If All Else Fails, Blame China

I’ve spent the last year educating myself about economics. Why economics? Simply put, government bureaucrats use the Ignorance of the Masses to push through economic policies which superficially sound well-grounded yet have dangerous and harmful downstream effects. Being ignorant myself of economics, I did recognize many U.S. foreign and economic policies were damaging in the long run, I couldn’t find the words to express my concern, nor explain why the policies were damaging. Saying “something is this way,” is not as powerful as saying “something is wrong due to these 5 factors.”

On Tuesday, October 4th, U.S. and global media outlets (Reuters) announced plans by the U.S Congress for the design of a bill to pressure China to modify the value of the Yuan, the Chinese currency.

According to Reuters, the U.S. Senate voted to open debate on a bill allowing for the imposition of tariffs on consumer products entering the United States from countries deliberately undervaluing currencies.

People may read right past that comment; I own bias is people do read right past “tariff” comments, not understanding the implications.

A tariff is a tax placed on a good entering a country. The country making the good does not pay the tax. We do; American consumers pay the tax. When we decide to buy a Blu-Ray player, LCD or Plasma TV, the price we pay includes the tariff. The cost is passed to us. Essentially, as we notice prices increasing, we decide not to buy, or we decide to buy a cheaper competing product. But, we pay the price, using more of our income to buy consumer goods.

“What is wrong with that?” You ask. “Maybe if tariffs were high enough, jobs would reappear in the United States!”

Maybe. Just remember the tariff is a social tax, a form of Socialism, designed to ‘level out the labor market’.

“How can you say that? That sounds like crazy-talk!”

A tariff is a method governments have of manipulating the price of consumer products ABOVE the fair market value. For example, say Taiwan produces a Blu-Ray player and your price at Wal-mart is $128. Now, say, Taiwan also undervalues it’s currency. According the U.S. Congress, the Blu-Ray player will have a tax added to the price. Now that Blu-Ray player will cost you $140. You’ve just been removed of $12 of your disposable income because the Congress does not like the way Taiwan manages its money. And, more importantly, the fair market value of that device has now been manipulated. You might be cool with that; I just want you to know you are out $12.

The Better Question: Why Does China Undervalue Its Own Currency?

This is the question I wish someone would ask, simply because I want a public figure to validate my own knowledge.

OK, so the controversy is this: China keeps the Yuan cheap relative to other currencies so products made in China are less expensive and people around the world buy more stuff. Right? People in Germany, and France, and Sweden, and Canada buy stuff made in China because the stuff is cheap. Buying inexpensive stuff means you have more utility with your money, you can do more things with your money.

Somebody has to make the stuff we buy. Enter the Chinese worker. China has an enormous labor market. China has a population of about 1,300,000,000 people. About 50% of those are workers, or about 650,000,000.

In other words, the Chinese labor force is more than 2x’s as large as the entire population of the United States, and larger than the entire population of Europe.

Most of these workers are barely literate, illiterate, or working their way through school to become fully educated. But to find work for over 1/2 a billion people is an amazingly complex task.

An easy way to provide employment is to undervalue your currency. If products made in your country are cheap compared to elsewhere, you can sell more, which means making more, which means employing more people.

From the Chinese perspective, an undervalued currency makes sense because keeping workers employed and working is essential.

I envision if China decided to allow their currency to “float” and operate against global financial markets as other currencies, Chinese economic growth would drop from the 9-10% range experienced now, to 4-5%. The U.S. Congress would say 4-5% is acceptable. The Chinese workers would riot in the streets from being unemployed. I’m not sure I want 650,000,000 people pissed off at me.

What About the United States Currency?

The U.S. Congress telling China to revalue the Yuan comes off as disingenuous. The U.S. dollar is slightly undervalued against the European Union’s Euro. The European Union has voiced displeasure over the value of the U.S. Dollar as a low dollar against the Euro makes U.S. goods cheaper in Europe. On the other hand, European goods are more expensive in the U.S., thus we don’t buy as much.

