Question for DU economist.

[Justicekthx]

I hear economist all the time say how good free trade is that manufacturing overseas is a good thing and i just have to ask why??

I mean sure the profits to business who want to sell the cheap trinkets etc to the american consumer may be large but isn't this only temporary?as wages fall due to middle class jobs being lost are you not just getting rid of your consumer?

The service industry a market that can rarely be outsourced tends to be low wage and few achieve middle class wealth working in this market.

the tech industry is all well and good but it tends to get outsourced and because of this the goods become so cheap people don't bother to repair they just buy another,see TV,DVD player etc and soon to be computer.

What i am saying is i just don't get it ,in no way can i see it being sustainable.



What am i missing?Whats the deal are most economist just crazy?

[Statistical]

1. It isn't sustainable look our trade imbalance.

Trade only works when each side is getting something in return.

US exports say cars and imports say tires.

Even if the US can make tires if it can make cars better it is actually BETTER to not make tires and instead make more cars and import tires.

So trade itself is not bad. However the US is running a large and growing trade imbalance. Money/wealth is flowing out of the country. In every empire the system collapsed when gold/treasure flowed out of the empire.

If we had a net 0 running trade imbalance even if some industries went away completely (say tires for example) and the US never produced that product it would be a net gain for the economy as we would focus on products we are "better" at making.

That isn't the situation. You can only run a trade inbalance for so long before the system collapses. It has happened hundreds of times in the past, it will happen hundreds of times in the future and the US isn't "special".



Even worse we have attempted to "sustain" this situation by debt. Not just federal debt, but state debt, local debt, consumer debt, mortgage debt, even business debt. The gold if flowing out.



This shows net US foreign investments. US owned foreign assets - foreign owned US assets.

Not only are we producing less but now nearly 20% of our GDP is foreign owned. Foreign onwership isn't bad as long as we have equivalent domestic ownership of foreign assets. Say Walmart makes $10 Billion dollars (gold/treasure) 20% of that is owned by foreign entities and wisked out of the country. $2B more flows out of the country.

We can only bleed so long. Every empire has failed for this exact reason. Rome collapsed because of economic pressures, so did the British empire. Now we have more robust economic "tools" so likely we can stretch the death out longer. Maybe 20 years, maybe 50, hell maybe even another 100 but eventually it will fail unless we can achieve a more sustainable balance of trade.

[TexasObserver]

42. I recommend this post.

It's insane to believe that we can continue to be an importing nation and we can survive financially long term. We are losing our ability to compete internationally in many areas, and the reason is we don't protect our industries the way other countries routinely do. The free market is a fiction used by those who like to pretend protectionism is not the standard internationally.

[T Wolf]

2. Extremely short-term is the focus. GRab as much as quickly as you can and then run.

There will be another scam to run after the current ones goes flat. They are all Ponzi-adherents.

[Nederland]

3. Comparative advantage

In the early 1800's David Ricardo provided a mathematical proof demonstrating that free trade will always result in higher GDP for all countries involved, a theory known as Comparative Advantage. The proof is pretty much bulletproof, but it suffers from assuming that all people in a country will benefit equally from economic changes brought on by increased trade. In reality, while free trade will result in a higher national GDP for all countries involved, it will not result in higher standards of living among people displaced by job losses. For example, it is the America's national interest to stop producing textiles because it lacks a comparative advantage in texiles. However, while letting China take over textile manufacuturing results in slightly better outcomes for most people by lower clothing costs, it results in severely worse outcomes for the people that worked in the textile industry. Proponents argue that the negative results can be offset by progressive taxation and retraining.

http://en.wikipedia.org/wiki/David_Ricardo

http://en.wikipedia.org/wiki/Comparative_advantage


On edit: The West Wing was a pretty progressive show, and you might find this Toby rant compelling:

http://www.youtube.com/watch?v=7U7QJu_Wsbk

[Statistical]

6. The problem is compounded by the trade inbalance.

Comparative advantage has proven true but it requires a trade balance.
Trade imbalance is a wealth imbalance. That trade inbalance has to be "paid" it is paid by a transfer of wealth.



