01
Mar
14

A Short Lesson in Global Economics (USA vs The World)

For those who aren’t interested in Economics and really who is, I will try and give the lowdown on understanding Economics and its effect on the world, especially its effect on the United States in a simple and, hopefully, interesting way. We will evaluate how the current economic theory that the United States is following which is ” Globalization” and how it is effecting the U.S. economy and whether something needs to be done.

The Definition of Economics

Economics is a “science” which studies wealth or the lack of it and its relationship with human behavior. So, even though, economists like to use a lot of mathematical formulas, they are not a “true” science like Physics or Chemistry, but more of a Social Science like Anthropology. Economists study the trends why some accumulate wealth and why others lose it. And it is from these observations that economists make their theories (these theories have never been tested, like in a real laboratory). From these theories, the economists advise how people/businesses/countries should act to accumulate wealth. The biggest problem for economist (and for anybody) is that they are trying to predict human behavior, which is hardly straight-forward or logical. The result, Ouiji boards (or the magic 8 ball) have been as accurate as when economic theory has been implemented. (There have been successes, most recent example, the fixes by Ben Bernanke, the former head of the Federal Reserve (the Central Bank of the U.S.), on The Great Recession.)

Incorrect Forecasting

Here is a good example of recent incorrect forecasting: Alan Greenspan, Chairman of the Federal Reserve from 1987 up until the recession of 2007, a strong advocate for Free Trade, smaller government, and strict Libertarian , as well as the most respected economist in the history of U.S. history, admitted his mistakes in not taking human behavior into consideration after Lehman Brothers, the fourth largest investment bank, collapsed. He was surprised that there was panic and that people were not “rational self-interested parties” after this bank collapsed. It was mainly Mr. Greenspan’s mistakes and his hubris that led the United States into the “Great Recession”  as well as a worldwide recession. The “Great Recession” was actually a depression, but nobody wanted to use that term for fear of more panic. (For reference of Mr. Greenspan’s interview on the mistakes mistakes leading up to the crisis, see F.T Magazine 10/25/13, or Alan Greenspan’s book: “The Map and The Territory: Risk, Human Nature and the Future of Forecasting“.) The economists, also, didn’t predict that many large corporations with very healthy profits (and no risk of going under) would lay off millions of their workers into the midst of The Great Recession, so that their short term stock market value would look better and only inflaming The Great Recession (It is not a subject that economists ever talk about, but obviously this will happen again).

Economics Joke #1

Why did God create economists?

Answer: In order to make weather forecasters look good.

Economists vs Non-Economists

Economists have their own language and their own belief systems. They like to talk in jargon to each other, like how engineers and physicians talk among themselves. But many economists do not like to talk to non-economists because they think lay people know nothing about economics, and this is partly true. For instance, one issue is the raising of the Federal Debt Limit. All economists know that the value of the American monetary currency (the true worth of the dollar) is strictly related to the following: 1)the backing of the dollars value by the U.S. Government  and the Central Bank, The Federal Reserve, (otherwise it would be as worthless as the bitcoin which has no backing at all); 2) the country’s ability produce goods and services; and 3) its promise to pay its bills. What drives economists crazy is that one political party does not want to raise the Debt Limit and, surprisingly, greater than 50% of people (non-economists) agree with this policy. The Debt Limit is NOT like raising a limit on a credit card, the Debt Limit is the promise that you will pay your bills that you have already rang up. The promise that the government will pay its debt is the cornerstone on which the dollar carries its worth. What would happen if the world’s number one economy in the world suddenly didn’t want to pay its bills?  It would send ripples all throughout the world. The value of the American dollar and its credit rating would sink like a stone.This would eventually cause a “Bank Run“-when many panicked people try to withdrawal all of their money from the banks, because they want to spend their money before it becomes nearly worthless (this is called hyperinflation – like when a $100 bill is worth only a $5 in a very short amount of time). This is different than ordinary inflation which is the persistent increase in the general price level of goods and services in an economy over time. So, if you are in the company of an economist, do not tell them raising the debt ceiling is a bad idea.

