Analysis: If the Truth Be Told

Among the misconceptions set forth by the new Right in this country is that American labor, largely through union activity, priced itself out of competition in a globalized economy. The argument goes that, in a market economy such as that of the United States, it is only rational for employers to seek the lowest cost factors of production, be they raw materials or labor; and if labor is cheaper elsewhere, then that is where profit maximizing companies will go to secure it.

Economics for Dummies: The Neo-Con Reader's Edition
The proposition that American labor is "too expensive" is simplistic, and here's why. Throughout the 1980s, the United States federal government ran ever larger budget deficits, due in no small part to the Reagan Administration's tax cuts in the early years of the Gipper's first term. Federal budget deficits put upward pressure on interest rates. This is because the United States Treasury is entering global capital markets to compete for lendable funds; and because a sovereign nation will pay whatever rate it must to induce lenders to provide the needed money, the result is higher interest rates for all debt, both public and private.

The price of an American dollar is the interest rate it can earn. So, as domestic interest rates rise, the value of the American dollar increases relative to the values of other currencies whose interest rates are not under the same pricing circumstance. Stronger American dollars means American exports, which are obviously denominated in those dollars, become more expensive in overseas markets. And relatively speaking, because foreign currencies are becoming less valuable as the American dollar becomes more valuable, imports to the United States become cheaper.

In fact, though, everything foreign becomes cheaper, including factors of production!

No, American labor didn't price itself out of global competition; the federal government, through its budget deficits, did that. Factors of production don't willfully commit suicide, particularly when irresponsible Republican Presidents are happy to do the deed as an old-fashioned execution of the labor movement.

Something for Everyone
When U.S. interest rates are higher than those of foreign trading partners, American dollars become very attractive overseas. In fact, they become so desirable that foreign producers will lower their prices just so they can sell stuff to Americans and thereby get their hands on some of those dollars. But don't worry about those greenbacks getting homesick. They'll come back as capital investment since this is where the dollars earn the good interest rates. That's the whole point of what exchange rates and interest rates do to maintain asset flow balance: the short-term asset called dollars flows outward, creating a negative trade balance; then it flows back this way, creating a pretty much equal, positive capital account surplus.

That means foreigners get to own lots of long-term, American assets, like corporations and real estate and piles of government Treasury debt, while Americans get to own lots of short-term, foreign assets, like Toyotas and blenders and computers and Walmart junk. It works out as an equation, and prevailing exchange rates set the stage for this circulation of capital to always stay in rough balance.

A Primer on Factors of Production
When any good or service is created, the production process utilizes a mix of five broad categories of inputs. These so-called "factors of production" are land, physical capital, labor, human capital, and entrepreneurial skill, this last one being peculiar to production in capitalist economies.

Land is the physical platform upon which production takes place. In some cases, lots of land is required; in other cases, very little.

Physical capital—machines, trucks, buildings, etc.—is to some extent and in some industries a substitute for land: for example, service companies can render production in a skyscraper, whereas manufacturing companies usually have to spread out because of the need for horizontal assembly lines. That's why the downtown areas of big cities are dominated by tall buildings housing things like banks, law firms, and insurance companies, whereas the peripheries of those same cities are ringed by manufacturing plants.

Labor is nothing but raw muscle power, brute mechanical energy ready to be set upon tasks put before it. Human capital is knowledge, skill, understanding, and perhaps even wisdom set upon tasks before a person. Labor and human capital are unusual in that labor is always becoming human capital, either through formal training, as in education, or through learning that comes naturally to any beast (with the exception of neo-conservatives, who seem never to learn one tom-fool thing, despite the cornucopia of their past mistakes).

Entrepreneurial skill is the risk-taking, human organization of the other four factors in a combination that will create some output at a profit that compensates the organizer for his or her risk borne. As noted above, this one is unique to capitalist (or so-called "market") economies, although all shades of it show up even in communist economies as underground and otherwise illicit activities.

A Moveable Beast
Many industries locate with factor costs in mind. If it saves enough money, a plant will operate as close as possible to the source of its primary production factor. That means, if a manufacturing process is labor intensive, then companies in that industry will tend to locate, or re-locate as the case may be, where the labor is cheapest.