Comparative advantage makes both these lines go up but the difference between the two lines is a transfer of wealth. Wealth once transferred will not transfer back easily.

One or two years is not much of an issue but 2 or 3 generations is. The wealth/gold/treasure flows out of the country never to return.

[Nederland]

8. It is wealth re-distribution for sure

Free trade will always result in wealth being transferred from the richer country to the poorer country. Most progressives support that idea.

[Statistical]

11. In a limited fashion sure.

The world per capita income (PPP) is $8200. This is adjusted by buying power of local currency.

So an unlimited transfer of wealth will equalize at around $8,200 per capita income for every person in every country. We can't handle that kind of economic and social unrest.

So while we wait for competitive advantage to raise up wealth in all countries the transfer of wealth needs to be orderly.

Currently we are transferring a trillion dollars out of the country by our balance of trade. We transfer another $600 billion or so by a negative net foreign ownership and interest payments to foreign debt holders. That's $16 trillion per decade at the current rate.

With a equitable balance of trade we could have an orderly control of wealth redistribution via foreign aid.

I do agree with you that competitive advantage works and a major component to the problem is the unequal distribution of that benefit in this country I am just adding that our massive and growing imbalance of trade present a substantial risk to the sustainability of the system. It also explains why the middle class is not just staying flat but actually getting poorer (in real terms adjusted for inflation).

[Nederland]

13. I guess that is a matter of perspective

I think many in the third world probably look at even the poorest US citizens and wonder why they need so much money...

[Statistical]

16. Well many American citizens likely DON'T need the wealth they have.

However the manner in which that transfer occurs also has costs. Social costs and costs via imperfect policies (like protecting failing industries vs boosting successful ones in order to save/create jobs).

An orderly bankruptcy is less damaging than a disorderly one because the fear and chaos of a disorderly transfer destroys wealth.
Likewise a disorderly transfer of wealth from the middle class in the United States to foreign entities will have massive social issues even if the long term (100+ years) result of that transfer is beneficial.

A more orderly transfer that instead takes a cut off the top of the growth of wealth in the United States and transfers that would have less social costs. A bias toward those at the top would be even better. Sadly in this country we often provide benefits, subsidies, and tariffs to protect the most disadvantaged industries and that the theory shows us is a losing proposition.

If you have $1 bil to send you get more return using it to boost the competitive advantage of your most advantaged industries rather than trying to prop up your least.

[Nederland]

23. Agreed

Like I said in my original post, proponents of free trade (and I am one) believe that the negative effects of free trade can be offset by progressive taxation. I believe that it would be nice if we had a more progressive tax structure in this country.

[A HERETIC I AM]

9. The word is ..

IMbalance

Not INbalance.

You repeated this basic error so many times in your previous two posts as to make it obvious it isn't a typo.

I'm sure you want people to take you seriously. This sort of thing tends to do the opposite.

[Statistical]

12. Fixed. n/t

[Deja Q]

19. While you're at it, correct the OP's mountain-high pile of grammatical and spelling errors too...

That way, everybody can learn and improve themselves.

[A HERETIC I AM]

27. The OP was too overwhelming.

Statistical's posts were instructive and reasoned with just that one single glaring thing. I admit that I am by no means an English major.

But since you may be more studied in this regard Deja, please feel free.

[Justicekthx]

10. Clothing cost might be lower

But how do you sell homes and cars when most americans are on min wage its as if we sacrifice one market for another one that only lowers standard of living,lowest common denominator doesn't sound like a good way to govern
and who cares about gdp when no one owns anything, i know i don't.

[Nederland]

17. I think a person in China...

...might look at people on minimum wage here and hardly classify them as people who don't own "anything".

[Romulox]

24. Our government *ostensibly* represents American workers, not Chinese workers.

Arguments in defense of inequality and greed that are predicated on altruism are destined to fall flat.

[Statistical]

29. I think the larger point is that a system in which standard of living in US rises

and standard of living around the world doesn't is a fantasy land.

It happened once in modern history and that was after WWII. That was simply due to the widespread destruction of the industrial base in the developed world with the exception of United States & Canada. Unless we plan on nuking the developed world back into the stone age that will never happen again. It was a one-time free bonus that we (mostly) squandered.

