Comparative Disadvantage

Over the past 30 years maybe even a bit longer there has been a steady and growing shift of manufacturing based jobs out of the country and into the Pacific Rim countries for example; Japan, Korea, Indonesia, India, Vietnam and China. We were told not to worry about this as those old obsolete factory jobs were being replaced by new service jobs in accounting, finance, health care, legal services and tech related development.  We were told that this was no different then when the United States shifted labor out of agriculture into manufacturing. Therefore don’t worry about it, things will work out and be even better.  We were told that this was called globalization and the free trade between nations was the way to prosperity for all.  And according to Adam Smith in his book The Wealth of Nations this was, in fact, true and was explained by the principle of comparative advantage which we must understand first before we can understand the opposite of disadvantage which is what we have.

Comparative advantage is a result of one group, or person, doing one thing very well and another group, or person, doing something else very well.  They then strike a bargain between them to trade some of each of their product or production to the other at some ratio that they both agree to.  The result of this is that both groups, and/or both people, have more then if they had tried to make or produce everything themselves, as in jack of all trades master of none. This is a key concept and for it to work properly there must be a “free” movement of goods and services between the two groups, or people, and no “interference” between the bargaining that sets the exchange ratio.  Meaning no outside influences like government and regulation which will always distort the process either some or a lot.

Today we find that the manufacturing jobs are gone but we also find that the service jobs are gone as well, in fact some of the service jobs left faster then the manufacturing jobs.  Try calling for any tech support or customer service and you will, in many cases, end up talking to someone in India.  Although it must be said that there has been some blowback on this as it was very hard to get someone to understand you. So what happened — what went wrong? Was it evil greedy business men looking to make a few cents more on a product because labor was cheaper someplace else?  Was it labor unions driving up the cost of labor?  Was in Health Care being to expense?  Was it Wall Street financiers finding ways to manipulate markets?  Was it the evil Oil companies ripping us off?

Actuality the answer is none of those! The question can be best answered by using a line from an old comic strip “Pogo” created by Walt Kelly from comments he first made in 1953 where he said, “We have met the Enemy and he is us!” So the answer is that we the citizens are the problem!

That is actually a parody of a message sent in 1813 from U.S. Navy Commodore Oliver Hazard Perry to General William Henry Harrison after the Battle of Lake Erie, stating, “We have met the enemy, and they are ours.” Kelly was a master of satire and parody and produced Pogo in syndicated form from 1949 to 1973 when he died from complications from diabetes. The strip was carried on by Kelly’s wife and son for two more years before it was stopped.

The reason that we the “Citizens” is the answer to why this happened is that we the “Citizens” let the politicians convince us that what was going on with globalization was OK and we should not worry.  We believed them even though it didn’t sound quite right to us. But they told us they were the “best and the brightest so we believed them. And there were some good times originally until the dot com bust and then 9/11 and Enron after that the cancer took hold with a vengeance and the jobs were soon almost all gone.  But there were signs early on like Billy Joel saw in his song Allen Town from a 1982 Album ‘The Nylon Curtain’.  Then there was the 1987 movie Wall Street Directed by Oliver Stone starting Michael Douglas, Charlie Sheen and Daryl Hannah, with its warnings about breaking up companies for profits.  And we can throw in Disclosure a 1994 movie also starting Michael Douglas which is about the games being played in Silicon Valley with all the production (a side issue) in Indonesia.

While the country was being dismembered one company and one job at a time we the Citizens were worried about all the really important things in life like; gay rights, abortion rights, civil rights, the environment, women’s rights, animal rights, handicapped peoples rights, emigration rights, affordable housing, breaking the glass ceiling, not offending anyone (Political Correctness), taking God out of everything, and not teaching anything of substance in our schools so that no one would feel bad because they couldn’t learn.  So today we have all those rights in spades but no jobs. Which was really more important?

Having lived through the 1980’s as a businessman in production related industries in a senior management position the effects of the political policies of the 1980’s were very apparent.  No one seemed to care about what was happening to business their focus was solely on all those issues listed in the previous paragraph which by the way is not a complete listing it’s just a sample.  But why would these social issues matter to businesses and job creation? And what does any of this have to do with comparative disadvantage?

First we need to discuss business and its purpose which is to make a profit so that the investors can be paid back for making their investment in time and/or money.  If a business can not make a profit that it can “keep” then the investors will either not invest or they will sell their position (at a loss) and the business will close. Therefore no business can stay in business without making a profit. So by simple extrapolation profits are good not bad.

