Back on Monday, January 25, 2016, I published, AMERICANS ARE COMMITTING (ECONOMIC) SUICIDE DAILY WITH IPHONES AND IPADS, in which I sketched out the capitalism death whorl that has been happening to Americans since the advent of globalization and unfettered free trade.
In that work, the key points I made are these:
- Reciprocal free trade only works with foreigners whose capital spending per citizen is about the same as ours. This is authentic free trade.
- With Third World tariff-free imports, Americans living standards forever fall because capitalism falls in the USA but rises elsewhere.
Free traders love to cite Adam Smith as their god of free trade. To his credit, Adam Smith proved that in commerce, both sides gain. In doing so, Smith fixed an error of the Physiocrats (Economists) who claimed that neither side gains or loses. However, Smith failed to account for differences in capital spending in trading nations and what would be the aftermath of those differences once trade would get underway.
In unfettered trade with China, for example, it is as if China becomes another state in the USA. Yet, it becomes a state with no environmental or worker safety regulation and with a population more than four times all the rest of the states. As well, the citizens of this new state gain all of the advantages of infrastructure and market access without paying taxes.
The result is seen even by a child — investors move all of the jobs to the new state of China to get instant gains in profits.
Peoples of two countries can have comparative-advantage free trade only when per capita capital spending in each country is the same, roughly. Some doubt this, however.
The Chinese lack comparative advantage. They do not produce more efficiently person-for-person precisely because their per capita capital spending is much lower than Americans. The Chinese simply throw manifold more bodies at every problem.
Worse, the Chinese are so inefficient, the Chinese likely are the world's worst polluters.
Even James Mill had this to say about comparative advantage:
If two countries can ... produce two commodities, corn ... and cloth, but not both commodities, with the same comparative facility, the two countries will find their advantage in confining themselves, each to one of the commodities, bartering for the other. If one of the countries can produce one of the commodities with peculiar advantages, and the other with peculiar advantages, the motive is immediately apparent which should induce each to confine itself to the commodity which it has peculiar advantages for producing. But the motive may no less exist, where one of the two countries has facilities superior to the other in producing both commodities.
By superior facilities, I mean, the power of producing the same effect with less labour.It should be clear that Mill meant capital is the power needed to produce "the same effect [output] with less labour." Yet, academician economists who champion free trade miss this key point — comparative advantage comes from superior capital and not from superior numbers of laborers.
Someone has a comparative advantage at producing something relative to another if he can produce more in the same time as another. For one to produce more than other requires the one to have more capital than the other. Most fail to realize that skills to be bundled in work are capital.
Americans can not have free trade with foreigners if the per capita capital spending by foreigners is less than it is for Americans. Under such a state, trading with foreigners who have superior numbers of laborers in all industries must lead to an equalization of wage rates. Americans simply get poorer while foreigners get richer.
Free Trade, A Closer Look
Americans in the various states have free trade with each other. For the most part, wages have equalized. Any living cost differences mostly reflect added costs imposed by various states' lawgivers, which have pushed higher break even wages.
Some wage differences reflect concentration of capital, for example, Silicon Valley. Where that happens, there is comparative advantage.
As no prudent investor would accept a lower return knowing where a higher return exists without risk, that investor will shift his investment to where he gets the higher return at the same risk. Thus, all of the work shifts to the foreigners. In the end, foreigners who were poorer become richer. Once rich enough, foreigners will no longer need to export to those who import from them.
In turn, those who imported and let go of their jobs eventually run out of buying power because no longer do they have anything to sell to foreigners in trade.
Heed my dictum:
Two countries can only have free trade if their per capita capital spending is the same.
What Happened with NAFTA and Mexico
Back on Saturday, October 8, 2016, I published PAULIE RYAN, SPEAKER FOR THE LOUSE, AN ANTI-AMERICAN, ANTI-CAPITALIST MORON. In that work, I revealed how adding Mexico to the US-Canadian Free Trade Agreement affected the American economy.
If the USA were isolated, and some states had weak regulations and poor residents, industry would move toward the poorer states precisely because firms could set up shop, pay lower wages and incur lower costs.
As long as the start-up costs for moving could be recouped during the depreciation of new factories, firms would move.
Well guess what? When the USA economy was isolated, firms did that exactly during the 1960s and 1970s. Major auto firms from Detroit moved to the South. The people in the South earned a little bit more and the people in Detroit and the north became much poorer.
When long-time third world Mexico joined the USA in the NAFTA "free" trade deal, Mexico became a poor state of our South, in effect, but a state without the same regulation schemes whose residents are many times poorer than even the poorest Americans.
And guess what again? Once NAFTA passed, manufacturers from the USA moved operations to Mexico because they could pay lower wages and operate under fewer regulations.
So before car making jobs shipped to Mexico, car making jobs shipped to Tennessee and elsewhere in the South. And look what happened to Detroit. It began its collapse long before NAFTA precisely because much of its manufacturing fled to other states.