Bank run on the Northern Bank in England on 9/14/07

Bank run on the Northern Bank in England on 9/14/07

The Basics

Business, Workers and Government

There has always been a struggle between business owners, its workers and the government. As each has its own agenda, it has always been a dynamic struggle all throughout the history of industrialized nations. As a business makes  money, the employer hires more workers who can buy food, clothes and shelter and, hopefully, the workers can pull themselves out of poverty. Obviously, a business that is making money is a great benefit. Both businesses and workers then pay taxes to the government. In exchange for the taxes, the government provides: roads, bridges, sanitation (infrastructure), schools;  safety services (police, fire, and emergency); and enforces laws and contracts.

“When we look at the size of the government across different societies, we uncover a rather amazing fact. With very few exceptions, the more developed an economy, the greater the share of its resources that is consumed by the public sector. Governments are bigger and stronger not in the world’s poorest economies but in its most advanced economies. The correlation between government size and per capita income is remarkably tight. Rich countries have better functioning markets and larger governments when compared to poor ones. Markets are most developed and most effective in generating wealth when they are backed by solid governmental institutions. Markets and states are complements, not substitutes, as simplistic economic accounts would have it.” (1). (Sorry about the economist lingo, but there was no better way of saying it.)

This goes against  much of what the strictest “Free Trade” advocates preach. Their refrain is that “government only gets in the way”. But without a stable government, businesses can not conduct business safely nor efficiently. Trade agreements can not be enforced in unstable governments. In a highly complex society (like the United States), it is really impossible to shrink the size of government greatly without a very large loss of efficiency and loss of enforcement of safety standards that the nation has come to expect: fair working conditions, clean air and water, and compensation due to unfair treatment.

Here are some recent examples of bad results due to decreased regulation (deregulation) are the West, Texas Fertilizer Plant Explosion and the The Elk River, West Virginia chemical spill plus, examples of decreased enforcement, such as lead found in toys and melamine found in dog treats that kill dogs, because China’s government can not enforce their own laws.

Government is Not The Problem

Government in NOT the problem. For many free market economists, there has been an incorrect line of thinking that the government interferes with all business. The single-minded goal of shrinking government and making America, “The Frugal Superpower”,  is a silly one. Historically, it has been repeatedly shown that government enhances businesses greatly. Growth of a country is measured by the Gross Domestic Product (GDP). The GDP measures the amount of production in the country in a certain amount of time. Currently, the easiest way to measure the GDP with the following formula: consumer spending PLUS government spending PLUS Investment PLUS Exports while subtracting imports. Just from the formula, one can see that government spending causes the economy to grow, while cutting back causes the economy to shrink. It also shows that exporting improves the economy while trade deficits where imports exceed exports worsens the economy.

Many people who follow the “Shrink the Government -Free Market Mania” forget that the American government (over time) has been set up to protect the welfare, safety and security of its citizens. People need a more efficient government, not just a smaller one (people still want their safety, security and welfare preserved).  The movement to”shrink government to the size to where you can drown it in a bathtub” is so wrong-minded and, at times, callus. What business runs more efficiently by randomly firing people? The reason why the Great Recession didn’t seem as catastrophic as the The Great Depression to the public was because of the already implemented government policies (safety nets) of: Federal Deposit Insurance Corporation (FDIC) which insures depositors’ money that are deposited in banks; unemployment insurance;  Food Stamps; Social Security; Medicare and Medicaid.  (During the depression, it was “no work, no eat”). When they say “Shrink the Government” these are actually calling on cutting these programs I just mentioned (and these  programs are ones that economists really do not care about – it is not part of their field).

Economics Joke # 2

How many conservative economists does it take to change a light bulb?

Answer: None, if the government would just leave it alone, it would screw itself in.

Business Goals

A: First and Foremost Profits

As we mentioned earlier, businesses, workers and governments have conflicting goals. The surprising thing that economists find when questioning non-economists (lay people), is that so many non-economists do not know what the true goal of businesses is. It is simple: profits. Big businesses (especially) do not care about national borders or, even, the nation they work in (maybe they did in the 1950s and 1960s). You can think of a business like a munitions factory. They will take orders and money from their homeland, (like the USA), while at the same time, take orders and money from their homeland enemy (like Al-Queda). It doesn’t matter, money is money. Lay people need to realize this. Former Bill Clinton adviser, Larry Summers, once a staunch free trade advocate, recently complained against “stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered” (2). Mr. Summers and any economist are just stating the obvious. Country does not matter, what matters is profits. And this is precisely the present policy of the United States Government (and the World Trade Organization since 1995 – which we will talk about later).

