Posted on 07/19/2004 9:16:15 AM PDT by Willie Green
For education and discussion only. Not for commercial use.
On July 13, the trade figures for May were released and again the United States suffered a massive trade deficit in goods – $50.8 billion for the month to be exact. Though the monthly deficit was slightly less than in April, it was $5.1 billion higher than in May of last year. Since trade in services was essentially unchanged, it was trade in goods which accounted for the continuing bad economic news as American industry continues to suffer in world competition. At the current rate, the trade account is on course to reach a goods deficit of $600 billion this year, a truly alarming amount of red ink.
Ideological defenders of this dark status quo have resorted to a staggering array of arguments, all of which collapse immediately upon examination. For example, Brink Lindsey, director of the libertarian Cato Institute´s Center for Trade Policy Studies claimed in a policy paper published in March, Between 2000 and 2003, manufacturing employment dropped by nearly 2.8 million, yet imports of manufactured goods rose only 0.6 percent. Actually, manufacturing imports were up 1.01 percent ($13.9 billion) according to the Commerce Department, and that was over a period which included a recession, when demand for imports is supposed to be reduced. Lindsey also neglected the other half of the equation, American manufacturing exports, which dropped by $131.6 billion (19.1 percent).
The combined effect of higher imports and lower exports was a trade deficit in manufactured goods that was a staggering $469.5 billion in 2003. Only someone completely blinded by ivory tower theory could fail to see how such a swing could harm the U.S. economy. But then what can be expected from someone who has argued that the true value of the World Trade Organization is not that it opens overseas markets to American exports (that support American jobs), but that it keeps the U.S. market open to foreign producers (who employ foreign workers).
More and more, defenders of the trade deficit are citing how cheap imports benefit consumers since they have clearly lost the argument about jobs. This is not, however, a new argument. Indeed, it goes back to the very first debates over trade policy in the 19th century. It was then called the cheap bread argument because bread was literally the main staple in working-class diets. The basic claim was that cheap imported grain was a substitute for higher wages, but the setting of the argument was even more ominous.
David Ricardo (1772-1823), an English banker and member of Parliament, is best known for the economic theory of comparative advantage in international trade. But he also authored the iron law of wages theory in 1817, which held that wages naturally tended towards a minimum level corresponding to the subsistence needs of the workers. The power of the labourer to support himself, and the family which may be necessary to keep up the number of labourers, does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit, which that money will purchase. The natural price of labour, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the labourer and his family. With a rise in the price of food and necessaries, the natural price of labour will rise; with the fall in their price, the natural price of labour will fall.
In other words, workers need a certain amount of consumer goods to survive and raise the next generation of workers. They cannot expect to earn more than this subsistence level. It is in the interest of employers to keep the cost of living down, so that wages can also be kept low. As Ricardo noted, A rise of wages, from the circumstance of the labourer being more liberally rewarded, or from a difficulty of procuring the necessaries on which wages are expended, does not, except in some instances, produce the effect of raising price, but has a great effect in lowering profits.
The value of trade then is not to the worker, who cannot expect his living standards to rise above their natural low level, but to the employer and factory owner who make a profit from the difference between what is paid in wages and what is earned from the sale of products. There was no notion in Ricardo that workers would increase their real wages as their productivity increased. They would earn their keep but nothing more. Increased productivity was the result of capital investment in new technology, and the higher profits would go to the owners of these improved means of production. This is very much what has been seen today, as productivity and profits have been soaring, but real wages have been stagnant at best and falling in many industries.
In is thus not surprising that the first great free trade movement in England was that of the Anti-Corn Law League led by firebrand Richard Cobden in the decades following Ricardo s iron law of wages. The Corn Laws created a system of protectionism for British farmers. The Anti-Corn Law argument was that food prices would be lower if England opened itself up to foreign grain imports. And if food prices dropped, so could wages and British industry would be more competitive.
There were other arguments made as well. For example, it was said that foreigners needed to sell agricultural goods in England to earn the money needed to buy British manufactured goods. A modern version of this argument is now being used in support of the campaign to cut U.S. farm support programs and open the American market for agricultural imports from Latin America and elsewhere. The problem with the argument today is that the United States is already running a trade deficit that provides foreigners with more than enough money to buy American goods – they just are not buying.
The view that workers were merely a factor of production, just another commodity, with no more chance of improving their condition than does a ton of pig iron or a pair of boots, was a major factor in the rise of anti-capitalist movements of which Marxist socialism became the leading doctrine. The socialists did not add anything new to economic theory. They accepted the dismal science of classical economics, but rejected as unacceptable its consequences.