The developed world is not expanding and the developing world doesn't have the wage base to purchase non commodity goods that the US is heavily invested in. Unless wages around the world rise they won't rise in the US either.

[Romulox]

31. So it's an argument based on naked power. Why try to wrap it into one about "altruism"

when the attempt to do so wraps you into knots trying explain why we should support cut throat capitalism--for the sake of altruism ( ).

[Statistical]

34. I agree there is no altruism involved.

We survive together as a species, either world GDP per capital rises or it falls.

Either way an economic pressures will cause an "evening effect". Think of it as wage diffusion.
Now you can attempt to slow that down by artificial means but it will still happen. Normally the more artificial the protection the more inefficient it is.

The wages of the world will even out eventually. We can start or foment wars in other nations to attempt to slow or temporarily reverse that process but that isn't exactly ethical. The near continuous cycle of wars in Africa since the end of colonization has results in a massive loss of wealth and potential wealth because that population hasn't enjoyed rises in wages.

Americans temporarily benefit from wealth destruction overseas much as we did as the result of WWII but those benefits are temporarily and are only the result of another group being disadvantaged.

The only ethical way to raise standards of living here and abroad is a rise in worldwide wages and wealth.

[Romulox]

39. Nederland implied that there is in his post # 17 to which I responded...

"Free trade will always result in wealth being transferred from the richer country to the poorer country. Most progressives support that idea."

http://www.democraticunderground.com/discuss/duboard.ph...

[Nederland]

44. I would dub it "enlightened altruism"

i.e., and recognition that we are all connected and ultimately the only way to really improve things for yourself in the long term is to help others.

[Romulox]

46. I would dub it "internally incoherent". Cut-throat capitalism--for the children!

[Nederland]

47. Yeah, and protectionism has a wonderful record...

...of causing world wars and depressions.

[Romulox]

48. What a ludicrous post. Internally incoherent, indeed! nt

[Jim__]

15. I'd like to see the mathematical proof.

Ricardo himself knew that comparative advantage was only true under certain assumptions, assumptions that he believed generally held. Those assumptions do not hold today (from wikipedia):

Ricardo explicitly bases his argument on an assumed immobility of capital:

" ... if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities, than the additional quantity of labour required to convey them to the various markets where they were to be sold."<3>

He explains why from his point of view (anno 1817) this is a reasonable assumption: "Experience, however, shows, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and entrust himself with all his habits fixed, to a strange government and new laws, checks the emigration of capital."<3>

[Warpy]

4. It's not sustainable

and it's caused a race to the bottom as more and more people have fallen into poverty.

Business people don't think in those terms, though. They always think the other fellow will still hire Americans and pay them decent wages. They have no idea they are cutting their own throats by destroying their primary market. They only see the quarterly profit getting bigger and their bonuses following suit.

They also don't think in the terms that say all the stuff they've offshored can be nationalized and taken away from them completely, turning them into the same thing they turned us into--the underemployed poor working for less than subsistence wages.

This is why governments are needed to step in and regulate business, support wages, and keep jobs from leaving.

Unfortunately, we've been skirting very close to fascism lately, and that's why things here have gotten so bad.

Most economists earn their bread and butter by ignoring uncomfortable truths like these.

[Nederland]

7. There is no "race to the bottom"

There is not a single case where you can show that the national GDP of the poorer country declined as a result of increased trade. It is a mathematical impossibility. There are problems with free trade as I describe in my post above, but a "race to the bottom" is not one of them.

[Warpy]

18. I don't suppose you've checked wages

or unemployment/underemployment statistics lately, have you?

Without easy, cheap credit to sustain the consumer market, it is beginning to fail.

Look at personal bankruptcies. Look at business failures, especially retail businesses. Look at commercial vacancies. Check to see which class is growing the fastest in terms of numbers, not percentage.

The consumer market is 2/3 of the larger economy.

You can talk about GDP or the Dow or any of the larger indicators all you want. The truth is that everything that is supporting them is failing.

Free trade as it exists now is a disaster for people in the US.

Human beings are the ones being forced to the bottom.

[Deja Q]

20. Yup. And having gone from 40x to 600x or more in wages, at worker expense,

CEOs have a little they can give back too.

