The new do-nothing economics – guest article by Larry Eubank

Disinvestment and the do-nothing economists

Guest article by LARRY EUBANK

During the Wall Street Crash of 1929 and the subsequent Great Depression, nobody knew with any certainty what was wrong or what to do about the economy, so the ruling idea became “Do something, do anything!” Many government agencies were accordingly created – the Civilian Conservation Corps, National Recovery Administration, Works Progress Administration, and others. These alleviated some of the worst suffering, but nothing really solved the problem until military production began to be cranked up for World War II.

In stark contrast, today’s pundits are just as adamant that we should “No matter what, do nothing”. Their idée fixe is that government should never adopt any policies whatsoever, least of all tariffs, designed to encourage domestic production. In particular, no actions should be taken to correct what some people see as the problem of outsourcing – the hollowing-out of our manufacturing base by the transferring of production to other, cheaper countries. Even in the state the US economy is in now, the prevailing, orthodox prescription is not so much laissez faire as laissez faire rien – let us do nothing, don’t meddle in the economy. Unfortunately, such an approach effectively means that we will continue to run headlong over the cliff.

An economic debacle cannot be far away unless drastic measures are taken, but commentators are adamantly opposed to doing anything. They vehemently denounce everyone who asserts that off-shoring is a serious problem, and that we need to eliminate some of the incentives that prompt companies to move production abroad. The least of the epithets applied to such persons is ‘protectionist’– self-evidently a bad thing to be. Perhaps ‘sacrificialist’ should be used as an epithet for the anti-protectionist faction – indicating their willingness  to sacrifice our national interests, manufacturing capacity, jobs, and prosperity rather than to act in our own ‘selfish’ interests.

It doesn’t take much reflection to demonstrate the weakness of the US economy. Not only is the official unemployment figure 8.2% as of July (the 41st straight month above 8%), but when the underemployed and those who have stopped looking are added in, the real unemployment rate is 19.1%. Federal spending is 25% of GDP, the highest since World War II. Federal debt is 67% of GDP, the highest since soon after World War II.

The economy is not bouncing back as it did in the past. Earlier this year (“How the Recovery Went Wrong”, 23 May 2012), the Wall Street Journal reported:

“Of the 11 recoveries in the last 60 years, this one is at or near the bottom in job growth and every other economic indicator.”

In short, it has every characteristic of a recovery, except the ‘recovery’ part.

The Census Bureau recently reported that the inflation-adjusted median income for male workers in 2010 ($32,127) was less than such workers earned in 1968 ($32,844). The poverty rate is the worst in 50 years. According to AP (“Poverty levels on rise”, 22 July 2012)

“The official poverty rate will rise from 15.1 percent in 2010, climbing as high as 15.7 percent. Several predicted a more modest gain, but even a 0.1 percentage point increase would put poverty at the highest since 1965.”

Above all, there is the continued loss of manufacturing, as innumerable factories move to other countries. We lost a third of our manufacturing employment, about six million jobs, between 1997 and 2010. And to add insult to injury, the pundits are blasé and insouciant about the matter. Their attitude is illustrated by a story entitled “Jean Genie” by Patrick Cooke, that appeared in the Wall Street Journal on 1 October 2003:

“Levi Strauss & Co. has announced that it’s closing its last factory in North America. Its blue-jeans, a spin-off of the Great California Gold Rush, will now all be made overseas. There’s the loss of 800 U.S. jobs, of course, but one is tempted also to lament the departure of this all-American symbol, created out of cheap, durable canvas. Yet the fact is that unless you’re a gold miner you haven’t got much claim on blue jeans anymore. They belong to the world now.”

As long ago as 2002, the Charlotte Observer reported (“Defeat fast track, says textile chief,” 28 July 2002),

“[I]n 1994, the year NAFTA passed, 50 percent of all of the garments sold in the United States were sewn in the United States. Today, that figure is 11 percent…No nation has ever stayed great when it lost and neglected its manufacturing base. Manufacturing is the creator of wealth. In the last 18 months, we lost 1.8 million manufacturing jobs (to foreign countries). Those won’t return.”

Companies keep moving production to foreign shores for one principal reason: low production costs. In order to sell their goods, companies must be able to offer them at a price competitive with those of all other companies. That means production costs have to be as low as those of other producers. Steven Rattner, former chief auto advisor for Obama, highlighted this issue at a Brookings Institution forum on 12 July 2012:

“So I’m not as sanguine perhaps as some others about our ability to compete in manufacturing, without unfortunately having to compete on price. And so for GM, compared to the 55 dollars in Michigan, in Mexico they pay 7 dollars an hour . . .  in China 4 1/2 dollars, in India a dollar.  I was in Shanghai a few months ago, I went to the GM plant there, it looks exactly like a plant in Michigan.  It’s just as productive, maybe more productive, with workers making a lot less…GM four years ago had something like 85,000 workers in the U.S. Today it has about 50,000…So the trends are still there, and I don’t believe, I don’t believe that we can reverse them. I think there are a lot of things…that would ameliorate them and allow us to be more competitive, but I don’t think we’re going to reverse them.”