Profits and self-interest go arm in arm in business (and that is not necessarily a bad thing according to Adam Smith [1723 – 1790], the founder of the Free Trade philosophy). Big businesses will do whatever it can to make profits whether the public approves or even if it even endangers the public safety. Examples: the tobacco industry lying that cigarettes do not cause lung cancer or emphysema; the auto industry fighting against catalytic converters, fuel-efficient vehicles and air bags; and fossil fuel industries spending billions of dollars on promoting the idea that climate change is a hoax. These changes to protect health and the environment didn’t happen due to “Free market forces”, no, they were instituted by the government as part of public pressure.

(Just an aside on the climate change issue. Obviously, if you think that global warming and climate change are a hoax, then somebody with very deep pockets and with something to gain must be supplying tons of money to the 98% of scientists who believe in climate change. But who would this mystery contributor be? A solar company? Can you name me one solar company that is large enough to contribute billions of dollars and have Congressional representatives in their pocket? A windmill company? Greenpeace? How about the U.S. Government? The U.S. government is not an autonomous entity and, yet, are we to supposed to believe that the government spent all of these billions of dollars just to get a carbon tax? )

The morale of the story, big businesses are the great motor to the economy, but we have to know that their motives are only for their own profit and whether their product is for the public good or public bad, they do not care a bit. (That is the part of the “invisible hand” talked about by Adam Smith, founder of free market economics). However, small businesses with ties to the community are much more likely to preserve the community ethic while pursuing its goal of making a living (but it doesn’t mean a small business won’t outsource).

B: Working Conditions

The other thing that the non-economist does not realize is the history behind the current standards of American workers. Non-economists take for granted the following: minimum wage, lunch breaks, overtime, vacations, prohibition of child labor, safe working conditions and a recourse against employers that abuse workers. But what lay people do not realize is that the people (the workers) had to fight for every single one of these items. The business owners never freely gave up any of these reforms, so it really should not be a surprise that a business owner in the United States may follow every one of these rules in the USA (as they are enforced, and the penalties too steep), but will break every one of these rules when they “outsource” (move a business from the USA to a foreign country). So, when terrible working conditions in China, India or Bangladesh are reported in the newspaper, magazine or television, people are shocked. We shouldn’t be shocked (that is the nature of big business), instead they should be thankful for the advanced standards on working conditions within the United States, due to the hardships endured by millions of U.S. workers before us. These reforms need to be protected, because there is always a movement afoot by businesses to repeal every one of these hard-fought reforms. (Not an exaggeration).

Economics Joke #3

A mathematician, a statistician and an economist each apply for the same job. The interviewer asks the mathematician, “What’s tw0 plus two?” The mathematician replies, “Four”.

Then the interviewer calls in the statistician and asks the same question. The statistician says, “On average, four-give or take ten percent.”

Then the interviewer calls in the economist and asks, “What do two plus two equal?” The economist locks the door, leans close to the interviewer and whispers, “What do you want them to equal?”

Types of Economists

Microeconomists and Macroeconomists

Actually, there are many types of economists in various specialties, but for the time being, we will make it simple. There are economists that evaluate a small group or communities, they are called microeconomists. They usually take human behavior into account. The other type are one that study large population groups like countries, continents or the world. They are called macroeconomists. And they generally do not take human behavior into account. For our discussion about the U.S. Economy and its effect from globalization, we will be concentrating on the macroeconomists.

Types Of Macroeconomists

There are two types of macroeconomists. The first is the Free Trade economists. They promote the trade of goods without taxes or trade barriers. They also believe in unregulated access to markets. Free Trade comes from Adam Smith. The majority of economists are Free Trade advocates. The Absolutists believe that nothing should interfere with the market as everything will correct itself eventually. The Free Trade macroeconomists in academic circles, also, do not do “predictions” on macroeconomics.(3) The Absolutists are much more extreme than Adam Smith ever was. Adam Smith began as a professor as a Morals Philosopher, he was an academician and a gentleman. Smith felt that businessmen had at least some scruples when he wrote “The Theory of Moral Sentiments” (1759), but that was before he visited French monarchy in all their excesses of the late 1700’s. Adam Smith would be disappointed with today’s big business CEOs who show no morals and have indulged in excesses surpassing King Louis XVI and Marie Antoinette.

