"Governments lie; bankers lie; even auditors sometimes lie: gold tells the truth." ~ Lord Rees Mogg
Column by Jim Davies.
Exclusive to STR
The Tea Party is confused; no new news there. It has the great virtue of gathering together under one banner a variety of folk displeased with government, but their interests are so diverse as to prohibit a coherent alternative platform. Rather like the electorate as a whole, some want government to do A, while others want it to do Non-A. Unfortunately, I saw little sign that they have a solution ready and waiting (scrap the lot) – because virtually all of them see the State as a useful tool (or weapon) with which to advance their own diverse interests. Their beef is only that it may have served other voters' interests but has neglected theirs.
One example is that there is (again, as in the rest of the population) no clear understanding of economics, notably free trade. If someone has been let go because his employer “moved his job offshore,” he is unsurprisingly grouchy, but the limit of his “solution” would be to use the force of government somehow to bring it back again. The process of analysing why the export of jobs took place is a bit beyond him; often, he's a bear of little brain.
Strictly, a “job” is impossible to “export”; that is a figure of speech. Look at things from the employer's point of view. He's in business to make a profit, and quite rightly. He has a set of products found to be saleable at a given price level, comparable to those of his rivals. He can compete by designing smarter, better ones and by being more efficient in their manufacture, but all his rivals know that too so there may not be much latitude. He has four major elements of cost, and will most easily maximize profits by minimizing them – without affecting product quality. They are capital equipment, bought-in raw materials and parts, labor, and utilities. To survive, he must evaluate each in terms of what they buy him.
So if, in regard to labor, the manufacture of his flagship product costs 100 man-hours at a total cost of $25 an hour (including all “benefits” and overheads) then the labor component of his cost base is $2,500. He might consider equipping his labor with more capital equipment (robots, say) so that he needs only 50 man-hours or $1,250 – but then he must add the cost of the robots, amortized over the period of their useful lives. Perhaps that's $1,500 per unit produced; in that case his costs are (1250 + 1500 =) $2,750--so that won't fly.
Alternatively, he might close the plant and open a new one in Mexico, where the quality of labor is only half as high but its cost is only a quarter as great. Now for the same job he'll need 200 man hours, but they will cost him only $6.25/hr or $1,250 total; he's saved half of his labor costs, and that's an attractive alternative.
Out of consideration to his long-serving employees, he might show them this alternative and invite them to propose a better one; for example, to stay put and work for a total of $13/hr so that he saves almost as much, without moving. Big pay cut, but at least they'd have a job.
It's there that the rubber hits the road. Many foreign workers are willing to labor for very much less than their American counterparts, but the well-unionized Michigander is unwilling to give up his premium price. So he goes to government to get “something done,” and politicians sniff the wind and promise to do it – to “get tough on China” or whatever. They can no more repeal the natural laws of economics than they can reverse the Earth's rotation, but they'll sure promise.
In making it look as if they are trying, they might enact an import tariff on foreign-made goods, so as to impose a new cost on that Mexican alternative. Trade would then not be free, but Joe Sixpack gets to keep his job and he never understood economics anyway. Oh, and everyone gets to pay a higher cost for the product than would otherwise be charged, and the difference goes to government so that it can afford to distort markets some more. So restricting free trade comes with a kind of turbo effect; the first round of it finances the next round. Net result: people lose, government wins. But Joe doesn't care; he never understood economics.
Two anecdotes, to illustrate the alternative.
One is current. I'm old-fashioned enough to like using a fountain pen now and then, and have been horrified to compare my handwriting today with what it was when I was 20 and using one all the time. Back then, it was really neat. Now, it's a scraggly scrawl. So I figure I'll use one some more, in place of ball pens, and see if I can regain a little youth. My Sheaffer – a 21st birthday gift – lies affected by age even worse than its owner, and new “nice” ones cost $40 to $400, but on eBay there's a range of Chinese pens (the Hero brand, for example) priced in the area of an incredible $4. Including shipping! Last year I tried one; not bad, and it had a really neat filling mechanism, but alas that broke so I need another. It could break ten times over before being as expensive as a home-grown rival, so I went for it. How the Chinese can provide it for so little I've no idea – but I sure like free trade.
The other story goes back to 1980, when I was a greenhorn. Fresh from the UK, one of the things I most noticed was the good quality and low price of American cars. I knew that there was a niche market for them in England, and discovered I could have one shipped across the ocean and sold for a very competitive price and still make a profit in the range of $500 to $1,000 per car. So I set about my due diligence, to make sure there was no hidden problem. Once I took the subway to a strange building in Lower Manhattan where there was an acre of government cubicles, housing people whose job it was to monitor exports. I turned up and told of my plans and asked whether there were any regulations I should know about.