That wage differential is a large factor to expect companies to ignore – especially since, if our companies don’t take advantage of it, other countries will, and our producers will be priced out of the market. We produce less and less, because we employ other countries’ workers to produce our goods rather than our own. And we consume more and more. As a result, we now have a gross public debt in the amount of $15.7 trillion, a figure roughly the same as our GDP, a level of debt only reached twice since 1900 – during World War II and after the Crash of 2008.

Nothing needs to be done; nothing can be done

Despite all our manifest problems, the sacrificialists continue to ‘fight the last war’, combating the mistakes of the Smoot-Hawley tariff. That is, they adopt the do-nothing posture: many continue to insist that the downturn (if any) is normal, that it is just a temporary dislocation, and the economy will soon recover, as it always has. They deny that off-shoring is impoverishing us or that it presents any kind of a problem, and they offer a variety of statistics and rationales for their viewpoint.

Old and new economies

Foremost among those rationales is what might be called the ‘buggy-whip’ analogy, meaning that new developments, inventions, and technology are causing old jobs to disappear. As Walter Williams wrote in November 2008)

“Manufacturing is going through the same process as agriculture. In 1900, 41 percent of American workers were employed in agriculture; today, only 2 percent are and agricultural output is greater. In 1940, 35 percent of workers were employed in manufacturing jobs; today, it’s about 10 percent. Again, because of huge productivity gains, manufacturing output is greater.”

There’s a difference between our current loss of manufacturing and past improvements in agriculture. Farmers didn’t move their production to foreign countries, or invest all their productive capital abroad. When our factories are packed up, bag and baggage, and shipped to other countries, how is that an advance in productivity? To have American companies shifting production to other countries in order to make goods to sell here is a new situation, and it must be dealt with somehow, not dismissed or glossed over.

Juan Williams offered a version of the buggy-whip rationalization on the Sean Hannity Show, on 17 May 2012:

“It’s been a hard slog, it’s not coming as fast as I would like it. But I understand what we’ve been up against in this country and I understand that the economy is re-engineering itself, that a lot of the old blue-collar jobs are going away and what we have now is an economy that’s based in a large part on technology, pharmaceuticals, education. Those are changes that are taking place that are natural changes in a growing economy.”

Old blue-collar jobs are indeed going away, but overseas – they’re not evaporating. That’s not a natural change – it’s disinvestment.

The buggy-whip scenario is closely related to the ‘service economy’ rationalization of years past; we were told that we were moving toward a service economy, and that such an outcome is entirely healthy. Matthew J. Slaughter expressed one version of this, in “How To Destroy American Jobs”, Wall Street Journal, 3 February 2010:

“Academic research…has consistently found that expansion abroad by U.S. multinationals tends to support jobs based in the U.S. More investment and employment abroad is strongly associated with more investment and employment in American parent companies…Expanding abroad also allows firms to refine their scope of activities. For example, exporting routine production means that employees in the U.S. can focus on higher value-added tasks such as R&D, marketing and general management.”

In other words, from now on we won’t produce things; we’ll all focus on make a living by marketing, managing, and taking in one another’s laundry. Nothing needs to be done: as James K. Galbraith put it,

“The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it.”

Federal Reserve Chairman Ben Bernanke said reflexively in a major speech in London in January: “The global economy will recover”. (He did not say how he knew.)

Embodying this principle, Ezra Klein wrote in Bloomberg.com (4 April 2012):

“I’m not particularly worried about the budget deficit. In fact, of all the major problems the U.S. faces, I’m least worried about the deficit. That’s not because we don’t have to get the problem under control; it’s because I’m pretty sure we will. Why? The budget deficit is unique: If Congress is unable to agree on a remedy, the problem goes away on its own. Would that all of our challenges were so cooperative.”

In similar vein, Mitt Romney recently told a morning roundtable of Nevada business leaders, “I believe the economy will come back. It always does”. We now have descended to the Little Bo Peep theory of economy recession: leave it alone, and it will come home, wagging prosperity behind it.