The other macroeconomist school is the Keynesians, named after John Maynard Keynes (1883 – 1946). Keynes, a British economist and thought to be the greatest 20th Century economist, was originally a free trade advocate, but saw the flaws in the Free Trade system. He believed that there were business cycles – boom and bust, and that there were policies that could mitigate these, especially during the recessions and depressions. Keynesian economist were the major school of macroeconomists in the United States from 1933 up until 1979. Then it reverted to Free Trade and monetarists (until the recession of 2007).

Examples of Keynesian economics

In the graph below it shows two things, the first is the Great Depression, the Stock Market crash started in 1929, but the banks and the government of President Herbert Hoover did nothing as their Free Trade Policy dictated (everything will self-correct, right? Maybe if you wait for decades). Franklin Delano Roosevelt took over as President in 1933 and implemented Keynesian economics with a resultant growth in the economy (measured as Gross Domestic Product). The second thing that this particular graph shows was the Post World War II growth based on the Bretton Woods agreement written by John Maynard Keynes and Harry Dexter White in 1945. More about Bretton Woods later.

The success of Keynesian economics

The success of Keynesian economics from Wikipedia

Stimulus package passed in early 2009

Stimulus package passed in early 2009

In a more modern example, the above graph shows how the stimulus package passed in early 2009 actually stimulated the economy (once again measuring the Gross Domestic Product). If you do not like Gross Domestic Product stats, then here is one on Private Sector Growth. (Red is under G.O.P. President, Blue is for Democratic President. For the latest report on the 2009 stimulus and its effect see the link from the Council of Economic Advisors (1.6 million jobs per year for four years).

Private Sector Growth - Before and After The Stimulus from Steve Benem

Private Sector Growth – Before and After The Stimulus from Steve Benem

International Trade-Trade of Balance

There is one subject we must address before we dive into the macroeconomic plans of the late 20th Century. And this International Trade or balance of trade. There has been trade between countries for centuries. One country swaps their products to another country for products that are otherwise hard to obtain. This is a mutually beneficial agreement between countries. If there is trouble with the agreement, there is enforcement by the government (without enforcement, these agreements dissolve, historically it has been central governments that have enforced these agreements, sometimes through the use of military force). Exports, the products sent from the home country to other countries are a great benefit as it brings in more income for the country, especially if it surpasses imports, the products that come in from other countries, The surplus is called a “Trade Surplus“, obviously a good goal. A “Trade Deficit” is when imports exceed exports. This means, net-wise, money is being paid to other countries. When the United States was still on the Gold Standard (money was valued on how much money the United States retained, up until World War I), a trade deficit meant that you had to transfer that amount of gold from your gold reserves to the other countries. Obviously a trade deficit is a very bad thing. Even though trade deficits are a bad thing, the United States have been running trade deficits since the 1991. Possibly why the US continues to run deficits is that it listens to another school of thought, first gaining popularity in 1980.This is the school of Monetarists economics. The most noteworthy Monetarist economist is Milton Friedman, who believes that trade deficits don’t matter (only inflation). Their theoretical model why trade deficits don’t matter goes through a lot of wild gyrations to explain this (however, many economists do not buy their argument).  As for me, the thought of constantly sending gold to another country to pay for your trade deficit is not a winning model.

Trade deficit of USA and other countries by largest debt

Trade deficit of USA and other countries by largest debt

The Economic Plans of the Late 20th Century

There have been only two U.S. Governmental economic plans during the later part of the 20th century, the Bretton Woods Agreement and the current policy of Globalization/Hyperglobalization/WTO Agreement. They will both be explained here.

The Bretton Woods Agreement

After World War II, the European nations were in a terrible state. Much of their industries had been decimated by the War, debts were extremely high and inflation was skyrocketing. Countries had been implementing severe trading restrictions because of the war. John Maynard Keynes, an academic scholar wanted to avoid a repeat of the post World War I German economy. Germany, in 1920, had huge debts, both domestic and foreign, yet no country wanted to lend them money. To cope, the Central bank of Germany printed much more money (without any collateral) which eventually led to hyperinflation in 1923. This hyperinflation (money is almost worthless) caused severe hardship and unpopularity of the government. It was no wonder that the population followed a populist but extreme leader right back into another World War.