That was my first encounter with the sub-species, US Government Man; and at once I got the impression they had never before been visited by a real, live person from outside; that is, a civilian whom they spent their days regulating. But they were polite enough. None of them knew the answer – they kept passing me from Charlie to Don to Jack and on and on; it fast became clear that the whole acre was dedicated only to the cause of limiting unemployment. But I pressed on, looking for obstacles before investing any money.
I found one. Lurking in the depths of British government regulations, there was a clause to say that cars sold over there shall have glass (windows, headlights, sidelights, brake lights...) that conforms to a list of British Standards. Over here, there is a corresponding list of American Standards. Guess which are the standards to which American car makers conform? You got it. Neither standard is necessarily superior to the other, but they are different. And the cost of replacing all that glass would just nicely eliminate my anticipated multi-hundred-dollar profit. This was Detroit's way of making sure that any international trading in their cars was going to be run only by them, not by free-trading entrepreneurs. Another bright idea bit the dust, and the losers were (a) US auto workers who would have sold a few more cars and (b) UK buyers whose first choice of car was to be denied. And your humble servant, of course.
So laws to “protect” domestic workers simply don't; they are a total fraud. To the extent that they do enable them to collect higher wages and benefits than the worldwide labor market would pay them absent those laws, the less competitive become the products they make, up to the point when there is an almighty collapse. Instead of a natural, gradual process of limiting excess wages over many years (to which any employee could adjust by seeking alternative work, locally or elsewhere), they all get laid off at once, with a massive thump. To the extent that these laws were written in response to union pressure, a big slice of the blame belongs to the unions. They, too, are a massive fraud; they do indeed raise wages above free market rates for their members, but only at the expense of non-members. Eventually, as in the Midwest since 2008, the crash arrives.
So much for free trade and labor. There's another vast implication of the subject with regard to other resources and production facilities. A common symptom is the widespread but undeserved respect accorded to national self-sufficiency.
It's taken as an article of faith never to be questioned, for example, that America should have or pursue energy independence, so “we no longer depend on Arab oil.” The argument might be applied instead – or as well – to food, or gold, or uranium, or rare earth minerals, etc. Politicians insist that the country must have within its borders (subject to their direct control) all resources that are vital, and theories about freedom of trade come second to all that. Like Joe, they don't understand economics and wouldn't care even if they did. There's a vast amount of straight-faced nonsense spoken before cameras in D.C., but seldom more rubbish than twaddle of that variety.
Let's start by acknowledging that in a war context, where trade is forbidden or impossible, it matters a lot to have domestic control of vital industries like fuel, iron, and food. The reason the Japanese government struck at Pearl Harbor was to prevent the US Navy embargoing its vital imports of oil from Indonesia, to fuel its Asiatic war; Japan is not oil-independent. After sea routes were controlled, Germany could import no rubber or oil from the same area, so had to synthesize oil and rubber for tires from coal. Necessity spawned remarkable inventions, but the delay and effort greatly increased the cost of continuing to fight – just as the US intended. Starve an enemy of a vital resource, you may get him over a barrel.
In all circumstances other than war, however, the converse is true. It makes perfect sense for Germans (today) to import fuel from Russia, often in the form of piped natural gas; the latter has plenty for sale, the former has a powerful economic appetite for the product. Notice that each society is doing what it does best in the trade; Germans have very limited domestic fuel sources (coal excepted) but a highly advanced manufacturing industry. Russia is short on the latter, long on the former. So both win. In free trades, both parties always win.
Just the same applies to supplies of that even more critical resource: food. If the population per unit of land is high, the country cannot feed itself, that's obvious. So look at this table of population densities; I notice Monaco is near the top. There are 17,676 Monégasques per square kilometer. But I've been there, and promise that I saw nary a single starving child. Also near the top are Hong Kong and Singapore, yet both are known for the quality of their restaurants, not for the length of their food lines. How come? Free trade. They produce and sell what they are good at producing, and use the proceeds to buy what they cannot produce. How absurd it would be to turn the Monaco palace yard, with its fabulous views of the Côte d'Azur and of the yachts of the rich and famous, into a potato patch.
Except in time of war, “national self sufficiency” is a false purpose; it fritters resources into tasks that are better done elsewhere, so adding needless expense. Free trade--no tariffs, no prohibitions, no discouragements like a mandatory “IMPORTED” warning label – provides all items in demand by anyone, at the only known fair price (that at which both parties are equally satisfied).
That being so, the more free trade is at work, and the more heavily each country comes to depend upon it, the more incentive their governments have not to engage in war. Freedom of trade is therefore a valuable protector of peace, until that happy day when all governments have vanished from the face of the Earth and all humans prosper in a gigantic free market.