Many economists and pundits also feel that nothing can be done. Robert Reich wrote an article in Slate on 17 Feb 2012, entitled, “The factory jobs aren’t coming back”. His subheading was, “Romney, Santorum and Obama all vow to fight for U.S. manufacturing. It’s not just a lost cause; it’s the wrong one”. Leftwing economic pundits seem to agree that manufacturing jobs aren’t coming back, short of some kind of strenuous action intentionally designed to protect our own interests. And protecting our own interests isn’t nice, or politically correct.

The current intellectual environment supposedly derives from the lessons of the Great Depression. But do the defenders of ‘free trade’ really know what they’re talking about? As Paul Craig Roberts pointed out on the Mises Institute website (“Anderson Misses the Point”, 9 May 2012):

“Before we spout mantras and mount our high horse to defend free trade, let’s be sure that what we are defending is, in fact, free trade. As Ricardo recognized, the free flow of factors of production can be something different. Nothing will more certainly destroy the case for free trade than to defend an impostor in its name.”

In 2004, Roberts also stated (The Missing Case for Free Trade”, www.creators.com, 15 March 2004):

“Economists and pundits mistake offshore production and outsourcing for trade, whereas in fact they are merely the substitution of cheap foreign labour for expensive first world labour.”

It is not really free trade we’re fighting against, but capital flight – the investment of our productive capital in foreign countries.

In short, we’re not fighting the same economic war as during the Great Depression. Then, they were trying to control or limit actual trade – trade as normally conceived of, as classically defined. Our problem is not trade, but disinvestment. The situation which we need to control, or at least acknowledge, is that we are ceasing to produce goods here, using our own workers and capital. Instead, we contract out the production of goods to other countries; we manufacture by remote control, investing capital and locating production in other countries. The crucial issue is not trade in goods, but the contracting out, or alienation, or off-shoring, of production and capital investment.

The question is this – does classical economics endorse off-shoring as conducive to increasing wealth for our nation? We might seek an answer to that question in an illustrative example Adam Smith gave about the benefits of trade (Wealth of Nations, Book IV, Chapter II):

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

The two alternative scenarios Smith compares are producing goods at home, and buying goods produced somewhere else, by somebody else. Note that Smith says, “If a foreign country can supply us” cheaper goods; not, “if we can invest our capital in a foreign country in order to supply ourselves”. Smith says, “The taylor does not attempt to make his own shoes, but buys them of the shoemaker.” He doesn’t say, “The taylor buys his neighbour a cobbler’s bench, tools, and materials to start a shoemaking business, in order to provide himself with shoes”. He doesn’t speak of contracted-out production. Smith’s conclusions cannot be stretched to include the latter situation, where we invest all our capital in other countries, in order to produce goods which we then buy. The prudent master of a family would not sponsor production and deplete his capital in other households; to do so would enrich those houses but lead to debt and poverty for the prudent master’s family. We need to return to economic first principles.

The real keys to wealth

Adam Smith indeed noted that discouraging imports to ensure a positive balance of trade and thus ample reserves of bullion was not the key to greater wealth. He described the “mercantile” system thus:

“The two principles being established, however, that wealth consisted in gold and silver, and that those metals could be brought into a country which had no mines only by the balance of trade, or by exporting to a greater value than it imported; it necessarily became the great object of political œconomy to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the exportation of the produce of domestick industry. Its two great engines for enriching the country, therefore, were restraints upon importation, and encouragements to exportation.” (Wealth of Nations, Book IV, Chapter I)

After demonstrating conclusively that “restraints upon importation, and encouragements to exportation” were not key to increasing wealth, Smith identified the actual key principle in these words

“There is another balance, indeed…very different from the balance of trade… which, according as it happens to be either favourable or unfavourable, necessarily occasions the prosperity or decay of every nation. This is the balance of the annual produce [i.e., production] and consumption. If the exchangeable value of the annual produce … exceeds that of the annual consumption, the capital of the society must annually increase in proportion to this excess. The society in this case lives within its revenue, and what is annually saved out of its revenue, is naturally added to its capital, and employed so as to increase still further the annual produce.” (Wealth of Nations, Book IV, Chapter III, Part II)

The key to wealth is production which is greater than consumption, thus leaving a surplus of capital to invest in yet more production. In such a situation, the economy grows like a snowball, adding production constantly in a continuing cycle.