Keynes wanted the nations to come together in an effort to free up international trade and fund post war reconstruction. Or to put it in another way, the agreement would encourage Free Trade and yet, create leeway so that there could be nation building. Keynes, together with U.S. Treasury official, Harry Dexter White, wrote a proposal and brought the countries together in 1944 at Bretton Woods, New Hampshire (for which the agreement takes its name) and it was implemented in 1945 with 44 countries agreeing to it. To battle inflation, the member states agreed to fix their exchange rates by tying their currencies to the U.S. dollar – which was linked to gold. There was also the creation of the International Monetary Fund (IMF) which was given authority to intervene when an imbalance of payment arose. One needs an enforcer of contracts as we have discussed before, however, this enforcer was dreadfully inadequate as it turns out.

The result of the Bretton Woods agreement – an unqualified success. The world economy flourished as never before. The volume of world trade grew at an annual rate of almost 7%, considerably faster than experienced to date, even better than the Globalization Period that would replace it.(4 )

The demise of the Bretton Woods Agreement started in the early 1970s. The U.S. government was running in deficit, mainly due to the funding of the Vietnam War and not raising taxes. So, instead of raising taxes and decreasing expenditures, President Nixon in 1971 severed the link between the U.S. dollar and gold – a decision to prevent a run on Fort Knox, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign banks. This transition from a link to the Gold Standard to a floating exchange rate (the dollar’s value is relative to other foreign exchange market, which is determined by: supply and demand; a Central Bank that can back up the currency; and the ability to pay back debts  [we had talked about this previously in the Debt Limit discussion]) then, caused: stock prices to plummet; skyrocketing oil prices; bank failures; and severe inflation. When exactly Bretton Woods Agreement disappeared is speculative, officially it ended with the severing of the dollar and the gold standard in 1971, but then there were no other policies put into place, so the influence of Bretton Woods could be considered finished anywhere between 1979 to 1995.

Globalization

In the 1970s, there was a great expansion of telecommunications, long-distance phone calls were simple and uncomplicated. Travel between continents were fast, safe and dependable. The 1980’s and 1990’s saw an even greater expansion of telecommunications and telecommuting. The vast oceans that separated continents were becoming easier to overcome. The world had become one large road that went from one continent directly to another continent. “The World is Flat” (2005) declared Thomas Friedman in his book. However, in 2011, he wrote; “That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back”.

Globalization is the moving of funds and business beyond the domestic and national markets to other markets around the globe. This was and still is the dream of Free Trade economists. Its promise was that by lower tariffs and moving businesses to other countries that this would lower costs of certain products and it would get rid of those “dirty” unwanted jobs nobody wanted anyway (this was what would later be called outsourcing (preferred term by non-economists or for the economists: offshoring). The U.S. would concentrate on “high tech” jobs. The U.S. would no longer “make’ things, and the U.S. was transform into a country of “clean service” jobs. Advocates for globalization argued that some people would get hurt in the short run, but in the long run, everybody would be better off. But, in fact, many will necessarily suffer long term losses in income from free trade, but, mostly in unskilled workers.(5 ) Globalization was an untested theory, and then it was put into effect full-bore.

Globalization was endorsed by 100% of all economists by 1995, although it never received even a favorable rating from the general public. And, with the backing of 100% of the economists, The World Trade Organization came into being on January 1, 1995. But before we get into the WTO, there was another treaty signed just prior to the WTO, it was called the Uruguay Round of the General Agreement on Tariffs and Trades, signed in late 2004. (This was signed through the fast track procedure meaning there was no discussion in Congress.) This agreement did two things: 1) it lifted restrictions on foreign investments and 2) it repealed (gradually over ten years) the 1974 Multi-Fibre Act which had imposed quotas to stop countries from “dumping“. Dumping is basically what Walmart does: it undersells and negatively effects its competitors by producing overwhelming volumes of product. Dumping is an “unfair” practice but it is not illegal, yet. There was one other treaty that preceded the WTO, called The North American Free Trade Agreement or NAFTA. This was an agreement between the U.S., Canada and Mexico, signed in 1994. It eliminated import tariffs between countries, hence “Free Trade”. The agreement was far from a rousing success. For the U.S. it caused a trade deficit, mild loss of manufacturing and outsourcing, for Mexico, it caused the collapse of the Mexican agriculture industry as the U.S. dumped its products into Mexico. So, with this first great experiment, NAFTA just implemented, the U.S. was ready to tackle more of the world, with the World Trade Organization (WTO).  For clarification, because NAFTA was only a deal with Mexico, it is not the cause of our major problem which has to do with offshoring of jobs to Asia and the very large and ever increasing trade deficits with China. No, that would be the WTO.