But This Controversy Is About Job Creation!

In part, no doubt there is some truth to the Job Creation argument.

Even the Job Creation Argument needs examination, though.

Do this: visit the web site Learner.org, and watch the video, Guangdong: Globalization in the Pearl River Delta. Fast-forward to about the 7:00 minute mark. Those workers in the video are making shoes for Nike. Sitting at a shoe press for 8-10 hours per day.

That is the job the U.S. Congress wants you to have, sitting at a shoe press, the vertebrae in your back calcifying from hours of hunched-back sitting.

Really? That is the job Congress wants to bring back to the United States?

My point is this:

For the United States to maintain a technological advantage, to maintain a standard of living our parents have worked hard to achieve, we cannot cling to labor market philosophies and policies better suited for the 1950s. Our U.S. labor market needs to adapt to for the 2050s, and beyond. Those brute-force manufacturing jobs are better suited for countries with necessary manpower and wage flexibility. The United States should leave those jobs behind and focus on the future, not the past. We seem to be riding a horse into the future, seated backwards in the saddle, lamenting what has come before.

Manufacturing jobs will always be present in the United States. Making cars, trucks, washing machines, dryers, heavy equipment, items both large and small, simply makes economic sense.

However, some jobs really can go somewhere else, and I argue, the U.S. benefits by having those jobs leave.

Technorati Tags: education,labor,globalization,congress,currency,employment,jobs,unemployment

The Complicated Geography of Labor

 

Americans are an ignorant lot. Though pained to state this, I believe that by-and-large Americans are pretty ignorant. Ignorance does not mean “stupid,” ignorance simply means, “uninformed.” Lest you think I am above being ignorant myself, I am not. I realize I am ignorant, though, and the more I learn the more I realize the depths of my own ignorance.

Americans are becoming more ignorant, I fear. Despite the increasing prevalence of technology in our lives, we are becoming increasingly fragmented in our knowledge. The Internet allows us entry into an enormous world of information. Sort of. Sifting for Truth on the Internet is very much like searching for a precious item in a New Jersey landfill. And, what is “Truth,” anyway. Let’s avoid that debate.

Politicians, and Corporations, deliberately or unwittingly, take advantage of our ignorance. Our lack of knowledge works to their advantage, and against ours. Also, our politicians are not immune to being ignorant or vacuous. Many of them seem to lack wisdom to truly understand dilemmas faced by the United States, especially when it comes to Unemployment, Employment, Labor, and Education.

As a result of their lack of knowledge, wisdom, or, perhaps, malevolently they hide their knowledge knowing that they can leverage the ignorance of their districts of their own benefit, politicians pander to Americans, furthering economic myths, and establish bad economic policy.

Here is an example of what I mean by saying “politicians pander.” A politician who says, “We need to bring jobs back to America,” might illicit a nice response from his constituency, and people will rally around a politician who proclaims that the “government needs to protect American jobs and punish those companies that move manufacturing to other countries.” This is pandering, potentially bad economic policy, potentially bad for America, and bear with me and I will explain why.

For this essay, my focus is manufacturing. Specifically, shoes. I am really discussing Globalization – the interconnectedness and dependence among various people, places, things, and ideas driving global development. But I want to couch my discussion of Globalization in terms of shoes.

For the record, I do not view Globalization as a good thing or bad. Guns are neither good nor bad; their use can be used for good or ill. Same as money. Money can be given to charity, or used for buying drugs, or people. Question the motives of anyone who says “globalization is _____” (bad / destructive / harmful / etc.) That person has an agenda and is distorting information for his/her own purpose.

Let’s get started.

Nike’s international headquarters is located in Beaverton, Oregon. In 2010, Nike made $19 billion in gross profits from its different business ventures. Nike has over 30,000 employees working in 160 countries. Including their suppliers, shippers, and retailers, Nike employees over 1 million people world-wide.