They are the reward for doing a good job

The lack of them is the penalty for doing a bad job

So how does a business make a profit?  Well there is really only one way and that is to sell a product for more then what it costs to make the product and in addition cover all the costs of being in business.  A key point here that most people do not appreciate is that the only thing that matters to an investor is the net cash left after the deduction of all expenses; which includes production costs, operating costs and all business taxes.  So it’s easy to see that to have anything left over to pay the investors, the price of the product or service has to be greater then all the costs of providing that product or service, including taxes.

Anything that raises any part of the cost of doing business “must” be passed on to the consumer in the form of “higher” prices.  Even Adam Smith knew this, it’s in his book.

Therefore if society determines that businesses must include social costs as for example in complying with OSHA, EPA, NLRB rules and providing HEALTH CARE (a complete listing of rules and regulations would fill this entire paper) as well as property taxes and income taxes the costs of doing business are by definition driven up.  And therefore as the costs are driven up the businesses must raise their prices or go out of business. Their revenue must always be greater then their costs, to stay in business. Or one other is by government subsidies (additional revenue) but then the government needs higher taxes to do that. And the government also gets the right to participate in that business.

Now we get to comparative disadvantage for we in America do not have a closed society we allow others to sell goods and provide services in this country.  Discounting transportation cost which are minimized by huge cargo container ships we have goods coming into this country from countries that do not have the same social cost structure that companies here have.  American companies are therefore at a comparative disadvantage.  And to be honest the actual direct labor component, even with unions, maybe the smallest element in their high cost structure.

For example the hard push today to “Green Energy” which costs more to produce as any technical person will agree to.  According to the International Energy Agency (IEA) in 2005 the average cost of electricity in the United States was $.052 per kWh and in China it was $.032 per kWh. This is before the big push to renewable sources which will drive up the cost of electricity here even higher. For example, according to the U.S. Energy Information Administration (EIA) in their report of H.R. 2454 (the clean energy act) electric rates $ per kWh could easily double during the time frame of the report if that law was ever enacted.  If the business in China were paying on average only 55.2% of those of their U.S. competitors now, that is a major Comparative Advantage that they have.  Further it would seem that that advantage will get bigger as the EPA pushes to implement its clean energy agenda. This is being done through rules and regulation by the EPA even without the passage of any carbon reduction legislation being passed.

If we add to that all the other social costs of doing business here (we are not considering the social merit here only the costs) from say worker safety and pollution for example we quickly find that it would be almost impossible for any U.S. company to produce anything in our country that could not be produced and delivered here cheaper from a foreign source.  It does not require a degree in economics or finance to see that this is just not going to work. Common Sense alone tells us that the system our current leaders have put in, because we told them we wanted these social benefits, welfare programs and regulations, and this will continue to drive production related business out of this county.

Walt Kelly, “We have met the Enemy and he is us!”

However our politicians, although they gave us the rules and regulation we asked them for, didn’t explain to us the consequences of those rules and regulations as they became apparent. As we saw in the songs and movies of the 1980’s even the entertainment industry saw what was happening.  So why didn’t the politicians do something — well it was really very simple.  As the trade imbalance increased and cheap goods poured in, through Wall-Mart initially, the countries that were flooding the U.S. with cheap products elected to buy U.S. treasures bonds (T-Bills) rather then products and services that were too expense to buy from the U.S.

So what most of us would say?  Well as it turns out this is the most critical element of the predicament that we are now in.  Our elected officials being from the best schools and being very educated (that’s what they tell us and is the reason we are supposed to listen to them) knew what was happening but since the countries that were giving us the cheap goods were buying T-Bills the politicians had more money to play with and so to them having those extra funds meant they could pay for things that they otherwise could not provide (to us).  This made them look good and got them re-elected. And they could always blame the job losses on the evil businesses that just didn’t care.

There has been a lot of talk by economists that claim this is of no concern as eventually those countries will have to move out of T-Bills so it doesn’t matter.  Although technically that may be true in “economics,” in the real world its nothing but farm pollution.  For example we are told that foreign purchases of T-Bills hold down the rate of interest which is good.  True yes, but rather then use that low interest rate to build infrastructure and promote business investment we used it to finance our social programs. The problem with that was that the social transformations increased the cost of doing business which made the situation worse.