Otherwise, saving their wealth from a global collapse was a sheer waste of time.

You are right; human beings are being forced to the bottom.

But, have no worries, what goes around comes around and other countries will start to whine and complain too... in fact, I've read articles going back to January, 2009, if not earlier... it's a global joke.

If I ever become famous, I'll let you know if I change my mind or not.

[Nederland]

21. Yes

Free trade has been bad for a large number of people in the US. It has been very good for people in the developing world. I guess it all comes down to whether or not you believe that transferring wealth from the rich to the poor is a good idea.

[Warpy]

28. Consider this, Robin Hood

Along with the wealth, most of which won't be realized until and unless the third world nationalizes manufacturing, the free traders have also stripped this country of a lot of vital industry.

We no longer have sufficient domestic industry to survive a big war or large scale trade disturbance, let alone win the war.

Consider we no longer make cloth or shoes or most electronic components. The equipment to do so was either shipped offshore or sold as scrap.

This country as a whole has been seriously weakened by stupidly managed fair trade policies.

[Statistical]

30. Industry is not strategically important in modern warfare.

Industry is not strategically important in modern warfare.

People think longingly of WWII and are ability to build weapons faster than they Germans could destroy them. What they forget is that in the following decades our ability to destroy has grown a thousand fold while our ability to protect has barely budged.

In WWII it took hundreds of bombers flying dozens of missions to drop enough ordinance to knock out a single key factory. Today a couple million dollars in cruise missiles using GPS navigation and ultra accurate map of the earth can fly just over the horizon and destroy a $2 billion dollar factory on the first try. Multiply that by a thousand and that would be just the opening salvo of a war between peers. If you can spend a million dollars and cause your opponent to lose a billion why wouldn't you? It simply is not cost effective to not completely wipe out the "other sides" industry in the first days if not hours of a war.

Modern war is fought with what you have one day one not what you can build once the war is started.

Of course that ignores the even more destructive reality that all our peers are nuclear capable.

[Romulox]

33. Can you cite any real world demonstration of this principal? Surely not Iraq or Afghanistan.

[Statistical]

35. Sure as soon as we go to war with a peer.

Of course you will be able see it out your window.

The only reason the wars in Iraq & Afghanistan are so subdued is because neither presents a direct threat to the United States. If they did there would be no attempt at rebuilding or patrolling or establishing a govt. It would be destruction pure and simply by the most effective means until they are no longer a threat.

It takes about 4 months to build a single F-22. If a war started today with say China how long do you think we would have before the F-22 plant is a crater?

[Romulox]

37. That's a verbose way of saying, "no". nt

[Warpy]

43. HAW HAW HAW!

Who told you THAT?

How long have our present wars been dragging on?

What happened to the non industrial South during the Civil War? That was modern warfare, whether or not you want to deny it.

[Statistical]

45. The civil freaking war?

They had the ability to destroy targets from around the globe? Spot troop movements in space? Level entire cities in a matter of seconds?

Sure we need industry to build weapons and we have a very large weapons industry in this country. Not only do we have enough for us we are the largest exporter of weapons in the world.

However all that industry dies in a matter of hours in a real conflict. There is no "shield" to protect vital industry in a modern war. The only shield we had in the past was first distance and then inaccuracy of weapons.

Modern weapons combine extreme speed, previously unthinkable accuracy, and massive firepower. The combination makes it impossible to protect industry. An ICBM can hit a target anywhere in the globe in 26 minutes. GPS and inertal guidance has accuracy of meters an thousands of kilometers away. Even non-nuclear weapons have been refined to a level of lethality not imagined in WWII.

A few cruise missiles can take a munitions plant out in a matter of minutes without risk. The same task took 100s of bombers months to achieve (at massive cost in resources and lives) in WWII.

You simply can't do protect industry in a war of peers, so then enemy will wipe ours in the opening attack.
The imply can't do protect industry in a war of peers, so we will wipe out theirs in the opening attack.
Both sides know the other side is going to do it so there is no reason to hesitate or keep the options open.

If a major conflict (even non-nuclear) erupted between say between China & US both sides would destroy the other sides industry within days. Both sides "play" with the weapons they built BEFORE the war started.

