China et al. Are Not “Killing Us”

The current Republican front-runner, Donald Trump, has repeatedly claimed that China, and many other countries, such as Mexico and Vietnam, are “killing us” in foreign trade. The basis of his claim is the fact that U.S. imports from those countries substantially exceed U.S. exports to those countries. In 2015, for example, the overall, total difference between U.S. imports and exports, known as “the balance of trade,” was in excess of $500 billion, with trade with China accounting for about 70 percent of that sum.

An excess of imports over exports is typically described as an “unfavorable balance of trade.” The description of the balance as “unfavorable” derives from the belief that exports are a source both of money coming into a country, in exchange for the goods exported, and of jobs in that country in the production of the exports. Imports, on the other hand, are viewed as taking money out of the country, in the purchase of the imports, and transferring jobs from the domestic economy to the foreign producers of the imports.

It is on this basis that Trump and many others believe that China et al. are “killing us.” The implication of this belief and its intellectual foundations is that the United States needs to adopt a government policy of increasing exports and reducing imports by such means as protective tariffs, import quotas, and export subsidies. (Trump has not yet explicitly enunciated this policy, but it is logically implied in what he does say.)

Now the truth is that in the monetary conditions of the present-day world, an excess of imports over exports does not at all represent a threat to the money supply of a country or the ability of domestic spending to support employment. In the 17^th Century, when the doctrine of the balance of trade first came into vogue, the money of the world was gold and silver. In those conditions, the only way that a country without gold or silver mines could increase its money supply was by means of obtaining money from abroad, in exchange for the export of goods. The import of goods could for a time reduce the money supply of a country.

But today, money is irredeemable paper, and every country manufactures its own money supply. Indeed, in these conditions, an outflow of part of the money supply of a country in exchange for imports is positively favorable. This is certainly true in the case of the United States dollar, which to an important extent serves as a global currency. The fact that dollars are in demand globally, but are produced only in the United States, implies that the United States must export a more or less substantial part of its new and additional supply of dollars. Exporting part of the supply of dollars represents getting imports of real goods in exchange for pieces of paper that are virtually costless to produce and replace. At the same time, it limits the rise in prices in the United States by holding down the increase in the supply of money in circulation in the United States. Thus, seen in this light, an excess of imports over exports turns out actually to be highly favorable rather than “unfavorable.”

Far more important than the gain associated with obtaining imports by means of the export of costless paper dollars is the gain associated with obtaining imports by means of the investment of foreign capital. To make this point as clear as possible, think of Saudi Arabia before it had an oil industry but after geologists had confirmed the existence of vast oil deposits there. What was necessary to develop those deposits was flotillas of ships from Europe and America bringing vast imports of drilling equipment, sections of pipe, the materials and equipment required for building oil refineries, and the consumers’ goods required for armies of foreign workers constructing the Saudi oil industry. Indeed, so far from being a source of unemployment in Saudi Arabia, this allegedly unfavorable balance of trade was the foundation not only of Saudi Arabia’s oil industry but at the same time practically all of the worthwhile jobs that exist in Saudi Arabia, which are either in its oil industry or closely connected to its oil industry. Thus, in fact, nothing could be more favorable in reality than what most of today’s economists absurdly describe as an “unfavorable” balance of trade and a cause of unemployment, namely, such an excess of imports over exports.

Today, investment by China and other foreign countries in the U.S. is what enables the American economy to import more than it exports. As in the case of Saudi Arabia, this investment and accompanying excess of imports over exports makes it possible for the United States to have more and better equipped factories and all other types of means of production than would otherwise be the case, and thus to have a larger number of well-paying jobs. Indirectly, even the purchase of U.S. government securities by China et al. has this effect. Foreign purchases of U.S. government securities hold down the diversion of capital funds from U.S. firms into the purchase of government securities. The government securities that foreign investors buy are government securities that U.S. investors do not have to buy, which enables them to have more funds available for the purchase of capital goods and labor in the U.S. To this extent, its effect is the prevention of the drain of capital funds from the purchase of capital goods and labor by business into the financing of government spending.

In addition, foreign investment in U.S. government securities serves to prevent the Federal Reserve from creating still more new and additional money with which to purchase those securities, something which would represent a substantial increase in inflation in the U.S.

American job losses are not the result of freer trade and an excess of imports over exports, but of government policies that prevent capital accumulation in the United States, among them policies that limit imports. An essential part of any economic policy that would truly help to “make America great again” is to avoid preventing imports.

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Copyright © 2016. All rights reserved. For permission to reprint, please contact the author at georgereisman@georgereisman.com.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics, a member of the FEE Faculty Network, and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Kindle Edition, 2012), The Government Against the Economy, and numerous essays and articles. See his Amazon.com author’s page at http://www.amazon.com/-/e/B001KCWY0Q. His website is www.capitalism.net. His blog is www.georgereismansblog.blogspot.com. Follow him on Twitter at GGReisman.