Nike does not make shoes, per se. Nike designs shoes. Nike sells shoes. Nike markets shoes. Nike contracts with factories around the world to build their shoes. Nike does not own the factory. Nike simply finds a shoe factory, perhaps in Brazil, China, Viet Nam, and contracts out the job of building the shoes. Nike may help find the raw materials for building the shoes. Nike might assist in finding rubber from Malaysia. Find cotton from France, or the United States. Locate leather from Brazil or Argentina.

Nike does not hire the labor that works in the shoe factory. Those workers are hired from local pools of labor by the managers of that shoe factory. Those local workers need employment and are willing to work. Willing to work for $5-$10 per day. Those workers do not protest for vacation days. Generally. Those workers do not protest for health care, for dental plans, for eye care. Those workers do not protest for retirement plans. That is the fact on the ground. For the time being. We may see changes in labor in Southeast Asia over the next 5 years or so.

Yes, yes, you say, you know that. People work for 1/10th of the wages of an American. In the U.S., our Minimum Wage is $7.25 per hour. The minimum average wage in Viet Nam (2009) was $1 per hour for an 8-hour day.

Now, place yourself in the shoes of a business owner. You are going to pay the same transportation costs as your competitor. You are going to pay the same raw material costs as your competitor. Those are economic truths, not my truths. Raw materials like cotton, leather, rubber, etc. are traded on global markets. The global markets determine those prices. You and your competition, Reebok, Asics, New Balance, will be buying from the same pool of resources.

You can try to find better labor costs, however. If you were building shoes in the U.S. you were paying one employee $54.38 per day to build shoes. In Viet Nam, you could pay almost 7 workers for one day’s work for the same job, and arrive at the same product, with 7x’s as many shoes. And, as the case is, those workers are not yours, you do not have to worry about them. Remember? You are contracting with a factory in Viet Nam. You will pay that factory based on the shoes produced. In turn, that company will pay workers.

 

Your U.S. workers will cry “foul!” and complain, and protest, and picket your office.

You, on the other hand, will still employ people, designers, engineers, chemists, advertisers, salespeople, lawyers, accountants, etc. Plus, you will also indirectly employee people around the world. In other words, skilled employees that make decent money.

People who buy your shoes will be happy because they will still be able to afford to buy your shoes because you have managed to control the overall cost of your shoes.

Consumers, you and I, push companies to relocate to find cheap labor. When we buy devices, clothes, and shoes at Wal-Mart, or Target, or CostCo, we are telling Nike, Reebok, Levi, Lee, Magnavox, etc., we want cheap clothes and cheap electronics.

By preventing the movement of manufacturing jobs abroad, the cost of our clothes, shoes, DVD players, iPhones, Droids, XBoxes, LCD TVs, will all go up.

“Yeah, but paying people high wages to assemble that stuff will put money in their pocket to buy those things!”

No, not really. Remember the cost of paying those American workers is going to be passed along to us, the consumer. If a company could save 90% of its labor costs by shifting the production to Viet Nam, and chooses not to, well, that is not really in the interest of the company, is it? That company is not maximizing capital, human capital, therefore not acting efficiently. The costs of labor will be passed along to us, the American consumer. Prices will inflate to match the increased cost of labor, thereby putting these devices, clothes, etc. out of reach of many people aka The Middle Class.

Another bad side effect is Inflation. If wages did go up, then companies tend to increase prices. Companies feel people can afford to pay more, since they are making more money. And, another economic “law” is that as the amount of something goes up, its value goes down. Put more dollars into circulation, the value of a dollar decreases and what you can buy with that dollar goes down.

Goes like this: Say all Americans gets a 20% pay increase. Sounds good, right? Wonder Bread, seeing this, thinks, oh wow, everyone is making more money now. Let’s sell a loaf a bread for $1.20, instead of $1.00. Wonder Bread bumps the price of bread up 20%, not because their costs increased, but because consumers can now afford to spend more.

“No fair, that isn’t right! Wonder Bread just negated my raise because now my grocery bill just went up 20%! Government, you need to stop this!”

