Red Tide

We've spent a lot of time worrying about the Chinese and what their economy and way of business is doing to our economy. While this obsession is in vogue currently, it was present in a different flavor years ago. I remember reports about the trade deficit with the Chinese going back to the days that they were still totally Communist and the pro-business policies had not been tried yet. Yet, the flavor of these worries seems to be escalating. Now, you are more likely to hear fears that this deficit is fueling the Chinese military, or that having the Chinese buying up U.S. government debt is a dangerous thing.

Back in the 90's there was a big movement toward "Free Trade". I can't remember whether this phrase cropped up before or after the public arguments about extending "most favored nation" status to the Chinese in trade arrangements. There was an announcement each year that they had once again extended this status to the Chinese, yet it always seemed to me that they were toying with holding the status back because of the way that the Chinese treated their people or would not allow information out of the country. Then there was a movement to formalize this arrangement into a more permanent status and you started hearing about Free Trade all the time. Those that tried to sell the public on Free Trade kept repeating standard arguments. Early on, there were concerns about losing American jobs to the Chinese. Advocates were saying that the jobs that would go away to China would be low wage jobs and would clear the way for Americans to do higher wage more skilled jobs. They said that the American public would benefit by having access to low priced goods.

This happened, to a degree. American manufacturing started to decline in fields like textiles and steelworking, but this higher wage higher skilled segment of manufacturing did not grow to a degree to outstrip the losses in the low skilled fields. There can be little debate that manufacturing in the U.S. has declined noticably in the last 15 years.

Many that advocated Free Trade talked also about how it would bring about Globalization and an equalization of wages. The problem with this is that they were not very honest about emphasizing what that meant. If you think about it, equalization of wages means a successful exporting country eventually has to deal with labor shortages and this results in wage inflation and rising prices. A country that imports more will eventually pay lower wages because the manufacturing base will decrease and the number of workers to fill the jobs will increase, making labor in oversupply. The result is a lowering of wages. This has in fact happened in the U.S.

The natural result in this is that laborers will tend to come together in their wages. The problem is that Americans expected that this meant that eventually other counties wages would rise to meet ours. They did not consider that equalization tends to be a lowering on one side and a rise on the other. When you average two numbers, the average is lower than one number and higher than the other. The only way to get to wage equity is if American wages drop. What we did not foresee was a rapid rise in Chinese inflation. Reports out this week show that the inflation rate in China is rising their wages much faster than our manufacturing decline is lowering our wages. The Chinese standard of living is leaping forward. People are buying cars in huge numbers, and wages are rising faster than expected. Couple this with energy prices and resource scarcities, and things rapidly start to tilt back in our favor.

In fact, the Energy markets are probably the thing that will turn around the discrepancy the quickest. World population continues to rise, and energy demand shows no sign of scaling back. Oil as a source of energy is finally reaching the end of its natural life, with environmental and geopolitical concerns making oil use less savory each year (not to mention the fluctuation nature of the price of petrochemical energy). Coal, too, is reaching a limit, this time from environmental pressures. Alternative energy sources will be needed to convert us over to our future energy needs, probably a combination of Nuclear, Wind, Solar, BioFuel, GeoThermal, and Tidal sources. No one of these forms will be enough, it will probably require a combination of all of them. Even if Fusion energy becomes feasible in the near future, all this means that there will be a huge need for jobs here in the U.S. to satisfy these needs. You can only make your energy at home, and while some things like wind turbines and solar panels, can be purchased from China, I suspect that the cost to ship them using fossil fuels will make it more feasible in the long run to make them at home. This means that many of the manufacturing jobs lost in the last few years will be coming home.

So I see in the upcoming economic climate the perfect storm: for advancing our economy and reversing the losses since Free Trade came into fashion.