Stop all welfare and remove the minimum wage laws and we will all be on the streets looking for a 25 cent tip like people in the developing world. But that is not a solution any sane person would recommmend, at least no sane Democrat. But that is how we can return to near 100% employment. Instead we raise the minimum wage, add new regulations to make it more difficult to hire people, arrest people who illegally sell hot dogs on the street or work “under the table”, and wonder why the unemployment rate is so high.
What economists do is to try is to figure out what is going to happen economically when new laws and other influences change how people spend money. If I am right, and you will have to make your own decisions, our quality of living is not likely to improve, but that of the developing world will continue to rapidly improve unless hampered by politics, local corruption or other disasters in their home countries. So the majority of the open, free markets will grow rapidly while our market stagnates. Their quality of life will improve dramatically and ours will not improve at all.
Economists TRY to predict future events more like geologists predict earthquakes than like weathermen. Unlike weathermen who can predict some weather in the short run, economists are always wrong statistically speaking. All economists can do is influence economic policy, which is a good thing because Americans insist on passing laws to regulate everything. Economists know certain things have caused disaster for the economy historically, and they convince government to pass laws to avoid those bad things. The trouble is that keeps us convinced that we need laws to prohibit and permit practically every action we decide to do. You need five permits to sell a hot dog on the street almost anywhere in America.
Economic trends that lead to economic disaster or economic growth are evident to anyone looking at history. We will talk about those obvious trends and policy here. So many things influence the economy, however, that predicting the future is impossible. How much more difficult when we have new laws and policies that govern our economy. Now days it seems the entire economy is regulated by law through tax policy and television and radio ads to try to influence our spending habits.
Historically, in the US we wanted more prosperity, more people making a living wage, so we instituted minimum wage laws and other labor reforms. It worked pretty well since the standard of living of the poorest of people raised, and income differences between the 1% and the rest of us diminished. And we instituted some welfare systems so that those who can’t work will receive money from those of us who can. More recently, however the trends have been different and more difficult to predict as we add new laws and regulations for insurance, the environment, and the overall bureacracy we all depend upon.
I am arguing, as economists do, that now there are new dynamics. However my argument is that the government itself, and all the economists, are stifling the economy on a grand scale that has not been seen before in history. No country in history has legislated and imprisoned its people like the US Government is doing today.
No one predicted the housing bubble which was supported by tax laws and other strong government influences. Banks held so much money backed by our homes. Then the homes suddenly lost value and the banks , and the next economic trends are likewise sure to be seen by future economists as obvious results of our economic systems.
In order to simplify the situation we might examine the simplicity of the economy noting that it works like you or I work. This is the simple, old, dynamic that happens around the world when there is no complicated government intervention.
In personal terms there are two and only two ways to earn more money. The first is to work harder, the second is to find other people to pay you. In terms of the economy there are two ways for the “economy to grow”. The first is increased productivity, doing more with less or working harder. The second is to expand markets or find more people to buy our goods and services. In the US we have a growing population overall, due mainly to immigration, so that is an expanding home market. But that isn’t the only reason for our historical economic expansion. But those very same reasons are pointing to a different economic future for us.
This simple dynamic above is visible in our connection with China and the developing world over the past few decades and explains the economic growth of both us and them. Our growth came from increased productivity and theirs from expanding their market to us. For example we haven’t built a commercial television set for sale within the US since 1973 because no one would buy such an expensive television with our labor costs. Labor in China and other parts of the world has been so cheap that we buy TVs shipped to us, sending our money to them. We get more value for our money, increased productivity, and they get our money by expanding their market. This is a dynamic that can only continue so long as labor costs remain low and we have enough money to pay their workers.
Economists are predicting that 2014 is the year that will turn around. Economists are always wrong, but the principles used for prediction are true. Regardless when it happens, or if some other unforseen principle interferes, wages for manufacturing workers are increasing around the world, and decreasing a little in the US. Eventually the world market will run out of room to expand. But even more quickly the cheap labor will dry up. As I have been saying for at least ten years, some day the Chinese are going to want to get paid.
That day is predicted to be 2014. In this case the prediction is that the cheaper manufacturing labor will be offset by the increased shipping costs making it easier to produce items in local markets for the same cost. Manufacturing will increase locally around the world and exports will similarly decrease due to the shipping costs. It will become cheaper to repair items than to buy updated replacements. We will see shoe repair shops, TV repair, telephone repair like in in the olden days before cheap Chinese goods were imported. We will make television sets in this country paying workers $15 an hour for about the same price as importing the same TVs from other markets paying their workers $15 a day and shipping them.
But it becomes more complicated to understand what will happen when we examine the dynamic that we have today, and how our present system will change. Our economy is based on high-cost, professional services, not low- cost goods, and a big change like the one that is coming is not likely to be simple, and certainly not predictable. Our complicated system of laws and regulations that rule every aspect of, well, our whole lives, and our recent history of providing domestic services at high labor costs instead of goods for export at low cost will not change overnight.
Americans seem to believe that a new law will solve any problem, and we have the laws and regulations to prove it. Soon we will see the results of our regulations when we start to compete with other markets, other countries, who have no such laws. The dynamic I refer to is difficult to see, and implicates more changes to our way of life than the picture I painted with the television example. Our economy has gone a long way down the legislative road. We are ruled by so many different economic laws and regulations that we require lawyers, tax specialists, accountants and a myriad of inspections to sell a hot dog. How much more to produce a television set or institute mass transit.
Our recent economic growth is not due to selling goods to other countries, but instead to selling real estate, insurance, advice, bonds, stocks and other intangibles domestically. We have a huge advantage over other countries because our dollar is the standard for the rest of the world based on confidence in our economy and nothing more. This is seen by developing economies investing in our economy and using the US dollar as much as their own currencies, which supports our economy.
The complications that will affect our economy soon can be seen with the growth of the automobile and oil industries world wide. You can buy a new car in most countries of the the developing world for $4000 with a 1 liter motor that gets up to 60 MPG. But you can’t buy that car in the US because our emmissions laws are based on the percentage of total emmissions, not the overall emmissions. So an eight cylinder SUV might put out five times the harmful emmissions of the 1 liter motor but the SUV passes our standards and the smaller car doesn’t.
So for us to get 60 MPG we need to use electric cars. There is no other alternative. These cars are expensive to build and maintain, with a limited battery life and/or a redundant power train. But the developing world can sell cars like the Nano http://en.wikipedia.org/wiki/Tata_Nano a four passenger 70 MPG $2500 automobile. A car like the Nano will never be sold in the US because of emmissions standards, even though per passenger, per pound, per vehicle, by any measurement there is this vehicle puts our less harmful emmissions than any car sold in the US. To pass our emmissions requirements the car would need twice the engine so that it can run the emmissions devices we require.
We know that recently the standard of living in the developing world is rising faster than ours. It is all we can do to maintain our living standards while the rest of the world has advantages to catch up. $2500 cars are easier to envision in every garage around the world than $40,000 hybrid that we are required to buy.
To review: the people in the developing world are getting paid more while Americans are making the same or less. Their economies are growing due to expanding manufacturing markets and our manufacturing markets bottomed out years ago. In 2014 it is being predicted that our manufacturing market sector will be able to compete domestically against low cost labor overseas because of increased shipping and labor costs internationally. That will give us more low paying factory jobs.
Copyright 2012 Kent Johnson