The World Trade Organization

All of the following set the table for The World Trade Organization agreement: Belief in trickle down economics, 100% of economists believing in globalization, deregulation and repeal of quotas which protected countries from the unfair practices of dumping (the WTO did have its own anti-dumping provision which is a much watered down version – I mean why repeal it and, then, in the next month re-instate it?) The WTO is an organization that supervises and liberalizes international trade (meaning decreased or zero% import tariffs), but at the same time, a nation like the USA is prohibited from nation building or using protectionism policies due to a clause called national treatment. National treatment means that imported goods should be treated no less favorably than domestically produced goods. Nor does the WTO allow governments to subsidize their own industries (on paper anyway). The WTO is not just encouraging globalization. It is enforcing hyperglobalization. This means the United States, like it or not, can not protect itself from unfair practices (like the artificial devaluation of the Chinese Yuan, which works like a subsidy on exports and combined with a tax on imports (6)). For the record, the WTO does have an enforcing committee just like the preceding Bretton Woods agreement, and it is ineffectual as well.

The Rules as per The WTO

The Rules as per The WTO

A Rising Tide Raises All Boats

Economists hate when non-economists use analogies for the financial sector, yet Free Trade economists love this analogy: “A Rising Tide Raises All Boats” to explain the supposed effect of hyperglobalization. They use this analogy over and over again. Basically, it means money will improve everybody’s  standing. Not only is this a bad analogy, it is not true. As Gene Sperling, Bill Clinton’s former economic adviser said, “It will lift some boats, but others will run aground.” People are not boats. If a community receives millions of dollars, many people will be no better off, some will be worse off. Many businesses will fail. If there is new business, in the U.S., it is usually a large, impersonal and uniform appearing chain store or restaurant that will close down one of the well-established community businesses, owned by a community leader.

And when this analogy of Rising Tide is used in macroeconomics, the analogy really falls apart. First off, the moon doesn’t cause a high tide all over the Earth at the same time. Where one place sees a high tide another place simultaneously experiences a low tide. And going back to a microeconomics argument, free traders say when government creates jobs, it takes away jobs from the private sector. This argument presumes that there must be limited resources: jobs, workers, liquid assets/capital, which is also true in macroeconomics as well.  So, when China had an explosion of growth which continues to this day, this growth must come from somewhere else. And this somewhere else is the United States of America. Asia, by the end of this year, will have the most millionaires of any continent. This money comes directly from the pockets of America’s middle class workers and especially the manufacturing sector. America’s now manufactures only 5% of what we use (in 1965, it was 53%, in 1988, it was 39%), with the loss of 5.7 million manufacturing jobs since 2000 plus three times that when you add affiliated jobs. Not only is there chronically high unemployment in the U.S., but we are left with an economy that has no way of benefiting from any future economic booms or even the current giant economic boom in: cell phones, iPhones, Androids, e-readers. So, a rising tide does not raise all boats, it floats most of its effect to one country (China) and runs another country into the ground.

Unintended Consequences

The phrase “Unintended Consequences” has been ascribed to Adam Smith (founder of Free Trade) in describing what happens when the nature of business happens, his point is that there is sometimes public good that may happen (but not always). Unintended Consequences is also used frequently by modern Free Trade Advocates as an argument to stay out of things like when government, in trying to help things out, causes unintended consequences which often is sited as bad. But that did not stop the Free Trade Advocates into jumping into a  whole new world of hyperglobalization and extreme Free trade by signing up with the WTO. Globalization was supposed to make goods cheaper, push America into cleaner tech jobs and service jobs as well as “float all boats”.