Now, most people are going to say, "Ah-hah! That's why America has lost all of those jobs to Third World countries. It's just tragic. It's terrible."

Well, yes, but blaming laborers in India and China or blaming greedy American companies misses the whole point. Remember what has been happening for more than several decades: American dollars—and therefore all things priced or denominated natively in those American dollars—have been very expensive. No, it wasn't the unions or escalating minimum wages or skyrocketing benefits in and of themselves that propelled companies to seek cheaper labor overseas: it was the regime of exchange rates that did much of the dirty deed; and those exchange rates were driven by the manner in which the United States chose to manage its fiscal house.

The chain of causality is not that difficult to track, but it certainly doesn't serve the purposes of neo-conservative politicians or the management of corporations to see it that way. Instead, the pro-business forces within this country would rather howl about getting wage and benefits concessions so America can remain, or maybe once again become, "competitive." But if the reason jobs flow overseas is relative currency valuations, wage and benefits concessions have no effect other than to produce a domestic labor force that would be entirely under-compensated were the United States government to have behaved in a financially responsible manner.

Yeah, But What About Illegal Aliens Taking "Our" Jobs
Go back to the value of the dollar. In a world where dollars are more valuable, factors of production will receive their best compensation if it is denominated in those dollars. Now, a machine can't get up and say, "Oh, I'm heading for Topeka because I can rent myself out in dollars, whereas if I stay here Mexico City, I get lousy pesos." Neither can a plot of land say, "I'm pullin' up my sod from here in Haiti and headin' to Miami where people pay for land in greenbacks."

But a person—that really unusual labor/human capital combo factor of production—can do precisely that: it can flow toward the place where its compensation is the best, even if "best" is nothing more than a technical feature of the currency's strength caused by exchange rates. And just as it does nothing to solve the problem of "expensive American workers" by demanding that they accept lower pay and fewer benefits, it does nothing to solve the problem of low wages and good jobs by turning into a bunch of kick-them-foreigners-out xenophobes. The immigrants—legal and illegal, both—are here not because America is the greatest land with the best television shows and the most wonderfully fulfilling jobs on Earth; it's because the American dollar is so valuable that they, like every other foreign importer, are willing to trade what they have at low prices just to have some of those greenbacks.

It's exactly the same dynamic, and it's caused by an America that has for years used the steroid of deficits to live so far beyond its public means that its currency is a magnet for every manner of foreign good that can flow this way.

Slapping tariffs on foreign imports, putting machine gun turrets at the borders, and pasting "Buy American" bumper stickers on Ford trucks doesn't fix the underlying problem. Fiscal discipline does that, and it's not just a matter of cutting every social welfare program that Right-wingers have been just dying to eliminate. It has as much, if not more, to do with constructing a tax system that isn't a candy store for Republicans to smash open for the electorate every time they want some votes.

What Won't Happen That Should
Somewhere along the way, some politician—be it a Republican; an Independent; or God forbid, a real Democrat—needs to lay it out for the American people:

No, I'm not giving you a tax cut. You've had too many. In fact, I'm going to raise taxes, most particularly on the wealthy, not just because they can afford it, but also because it's when they screw up that the most damage gets done that the government has to clean up. And if the rich people say anything, I'm going to rip into them for the bunch of perpetual crybabies they are.

Oh, yes, and about cutting federal spending: we need to chop down a lot of pork-barrel projects. That's always on the agenda. And we'll probably get rid of some social services spending, too, but that's sure as Hell not a priority when we've got so many people doing without in this country. Before we do much cutting of domestic programs, we're going save a whole lot of money by knocking it off with starting wars against stupid little dictatorships halfway around the world. That's too expensive, especially when they get so bitchy about the part where we try to take their oil.

And finally, if any of you stand up and start whining about 'immigration reform', 'fair trade', or 'wage concessions', you're going to get kicked right in the ass, even if you can't pull your head out before my boot hits paydirt.

Saying such things would require the intelligence to grasp what is right and then the bravery to lead righteously.

That means it won't happen. Not in this era, anyway.




The Dark Wraith has spoken.