I am puzzled by the economic conundrum, that the USA finds itself in:
the USA runs huge trade deficits with China-all that stuff you see at WALMART and HD is made in China. We pay the Chinese with freshly-printed pieces of paper (dollars). The Chinese don’t buy anything from us, so they pile up dollars. The profligate US government spends like a drunken sailor on crack-we are running trillion $ deficits-we give money to places around the world, and we spend “stimulus” money on idiotic prjects like Kennedy family memorials (51 million this year). So th gov. has to borrow hundreds of billions of -which we do from the Chinese (which they are happy to do, because they have all those dollars). Now, we are told, there is a fly in the ointment-because of the recession, the Chinese are selling less to us, so they have fewer dollars, which means there are fewer dollars for the deficit-running US Treasury to buy. Hence the fiscal “crisis”.
Why don’t we just make stuff here, instead of importing it? Then we would have the dollars at home, to give to our profligate government. (and save a lot of oil-shipping all the junk from China uses a lot of energy!)??We would also have lower uemployment-which is a major cause of the deficits as well!
I am puzzled by the economic conundrum, that the USA finds itself in:
We don’t make stuff here because there are not enough people in America willing to make a career out of earning China-scale wages to make manufacturing profitable. And China doesn’t hold most US debt, Americans do.
“Making stuff at home” is economically inefficient, and makes everyone worse off. Look up comparative advantage.
We also don’t make stuff here because the Chinese currency (yuan) is deliberately “held” at a below-market value by the Chinese central bank in order to make sure Chinese exports stay cheap.
Shipping stuff across the Pacific is not really very efficient, and neither is it cheap. US workers wouldn’t have to accept Chinese wages to be competitive if the price of Chinese goods wasn’t artificially low.
Of course, when you factor in US pollution controls, higher employment costs (aside from wages), and so on, the numbers are a bit closer.
Comparative advantage doesn’t take transport costs into account, among other things.
Several years ago my brother was assigned the task of buying a large number of logo imprinted t-shirts for his company. He wanted to buy locally but the best American price he could find was $3.55 each plus shipping … and that was from a friend in the business. He ordered them from China; a container full of custom imprinted t-shirts delivered to Virginia for 85 cents each. Sometimes it is tough to buy American.
I think a big part of China being hesitant to purchase US debt now has a lot to do with their fear that that debt will be paid back with highly inflated dollars.
Yes it does. Comparative advantage considers ALL costs. Or looked at another way - proximity to markets or to major shipping routes is an aspect of comparative advantage.
Comparative advantage doesn’t leave anything out, because it’s not an artificial construct like GDP or other economic measures - it’s merely a term used to describe the fact that labor and value creation is not fungible, that opportunity costs are not the same everywhere. It can be applied to countries, individuals, or anything in between.
There is a difference between comparative advantage and absolute advantage which is critical. Absolute advantage is the measure of whether one supplier can produce and deliver a product for less cost than another. But comparative advantage considers opportunity cost, which is a crucial difference.
Let me give you an example: Let’s say Bob can make $600 worth of tables per day, or $400 worth of chairs. Dave can only make $300 worth of chairs, and $100 worth of tables. Should Bob ever trade with Dave? After all, he’s more efficient at making both tables and chairs.
But look what happens after 10 days if Bob spends half his time making tables, and half his time making chairs - He’s got $3000 worth of tables, and $2000 worth of chairs, for total value created of $5000. Dave, on the other hand, has $2000 worth of tables and chairs. Total value created between them: $7000.
Now let’s say Bob focuses on tables, and Dave focuses on chairs - After 10 days, Bob has $6000 worth of tables, and Dave has $3000 worth of chairs, for total value created of $9000. A $2000 gain. Now Bob and Dave can trade tables for chairs, and both of them come out ahead.
Bob gained by trading with Dave, even though Dave wasn’t as good as Bob at making tables OR chairs. This worked for Bob because the time spent making chairs cost him more in lost table-making opportunity than he saved by making the chairs himself.
Note that in this description I didn’t say anything about shipping cost - it doesn’t matter. From Bob’s perspective, all he has to know is the price of Dave’s chairs. Now obviously, if shipping costs are so high that they raise the price above the opportunity cost, then Dave and Bob lose their comparative advantage with each other and no trade will take place. But that’s just an aspect of the measure of comparative advantage, just as electricity cost, employee availability, natural resources and other factors are part of comparative advantage. There’s nothing special about transportation that makes it be ‘excluded’ from calculations of comparative advantage.
