Category: Issues – Trade

Why is America divided?

America is divided on economics, and specifically on the efficacy of tariffs. Whereas successful businesses love Free Trade, struggling businesses want Tariffs.

East and West coasts vs the Middle

The software companies don’t need tariffs to survive. The US has managed to convince the world that US software giants have a natural right to exists and dominate the whole world. They don’t even need to pay all US taxes, having convinced places like Ireland to be a home for their international sales. This means that the giant companies can “legitimately” pay Irish taxes instead of US taxes.

US banks don’t need tariffs to survive. Yet when they sneeze the whole world catches cold. They are sitting pretty, with the US dollar the international reserve currency. This may change with the advances in BRICS.

US Banks and software companies bring lots of employment and profits to the east coast and the west coast of the US. They are doing well, and want the current situation to continue. The middle of the US is not doing so well, but Donald Trump offers a different way forward, even though there are aspects of Trump’s approach to politics and economics is challenging. Yet there is no indication that the Democrat Presidential candidate has anything to say that will bridge the underlying problem.

Here is what Politico has to say about Kamala Harris’ position on tariffs:

The vice president’s biggest challenge may be defining her policies. And many industrial workers, who will be key to her chances across the Midwest, have already expressed dismay with the economy — even if they’ve been beneficiaries of the Biden-Harris industrial policy push.

No cut-through tariffs policy under Kamala Harris.

History of Tariffs

Tariffs can be considered to have been previously introduced to offset an inherent competitive advantage in the exporting nation. This still continues to be the case. Yet now we realize that tariffs are not a one-way street to success. If they are set too high, this can embed business inefficiency, lead to noncompetitive wage rates, and unnecessarily result in paying higher prices for all goods and services.

Contrary to current economic thinking, tariffs are not a “curse word.” Indeed, the clear rationale for tariffs in the 21st century is to attempt to achieve a rational trade-off between lower prices and “full employment.”

A truly rational trade policy would set a moderate level of tariffs for those sectors of the economy that the government of the nation decides it wants to keep and is in danger of losing. Such a policy would not create a trade war, especially since no nation in the post-Trump world will be able to resist its compelling logic.

Modest Tariffs are needed

Imposing a moderate level of tariffs, even on ALL goods entering a country, should not result in a trade war. Yet even without such a policy we have already got a trade war. Why?

Trump is loved by some farmers. Democrats should be asking why this is the case and offering something similar. Are they? Not as far as I can tell from Australia.

The Democratic leadership just wants to prosecute Donald Trump and cast his supporters as lacking in intelligence. Yet as soon as the software giants and computer hardware suppliers are in economic trouble they want to impose very heavy punitive tariffs on China. Is this rational? It certainly doesn’t help geographically middle America.

In agriculture, it is easy for poverty to overwhelm ordinary producers. A modest tariff will hold back competition, at least sufficiently to allow these producers to survive.

Every country should be reasonably self-sufficient in agriculture, particularly in those countries where agriculture is the main source of employment. If rich countries can allow the farmers in such a countries to thrive, the whole country could be on a path to economic success. Tariffs are the means to achieve this.

A 20% tariff should be available to every industry sector that want this level of protection. The US should encourage every nation to do the same, not try to bully them to remove all tariffs, even ones as low as 20%.

Globalization needs tariffs

Every country needs a diverse economy, including in the Computer-space, to flourish in this very competitive world.

Tariffs can help start-up and establish companies to thrive. If the WTO continues to demonize tariffs and “protectionism” when it will give nations more economic freedom to act, then perhaps the best approach is to demonize the WTO and anyone else who prefers an ideological position to a well argued alternative position.

We will see!

Scott Morrison wins Australian Federal Election

Scott Morrison has overcome the attempt to re-introduce class warfare into the Australian electoral system with a “steady as she goes” campaign strategy.

Labor’s Campaign

In a carefully calculated attempt to re-invigorate union control of the Australia economy, the ALP set out a programme to target all Australians who were not unionists. This programme included the following “difficult to explain” elements:

  1. Eliminating Franking Credits for retirees in self-managed superannuation funds, but keeping them for retirees who are in externally managed Superannuation funds, which are mainly union-managed funds.
  2. Supporting the proposition that there should be an increase to the minimum wage without regard to the possible negative impact on jobs.
  3. Allowing lawless union activity and removing the “industrial umpire” in the construction industry.
  4. Radical action on climate change beyond that agreed at COP21 and beyond that committed to by other comparable nations, with little real consideration of the employment consequences of this approach. Given its rhetoric, and reliance on Greens preferences, the ALP were unable to articulate a policy fix to work around this. This did not trouble voters in Melbourne or Canberra, since they did not perceive a risk to their own jobs, but it did worry voters in Queensland.