It follows that when our capital is invested abroad, it increases production there, and thus improves their “balance of the annual production and consumption”. At the same time, the balance of production and consumption here, in our own country, falls toward the red. When that happens, “capital must decay”, money must leave, and we must go into debt for what we consume:

“If the exchangeable value of the annual produce, on the contrary, fall short of the annual consumption, the capital of the society must annually decay in proportion to this deficiency. The expence of the society in this case exceeds its revenue, and necessarily encroaches upon its capital. Its capital, therefore, must necessarily decay, and together with it, the exchangeable value of the annual produce of its industry.” (Wealth of Nations, Book IV, Chapter III, Part II)

As David Copperfield’s friend Wilkins Micawber said:

“Young friend, I counsel you: Annual income twenty pounds, annual expenditure nineteen pounds – result, happiness. Annual income twenty pounds, annual expenditure twenty-one pounds – result, misery!”

It is thus with the “balance of the annual production and consumption” of a country. Smith might have paraphrased Micawber this way –

“Aspiring country, I counsel you: annual production greater than annual consumption – result, capital formation and prosperity. Annual production less than annual consumption – result, misery and impoverishment!”

We are experiencing massive disinvestment, which results in a decrease in our own production. Paired with increasing consumption (financed by debt), the combination is a recipe for economic destruction.

Poverty of nations

We see that the real central principle for increasing wealth is to produce more than you consume; invest surplus capital in increasing production; and repeat the process continually to make the snowball grow. We are not doing that. It stands to reason that if we contract out for goods we formerly produced, we produce less by that exact amount.

Manufacturing is what made our country wealthy and powerful. Yet the great delusion exists among many economists today that manufacturing is somehow inessential; that it is merely one factor of production among many alternatives, and that we don’t need to produce – we can just consume, pay others to produce, and go into debt to finance the difference. That is a catastrophic delusion.

Even The Nation, hardly a bastion of classical economic theory, diagnoses our problem semi-coherently, roughly along Smith’s lines. On September 2010, Thomas Geoghegan reported (“Ten Things Dems Could Do to Win”, http://www.thenation.com, 9 September 2010):

“Because we buy more than we sell, we have a trade deficit. So the books have to balance, right? Someone has to make up the difference…As long as we’ve so much trade debt, we have to figure that a distressing amount of any stimulus will go ultimately to re-employ the workers in China, Brazil, Japan and even Europe, who fill the gap between the ‘demand’ we pump up and what we actually ‘supply’. When we have a big trade deficit, it means that the more we prime the pump, the more we drain out this distressing amount of our national wealth…We have to bring back exports, so consumers and Washington don’t have to keep coming up with the cash to pay for the trade deficit…And we have to reward investment in manufacturing by lowering labor costs in what is left of our globally competitive industry.”

But the only prescription offered by Democrats in Congress, in season and out of season, is the so-called Keynesian one of spending massive amounts of money in order to ‘stimulate’ the economy. This ‘hair of the dog that bit you’ strategy – spending billions more, when we’re already trillions of dollars in debt –  is apparently the only idea Democrats have left.

Something must be done to increase production (and capital investment) here, and to decrease off-shoring. We need to restrain our companies from investing productive capital elsewhere, and encourage them to produce our goods here, on our shores, using our workers. Maybe that will require “restraints upon importation, and encouragements to exportation”, and maybe it won’t. Maybe things like tax policies and pressuring China to value its currency realistically will help bring back our factories. Many commentators have pointed out that our tax laws exert a perverse incentive, especially the corporate tax rates here as compared to the tax-rates on profits made in foreign countries, and also the tax for repatriating capital – but any attempts to change the tax laws have met fierce resistance. But whatever it takes must be done. The alternative is debt, recession, and poverty.

In an article discussing the Smoot-Hawley tariff (“Protectionism – The battle of Smoot-Hawley”, Economist, Dec 18, 2008), the author claims that a lack of foreign trade was not a cause of the Depression –

“[F]ew economists think the Smoot-Hawley tariff . . . was one of the principal causes of the Depression…[T]he volume of American imports had already dropped by 15% in the year before [Smoot-Hawley] was passed. It would fall by a further 40% in a little more than two years. Other, bigger forces were at work. Chief among these was the fall in American GDP, the causes of which went far beyond protection. The other was deflation, which amplified the effects of the existing tariff and the Smoot-Hawley increases.”

Among reasons for a fall in GDP was the loss of agricultural production due to the ‘dust bowl’ and drought. There was also a loss of capital for investing in production after the stock market crash. The point is this: one very real cause of the Depression was lowered GDP, that is, lowered production. The criterion of “production higher than consumption, leaving a surplus of capital to invest in further production” was not met, until World War II caused a surge in production of war materiel.

In some ways the situation is similar now: we have a lowered GDP (at least, lower than it otherwise would be) because we are out-sourcing, or contracting out, production to other countries. That means our own production is in decline, relative to consumption, and we are on the path to “poverty of nations”. We produce less and less, consume more and more, and cover the difference by borrowing massive amounts of money. We need to produce more, i.e., bring production home. What tactic is best for achieving that purpose is open to debate. But one thing is certain: inaction, or anti-protectionism, is no cure.