See my work WHY DID DETROIT COLLAPSE? for more on Detroit.
How Capitalism Really Works
Far too many simply do not understand how capitalism works. They cling to silly academic falsehoods foisted upon them in Econ 101 classes.
Here is how capitalism works:
- The return to capital is the source of wages.
Where there is no capital, there can be no wages (e.g., much of Africa). Where there is high capital per capita, there is high wages (e.g., US, Canada, Norway, etc.) and where there is low capital per capita, there is low wages (e.g., China, India, third world, etc). - The source of more capital is increasing return to capital.
- Only under increasing returns to capital, can there be increasing wages.
- When there is a labor shortage, capital spending leads to productive gains, literally amplifying the workers. This leads to increasing returns to capital and thus increasing wages.
- But where there is an abundance of labor, capital spending will be low as returns to capital will be low.
UNFETTERED FREE TRADE CAPITALISM DEATH WHORL
A capital-intensive country can not have free trade with a capital-poor country. The effect is akin to adding a new poor state or province. All of the work gets transferred to where wages are lower.
- When a high-wage people enter into trade with a low wage, high population people, the net effect is as if the high-wage people have increased their population by the amount of the low-wage people.
- This leads to lower returns to capital in the high-wage country for the same kinds of production.
- As the return to capital falls, wages must fall.
- With falling wages, prices must fall as wages are the ultimate source of prices.
- On falling prices, the returns to extant capital must fall across all production for all products.
- At this point, the economy goes into the capitalism death whorl.
Since the return to capital is the source of wages, when a country that trades with the USA has more hands to put to work and less capital spend, because the USA has fewer hands, Americans simply get lower returns on capital. With lower returns, wages fall for Americans and fewer get put to work. That is contributing to the capitalism death whorl.
Balanced Trade Is Right Trade. It is Smart Free Trade.
The members of Congress should be accepting of balanced trade. To achieve balanced trade, foreigners should be forced compete against Americans through efficiency under capitalism as capitalism is the only way to get a high living standard.
That is why import taxes (tariffs) should exist. Import taxes ought to be levied at the rate of the inverse of the ratio of foreign per capita capital spending to USA per capita capital spending.
As you can see in the table, some tariff rates are negative. That means Americans actually should pay tariffs to these countries at the indicated rates. So for example, the Australians should levy a 11.2% tariff on American-made goods.
sources: World Bank, OECD national accounts data; United Nations Population Division estimates
So What Should President Trump and Congress Do for Authentic U.S. Citizen Americans?
- Cancel all trade deals.
- Let any country sell into the USA.
- Tax imports at the rate that equalizes foreign per capita capital spending to US per capita capital spending.
- Ban all foreign imports from countries that levy tariffs on American-made goods when a tariff should be levied on foreign goods to equalize capital spending.
Nearly all foreigners can not compete with Americans on capital. They compete on wages by throwing more bodies at the problem.
Americans need smart free trade, which is balanced trade. Americans can have that only with with other highly industrialized countries and an import tax levied based on per capita capital spending differences. All should be for it under such circumstances.
Agnostic tariffs need to be levied on all countries with the rates set based on the per capita capital spending in the ideal. Short of that, the reciprocal of per capita GDP would suffice.
Globalization and Unfettered Free Trade Kills
What is killing the USA, our economy and capitalism itself is importing goods taxes-free from third world countries whose means of competition is a mass of workers with little capital.
We have been living under the capitalism death whorl during the last 28 years because successive congresses have embraced globalization. Under globalization, congresses have let foreigners flood the United States with goods made in lands were per capita capital spending is much lower. As well, congresses have swelled the working-age population needlessly with excessive immigration, both legal and illegal, which has set off round after round of falling wages (see: UNFETTERED IMMIGRATION IS KILLING AMERICAN CAPITALISM).
We have been living under the capitalism death whorl during the last 28 years because successive congresses have embraced globalization. Under globalization, congresses have let foreigners flood the United States with goods made in lands were per capita capital spending is much lower. As well, congresses have swelled the working-age population needlessly with excessive immigration, both legal and illegal, which has set off round after round of falling wages (see: UNFETTERED IMMIGRATION IS KILLING AMERICAN CAPITALISM).
Free trade with third world countries is akin to adding those countries as states to the USA. Manufacturers then shift production there because lower wages in the short run mean higher profits.
As long as there is free trade with countries that spend less on capital per person, jobs will flee the USA for those countries. When jobs flee, wages fall for everyone else who is lucky enough to keep his or her job in the USA.
This is inescapable. It's all part of the natural laws of capitalism.
Billionaires and mega millionaires have moved factories to China, India, Mexico and elsewhere while importing products back into the USA. They have lobbied Congress to borrow ever more to fund more welfare and subsidy so that Americans can afford to buy these imported products all the while true wages have been falling for Americans. That is not free trade.
If Americans do not stop this, working-class Americans will become as poor as Hindians or Chinamen.
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