I’ve spent the last year educating myself about economics. Why economics? Simply put, government bureaucrats use the Ignorance of the Masses to push through economic policies which superficially sound well-grounded yet have dangerous and harmful downstream effects. Being ignorant myself of economics, I did recognize many U.S. foreign and economic policies were damaging in the long run, I couldn’t find the words to express my concern, nor explain why the policies were damaging. Saying “something is this way,” is not as powerful as saying “something is wrong due to these 5 factors.”
On Tuesday, October 4th, U.S. and global media outlets (Reuters) announced plans by the U.S Congress for the design of a bill to pressure China to modify the value of the Yuan, the Chinese currency.
According to Reuters, the U.S. Senate voted to open debate on a bill allowing for the imposition of tariffs on consumer products entering the United States from countries deliberately undervaluing currencies.
People may read right past that comment; I own bias is people do read right past “tariff” comments, not understanding the implications.
A tariff is a tax placed on a good entering a country. The country making the good does not pay the tax. We do; American consumers pay the tax. When we decide to buy a Blu-Ray player, LCD or Plasma TV, the price we pay includes the tariff. The cost is passed to us. Essentially, as we notice prices increasing, we decide not to buy, or we decide to buy a cheaper competing product. But, we pay the price, using more of our income to buy consumer goods.
“What is wrong with that?” You ask. “Maybe if tariffs were high enough, jobs would reappear in the United States!”
Maybe. Just remember the tariff is a social tax, a form of Socialism, designed to ‘level out the labor market’.
“How can you say that? That sounds like crazy-talk!”
A tariff is a method governments have of manipulating the price of consumer products ABOVE the fair market value. For example, say Taiwan produces a Blu-Ray player and your price at Wal-mart is $128. Now, say, Taiwan also undervalues it’s currency. According the U.S. Congress, the Blu-Ray player will have a tax added to the price. Now that Blu-Ray player will cost you $140. You’ve just been removed of $12 of your disposable income because the Congress does not like the way Taiwan manages its money. And, more importantly, the fair market value of that device has now been manipulated. You might be cool with that; I just want you to know you are out $12.
The Better Question: Why Does China Undervalue Its Own Currency?
This is the question I wish someone would ask, simply because I want a public figure to validate my own knowledge.
OK, so the controversy is this: China keeps the Yuan cheap relative to other currencies so products made in China are less expensive and people around the world buy more stuff. Right? People in Germany, and France, and Sweden, and Canada buy stuff made in China because the stuff is cheap. Buying inexpensive stuff means you have more utility with your money, you can do more things with your money.
Somebody has to make the stuff we buy. Enter the Chinese worker. China has an enormous labor market. China has a population of about 1,300,000,000 people. About 50% of those are workers, or about 650,000,000.
In other words, the Chinese labor force is more than 2x’s as large as the entire population of the United States, and larger than the entire population of Europe.
Most of these workers are barely literate, illiterate, or working their way through school to become fully educated. But to find work for over 1/2 a billion people is an amazingly complex task.
An easy way to provide employment is to undervalue your currency. If products made in your country are cheap compared to elsewhere, you can sell more, which means making more, which means employing more people.
From the Chinese perspective, an undervalued currency makes sense because keeping workers employed and working is essential.
I envision if China decided to allow their currency to “float” and operate against global financial markets as other currencies, Chinese economic growth would drop from the 9-10% range experienced now, to 4-5%. The U.S. Congress would say 4-5% is acceptable. The Chinese workers would riot in the streets from being unemployed. I’m not sure I want 650,000,000 people pissed off at me.
Essentially, China is acting in its own best interest keeping the yuan valued considerably lower than the currencies active in the countries China’s products services.
What About the United States Currency?
The U.S. Congress telling China to revalue the Yuan comes off as disingenuous. The U.S. dollar is slightly undervalued against the European Union’s Euro. The European Union has voiced displeasure over the value of the U.S. Dollar as a low dollar against the Euro makes U.S. goods cheaper in Europe. On the other hand, European goods are more expensive in the U.S., thus we don’t buy as much. That differential in currency value creates jobs in the United States. That differential in currency value eliminates jobs in Europe.
But This Controversy Is About Job Creation! No You Get It? China Steals Our Jobs!!
In part, no doubt there is some truth to the Job Creation argument.
And, no China does not steal our jobs, any more than Illegal Immigrants steal jobs. When was the last time you heard a hair stylist, dentist, optometrist, pharmaceutical rep, or computer programmer complain about losing their job to an “undocumented worker?” Think about it.
Even the Job Creation Argument needs examination, though.
Do this: visit the web site Learner.org, and watch the video, Guangdong: Globalization in the Pearl River Delta. Fast-forward to about the 07:00 minute mark. Those workers in the video are making shoes for Nike. Sitting at a shoe press for 8-10 hours per day, making about $140/month. That’s the job you want?
That is the job the U.S. Congress wants you to have, sitting at a shoe press, the vertebrae in your back calcifying from hours of hunched-back sitting.
That is the job Congress wants to bring back to the United States? Yes; yes it is.
My point is this:
For the United States to maintain a technological advantage, to maintain a standard of living our parents have worked hard to achieve, we cannot cling to labor market philosophies and policies better suited for the 1950s. Our U.S. labor market needs to adapt to for the 2050s, and beyond. Those brute-force manufacturing jobs are better suited for countries with necessary manpower and wage flexibility. The United States should leave those jobs behind and focus on the future, not the past. We seem to be riding a horse into the future, seated backwards in the saddle, lamenting what has come before.
Congress needs to work for current and future employment conditions, not perpetuate the past.
Congress also needs to encourage the United States to work to its advantage, rather than play school-yard politics, worry about education and employment training at home, and come to grips with its own budget deficit (which, again, points to irresponsible behavior and blame-shifting.)
Manufacturing jobs will always be present in the United States. Making cars, trucks, washing machines, dryers, heavy equipment, items both large and small, simply makes economic sense.
However, some jobs really can go somewhere else, and I argue, the U.S. benefits by having those jobs leave.