Washington's Birthday Tweets

Three tweets concerning Washington's birthday, posted Feb. 21, 2016.

George Washington is the single most important figure in American history. His birthday, February 22, should be a national holiday. 

Washington’s birthday and Lincoln’s birthday have been rolled up into “President’s day,” in order to make room for Martin Luther King day

To make room for Washington’s birthday, Martin Luther King day and Lincoln’s birthday should be rolled up into “Black Freedom day.”

Economic Inequality and a Booming Economy

As in my last post, I made the following comments on Amazon.com, in the back and forth of readers' discussions of Piketty's Capital in the Twenty-First Century.

A Piketty supporter asks: "Tell me the time in the [sic] history when the inequality was high but the economy was booming."

Answer: Broadly speaking, throughout the English-speaking world from about 1775 to the present day; the rest of the western world from about 1800 to the present day; Japan from about 1960 to the present day; South Korea from about 1970 to the present day; and China from about 1980 to the present day.

In these years, waves of continuous economic progress began in the areas named, that on the one side created multi-millionaires and billionaires, and on the other side provided growing masses of wage earners with the ability to afford, first, such things as cotton underwear, shoes, new clothes, improving diets, and then railroad and steamship travel, and then electricity, radios, vacuum cleaners, air conditioners, refrigerators, washer/dryers, flush toilets, automobiles, motion pictures, television sets, computers, cell phones, tablets, and, of course, antibiotics and all kinds of other pharmaceuticals as well as all kinds of surgical procedures.

The introduction of the innovations resulted in high profits for the businessmen who introduced them. The profits were heavily saved and reinvested, and served in the expanded and improved production of the very kinds of goods whose production provided the profits. The inequality was/is in the height of the profits and in the consequent wealth invested in producing the goods that the masses buy. That same wealth is the base of the demand for the labor that the masses sell.

This is an answer spanning centuries and many millions of square miles. For elaboration, read my book Capitalism: A Treatise on Economics. For a brief introduction, read my Kindle essay "How the 1 Percent Provides the Standard of Living of the 99 Percent."

 

The Threefold Disaster that Comes from Imposing Economic Equality

I made the following comments on Amazon.com, in the back and forth of readers' discussions of Piketty's Capital in the Twenty-First Century.

 

People are unequal in their genetic inheritances, their upbringings and environments, and, above all, in the important choices they make over the course of their lifetimes. An inevitable result is economic inequality.

Imposing economic equality nonetheless has at least three enormously destructive effects:

1. It is tantamount to the destruction of the law of cause and effect in the realm of production. For example, under economic freedom, an individual who produces twice as much, while everyone else continues to produce the same, will be able to enjoy twice as much. But if his doubled production must be shared equally by the the 7 billion-plus inhabitants of the globe, this individual instead of receiving twice as much as the result of his doubled production will receive only one 7-billionth of twice as much, which is to say, for all practical purposes, nothing whatever. Under the freedom of economic inequality, an individual is capable of improving his own and his family’s economic well being dramatically. But when the requirement is that in order to improve his own well-being, he must improve the well being of the whole population of the world to the same extent, then he can accomplish nothing. It is like seeing that an individual’s legs are strong enough to enable him to walk, and then demanding that to walk, his legs must be sufficiently strong as to be able to carry the weight of the whole world’s population.

2. Economic inequality is essential to enable less capable people to outcompete more capable people and thus to be gainfully employed in the economic system. For example, here are two workers, one of whom is twice as productive as the other. What is required to induce an employer to prefer the employment of the less capable worker? The less capable worker must be willing, and legally free, to work for less than half as much as the more capable worker. In that case, he becomes the less expensive worker per unit of output. Imposing economic equality, or any measure in the direction of economic equality, such as minimum wage laws or increases in the minimum wage, prevents less capable workers from competing, and forces them into unemployment and a life of permanent poverty.

3. Imposing economic equality wipes out the enormous gains that the average person derives from the greater wealth of others. In a market economy, the wealth of the rich is not in piles of personal consumers’ goods, but in means of production, in which capacity it produces the goods and services that everyone buys and is the foundation of the demand for the labor that the wage earning masses sell. The greater the wealth of businessmen and capitalists, the greater is the production and supply of goods and services and the greater is the demand for labor, and on this foundation the lower are prices and the higher are wages, and thus the higher is the general standard of living.