Maximising Scott Morrison’s win

Continuing failure of the Liberals to win over Canberra’s voters (and the opinion-makers at the ABC and SBS) will be a cancer on future Liberal policy making. In addition, the time is approaching when the ALP will not be able to govern in its own right, but in a future time its only hope will be to govern in coalition with the Greens. Already, the ALP cannot win many seats without Green preferences.

For the Liberals, it will not be enough to point out the overt socialism of Green leaders or the economic dead-end of Labor’s class war. Furthermore, the Greens are already starting to show more pragmatism than the ALP on policies like the Franking Credits changes, with plans to protect less wealthy investors. The challenge for the Liberals will be to come up with their own version of “reasonable and easily defensible policies.” Here are some suggestions for immediate action:

  1. Fix the “wages drought” by arguing for a $1 hour increase in the minimum wage in this year’s Fair Work hearing.
  2. Make Mabo Day a Federal public holiday.
  3. Explain that Australia is cutting its CO2 emissions in accordance with its commitments to COP21.
  4. Explain that the Coalition has a policy to provide dispatchable electricity via Snowy 2.0.
  5. Protect jobs in vulnerable sectors, such as horticulture, via modest tariffs.

Wages Drought

The government and the Reserve Bank have already agreed that inflation should be between 2% and 3%, yet it is currently running below that level. We know that inappropriate across-the-board increases in wages are the main cause of runaway inflation. Surely the corollary of that is that inappropriate wage-freezes are the cause of inflation running at too low a level. Therefore, it follows that a significant minimum wage increase at this time is appropriate. Don’t drop the ball on this, Scott Morrison. If you do, you will be opening up the field to the ALP to foster discontent.

Most of Australia’s export industries will not be hurt at all by this change, as they operate at the other end of the wages spectrum, with mining, medical research and IT sectors paying well above the minimum wage to most of their employees. The tourism sector could suffer some short-term impacts, but it is a highly vulnerable sector in any case with many other factors playing a more important part than the wages paid to minimum wage employees.

The import-competing sectors could suffer some pain, but the government has the means to address this issue by another mechanism, discussed below.

A change in the minimum wage will be much more effective in restoring balance to the Australian economy than can be achieved by cutting interest rates since that is likely to have other and unmanageable consequences.

Mabo Day

Most Australians recognize the importance of Australia Day. It recognizes the beginning of European settlement in this nation; most Australians are Europeans. On the other hand, Mabo Day could be an equally important day in Australia’s calendar. It would be a day to remember when the original inhabitants of this land began to get legal title to the land upon which they are still living. It can be a day when Aborigines, Torres Strait Islands and the European and other immigrant peoples remember and celebrate the original inhabitants of this land. Scott Morrison, don’t you think it deserves to be recognized?

COP21

In Paris, Australia made a voluntary commitment to cut greenhouse Gases by 26% to 28% by 2025 from 2005 levels.

Since Australia only emits 1.3% of the world’s greenhouse gases, it is not possible for Australia’s action to have any measurable impact on global warming. Therefore, it is appropriate for Australia to be a follower, not a leader in this matter, especially since its commitments to COP21 follow that requirement. Certainly we can do more, provided it can be done without seriously damaging our own economy and without destroying the jobs and incomes of ordinary Australians. This is the lesson of the recent election, which was claimed to be a “referendum” on this subject. The nation’s action on climate change should bring the nation together, not divide it, as the ALP and the Greens wanted to do. On this point, Scott Morrison was clearly correct.

While many in the electorate like the idea of Australia leading the world on climate change action, and probably most of the voters in Canberra (which includes the civil servants advising the government and the nationally-funded broadcasters, the ABC and SBS), it will have a cost in terms of jobs, a point which voters in Queensland clearly perceived.

In addition, Australia should not be party to the worldwide green conspiracy to deprive India and other emerging nations of access to cheap electricity via Australia’s coal. When the West and China emit less CO2 than India it may have a moral right to dictate how India should proceed in this matter. Whether it should do so, even at this point, is a matter of geopolitics as well as moral arguments.

Snowy 2.0

Only the Coalition has a workable policy to turn generated electricity into dispatchable power. This important contribution to this subject was made by the former PM, Malcolm Turnbull, being a policy that Scott Morrison has retained. Of course, Snowy 2.0 is only a start, but this “solution” is likely to be repeated, with the Kidson power project in North Queensland also being indirectly supported by the Queensland Labor government.