What are you, a Communist? Who are you to tell Wonder Bread how to run their business? What business is it of the government to tell Wonder Bread what they can charge for bread?

Maybe the good isn’t bread, it is a Blu-Ray player. Let’s revisit the earlier notion of passing along costs of production to the Consumer, you and I. For the sake of argument, consider from before the example of the U.S.-made Blu-Ray player versus an identical Blu-Ray player available from China.

The increase in cost of that Blu-Ray player from being made in the U.S. with U.S. wages now is $200 versus $150 for the China-made version. Now, if you are standing at Target, and two equal Blu-Ray players are shelved beside each other, and the U.S. Blu-Ray is $200, and the China Blu-Ray is $200, which one are you going to buy? You also think, if I save $50 I can go back and buy 5 of the Blu-Ray DVDs off the $10 rack.

History has already proven what Americans will do. That is why shoes are made in China, and TVs are made in China. In the 1970s and 1980s, Americans opted for the cheaper devices made in foreign countries over the same products made in the U.S.A.

“Yeah, the government opened up the trade floodgates! It’s the damned <insert political party here> fault!". They are the ones who destroyed manufacturing!”

Yes, you are correct. The U.S. government opened trade with China, and Japan, and Taiwan, and Singapore, and India, and Bangladesh, and wherever. And, you benefited. You ran right out and bought that LG LCD TV, that XBox, that iPod Touch, that microwave oven. Or, your parent’s did; or, grandparents. Doesn’t matter. Americans saw the value of the products, the savings they were able to achieve, and how they could better use their money for other things.

Let me get this straight: you would rather pay an extra $50 for that Blu-Ray player to keep an American employed? In other words, you want the U.S. government to place a $50 dollar tariff on the China-made Blu-Ray player so that the cost is the same? $50 is a lot of money. Are you sure you would do that?

If you answered “Yes,” then you are advocating for government involvement of Labor, which is primarily a platform of the Democratic Party. Are you a Democrat? Then, you are also advocating for tariffs to protect domestic economics, throwing a wrench into Free Market economics, and that is a Socialist tenet. Are you a Socialist?

Listen to the news, and listen to political pundits from all parties. Politicians speak from all sides of their mouths. They want to keep costs down, yet prevent jobs from going off-shore, yet want to reduce education spending that builds a healthier economy. Right …

And, Americans seem to want it both ways, too. We want cheap phones, and cheap TVs, and cheap cars, and cheap whatever. Yet, we also claim to want good, high-paying jobs. Well, remember folks, that someone has to pay for that high-paying job, and that someone will be you and I.

Americans need to be aware of the repercussions of their “calls to action.” Like “fix unemployment!” or the cry for “we need jobs!” That is why you need to stay awake in Microeconomics and Macroeconomics; this is where we learn about these topics. But most of us are like, “man, these supply and demand curves are freaking boring.”

Yeah, well ignoring those Supply and Demand curves allow corporations and politicians to work their magic at our expense.

And, ignoring your math class allows corporations and politicians to run a numbers games against Americans as our ignorance grows.

We have jobs, 3.5 million that have gone unclaimed.

Those jobs have gone unclaimed, in part, because Americans do not pay attention to educating themselves to the Job Vacancies or Employment Growth Sectors. We educate ourselves for stuff that sounds fun. Like “Sports & Leisure,” or “Journalism,” or “English.” There is nothing wrong with those degrees in and of themselves. The U.S. doesn’t need them right now. We need computer programmers, nurses, health care workers, chemists, engineers, database managers. Those are good jobs. High paying jobs.

Educated people will always have a distinct advantage over those that have fewer skills or lack formal education.

As the Election Season begins, we will have to listen hard and well to sift through the BS from all sides. Take nothing said by anyone for granted. Do not fall victim to Confirmation Bias, believing what you hear or read from people who seem to think as you do. That is borderline Fascism.

Question.

Technorati Tags: education,unemployment,nike,reebok,globalization,democratic party,republican party