Saturday, September 22, 2012

How to Destroy the Global Economy

    World leaders seem determined to destroy the global economy via their idiocy.  Ever helpful, the Village Elliot will elucidate for our leaders some simple steps that are likely to bring the world to the brink of destruction. 
     Actually, the global economy can probably be brought down by the United States (the number one economic superpower in the world), and China (the number two economic superpower).  
     In some ways the economies are built upon opposite principles.  China's amazing economic growth for the past 30 years has been fueled by an export-based economy, rolling up government surpluses (at least until recently) and discouraging consumption.  They few economic success in terms of their production.  Through a variety of laws and political maneuvers, their economy is export-friendly and consumer-unfriendly.  Hence, according to Wikipedia, China is by far the number one producer of commodities such as steel (8 times the US), aluminum (10 times the US), coal (3.5 times the US),  cement, (30 times the US) and many many others. The US produces more natural gas and oil, but otherwise we are nowhere near China.  Their manufacturing technology is also by far better than the US. China produces twice as many cars.  The US no longer even tries to produce its own TV's and VCRs and let's not even talk about cheap-o children's toys.   Overall, the Chinese Industrial Output was valued at about 4.4 trillion dollars versus 3.4 trillion for the US.  
 China produces a bit of steel---eight times the output of the US, which used to be number one in the world.

    The US, on the other hand, bases its economy based on comsumption, not production.  Hence we out-consume the Chinese by two to one even though China out-produces our industrial output. Figure that one out, please.    The US economy is partially financed by its incredible buying power, and strong banking (at least until recently) such that our politicians are gladly sponsoring some 1.5 trillion dollars of national debt per year, and an annual trade deficit of some 500 billion dollars.  Oh some of the congress may pretend to be upset at the deficit, but as long as the standard of living is maintained among likely voters, they have proven that they are willing to tolerate massive debt.  

    The problem is that when things go sour, the politicians try to fix things by doing what they have always done.  In China, there are now warehouses that are completely full of merchandise that they can't sell because overseas demand is completely saturated.  I mean, how many Happy Meals can they expect American kids to eat?   The average Chinese worker works 60 hours a week but doesn't make enough money be able to afford to buy the products that they make.    The solution?  Lower the price and export even more!!

   In the US we have high unemployment and stagnant growth, not to mention an inconceivably large deficit.  It would only make sense if we could modify our system to favor hiring the people who are now unemployed so that they could make some of the products that are currently imported.  However, our politicians simply can't imagine  that.  Our politician's solution?  Borrow more money and import even more to maintain the average standard of living.  If we have additional unemployment, it doesn't matter as long as purchasing power among the employed goes up to compensate.  

    What would happen if these politically imposed economic trends continue?  China will produce more and more stuff at a lower and lower price while it's people all suffer in poverty.  In the US, rich people will have warehouses full of possessions imported from China, while the rest of the American people are unemployed.   Likely this is not going to actually happen however, because at some point the people will wake up and toss these idealogues out of office.

  What's really going on here is that politicians are too rigid in their thinking.  Any economist can tell you that you need different strategies to fit a changing situation.  When the economy is bad, you need tax cuts and increased government spending.  Conversely when the economy is growing you need to increase taxation and cut back on spending.  This is in fact what happened in the Clinton era, but was reversed by Bushanomics in which we cut taxes and increased spending with a growing economy.  Not smart. 

   This whole thing would work if China would find policies that would allow its workers to be paid enough to buy more of the products that are produced, and export less.  On the other hand, the US needs to employ its workers, and one way to do that is to decrease imports and manufacture more products domestically.  That results in more hiring and more jobs and less borrowing.  

   In the case of the US, this is unpalatable, however.  We really don't care that much about the unemployed, and we certainly don't want jobs for involving commodities like energy, or the basic building blocks of economic growth including  iron, steel, cement, non-ferrous metals, chemicals, etc.  Heavy industry is considered environmentally icky, and if we hire a bunch of workers, they just unionize anyway.  So politicians are not comfortable with heavy industry.     Hence our politicians are not adverse to destroying jobs in these fields, and allowing them to go overseas..   Better we should create a new economy based on Americans pushing paper around,  and allow China to produce products and sell them to us at ever lower rates. 

America does not really care about workers in heavy industry, as terrible as that sounds.   Give American politicians the choice between cheap stuff from China versus low unemployment, and they'll take the stuff, thank you very much. 

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