Global Competition

We need to learn how to compete globally. If all countries do not play by “free market rules” you don’t have free markets. I believe in free markets and I concur with Milton Friedman that free markets, in order for them to work properly, must have a referee so that all players are competing on a level playing field. Each player in the market must not be allowed to destroy the market and turn it into an oligopoly. If this happens society loses. Capitalism is here to serve society. Society is not here to serve capitalism.

A problem with global markets is there is no strong referee to punish countries that do not abide by free market principles. It is not easy to force China not to manipulate its currency. It is difficult to require China, South Korea and Japan to remove the tariffs placed on imports of automobiles from the U.S.

Below is an excerpt from an August 4, 2012 article in the New York Times, In Pursuit of Nissan, a Jobs Lesson for the Tech Industry?. In order to give the American worker a fair shot at good jobs we need to consider such national strategies.

“Apple products remain expensive; the latest iPad, for instance, costs about $760 in Brazil, compared with $499 in the United States. But because those devices are made in Brazil and lower tariffs are charged on parts used to assemble them, Foxconn and Apple are pocketing larger shares of the profits, analysts say, offsetting the increased costs of building outside China.”

This is a way of redistributing income. Make products within the U.S., subsidize the producer by reducing tariffs and other taxes and provide good paying jobs to workers. The result is higher prices for goods and services.

As someone who believes in free markets, for years I have resisted doing such things. A free market mentality may not work as well when dealing with other players, other countries, who are willing to trample over the concept of capitalism. Here are some comments made by Romney concerning China’s approach to competing.

Stimulate, Export, Plan & Cut Military

Stimulate, export, cut deficit and military and restore equality are all related..

We are in the fourth year of a Great Recession that could have been a depression. The end is still not in sight. The net worth of all Americans was affected negatively, as has their optimism and willingness to go on spending binges as they have over the last several decades. To make the recovery happen, part of the answer is to stimulate our economy by investing in our future including infrastructure, education and the internet.

 Our ability to presently stimulate is somewhat limited by the debt burden our country is currently carrying as depicted by the chart below. If we cannot show how we can afford to stimulate now and implement a debt reduction plan in the near future, we could be facing the same problems as Greece, Spain and Portugal.

Ccircumstances after World War II , when we were the last modern economy standing, no longer exist. We were ready to convert to a peacetime economy and ready to help the remainder of the world to rebuild.

Today there are many nations in the world competing for the same consumer. Further, the American consumer is not willing and able to consume as he did in the past. He cannot use the equity in his home as a piggy bank. Restraining the consumption binge is a good thing; however, it means that we must find another engine for our growth rather than the American consumer.

The new engine is exports. The rest of the world is rushing to catch up to our life style and wealth. They want to consume and someone is going to fill their desire. People throughout the world are looking to increase their consumption of goods and services. If we do not meet this demand there are other nations clawing to fill their needs. These consumers are in China, Iran, Brazil, Russia, Southeast Asia, India, Pakistan, Eastern Europe, South and Central America, Africa and the list goes on and on and on.

Exports will only work if there is indeed free trade with the rest of the world.

Romney is right. Today China is not practicing free trade. China is artificially keeping its’ currency low. As a result, it is more expensive to buy goods from the US then it should be. Chinese goods for Americans are artificially cheap. This results in Americans, and the rest of the world, buying more goods from China then they would if the Chinese currency was valued to the market. At the sme time, our goods and services would be cheaper for the Chinese consumer.

The US has been weak-kneed on this issue. If we are going to get back to prosperous times, we need to address the currency issue. This is not going to be easy. China is a major creditor of ours. We all know how much power and influence our lender has over us in our personal lives. China has that same influence over us as a nation.

Other free trade issues need addressing. For example, Japan places a very high tariff on cars that we export to Japan. This also has to change.

After World War II, the United States defended the free world at great financial cost to this country. We also assisted the free world in getting back on its economic feet. That was then; this is now. We are proud of what we did to help the world to recover from the devastation caused by World War II. We were equally proud of what we have sacrificed to help our allies get back on their economic feet. What we did defines who we are. We are a caring, loving and giving people. We would not want it any other way.

Many of the countries that we have helped, both economically and defensively, are now some of our biggest economic competitors. If we want to prosper, we can no longer subsidize their defense and accept unfair trade restrictions. It is unfair of them to expect us to continue doing so.

China’s Bubble!

Just about all experts believed real estate was exempt from bubbles. Invest in real estate and nothing can go wrong. The theory relied on banks to make rational decisions about who they would lend too and they would be properly regulated. The secondary market and cooperative rating agencies allowed banks to unload risky loans; so they thought. When the loans stopped performing so did real estate

China now appears to have an over supply of real estate, relative to its price, given the fact that the world has slowed down its purchases of goods and services produced in that country. The result is an asset not providing a reasonable return or no return at all.
China will probably weather this storm because of its high level of reserves. It can either sell foreign debt or not renew it when it comes due. Either way, this spells more trouble for the U.S. and Europe.

More Exports Equals Less Control

We need to increase our exports and learn to protect ourselves from downturns in a global economy. This will require diligent, but not excessive, regulation of free markets and enforcement of anti-trust laws. It is the later that is the major problem… 
It will be a long time before consumption levels in the United States reach the same levels  of the pre-2008 era. Housing values are still recovering and much of the consumption was financed by consumers piling on too much debt as a result of the sub-prime debacle.Those days are over. Our own consumption must be supplemented by exports to other countries.
The world is rushing to catch up to our life style and wealth. They want to consume and someone is going to fill their desire. If we do not meet this demand there are other nations clawing to fill their needs. These consumers are in China, Iran, Southeast Asia, India, Pakistan, Eastern Europe, South and Central America, Africa and the list goes on and on and on
I believe in America and I believe we will learn to compete economically with other nations. However, while increasing our exports we will lose some of our ability to control the level of swings in our economy. We were able to counteract some problems caused by the depression of the 1930’s by government infusing money into the economy by repairing infrastructure and creating programs such as the Civilian Conversation Corp and by the significant increase in demand brought about by the unwanted World War !!. Relying on exports for a larger share of our prosperity means that a good part of the demand being filled by American workers will be from foreign consumers.The old ways of combating recession, the government pumping up domestic demand, will not work.
Globalization will require more cooperation between government and free markets, rather than less.

Stop Consuming

Where is the needed demand coming from to create sustainable jobs?

Families in this country were rocked by the 2008 meltdown of the finacial markets and their resultant net worth. Not only did the value of their homes fall, so did the value of their retirement funds with the freefall drop of stock markets. The stock market recovered and home prices are still falling.

It is a mistake to believe we will return to the days of borrow and consume anytime soon. We shouldn’t. We consumed too excess. If this country is going to remain the super power that it is, it must consume less and save more. If this is true, where will the jobs come from?

We must get better at exporting. Germany does it, why can’t we? We also need to invest in our future including broadband, education, high speed rail where there is demand, fixing our roads, bringing back our free markets and others. We should not be spending for the sake of spending, but rather for the sake of our future. We need free markets.