I’m curious as to what else you think is left out of comparative advantage?
Transport costs are almost negligible these days. Find the thread in which Una talks about importing foreign coal to run power plants next to U.S. coal mines. You can find a million examples of shipping things across oceans that would seem to make no sense economically. Fresh fruit. Bottles of waters. It’s much cheaper to send stuff intercontinentally than intracontinentally.
As for the OP, the Chinese are amassing dollars through trade but they don’t sit there in piles. Lots of those dollars come back to the U.S. to buy the treasury bills that are funding our economy. (And increasing the deficit, but that’s a long-term issue.) “there are fewer dollars for the deficit-running US Treasury to buy.” Huh? This is opposite to the way things work. The Treasury does not buy dollars. Why in the world should it? It issues T-bills (simplified) and offers to pay interest on them. All those people out there who say we are printing money to fund the deficit have it wrong. Some money is being printed but that’s a small piece of the total and not at all what the Treasury is doing. Printed money doesn’t increase the deficit.
And the Chinese are the biggest spenders on construction in the world, which makes for huge spending on raw materials, specialized parts, architects and engineers, and other goods and skills that are only available in other countries. That money flows back around the world. Very much like the U.S. about a century ago.
And also just like a century ago, manufacturing moved to the country with the cheapest and most efficient labor and lowest costs. That was us then. It’s not us now. Manufacturing is never coming back because we’ve priced ourselves out of that market to create our middle class. Other countries learned from that and they are copying us. China, BTW, is losing manufacturing jobs to other Asian countries because its workers are now paid higher than in many other countries. That’s what a global economy means.
Pollution and pollution control, labor standards, security implications, intellectual property rights…
None of those are excluded. In fact, lower labor standards is one of the reasons 3rd world countries HAVE a comparative advantage. The U.S. has a comparative advantage over Canada in labor in some cases because Canada’s workforce is more unionized and therefore more expensive. That gives the U.S. an advantage in those industries where Canada’s labor cost is higher.
The other things you mention, such as security or intellectual property have nothing to do with comparative advantage at all. They are simply social choices. I think you’re trying to take a category of things called “Why I don’t like trading with foreign countries” and trying to use them to discredit comparative advantage. They just don’t apply.
You could decide tomorrow that all workers are entitled to free daycare for their kids, and that does not mean that countries who don’t have that policy somehow are not competitive any more. In fact, such a decision would hurt the U.S.'s comparative advantage in some goods by raising the cost of labor.
Security and intellectual property certainly have economic implications. One of the big problems with setting up a factory in China to produce your proprietary technology is that in six months there will be another factory down the street making knockoffs of your product.
The security implications are longer term, but consider this: if the current exodus of manufacturing jobs (and capacity) from the US and Western Europe continues, eventually it will affect our capacity to produce weapons and military vehicles. Defense contracting is not normally a profitable venture in itself; you need civilian orders to keep production lines humming during peacetime. If Lockheed moved its facilities to Harbin, what do you think would happen to US air defense capability? More importantly, what would happen to Chinese air capability?
The labor standards and pollution issues are not, strictly speaking, economic issues, and I’m not saying that building stuff here is cheaper because of them; I’m saying the opposite. The point is that considering where to build your widget based solely on comparative advantage is short-sighted and requires you to abandon moral considerations entirely.
Comparative Advantage is not synonymous with ‘economic implications’. Intellectual property is a matter of international law enforcement. Security implications are a completely different subject.
I see you have changed the subject, and are now saying that Comparative Advantage isn’t the only factor to consider in trade. That I can agree with. I was taking exception to the notion that Comparative Advantage as a concept was somehow invalid because it did not account for certain other factors.
I didn’t change the subject at all. I simply expounded on the things that have to be considered in conjunction with comparative advantage- and which I’d mentioned in my prior post.
I’m curious as to how you could interpret that as a “change of subject”.
My originally comment was simply a response to muttrox’s post, which implied that comparative advantage is all that should be considered when deciding where to build widgets.
Since international law enforcement is currently doing little or nothing to enforce intellectual property rights, your point is moot.
>Why don’t we just make stuff here, instead of importing it? Then we would have the dollars at home, to give to our profligate government.
As others have mentioned we are most likely too poor to buy the things we make, for a variety of reasons.
As far as money goes, well, money is a commodity like anything else. Why shouldnt we print more? Selling bonds or releasing more cash into the world has an effect. If that inflationary effect is not as bad as the alternative, namely going broke, then its the smart thing to do.