It was an absolutely perfect positive feed back situation working like this: as the foreign purchases increased the government had more funds to make social changes which then raised the cost of doing business, which drove more business out, which then resulted in more imports, which then result in more money for the government to play with. There was just no incentive to stop this from happening in the government; it would have stopped the money flow to them.

In addition as the businesses closed or moved operations out of the country there were both fewer businesses to pay taxes and fewer employees to pay them as a result.  So with fewer and fewer workers the tax burden per worker was forced higher and higher. Fewer workers meant the government needed to provide more services and therefore the government needed more funds and the resulting growing deficit was financed increasingly by foreigners.

In simple terms the foreign purchases of T-Bills represents the hidden social cost of U.S. policies compared to those in the rest of the world that is bringing us our products.

In the study of economics one quickly learns that in the “long run” most everything works out.  The artificially induced distortions by governments and rulers are never sustainable for very long.  Look what happened to the workers paradise the U.S.S.R. it only lasted 70 some years before collapsing. China lasted even a shorter time maybe only about 50 years before making a major change and letting a private sector develop there. Although to be fair they did see what happened to the Russians and so making a change was the only way to avoid a similar collapse for them. They did stay in power which was the really important part to them.

We can not by law or regulation overrule these three things: human nature, the laws of physics and engineering or the principles of economics.  An economics professor of mine one told us in class that the only thing any government can do is to create “shortages” or “surpluses” and he was 100% right.

We have the Department of Energy and a shortage of energy

We have the Department of Heath and Human Services and we have a surplus of poor

We have the Department of Labor and a shortage of jobs

We have the Federal Reserve and that has given us both a shortage of and a surplus of money.

Neither the shortage of energy nor the surplus of poor nor the shortage of jobs nor the swings in money existed as a major problem prior to the creation of these agencies.  Each of these government departments was created to fix a problem that at the time was a short term problem not a structural problem.  And each time this happened we lost a little bit of our Comparative Advantage for each of these changes added more rules and regulation that had to be followed.

So now these and many other government actions and social issues have eliminated most all of the Comparative Advantage that the U.S. once had.  The options for getting it back are slim to none unless we take drastic action — and very soon.

So where has this taken us then what have all these really smart and educated politicians given us with their politics?   Well it a very easy thing to answer — no jobs!  Americans want to work and take care of themselves and their families they don’t want some big government telling them what they can or can not do.  The Citizens can develop a feeling in them collectively when major shifts occur;.how this occurs is not the subject of this post but the facts are that the public, the Citizens, know that things are not right.  They may not know the details because they have been hidden but they do know that the country is in deep trouble.

One last comment in this post is that there is a fix for at least a part of this.  The process of other countries buying U.S. Treasurers in lieu of buy things here is the main reason we have lost so many jobs. In a free market this would not have happened but since there is no true free market we need some way to compensate for this.

There are two ways this could be done although neither would never be done, and it’s relatively simple.  The first method would be that Congress could pass a law that would state: Starting immediately U.S. Treasuries will no long be sold to anyone that is not a U.S. citizen or a U.S. corporation.  And if a Corporation then it must be at least three fourths’ owned by U.S. Citizens.  All Treasuries that are now held by non qualifying entities will be held to maturity but will not be refinanced.  This will force the money into product services or other non government equities of some kind.

This will raise the interest rate for government securities but that will only put the cost of this kind of borrowing in line with where it should be to begin with.   The effect of this will be to raise stock prices and force the government to be more realistic with its expenditures.  Obviously the change will be traumatic but it will be better then other alternatives as described elsewhere in the book.

The second method would be somewhat easier to implement but it would be just as confrontational.  This method is one of tariffs but not as we presently know or think of them; we add a different twist to them.  If we agree that the various social costs in the United States are in fact driving up business costs and if we agree that the corollary to that is many of the countries that import to us do not have those same costs then there is a way to fix this.

We would set up two tariffs the first being a Social tariff and the second an Environmental tariff.  A task force would be set up consisting of the countries Business and Unions but no politicians.  They would determine what those two non business (not related to producing the product or service) related costs are.  They would also look at the various countries that ship goods here and estimate what each of those counties costs are.  Once that has been accomplished a comparison can be developed between them and two tariffs established one for social costs and one for environmental costs.  A particular country could have none, one or both applied and they would be administered separately.