On this question, Labor and the Greens have been very quiet, hoping not to give any credit for real action on climate change to the Coalition. Scott Morrison and the Coalition should not allow this policy vacuum in their opponents’ rhetoric to continue to go unchallenged.

Tariffs

All major parties have a blind spot on tariffs, believing for some reason or other that minimum wage Australians can compete with people overseas on half, quarter and even one-tenth of Australian wages and conditions without any problems.

This is a manifestation of the arrogance of the Canberra bubble and I seriously hope that Scott Morrison can burst this bubble.

Critiquing Some Labor Policies

Franking Credits

The system of Franking Credits is an innovative approach to avoid double taxation for Australian investors. It was introduced by a previous ALP government. It had the significant benefit that overseas investors in companies of all kinds were no longer better treated than local investors (since overseas investors are only taxed at a notional rate on dividends and interest earnings). The outcome of the ALP’s tinkering could have been the beginning of the end of this scheme in its entirety, a result in which Labor’s class-war warriors would have rejoiced, urged on by the Liberals’ hard-right “free trade” faction. A plague on both their houses!

Negative Gearing

The system of negative gearing for housing investments has been a thorn in the side for taxation system designers of all political persuasions. A previous ALP government tried removing it, but had to unwind the change because it immediately caused property rents to increase. Undeterred, ALP’s Bowen planned to try to do this again. The problem with this plan is that rents provide a very poor return on residential property returns, with the shortfall made up by immediate tax deductions for the loss on property investments and the hope of future capital gains. Ignoring the likely adverse outcomes of a policy platform is not recommended.

Capital Gains Tax changes

There is a fairness aspect to the Capital Gains Tax discount and there is an economic incentive aspect. The fairness aspect relates to the “lumpy” nature of capital gains since, for individuals selling a business and receiving a capital gain, this could be a once-in-lifetime event. In this case, taxing at the full marginal rate of tax applicable in that year would be unfair. Even though averaging could be introduced at this point, there is a more important element that should be included when considering capital gains taxes. This relates to the nation’s need for capital investment and capital accumulation in order to maintain the nation’s prosperity into the future. Encouraging investment via the capital gains discount should help to build up the nation’s capital; even negative gearing also serves this purpose. At present, Australia has a problem with insufficient capital investment. The need for more investment is a matter that does not appear to have been considered by the ALP when proposing to reduce the capital gains discount and their changes to negative gearing. While their proposals had a ready audience among those who do not invest for the future, the ALP has no excuse for not putting national interest ahead of a “cheap win” in these matters.

Conclusion

Scott Morrison is to be congratulated for running an effective campaign, highlighting some of the inadequacies in the “bold agenda” put forward by Labor. It is now up to the Prime Minister to lead a government that really does work for all the people, not just for those who voted for the Coalition.

Trudeau Supports EU Folly at G7

Justin Trudeau has said that the US President won’t be allowed to kick Canada around. He believes that the US should give up its strategic investment in iron and aluminium in order to keep the “rules-based trade regime” in place. He seems to think that Canada’s war efforts deserve that sacrifice by US workers.

Trudeau’s Trade Rules

In Trudeau’s world, a quota system for dairy imports, plus a 300% tariff on non-quota imports is “rules-based.” I wonder what rule is being invoked here.

Yet it is only natural that Canada doesn’t want to surrender its dairy industry to that in the milder climate US industry. So also in the USA, the steel and aluminium industries are being destroyed by cheaper imports.

Apparently, Trudeau is not sharp enough, nor are his advisers, to see the parallel between dairy and the US aluminium and steel industries. One could say that Trump doesn’t want to surrender his aluminium industry just because Canada has cheaper electricity (due to more plentiful supply of hydro-electric power in  Canada.)

EU’s Trade Rules

EU has a tariff of 10% on the import of motor cars. USA has a 2.5% tariff on the import of motor cars. I have not seen any suggestion from the EU that they would prefer a US 10% tariff on their car exports.

Rather, it would appear that the G6’s “rules-based-order” is intended to keep the EU’s tariff advantage unchanged.

Claiming the high ground when you are actually crawling around in the gutter makes interesting reading. If the press were not so obsessed with its anti-Trump bias it would quickly see the hypocrisy. However, it is hard for a hypocrite to see the hypocrisy in a fellow “pretender.”

A new Rules-Based-Order?

What no-one will consider is whether a new “rules-based-order” mandating a fixed 20% tariff on all goods & services will actually work more effectively than the current WTO aim of zero tariffs. Try answering this proposition without the usual “tariffs are bad” mantra, if anyone dares. I am still waiting for a mature response from an economic leader or advocate for more free trade, or even a humble academic.