As far as no one buying USA debt. I dont think thats true. The US has no trouble selling bonds and the buyers get 3.5% with little risk. Why wouldnt you buy a bond from the US? Every nation on earth has an incentive to keep the US afloat because all their economies are in some way tied into ours.
I think this recent Ron Paul led isolationism and xenophobia is getting out of control. Isolationism is economic suicide. Look at closed economies vs open economies. Cuba and North Korea arent doing so good. Thats the model these isolationists want us to implement. You cant move to that model without drastic changes in the quality of living. No one wants that.
>the Chinese are selling less to us
Thats because global demand has lowered. That has nothing to do with bond ownership or debts.
>Hence the fiscal “crisis”
No. The financial crisis exists because of securitized mortgages sold with ratings way below their actual risk and a sudden loss of a trillion dollars due to foreclosures. This has nothing to do with China or the dollar or “making more stuff at home.”
>“stimulus” money on idiotic prjects like Kennedy family memorials ($51 million this year)
Thats what a stimulus does. It creates work to keep people employed. You may not like that project but the people it employs sure do. They probably by their supplies from the company my uncle works at and might buy their tech or services from my company. The idea here is that spending on projects is a tide that raises all boats. Part of managing a recession is keeping people employed. That exactly whats going on here. This money isnt being destroyed, its going to be spread all through the nation’s businesses and into the pockets of ordinary Joes like you and me.
No, it is not. Money is an accounting mechanism. It has no intrinsic value.
You can print all the money you want and still go broke. Money is not wealth. Ask the people of Argentina or the people who lived through the Wiemar Republic in Germany.
Inflation is very destructive. It’s a hidden tax on savings. It distorts prices and lowers the efficiency of trade. It makes long-term planning difficult.
The Chinese have been selling off long bonds, and moving into short term positions, precisely because they no longer think the long term risk is low. They are calling for the world to move off the U.S. dollar as a reserve currency because they no longer trust that it will be stable.
And the notion that people will always buy your bonds is simply not true. Two days ago the U.K issued a bond auction and couldn’t find buyers for all its bonds. A couple of decades ago, New Zealand had to drastically cut its spending because it could no longer find buyers for its bonds. Last year, the U.S. treasury couldn’t clear a 30-year bond auction at the price it wanted, and it wound up costing the treasury something like 175 million dollars. Bond auctions are by no means a fait accompli, and reckless government monetary policy will certainly have an affect.
Ron Paul is an isolationist? Being a Libertarian, I’d have thought he was for free trade. Is that not the case?
>No, it is not. Money is an accounting mechanism. It has no intrinsic value.
Nothing has an intrinsic value. Even gold has a value only because there’s a demand for it because homo spaien has a thing for shiny things. All things are worthless matter without market demand.
>Ask the people of Argentina or the people who lived through the Wiemar Republic in Germany.
Inaccurate comparison. The US as an economy and its current situation has nothing to do with either of those scenarios. Yes inflation is real, but inflation is manageable.
>And the notion that people will always buy your bonds is simply not true.
Actually it is true and I just linked to proof to it. Are there ups and downs? Yes. Welcome to what we call ‘a market.’
Ron Paul isn’t a Libertarian. He’s pro-free trade when it suits him and anti-free trade when that suits him better (usually, when he wants to win some populist points by claiming there’s a conspiracy to create some sort of supranational North American state). He’s also perfectly happy to ignore the usual libertarian social freedoms platform when it suits him, which is nearly all the time.
Oh, its also worth mentioning that the fears right now are not inflation, but deflation, which could be just as bad.
I was going to write a long post, but Sam seems to have said everything I was going to do better than I would. I think it’s just because I defendedhim in the Pit.
I did not mean to imply that. But as Sam has pointed out many of the considerations your brought up are part of comparative advantage, not separate factors.
Ron Paul is extremely useful as an economic indicator. If you find somebody who agrees with any economic statement Paul makes you can fairly eliminate listening to that person on economics ever again.
Not so. Wages used to be paid in salt, and that certainly has value without market demand. Gold has intrinsic value, not as inflated as market trading makes it, but it would still be used even if it was forbidden as a trading commodity. What can you do with those fancy-printed bits of fabric-paper we call money if everyone decides it’s worthless?
Its situation right now might not have anything to do with it, but that doesn’t mean it won’t in the future. Inflation is most definitely not always manageable. The US may just be on course to find that out.