It would not be reasonable to implement something like this all at once and so it would be phased in over time, say ten years, at 10% of the total differential added each year.  Offsetting this would be an annual review of the tariffs such that if a country got worse of better vis-a-vis the United States the numbers would be adjusted up or down.  A system like this would force countries doing business with us to either clean up their countries or pay the penalty through the tariffs. Over time the comparative disadvantage would be reduced and that would allow some of the lost jobs to be brought back here. The offset to this is that the costs of goods would go up and that must be understood itf we are going to protect our jobs.

Neither of these solutions is desirable in themselves but the alternative of continuing the present system is much worse.  We must have jobs in this country commensurate with the abilities of the citizens and that means there must be a range of jobs available that encompass the full range from manual labor to university professors. Obviously those are the extremes and the bulk must fall in the middle such that the average person can hold a full time job that pays a decent rate.  If we as a society do not provide that then we have failed both as a society and as people.

Over the past few decades there has been a movement created to make a great many changes to our society to correct for the various injustices that are perceived to have existed.  For example we have, as a society, decided that it is wrong to exclude any American, regardless of cultural background, gender, sexual orientation or religious affiliation, from the opportunity to participate in public affairs of any kind.  Ensuring that every American Citizen has equality of opportunity is an admirable idea as well as being part of our core beliefs; where we as a society often go astray is in the implementation of valid ideas.

We must remember: Our society is the result of thousands of years of development.  Culture and beliefs cannot magically be changed with the passage of a few new laws.  Real social change takes generations, and, in fact, changes that are imposed suddenly–and artificially–can only create new problems and backlash.  Worse they can disrupt the very fabric of a society.

As it stands, the laws that we have passed to prevent the exclusion of minorities from our political and economic processes proceed from the assumption that minority individuals (women, African-Americans, Asian-Americans, Hispanics, etc.) are entitled to opportunities because they come from minority backgrounds, not because they possess particular qualifications.

The original idea of not allowing the separate but “equal” concept that existed prior to the fifties for “blacks” to continue was fine, for it was clearly not equal.  The thinking went astray after that change when politicians decided that all minorities, and there was no end to them, could be made to believe that they were “entitled” to special treatment (going to the head of the line so to speak to make up for past injustices). There is little doubt that today, individuals are promoted in part because of their race or gender not because they are the best for the job.

This entitlement culture resulted in a continuing fragmentation of our society into “special interest” groups each vying for victimization status.  The result being that political and other decisions can no longer be made without consideration of the perceived impact on these special interest groups, regardless of the benefits these decisions may otherwise bestow.   A minority person is often appointed to a public position for no other reason than to provide “fair representation” of their minority group.  So, as a consequence, we end up discussing a person’s heritage or gender (real of perceived) not their ability to get the job done.

Another variation of current social thought. There was a television commercial a while back advertising a book on women and women’s issues that was written by a woman doctor.  This commercial implied that only a woman could understand the problems of another woman.  Therefore implying, only a female physician could truly provide effective treatment for a woman.  In other words, men do not experience women’s problems so they cannot possibly deal with them effectively.  It is easy to see that this logic is not only flawed, but is simply absurd.   By extension, only a doctor who has had cancer would be qualified to treat a cancer patient.   Most people would not buy the latter idea, but many are falsely led into serious consideration of ideas like that promoted by the “women’s” commercial, because these ideas carry the weight of “political correctness.”

Then we have the proposition that qualifications no longer mean anything.   In fact, the need for qualifications can be avoided altogether by the use of such techniques as “gender normalization:” This works like this, women are given “points” to compensate for physical differences with men — in strength, for example — in order to compete for jobs with physical requirements with males especially in the military.  Alternatively, the need for physical strength is written out of the job requirement so that women can qualify.   What we are doing with this is developing a social handicapping system, which penalizes skill and ability, bringing standards down to the level of those of lesser ability or achievement.

Along with the above social issues we have also saddled ourselves with the concept of “political correctness.” In plain language, “political correctness” means the prohibition of doing or saying “anything” which may offend anyone for any reason be it real or imaginary.”  Our language has even been modified to reflect this attempt to avoid offense of any kind.

Then we have the feminization of society.  For example, with the development of birth control methods, American women were, for the most part, freed from the burden of unwanted pregnancies, not a problem.   Then, partially because they had more time for other activities, women were put under pressure to work outside the home and to take on leadership roles in business and public life.  They are undeniably very capable of assuming these positions.

