The Have’s and Have-nots: The Stimulus Package and Trade

Tim Duy gives an interesting post on The Economist’s View. His response to Movie Guy is instructive. I had a follow-up response, which I include here with a little elaboration.

Tim does acknowledge that our reliance on foreign production will be difficult to correct. The payscale differences are enormous. The differences between our respective protection of labor and the environment is equally enormous. These difference feed the trade imbalances, which in turn affects the balance of payments, requiring ever greater official inflows into our coffers. The growing power of Sovereign Wealth Funds in China, the Middle East, and elsewhere is a potentially dangerous side effect.

The view that trade is at the center of our problem is not a mainstream view. Globalization and unrestricted trade were to raise all boats: Manufacturing jobs lost to developing countries were to be replaced with higher skilled jobs. Unfortunately, those skilled jobs are disappearing as well. See BeijingMan’s for a good understanding of those pay scales are in Beijing. Remember, elsewhere in China, those wages will be considerably lower.

What we have seen so far? The U.S. has been the primary consumer, even as its trade deficit and private and public debt grow. We now have consumers that produce little and producers that consume almost nothing. (I do acknowledge that China has a vast appetite for raw materials as it builds its infrastructure. But as a consumer of finished goods–not much. And I do not expect it to be in the short term–maybe by 2030.)

For a while, our financial system was touted as a wonder, the key to our future success. (I guess we all were supposed to be become bankers and investors. Many physicists did.) Well, that system is caput. We failed to make our financial system transparent; we failed to be good stewards of our banks and investment firms.

My point, plain and simple, is: Globalization as presently practiced has been laced with real peril. As Americans, we have yet to appreciate fully the problems yet to come. Whether the stock market rebounds today or tomorrow is not the problem. I let more skilled commentators do that forecasting. Nouriel Roubini has been consistently on target in this area.

We are in the position of stimulating that tapped out American consumer one more time. This time, the consumer will use the government’s credit card, not his own. Our national debt consequently grows by 1% of GDP–all in a month.

What will the American consumer buy? Foreign goods, of course. This stimulus package is for the world as much as it is for us. If we do not understand this fact, we are in deep trouble.

This stimulus package does not address the central underlying problems, problems that are deeper than a poorly regulated and almost opaque financial system.

Trade is at the center of our problem. Trade is a tricky business. Off shoring, outsourcing, subcontracting elsewhere in order to increase profitability, while understandable, can create real problems if there is already enormous disparities between those countries that lose the jobs and those countries that gain them. (Check out the pay disparities up and down the line–I have done so repeatedly.)

These dislocations and disparities many economists have all too quickly ignored or glossed over in their celebration of globalization. Those who raise the problems are dismissed as protectionists or uncaring. I am neither a protectionist nor uncaring.

We cannot simply make China et al the manufacturing and production centers of the world as quickly as we have done. More thought should have been given to the process, more attention given to the issues. Please note the modifier quickly.

Lest I still be foolishly accused of being protectionist, let me say again I am not. No straw men, please; my position is far more complicated than that silliness.

Third world, impoverished countries with populations as large as China’s cannot move with lightning speed into a world economy already dominated by wealthy nations. When we mindlessly toss in other impoverished nations, the danger grows.

Trade works best among equals. When there is vast inequality, plan…plan. Check the details. NAFTA has been a mistake of monumental proportions simply because we were not careful. No care was taken concerning labor and the environment; no real care was given regarding Mexico’s agricultural firms. The vast tide of illegal Mexican labor should alert us to NAFTA’s dangerous shortcomings.

The dangers of such disparities have not been fully acknowledged. Other than at AngryBear, I have found no discussion or understanding of China’s blueprint for the future, of its very realistic expectations. The CAS (Chinese Academy of Science) has clearly stated its payscale expectations–and when it expects to achieve them. I have discussed these issues repeatedly on AngryBear. If you want a link, use Google on AngryBear.

It is folly to expect one nation to be the consumer of last resort and poor nations to be the primary producers. While the goal of economic equality among all nations is laudable and desirable, we must look carefully at the process by which we achieve this goal. Simple protectionism is counterproductive.

The issue that must be confronted is at the center of the WTO: Foreign firms within a nation must be have a level playing field with indigenous firms. On the surface, this principle seems eminently fair and proper. (Of course, foreign firms in China, until recently, had a 2-1 tax advantage over indigenous firms. Should the WTO have allowed this inequity? No, at least not without some thought.)

WTO membership requires the level playing field principle. But setting the taxation issue aside, what is the problem with this principle?

First, the principle refuses to acknowledge that the enormous disparities in wages between wealthy countries and poor countries might be a problem. No country can lose its manufacturing base.

There is no burden on a poor country to insist that its labor be free to collectively bargain. Nor is there any requirement that a poor country protect is labor force from abuse. Labor policy is a national, not a global issue. So says the WTO. I disagree.

Simply put: Nothing stops multinationals from simply exploiting the cheap labor. Multinationals simply outsource the production to sweatshop firms.

For a while, everything seems rosy. Wealthy consumers get cheap products. But as the wealthy nations lose their manufacturing base–replaced with jobs in government, health care, and service industries–the problem grows. Strains on its social safety net grow.

Secondly, the principle is blind to the potential ultimate effects: Massive trade imbalances, growing wealth in the hands of a few, and dangerous dislocations in the balance of payments…to name only a few.

To keep the “wealthy” consumer buying, the so-called poor nations have to lend moneys to the so-called “wealthy” nations. Something is amiss and out of place here.

When labor policy becomes merely a national not a global issue, the world suffers. The same can be said about environmental policies. In the end, we are all in the same boat. We just have to stop drilling holes in that boat. Time to plug the leaks.