watercraft, construction equipment, agricultural equipment, lumber, polymers, pharmaceuticals, medical equipment. Our manufacturing “base” is not as small as you think it is. We’re just not churning out chotchkies anymore like the Chinese.
Always remember that Chinese statistics are BS. Earlier this year, they laid off TWENTY MILLION WORKERS. They have a poverty rate above 40%. Their trade surplus is maintained through manipulation of their currency. They depend on the rest of the world for their food supply. They’re destroying their environment by strip mining.
China has 130% male-female ratio. The idle, lonely men are banding into organized crime syndicates. It’s so bad, China made a public display of executing several of them recently. Read today’s (October 13, 2009) Wall Street Journal, page A13. This is just the superficial problem leaking out. The real problem is kept well hidden. As one exterminator once told me, if you see 1 roach, there are 1000 you don’t see. China has a LOT of roaches.
I’m not saying the Chinese are doing badly. I’m just saying that all is not as well as the commies say it is.
I agree that many Americans will have to accept lower wages – and they should. Their human capital simply doesn’t demand more. There’s a serious question of whether our education system is up to the challenge and whether our society is up to the challenge. If we push education, Obama style, all we get are diluted degrees not worth the paper they’re printed on.
I have to disagree about China’s independence. They cannot maintain their production levels without massive external consumption of their products. Most of their population simply doesn’t have the money to buy anything. Half the population is living off of one bowl of rice a day.
I predict (and I don’t do this very often) that Chinese communism will fall within 10 years. They might very well soon be in an all-out civil war. There’s trouble brewing and they won’t be able to contain it by fear alone. Chinese are tasting freedom, democracy, and capitalism and they like it.