Unfortunately, when women assume the responsibilities previously held almost exclusively by men, women not only change the social dynamics of the work place with lots of unintended consequences, but they abdicate their former responsibilities as caregivers to our children.  Since the child-rearing skills of our women produced the men that conquered the world, we are losing a formidable body of skills, indeed.

The other side of the coin is that women are displacing men in the work force, and the men therefore must, in turn, become the caregivers to our children giving rise to a new tern “house husband.”  So it can be seen that we could have a double negative for if the women displace talented men in the work place and if the men aren’t as good as women in child rearing that the net affect on society will be very negative from a performance perspective.

Women are now entering all fields and occupations in the United States in a hell-bent race to “gender neutralize” everything.  But if jobs are to be doled out to people in proportion to their percentage of the population (quotas are the only way to be sure this happens), eventually all positions in all fields will be dominated by women, since there are more women than men in this country.  One documented result is we now have more women graduation from college then men as a result of this policy.

It also means that, to a greater and greater extent, household duties will have to be assumed by men.   Implicit in this train of events is the logic that household work and raising children is demeaning work, to be performed by people at the lowest social level (i.e. the smallest percentage of the population, which, in this case, means men).  The twisted logic inherent in trying to accomplish this kind of transformation is beyond comprehension.  Whether this next statement is political correct or not it is true that there are very real hard wired gender based roles is society.  If we ignore that then we do so at our own peril.

Another very popular social trend is “multiculturalism,” which is being touted as a way to make everyone feel good about themselves, in this case about their background.  As is true with all such “programs,” multiculturalism sounds like a positive idea, but, in fact, has a very negative and detrimental effect in practice.  Inherent in the multiculturalism belief structure is that all cultures are equal and no one culture is better then another.

If someone really believes that is true then there is no reason for anyone to immigrate here for here in America we have a very different culture then exists anywhere else.  The quote below from Teddy Roosevelt in 1919 gives a very good view on being an American.

”Rn the first place we should insist that if the immigrant who comes here in good faith becomes an American and assimilates himself to us, he shall be treated on an exact equality with everyone else, for it is an outrage to discriminate against any such man because of creed, or birthplace, or origin.

But this is predicated upon the man’s becoming in very fact an American, and nothing but an American … There can be no divided allegiance here. Any man who says he is an American, but something else also, isn’t an American at all.

We have room for but one flag, the American flag, and this excludes the red flag, which symbolizes all wars against liberty and civilization, just as much as it excludes any foreign flag of a nation to which we are hostile … We have room for but one language here, and that is the English language … and we have room for but one sole loyalty and that is a loyalty to the American people.”

Theodore Roosevelt January 03, 1919

 To a great extent but not solely the result of the 2008, 2010 and 2012 elections politicians that did not believe that the American system of the past 200 years was any good — were put in power.  Their view of what the country should be like as shown partially in this writing is not what the Citizens of the country think it is and so a very serious conflict is developing.  The Tea Party movement is just the beginning of that conflict.  This work has been written to give the Political and Social background for why this ‘change’ is being fought so hard by such as large portion of the Citizens.

We’ll end the discussion now with a final thought on society and political correctness.  Much to-do about nothing has been made in reverence to ‘names’ that people are called and how it affects’ them and how bad that is.  Well the author of this work has been called just about every name in the book from ‘baby killer’ to “racist.’  And he was discriminated against in the job market because he was a Vietnam vet.  Is there anyone in the world that has not been discriminated against at some time, probably not so the discussion is only on degree?

So what, is the proper response to negative words for if you allow anything like that to have any affect on you then you have given those that do or say things you don’t like “Power Over You.”  Their words are a Taunt made to you and if you react to them that reaction is what they want. Don’t give them the satisfactions of making you react, ignore it. You know if there is anything that you have done that is bad and for most of us it is not true.  But one thing is for sure if you react to those taunts in any way they will not stop.  By not reacting to the offending words you ‘Maintain that Power’ and you become a stronger person.

Consider this old saying which was told me by my mom after some confrontation involving name calling in grade school. It is as true today as it ever was.  Bullying and taunting today causes more problems then they ever did in the past because the kids today are sensitized to things like name calling.  They have never been told what my mom told me.

“Sticks and Stones May Break my Bones but Names will Never Hurt Me.”

That is unless you let them hurt you by your reaction and then you are at fault for the choice was yours after all.