Zero tariffs are loved by economists, since they believe in the creative destruction of any “weak” segment of the economy. I don’t think too many ordinary workers will agree with them in any country that is actually a democracy (once they realise that they have been dudded by their “friends”).

On the other hand, the economists’ “creative destruction” would not be accepted in China, which is growing at 5% per year.

Bring on Trump’s so-called trade war. Even though the excuses for its likely economic success will be deafening, I reckon the voters won’t care.

Increasing Jobs and Wages

Managing trade is a government responsibility. It should lead to increasing jobs and wages.

Business and Trade

Someone has suggested that trade is good for the economy, since the advocacy of business for more trade proves this to be the case. Yet it would be unnatural (and should not happen from a governance perspective) for businesses to put increasing jobs and wages for the nation as a whole as a priority in their boardrooms. Just saying this makes it sound as ridiculous as Senator Sanders’ continual attack, in the US context, upon business profits.

Adam Smith’s “Invisible Hand”

It is the government that has actually made Adam Smith’s “Invisible Hand” work with all the power it has manifested in the 19th and 20th century. It did not happen by some wonderful and mysterious alchemy, as some economists seem to think. Yes, protectionist trade policies can lead to increasing jobs and wages.

It is the government’s job to make sure that trade agreements it signs increase jobs and wages; it is not the job of business.

Yes. It is amazing, but the governments of USA and Australia have delivered the fundamentals of economic growth, mostly through protectionist policies in the 19th century (USA) and in the 20th century (Australia). They did actually increase jobs and wages.

In the US context, only Donald Trump has realised the truth of this obvious point. Certainly not most “economic experts.”

Economists are yesterday’s prophets

Recent history has shown that so-called economic experts are blind to economic and political facts. They are stuck in a 1820’s paradigm. Despite having had nearly 200 years to check out whether Comparative Advantage works or not for ordinary workers without government oversight, they haven’t bothered.

Nationalism is the only way forward

Most commentators are totally blind to benefits of a revival of nationalism. Yet this will again see governments looking after the interests of voters.  How can it be otherwise in a democracy? Do commentators think that increasing jobs and wages for ordinary workers (voters) is not important?

Today, in the Australian, Bernard Salt pointed out that only 300,000 jobs have been lost in manufacturing over the last 16 years, but 1.3 million jobs have been added elsewhere. Yet despite the superficial appeal of this analysis for the zero-tariff argument, it actually means that 300,000 people are now out of a job and will not be able to retrained in anything like the jobs that they have lost. They are NOT going to get jobs in the rapidly growing medical / health industry, except as janitors and ancillary staff. Perhaps they can all become baristas in the food service industry! Is that the best we can offer?

Yet a modest tariff regime that would increase the probably of these people being employed in paid jobs, suited to their skills and abilities. Sure, well-paid medical workers and economists might have to pay 10% more for some goods, but they can afford it!

Sometimes we forget that an average IQ is 100, not 150, even in the USA or Australia! Not everyone can be trained for a highly-skilled job.

Increasing jobs and wages

Jobs and wages are more important than ever-cheaper goods. Who can deny it? Apparently, almost all economists. Unfortunately they are leading a declining bunch of out-of-date politicians by the nose to their decline and eventual irrelevancy.

Nationalism will eventually prevail over the current ideologically driven, dominant, economic approach.

Bring on the day! In USA, Donald Trump has began to introduce a tariff regime that is fair to the USA.

Higher Minimum Wages in the Developing World

Higher Minimum Wages in the developing world will increase prosperity everywhere.

G20 & WTO should lead

The G20 and the WTO have dropped the ball on trade. They should be taking the lead in “forcing” downtrodden nations go for higher minimum wages. But they don’t – the G20 and WTO just hand all such matters over to the leaders of global industries, aka “the market.”

While increased trade has resulted in some improvement in living standards in some developing nations, in general the gap between the developing world and the rest has not narrowed very much, especially if you leave China, Taiwan and South Korea out of the picture. The difference in those places is that the leaders of these nations didn’t believe the more trade would be enough: they also decided to control the situation more tightly.

These two “organizations” congratulate themselves on having done a good job in increasing the standard of living in the developing world.

They congratulate themselves too much. China has been the biggest beneficiary from free trade with the West. They have done this by keeping much of their own protective regime in place, and closely managing their own economy vis-à-vis the rest of the world. They call this “communism with Chinese characteristics.” There is no way that the Chinese will put themselves in the hands of global capital, but this exactly what the G20 and the WTO are advocating. At the same time they take much of the credit for the improvement in China’s economic situation. Well, good for them! I hope it keep them happy at night, as their own constituents lose their own standard of living at the same time.