Ricardo held that like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature. But it was this very interference that allowed the United States to escape the Ricardian trap. The great success story of America is the transformation of the working class into the middle class. Trade protectionism kept the demand for labor higher and the supply of labor lower than the natural order favored by the classical economists. The result was higher real incomes, as the creation of a mass market of affluent workers supported the advancement of industrial science and growing productivity. Unions and professionals were able to bargain for their share of the higher profits. America became the envy of the world. Higher incomes are always preferable to lower prices because they impart more control to the wage-earner over how his money will be spent, or saved.
Now, the return to prominence of classical theory in the service of transnational corporations has branded the achievements of American society as commercial liabilities, harming the competitiveness of American industry in the face of underdeveloped societies where Ricardo s iron law still rules and workers receive the barest subsistence. Ricardo is very clear about what happens when the number of labourers is increased, wages again fall to their natural price, and indeed from a reaction sometimes fall below it. When the market price of labour is below its natural price, the condition of the labourers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries. It is only after their privations have reduced their number, or the demand for labour has increased, that the market price of labour will rise to its natural price, and that the labourer will have the moderate comforts which the natural rate of wages will afford.
For Ricardo, the reduction in number of workers is the result of mass starvation as their wages drop below what can maintain their families. People are thought to be no different than herds of any other animal. Today, the increase in the labor supply in the United States is not from domestic overpopulation, but from the mass surge of foreign populations into the global labor pool. The way to restore a favorable balance for the American middle class employee is to cut the foreign workers out of the U.S. market. Nations progress by improving their own means of production and boosting incomes, not from the consumption of cheap imported goods that boosts production somewhere else.
William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.
ping
Continuing bad economic news? Ya, low unemployment, low interest rates, low inflation, and rapid GDP growth is all bad economic news.
The protectionist argument yet again. Remember what happened in the 30's -- want to repeat that?
Is the job market, stock market, trade deficit or budget deficit better than before PNTR? See my tag line for the answer.
A ringing call for economic lunacy with a dollup of jingoism thrown in for good measure. Ricardo is not given his due and his theory is not adequately fleshed out. Ad hoc conclusions drawn out of thin air do not help make up for misleading statements and a lack of logic. Misleading and incomplete comments are particularly disingenious and deceptive.
All in all I would give this a C-.
To Kerry and other economic Loons it is terrible news just terrible.
Placemarker to read later...
Sounds to me like you're describing your own post.
"the United States is already running a trade deficit that provides foreigners with more than enough money to buy American goods ? they just are not buying."
"Higher incomes are always preferable to lower prices because they impart more control to the wage-earner over how his money will be spent, or saved."
Actually I think this is a pretty good assessment of the theory. Ricardo's theory was not based on a global market. It was impossible then to imagine the trade we have on global scale today. It's an antiquated theory that does not take into account today's advanced delivery systems, high volume production and the availability of near slave-labor.
I suppose we should return then, to the late 1800's where everybody earned just enough to survive, while the companies they worked for made good profits. Ahh, those were the days that super-capitalists miss the most, eh?
Balderdash. Does the term "comparative advantage" ring a bell? Guess not. I suppose Minnesota must immediately create its own citrus industry, rather than buying oranges & lemons from elsewhere at vastly cheaper prices - the state's prosperity depends on it!
I have nothing constructive to add to this thread. But, I did want to see my tag-line in it.
You DO understand the difference between "nations" and "the several States," don't you? Or do you need to complete 8th grade yet?
Un-employement is low. UNDER-employment remains higher than traditionally 'comfortable' using typical DOL measures.
Interest rates are low, but that's irrelevant unless one is purchasing a home or re-financing. What COUNTS is real wages after inflation, which is going south (check the DOL numbers...) As a matter of fact, the wage-after-inflation number proves the thesis of the article, as does (indirectly) the interest-rate thing.
As to GDP growth: don't count too many chickens. Consensus is now only around 3.5% this year, not 4.0, as was the "wisdom" in January. The ECRI weekly leading numbers have been down for several weeks running.
Or buying a car. Or has a credit card tied to prime. Or seeking a personal loan, etc...
Consensus is now only around 3.5% this year, not 4.0,
Only 3.5%!!! Its going to be 1929 all over again with a number like that!
Ah, the voice of reasoned discourse. Please specify at what level of political subdivision it is that the laws of economics cease to apply.
A county - or individual, for that matter - with abundant, low cost water will certainly have an advantage in crop irrigation over a parched neighbor. Your enlightened response appears to be "Economics only applies to Nations!"
You tell me who needs to take a refresher course...
Great article! It brings out that Ricardo's theories - and the Iron Law of Wages - will reduce employees to a minimum subsistence level. This is not unlike various third world countries. It is also the soil from which extremism of every from sprouts!
Certain misguided free traitors believe they'll be exempt; they are wrong. Either they are, fundamentally, wage earners - and their incomes will be devalued along with everyone else's. Or, they have capital and will be faced with securing themselves from the instability of a hopeless and grindingly poor underclass.
Save America - stop free traitin'!
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