For further discussion, see my Kindle essay "How the 1 Percent Provides the Standard of Living of the 99 Percent" and my magnum opus Capitalism: A Treatise on Economics also available in the Kindle store . A complete list of my 16 Kindle publications on free enterprise appears at http://www.amazon.com/-/e/B001KCWY0Q

 

Radio Interview

I was interviewed yesterday by John O’Donnell of Power Trading Radio on the subject of “How the 1% Provides the Standard of Living of the 99%.” The interview can be heard at www.powertradingradio.com.

Sincerely,

George Reisman

NY Times Covers Up Gestapo-like Political Raids in Wisconsin

New York Times covers up Gestapo-like political raids in Wisconsin. For proof, go to http://bit.ly/1CXfewe and then to http://nyti.ms/1MMSkpY.

If you are a subscriber, see also The Wall Street Journal's article on the subject, at http://www.wsj.com/articles/the-wisconsin-targets-tell-their-story-1437608811.

 

Ebola Won’t Wait for the FDA

Just as fear of Ebola gaining a foothold in the United States in Dallas seemed to be passing, a new case has appeared in New York City. Even if we are so fortunate that no further cases result from this one, the underlying problem will still remain, namely, that many thousands of new cases of Ebola are occurring in West Africa, where its incidence is accelerating.  So long as this is true, it is simply not possible to avoid new cases coming in from abroad, even with the most stringent bans on travel from West Africa. Indeed, even if for a time the disease did not enter the United States again, but merely spread throughout the Third World, that process would create multiple new sources of contagion and, to protect itself, the US would have to impose corresponding additional travel bans. Unless the United States, or the United States in combination with the world’s other advanced economies in a position to cope with small numbers of cases, is able to put itself in a position in which it could effectively close its borders to the rest of the world, the only long-run solution for Ebola is to bring the disease under control in West Africa and wherever else it might appear.

In other words, what is needed is one or more effective cures for Ebola and low-cost, reliable methods of stopping its spread. Unless and until this can be done, the whole world remains at risk of being ravaged on a scale exceeding that of the Black Plague in the 14^th century. With today’s highly interconnected global economy, Ebola has the potential to infect practically every one of the world’s more than seven billion people. With a mortality rate of seventy percent, that implies a potential for approximately five billion deaths.

And Ebola is not the only disease that threatens mass death. There are also various strains of flu and other respiratory illnesses. No less frightening is the fact that existing antibiotics tend to lose their effectiveness as bacteria become resistant to them, with the result that there is a continuing need for new antibiotics in order to in order to stay ahead of the changes in bacteria populations and thereby avoid losing the benefit of many of the medical advances made in the last century.

It is impossible to meet such threats under today’s governmentally imposed FDA regimen, in which it typically takes more than twelve years to bring a new drug from the laboratory to the market and requires an investment ranging from several hundred million to more than a billion dollars. Indeed, it appears that there could already have been a cure for Ebola if its development had not been been stifled by this regimen. According to The New York Times, “Almost a decade ago, scientists from Canada and the United States reported that they had created a vaccine that was 100 percent effective in protecting monkeys against the Ebola virus.” But, as The Times put it, “The vaccine sat on a shelf.” It sat on a shelf because of the prohibitive costs imposed by the FDA on the development of new drugs.

The FDA regimen that we have for the development of new drugs was established for the intended purpose of making new drugs safe and effective. But its actual effect has been to leave us in a position in which we have drugs of zero effectiveness because those drugs have been prevented from even existing in the first place, and in which we are all terribly unsafe because of the absence of those drugs. The effect of the FDA’s regimen has been to prevent the development of the medicines on which countless lives depend.

It is true that about fifty-five years ago the FDA, by refusing to approve the use of Thalidomide as a tranquilizer for pregnant women, prevented a substantial number of babies being born with severe birth defects. It may also be true that in keeping as many new drugs off the market as it has, it it has also succeeded in preventing other, similar disasters. Of course, if it kept all new drugs off the market, there could be absolutely no disasters caused by new drugs. The disaster, the far greater disaster, would then be the absence of new drugs. What the FDA has achieved is precisely a substantial movement in that direction. It protects us by preventing us from taking the risks inherent in progress. This is not protection, but a formula for unprecedented disaster. In the face of such a tradeoff, the United States and the rest of the world would be safer without the FDA.

To have a chance of overcoming Ebola and other potential public health calamities, the FDA must lose its monopoly on deciding what medicines can be produced and sold in the United States. Short of its being abolished altogether, which would be the best solution, its powers must be reduced to that of an advisory body only, in which case, while it might continue to approve or disapprove of drugs, no one would be compelled to follow its decisions. Then we would have a fighting chance to once again make the world safe from plagues.

 

*Copyright © 2014 by George Reisman. George Reisman, Ph.D. is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). See his Amazon.com author's page for additional titles by him.  His website is www.capitalism.net and his blog is georgereismansblog.blogspot.com.  Follow him on Twitter. 

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