Mexico needs a higher Minimum Wages

Take Mexico as an example. Many commentators believe that Mexico has benefited from NAFTA. Certainly the Mexican government believes this to be the case. However, Mexican workers receive $15 day, whereas their wage competitors in the USA receive $15 hour. This is not because Mexican workers are only one eighth as productive as US domiciled workers, as someone has ridiculously suggested.

Don’t expect global corporations to encourage developing nations to introduce higher minimum wages. They love low wages. They won’t fix them, and indeed, they can’t. To pay more for labor than the market requires would be a breach of their governance standards.

WTO could support Higher Minimum Wages

A real fix would be for the G20 and the WTO to introduce a rule that says something like this: “Country based tariffs can be introduced where the effective minimum wage built into the goods being imported is less than half the effective minimum wage in the importing country.”

Taking Mexico as an example, if higher minimum wages were introduced the Mexican government would be compelled to introduce a minimum wage that was equal to half the effective minimum wage in the USA. Such an action would see real benefits being achieved from that nation’s increased export activity.

Nevertheless, while the G20 will have to backtrack on its impotent rage against Trump’s trade rhetoric following his election, it will do nothing of any use in fixing the trade problems of the world. Apparently, the G20 leaders do not understand that crushing the wages of ordinary workers actually reduces national wealth. They do not understand how global corporations work, and that they are not a force for improving the wages of ordinary workers. Perhaps they should read George Cooper’s Money, Blood & Revolution.

Prosperity, Insecurity and Poverty

We live in a time of great prosperity, unparalleled plenty, variety, health and peace. We also live in a period of intense and global competition, where not one job has even a scrap of the security that a job might have had 50 years ago.

Unparalleled Prosperity, with increased Insecurity

We are more prosperous than ever before, but would any ordinary working person willingly accept that getting everything 20% cheaper is really worth the employment insecurity that the current free trade arrangements are causing? I doubt it.

Automation is NOT the problem

For those who argue that it is automation, not unrestrained free trade, that is causing increased employment insecurity, I say, “Balony!” I spent a large amount of my working life implementing automation, and it didn’t lead to widespread unemployment. That is because the governments of the world hadn’t yet handed over power to global corporations, via unrestrained free trade.

Prosperity provides an opportunity to fix poverty

We can use the world’s prosperity to lift nations out of poverty, via trade, but we have to do it differently. It is no good just using our prosperity to lift the incomes of the top 20%.

We have given up the opportunity that prosperity has provided, since the great democracies of the world have surrendered their authority and power to global corporations. Shame, shame and more shame upon them all.

How to fix

There is a fix. It is in the hands of voters. It is also in the hands of the world leaders, via the WTO. It is Donald Trump who has provided the catalyst. Those who condemn him are among the worst offenders in regard to causing the current malaise. So I support Trump’s abrupt and counter-cultural rhetoric! Shock, horror!

We will be the poorer if we don’t pick up the baton that he has placed in the next runner’s hand.

Lower Company Tax Rates will NOT fix Economic Malaise

Company Tax Rates are not the reason that economic growth is sluggish in the current global economy. Lowering Company Tax is not a priority

While cutting company tax rates to attract and keep businesses in the country is currently an attractive idea, it is without proper theoretical justification.

Company tax on Domestic Earnings

If I can earn 2% profit on domestic sales of $1b = $20m, and pay 10% tax, then the net income I can earn is $18m. However, if I can earn 5% profit on sales of $1b = $50m, and pay 25% tax, then the net income I can earn is $37.5m. I am much better off if I can increase my profit margin, rather than seeking lower company tax rates.

If imports are subjected to a 5% tariff, then this situation is more than possible.

Furthermore, if I need a 5% profit in order to profitably invest, then I won’t invest in a high-cost country. This is closer to the real situation in the world, where there is not a problem with corporate tax rates, but there is nothing in which to invest in the West. Competition from the East is driving away all investment opportunities, which is actually also hurting the East, since it markets are drying up.

The current situation is both appalling and lacking in a theoretical justification, despite the dominance of this ideology among the elites. If they don’t wake up, they will lose all influence in the West, as is beginning to happen in the USA, France, and even in Australia.

Global Trade Reform is required

As Donald Trump has demonstrated, the West’s voters are calling for a trade realignment. None of the main-stream parties are really on board (even the Republicans are running on Trump’s coat-tails and are not “true believers”). Indeed, President Trump has created a catalyst for global trade reform. The USA could use this opportunity to implement reform via WTO that will work for both developed and developing nations. Yet it remains to be seen whether Global Trade Reform will happen.