There is some slight indication that Obama discerns the problem. As recently as 30 May 2012, he proposed removing tax breaks from companies that off-shore production – specifically, the low tax rate on the foreign earnings of U.S. multinational companies. He said

“[P]art of building that broad-based economy with a strong middle class is making sure that we’re not just known as a nation that consumes. We’ve got to be a nation that produces, a nation that sells…[I]t still makes no sense for us to be giving tax breaks to companies that are shipping jobs and factories overseas. . . . So it’s time for Congress to take tax breaks away that allow for deductions moving jobs overseas and instead cover moving expenses for companies that are interested in bringing jobs back to America.” (Remarks by the President at Export-Import Bank Bill Signing, transcript at http://www.whitehouse.gov)

That shows that at least Obama remembers what he said when he first ran for President – that he would “stop giving tax breaks to companies that ship jobs overseas, and I will start giving them to companies that create good jobs right here in America”. Such policies would be a good start, though it would probably take fairly substantial tax advantages to outweigh the advantage of $4.50/hr. wage rates in countries like China.

Some commentators seem to have adopted a universal principle which makes cheap consumer goods the be-all and end-all of economic policy. For example, responding to Donald Trump’s call for a 25 percent tariff on Chinese imports, Peter Grier wrote (“Did Donald Trump endorse Mitt Romney because of China?” Christian Science Monitor, 3 February 2012):

“Walk into a Walmart, and look around. Everything’s made in China, pretty much, right? Now imagine everything suddenly 25 percent more expensive, due to a new US government tariff. Would you be happy? Us neither.”

You certainly wouldn’t be happy about that, unless you were out of work and you had heard that a manufacturing plant will be returning to your town, because the wage rates of China were no longer sufficient incentive to make our companies manufacture there. Then you might be happy.

An economy is more than just one factor or element. It is like a human body or other organism – all the systems must be functioning properly in order for the whole thing to be healthy. Choosing as an economic lodestar the goal of minimizing consumer prices takes no account of the fact that we need jobs, production and capital investment as well as cheap goods.

It’s not just economics

Nothing can be done to bring jobs back from low-wage countries, short of some action by the government to protect our economic interests – and it is a firm left-wing principle never to act in our own interests. But unless something is done in our own interests, manufacturing simply won’t return – not with such a massive differential in production costs. That means production will remain less than consumption, and we will continue down the road to poverty. We’re like the helpless Eloi – knowing we’re doomed, but unwilling to exert the effort to avoid our fate, because protectionist policies would make us Morlocks.

The anti-protectionists offer no insight or solution, but merely continue to emit pedestrian banalities, in a thousand articles like this:

“Unfortunately, Congress is suffering from a bad case of amnesia. Over the past several months, protectionism has reached a fever pitch with lawmakers in both Houses clamoring to attach their names to as many as 50 anti-trade bills…[A] new batch of economists are just as determined to turn back the rising protectionist tide…Free trade among and between people of various nations is the mechanism that allows producers to maximize their comparative advantage…[S]upport for free trade is virtually universal among reputable economists. More importantly, history has shown the devastating consequences of protectionist policies. Let’s hope Congress steps back from this precipice and rejects the misguided policies of Smoot, Hawley, Schumer and Graham.” (“Economists Against Protectionism”, Pat Toomey, Wall Street Journal, 1 August 2007)

Note that the title of Toomey’s article is “Economists Against Protectionism”. It would be helpful if economists were not just against protectionism, but also against disinvestment – against capital flight and the abandonment of this country by its business enterprises. Too many economists seem to have forgotten that their task is to help our economy prosper. They don’t seem to notice the decrepit, abandoned factories and other signs of decay and impending catastrophe. Rather, they band together in upholding ideological purity and defending the pieties of their trade. They are like medieval scholastics – isolated from reality, reasoning entirely within the artificial constructs and abstractions of their purely theoretical world.

In short, purists, pundits and mainstream economists oppose ‘protectionism’ not for merely economic reasons, but also because their quasi-religious creed forbids our country to act in its own best interests. Thus it’s not economic theory as much as their own personal sanctification that is at stake, and they will never agree to do anything to help our economy if it is seen as harming other countries’ economies. They will continue to admire the Emperor’s New Clothes of globalization, as our economy and society crumble. For the modern leftist, it seems that economic arguments and even reality itself are often secondary considerations.

LARRY EUBANK was a computer programmer and consultant for 25 years, and is now a freelance writer, and author of Why Marx Was Wrong (2011)

 

 

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