1) Loss of Jobs

The Free trade advocates did acknowledge a problem that some people in the U.S. would lose jobs, but they envisioned these people would re-enter the work force as unemployment would stay low. They were very wrong about this scenario, little did they realize that millions of manufacturing jobs would be lost or offshored, nor did they realize that there were so many jobs associated with manufacturing, also, would be lost, nor did they realize that it wasn’t just dirty manufacturing jobs, but it was also the high tech jobs that they valued that were being lost. On top of that, the Free Trade economists did not realize that the “future”upcoming service jobs boom never came into fruition. These service jobs were easily offshored even easier than the manufacturing jobs.

outsorcing

Offshoring is still very rampant problem to the tune of 2.63 million lost American jobs in just 2013. Plus, there are more potential and readily offshore-able occupations like: computer programmers, telemarketers, bookkeepers, accountants, bill and account collectors and software engineers (a total of 210 occupations). A recent study by The Congressional Research Service shows that as many as 25.6% of all American jobs (or 40 million of all American jobs) that could be offshored within the next couple of years. Offshoring is just “another piece of business” to CEO’s. Do you think Steve Jobs lost one hour of sleep when he sent all of the Apple jobs to China? (See the movie “Jobs” and you will know the answer.)

Manufacturing jobs from Jan 2000 to Jan 2012

U.S. Manufacturing jobs from
Jan 2000 to Jan 2012 (China had 99 million manufacturing jobs in 2009, US 11.5 M)

2) Income inequality

Another unintended consequence of globalization is income inequality. the rich got richer and the poor got poorer. In 1980, there were laws that lowered the tax rates of the top income earners and then there were laws that helped these same top earners from paying as much tax (called tax loopholes) which also helped the corporations. So, it is not a surprise that the rich got richer. We just didn’t expect the CEO’s of corporations pay to expand exponentially. (See below graph)

CEO pay exponentially increases

CEO pay exponentially increases

But, at the same time the middle economy class and the lower economy class saw their income not even keep up with inflation. Why was this? The trickledown theory (popular in 1980) postulated that if the rich got more money then some of it some of it would trickle down to the lower economic classes (and raise all boats). The reason this theory didn’t work was because the theory was severely flawed from the beginning (and shame on you if you ever believed it). There has never been anytime in history has that trickledown ever happened (classic example, as was brought up previously, King Louis XVI just before the French  Revolution). The reason that wages have become stagnant for the middle and lower economic classes was due to the millions of jobs that were offshored without a new source of jobs. We have already explored the concept that there are only a finite amount of good paying jobs. Therefore, if you eliminate those well-paying American jobs (by offshoring), one is left with a large void, which means a scarcity of decent paying jobs. And many of those good-paying jobs were union jobs and manufacturing jobs.

The next graph shows two things: 1) During the Bretton Woods Agreement (1945-1981), income increased proportionally in all economic groups; 2) during the globalization era (1981-2008), the top 10% in income earnings came away with 96% of all new income, while the bottom 90% only received 4% of all new income.

From 1945 - 1981, there was income growth proportionally in all economic groups.

From 1945 – 1981, there was income growth proportionally in all economic groups.

What is the problem with economic inequality? The economy of many nations are dependent on consumer spending, it makes up 70% of the US economy (or GDP). If the middle class and lower class are stuck with low wages and are just trying to make ends meet, then they don’t spend money and businesses are hit hard. That is because the middle and lower classes represent a large amount of people (90% of the population).

Further breakdown of income by economic groupings

Further breakdown of income by economic groupings

3) Loss of Standards

When one buys a product made in America, the consumer expects certain standards to be met: 1) the product is safe to use or safe to eat (toxins and poisons are prohibited); 2) the product is made of quality, better standards than almost every other country; 3) the product is made by an adult worker; 4) the product does not contribute greatly to the destruction of the environment; 5) the maker of the product is liable for defects that may lead to injury or death; 6) the product was made with at least these minimum labor standards-a non-dangerous working environment, lack of harassment, pay for overtime, vacation time, workers are there on their own volition (not slave laborers or victims of human trafficking), and fair pay.

When the United States joins a Free Trade Treaty, the non-economics (lay people) naively think that the products bought from the other countries will conform to the standards of made in USA products. This is not true at all. Once a treaty has been signed, all of these American standards are forfeit. Some Americans hope that the other countries will eventually raise their standards to that of the USA. China expects the United States to bring down its standards to that of China. At this time, there is no global standards nor is there ever likely to be one. The adage that once was so commonly used in the 1800s is once again in vogue for imported products which is Caveat Emptor which means Let the Buyer Beware. This is a sad state of affairs for one living in the 21st century  when purchasing imported products.