Since this not now (May 2018) likely to happen, governments need to look at smaller changes that they can make. For example, in Australia, the government could introduce an Overseas Out-Sourcing Tax. This should be levied to cover the additional costs that Australian companies have to pay for locally sourced labour. These costs are: Superannuation Levy 9.5%, payroll tax 5%, and leave payments 5%+. That then adds to a 20% levy that should be charged for every company purchasing services from overseas – it is just a case of moving towards the (impossible to achieve) aim of a “level playing field” (I use their terminology against my opponents). This can be easily collected via a self-assessment system, added into the BAS.

Company Tax on Export Earnings

In regard to exports, why would I set up in any high-cost country to export to the world? The reason must be the quality of the staff that I could employ, and the higher export sales (or lower final costs) I can achieve. Let us follow that scenario.

If I can earn 2% profit on export sales of $1b = $20m, and pay 10% tax, my net income will be $18m. However, if I can earn 2% profit on export sales of $2b = $40m, and pay 25% tax, my income will be $30m. If this were the situation, my decision to move my business to a high-cost country would be entirely rational on the grounds of higher potential net profit after tax, even with a higher rate of tax.

Surely, few can dispute the significant advantages of more skilled staff. If anyone wishes to do so, please explain why tech companies are located in high wages, high taxes, California, rather than in Bangladesh, with low wages, and a tax holiday.

Domestic Demand drives most Business Income

Most businesses primarily service domestic demand. If that fact were given more attention, the current economic malaise would be fixed overnight.

Nevertheless, mainstream leaders like to mix with the (export) winners, not with domestic players. Their obsession with a particular economic ideology will see the world being changed, but not in the direction they are planning. Lowering company tax should NOT be a first priority.

Steven Keen on Democracy and Capitalism

The radical Australian economist, Steven Keen, has somewhat surprisingly “come out” as an opponent of Free Trade, at least as currently practiced.

In an breakthrough interview published in The Epoch Times, Steven Keen explains how Donald Trump could revive American manufacturing. This article is tellingly entitled, “Why Free Trade Doesn’t Work for the Workers.”

Steven Keen argues Ricardo’s (1820) theory is flawed

Keen pointed out that the argument by classical economist David Ricardo (1772–1823) about wine and clothes involved the workers in one industry losing their jobs. Ricardo assumed, as do modern neoclassical economists, that workers in the losing industry can get a job in the winning industry. So it’s assuming full employment, everybody who wants a job gets a job, which is not the real world. And they also assume you can move resources from one industry into another. Certainly, workers can be retrained. While it takes time, it can be done.

Drawing an example from China, Keen noted that China now produces more of everything, and that it is not possible is turning a weaving machine into a steel furnace. And that’s why you have the rust-belt. In the case of China and the United States, the steel plants in the United States won’t become weaving machines; they just turn into rust. So what you have is absolute destruction of physical resources in one country. Or they ship the capital to the place where the low wage workers are, like China or Mexico, and what you get is a class redistribution of income. The workers in the developed country lose, the capitalists in that country gain.

Steven Keen argues that Free Trade gives Capitalists a “Free Kick”

Keen observes that in this scenario, capitalists in the developed country still own the machinery and employ people but in a different country and at lower wages. Then they sell the products back into the American markets at the same prices but at lower costs. So they gain, and the working class has to finance their consumption with increased levels of debt because they don’t have the income anymore. The workers in the developing country also gain, so it’s also a wealth transfer from the developed to the developing country.

Why BrExit “won” & why Trump won

Steven Keen comments that in a democracy you get to the point where the workers have lost so much because of globalization, they get sick and tired of hearing the fairy tale that they won’t suffer and that it’s all for their own good. And they look at their decayed streets and factories and dismal jobs and lower share of income, and they say: “You know what, I’m going to vote against this.” And that’s what we are seeing globally now with Trump and Brexit, this revolt against globalization and financialization. The absolute losers of all of this are the working class of the first world. The winners are the multinational corporations.

Welfare vs Work

In an interesting and perceptive comment on human nature, Steven Keen says that humans get their sense of self-worth by contributing to a community. If you are human and you are being paid for staying alive, you are not particularly happy about it, your sense of self-worth is pretty low. But if you have a job and can contribute to a community, that’s where your sense of self-worth is going to come from. All this welfare is replacing work which is the case in the rust-belt areas makes people angry and resentful. Their self-worth is challenged and they are not going to be happy with the establishment.

He believes that is why Trump has such an appeal, and they don’t care about him being politically incorrect. They like the fact he is like a human hand grenade. They threw the human hand grenade into Washington.