Did Hyperglobalization Reach its Goals?

Let us go over the of the goals of hyperglobalization and decide whether they were met for the United States.

  1.  Less dirty manufacturing jobs – yes.
  2. More high tech manufacturing jobs – no.
  3. More high tech service jobs – no.
  4. If people lose their manufacturing jobs there will be better jobs -no.
  5. All countries will benefit – no.
  6. Poor people will be able to afford stuff – yes.

So, here is the results of hyperglobalization, poor people will be able to afford stuff at the expense of American manufacturing. Now that we know the results maybe we should put this to a vote. Here we are in Washington D.C. with the top 100 CEO’s in the room and we put this question to them: “How many of you are in favor of sending millions of dollars into foreign countries, so poor people can afford things?” The vote: 0 yes, 100 no. Now if the question were put this way: “How many of you are in favor of sending millions of dollars into foreign countries in order to cripple US manufacturing, slow US economic growth and making a Communist Totalitarian government the number one manufacturing power in the world, while making tons of dollars?” The vote: 100 yes, 0 no. The ayes have it, now let us pass the next thing on our agenda which is the Trans Pacific Partnership (TPP). That is right, the already hyperglobalized United States wants to become even more hyperglobalized with another treaty which is very bad news, (see my link). Last year, 68% of imports into the U.S. entered duty-free (that is correct 0% tax). The rest came at an average tariff of 4.4% (7). Any further hyperglobalization and Free Trade Agreements will have a very negligible positive effect for the United States, but it does a tremendous downside of worsening trade deficits and exacerbating offshoring of American jobs. Tell your congressman, No to the TPP.

Final Evaluation of The World Trade Organization Agreement

The World Trade Organization agreement in 1995 is the contract that brought the United States into the world of hyperglobalization (although some feel globalization started in 1981). While in theory globalization sounded like a good idea, we now have almost 20 to 35 years of data, it can be seen that this experiment, that it was a very bad one for the United States. Growth for the U.S. was much less than under The Bretton Woods Agreement. Plus, the Bretton Woods allowed for some nation building, which hyperglobalization does not allow. Hyperglobalization has helped China to become the number one manufacturer in the world,  at the expense of the U.S, which has suffered great losses in manufacturing, chronic unemployment and an ever-expanding trade deficit.  And the ever increasing trade surpluses carried by China on all other nations will certainly cause a long lasting recession in the near future. The United States needs to get out of the WTO. Buy American.

Trade deficit with China

Trade deficit with China

Conclusion

congrats

Congratulations for making it through the economics lecture. We actually learned may economic terms like: Adam Smith, Free Trade, trade deficits, trade surplus, the Gold Standard, the floating exchange rate, bank run, inflation, hyperinflation, Debt Limit, globalization, John Maynard Keynes, Keynesian Economics, Bretton Woods Agreement, NAFTA, WTO, The Great Recession, GDP, FDIC, dumping, TPP, microeconomics, macroeconomics, offshoring or outsourcing, income inequality, Caveat Emptor, the invisible hand, trickledown theory, A Rising Tide raises All Boats, tax loopholes and hyperglobalization. I hope this gives you a sense of economics and the people that make it their profession. Maybe it will help you understand why economists views are so different than non-economics. Obviously many economic issues are much more complex, but if you know the basics, you will note that the complexities are often insignificant details.

References

I want to thank investopedia and wikipedia for providing links for many of the economic terms.

1. The Globalization Paradox: Democracy and the Future of the World Economy, by Dani Rodrik, W.W. Norton & Co. 2011, pg. 16

2. Ibid pg 86.

3. The undercover Economist Strikes Back: How to Run or Ruin an Economy, by Tim Hanford, Riverhead Books, 2014 pg 212.

4. Rodrik, pg 71.

5. Ibid pg 56.

6. Ibid. pg 276

7. Time Magazine, March 3, 2014, by Fareed Zakaria, pg 24.

I would highly recommend the book: “The Globalization Paradox” by Dani Rodrik, Professor of International Political Economy at Harvard University. He was one of the first to criticize globalization even before The Great Recession happened.

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