Automation

Getting closer to a nuanced view on automation than most commentators, Steven Keen begins by arguing that part of the motivation for American businesses to move production offshore was cheap labor. But with better and better robots, you can have machines you can retrain for different assembly processes. And you have 3-D printing turning up, which has become mainstream. So it means you can produce onshore without cheap labor. But it also means you can produce without labor at all.

Although he does not define what “a well-functioning human society” would look like, he thinks that in such a society producing without any labor at all would not be a problem. He believes that the problem in a neoclassical capitalist system is that the workers lose out because their only source of income is wages. If there is no need for wages anymore, you don’t have an income anymore.

My Response

Steven Keen’s analysis of the modern economic dilemma is first class, however he does not offer anything substantive in the way of a solution.

A declared opponent of “neoclassical economics,” Steven Keen is quite happy to make comments like, “In a neoclassical capitalist system [in this scenario] the workers lose out because their only source of income is wages.” However, when he goes on to say, “If there is no need for wages anymore, you don’t have an income anymore,” but “in a well-functioning human society, that wouldn’t be a problem.” In this he is contracting his own point that welfare-dependency is a self-defeating solution to current economic problems.

From the full text of this interview, we know that he is still an opponent of tariffs as a way of achieving balance within an economy, and still hankers after the socialist ideal of a world without artificial borders.

In this area, this site is closer to Donald Trump on the need for tariffs supporting national objectives. Nationalism is deeply rooted in human psychology (beginning with a mother’s care for her child). This cannot be claimed for internationalist objectives of Ricardo’s Free Trade ideology or Marxist ideology. While Keen sees the future as being “post capitalist,” I see the future being in capitalism being brought (again) under the control of national parliamentary democracy, thus reflecting the needs and interests of the people.

I am confident that Steven Keen would agree with me in the proposition that an objective of the political system should be to deliver a result that is in the interests of ordinary people (the top 1%ers are quite able to look after themselves). I am not so sure he would agree with me in seeing a nationalist capitalist system as the basis of that model. Time will tell on that point.

I promote Democratic Capitalism because I believe it will serve the majority of people quite well. Indeed, the current trend is in support of the principles of Democratic Capitalism. As evidence for this, I can cite Theresa May in the UK (“Democracy that works for everyone”), and Donald Trump in the USA (“Make America great again”).

Global Trade Reform

President Trump has created a catalyst for global trade reform. The USA could use this opportunity to implement reform via WTO that will work for both developed and developing nations.

The Problem with Global Trade

Even though the push towards globalization has done much to reduce poverty in those nations able to exploit the changes for the benefits of their own citizens, it has presented three easily identifiable problems;

  1. Zero tariffs do absolutely nothing to remove the first-mover-advantage of Western nations. Without tariff protections, developing nations are severely limited in their ability to develop diverse economies. Each nation should seek a diversified economy, despite the benefits of specialization. Providing a diversified economy is the only way in which a nation can utilize all the skills of all their people.
  2. Western nations are unable to provide sufficient work for ordinary workers in the face of very low wages that are being offered in developing nations. A skilled worker in the USA on $15 an hour cannot compete with a skilled worker in Mexico on $15 a day. It will never work out well for the ordinary workers of the West, who actually represent the majority of voters. (Elites: watch out, your day of reckoning has come!)
  3. Globalization has failed to deliver the real equalization of incomes between developed and developing nations that has been promised by its advocates. The pressure to keep wages down in developing nations is maintained by global corporations. They are only too willing to move operations from one country to another in search of the lowest possible cost of labor. Of course, they are only operating in the way the situation requires. If it is to be changed, it will have to be changed by changing the situation, not by requiring corporations to act in ways that conflict with their own charters.

Implementing Global Trade Reform

Having defined the problem with global trade, reform of its operation becomes self evident. Here is a simple two-part fix, which Donald Trump could initiate and virtually force the whole world to adopt.

  1. The WTO rules to be changed so that any nation can introduce and maintain a high level of tariff in order to offset an identified first-mover-advantage. It is suggested that a tariff of 25% would be a good starting point for a discussion on this aspect.
  2. The WTO rules to be changed so that any nation can implement a country-by-country tariff on goods coming from another country, where the minimum wage (actual or official) is less than 50% of the minimum wage of the importing country.

Only item 2 of this program for global trade reform really applies to the USA, and pending a WTO agreement, Donald Trump could implement that aspect immediately.

In regard to NAFTA, Mexico could be encouraged to raise the minimum wage in all factories exporting to the USA to 50% of the USA minimum wage.

Under these arrangements for global trade reform, the pressure to move work from nation to nation in the search for the lowest possible wage levels would come to an end. It would also end the waste of national resources that comes from starting a factory in one country and moving it to another.

Global trade reform along these lines would see the incentive for nations (like Bangladesh) to be the work-house of the West coming to an end. Indeed, the wages of ordinary workers throughout the world would be increased.

Super-low prices will end

Yes, it is true that the prices of some very low-priced, but valuable goods, like clothing, would increase significantly over time. This would reflect the fact that the workers of the world were not continuing to be impoverished in order to meet the needs of the developed world.

For those who do not like that prospect. Suck it up! It is coming!

Open Markets – not Free Trade

Free Trade is supposed to enhance Open Markets, but the facts shows that Free Trade kills competition. It makes oligopolies and destroys truly open markets.

Open Markets require many players

It is axiomatic in economics that an open market requires many players, and that competition only works for maximum effect when there are open markets.

The experience of the last 30 years has shown a trend towards agglomeration, with smaller firms being swallowed up. This is done in an attempt to achieve a level of market power and cost efficiency resulting in a firm being of sufficient size that it can compete with all comers, and dominate a market.

If economists were not blinded by their own theories, they would realize that this trend is antithetical to their “ideal world” of perfect competition. Instead of combating this trend, they are prepared to explain it away as a limitation to their micro-economic theories.

Open Markets deliver mixed results

The effect of open markets is clearly seen in the agricultural sectors especially in subsistence economies. Here the farmers deliver their products to the market and receive whatever the customers will pay – they are entirely price-takers.

No-one wants to be a price-taker in an open market. We all want to be price-setters. In the agricultural sector this can only be achieved if the producers gather together in a collective, and only deliver to the market those goods that must be sold, because they will perish, or those goods that will receive the best price that the market is likely to pay (in the medium term).

The ideal situation is where the market sets the price, based on supply and demand, but where both buyers and sellers have equal power. Yet this never can be achieved under Free Trade. This is because the lowest-cost producer has virtual monopoly power.

The end result under Free Trade, is that open markets for many goods and services become a virtual fiction, with a few operators holding an unconscionable level of monopoly power, by virtue of operating in an oligolopolistic space.

Restoring Open Markets in the US via a Cash Destination Tax

The US Republican proposal for a Cash Destination Tax has the potential of restoring a more competitive market situation in the United States. This is because US producers will gain a slight advantage over those producing goods and services overseas. This will arise because only the costs incurred in the United States will be deducted from income when assessing income tax payable by corporations.

The slightly higher prices that United States firms will be able to charge for sales within the United States will encourage additional producers to enter the market. As well as improving the Open Market status of the US economy, wage rates for US workers will rise, bankruptcies will reduce, and the neglected cities of the US will revive again.

However, one aspect of the Republican proposal for a Cash Destination Tax is totally unacceptable. This is the proposal not to charge Income Tax on any revenue earned by exporting outside of the United States. Surely, the proponents of this aspect of the tax know that importing countries will be entitled to treat all US firms as if they were dumping their goods. One thing is for certain, the EU will impose countervailing dumping penalties on all imports from the US. It is also the way of such things, for dumping tariffs to include a penalty component.

If the Republicans insist on “no Income Tax on Export revenue”, we can look forward to a full-throated trade war. Good luck with that! It won’t end well.

Too much Competition is Too Much!

Who is too thick not to realize that getting imported goods at a price 20% cheaper is not worth the social dislocation that the current Free Trade ideology is creating?

Apparently, most of the people protesting against the Donald Trump agenda are as thick as bricks.

Yes, the Obama years saw the US economy recover, albeit ever-so-slowly, from the sub-prime induced difficulties. However, the EU and the Obama administration were too thick to realize that the Global Financial Crisis merely exposed the soft under-belly of the economies of the Western world. Radical changes are required to fix this situation, and the world can thank God that the US electoral college decided to elect the radical Donald Trump, rather than Hillary Clinton, who would have continued Obama’s failed policies.

There can be no investment where there is nothing in which to invest. For most industries, this is a problem caused by Free Trade. Who will invest in the developed world when  almost everything can be made more cheaply in Asia. Yet the irony is that these cheaper goods have to be exported back to the developed world, with the markets in the developed world drying up because the jobs supporting them have gone.

Undeveloped economies need trade reform

Undeveloped nations should give their utmost efforts to making the farmers more prosperous, with higher prices being achieved for their produce. This will require a modification of their own Open Market theories, such as discussed above, so that their markets work for the good of their own nations, not for the benefit of global capital.

Look after yourselves! Capitalists are required to look after their shareholders, not to look after the nations in which they operate. Oxfam may fulminate, but its pleas will achieve nothing if national governments do not look after their own people.