The idea that a Ford plant could be converted to make tanks or a civilian shipyard to make carriers in time to materially affect a modern war is just laughable. It makes about as much sense as building a lot of castles because that worked for a long time in the past also.

[Romulox]

32. Your argument turns a blind eye to ever-growing domestic inequality.

I suspect this is intentional.

[Statistical]

36. No he clearly indicated that above.

There are benefits and costs to trade. The benefits outweigh the costs however in the US the benefits are given mostly to the few and the costs borne by the many.

The issue with trade is more a symptom of the larger issue of inequality of wealth in the this country.

Even if we shut down trade completely (at huge and massive cost to our economy) the inequality of wealth would still be an issue.

Trade is the symptom and the underlying problem is inequality of wealth.

People blame "fair trade" but since the 1990 the GDP has expanded 37%. There is no reason why wages couldn't have expanded 37% EVEN WITH fair trade. There is more wealth however it has been shared unequally. The top didn't get just their 37% they got a 1000% increase while everyone else suffered.

[Romulox]

38. No, he indicated there are winners are losers, but posits no solution

finally arriving at the conclusion "There is no 'race to the bottom'" and describing himself as a supporter of free trade despite his misgivings.

That's a waive of the hand, that's not any sort of reconciliation of what are obviously two contradictory trains of thought.

[Greyhound]

40. It has not "been very good for people in the developing world", it has been a disaster.

It has been very, very good for a very few people granted license in those countries to steal even more, but "free trade" is an unmitigated disaster for the average proles.

India is just one example, a "new middle class" rises there at the expense of an entire sector of the economy here, more people begin to do better, but far more people (the poorest) do much worse as they cannot afford to participate in this new prosperity. After a decade or so, this "new middle class" has accumulated more stuff and their lifestyle has improved and they begin to demand higher wages and better conditions and are then replaced with even lower cost workers in other countries. India has a few billionaires and a larger consumer class, but loses the advantage that started it and millions more have even less than they did when it began. Now, the citizens of both The U.S. and India are worse off, overall.

This "free trade" scam simply pushes more capital into fewer hands in each cycle leaving devastation in it's wake. The same scenario has played out in Mexico, Argentina, Ireland, nation after nation. China is still on the up cycle and has the benefit of being a dictatorship, but is already feeling the pressure.

It is literally a race to the bottom with the only winners being the corporations that invented it in the first place.

[ChiciB1]

5. Very Interesting... But NOT Surprising! n/t

[Romulox]

14. Economists just declare incovenient data points (e.g. distribution issues) irrelevant.

We are told it doesn't matter how a country's GDP is distributed, as long as the GDP is growing. Thus a country in which there lived two people: each owning $500 (a total of $1000 wealth) is inferior to a similar country in which one person has $1000 and the other $1 under the conventional view. The latter society is said to be "wealthier" and therefore "better off" under the same sorts of theories.

[krispos42]

22. It's suppose to be good because...

...there's a idealology that the less the market economy is distored by laws and regulations, the better the market serves the people.

However, since the market is dominated financially by the wealthy, it serves them, and the wealthy gain far more by manipulating the system than by playing by free-market rules.


Fundamental concept: companies don't want to compete for business. It's in their best interest to form a monopoly as quickly as possible so they can squeeze every last dime from their customers. Market forces, competetion and innovation, favor the consumer but limit corporate profits. Therefore to maximize wealth you have to monopolize the market so that you don't have to spend any money on price wars, good customer service, or innovation. You just gouge the fuck out of the customers.

[hfojvt]

25. most of classical economic theory is built on one fundamental principle

that principle is "don't interfere with the market". Supposedly "the free market" is the best way for allocating scarce resources and attempts to regulate prices just backfire.

The case against tariffs goes something like this. Suppose you put a tariff on something, say steel, in order to protect those workers. Then look at the costs and benefits. On the benefit side, you have protected some jobs that otherwise might be lost, but that's not free. There is a cost to all the consumers of steel. All those people are paying higher prices for steel and for everything else with steel somewhere in the chain of production. That's a lot of people being made worse off by the tariff. Why should they be forced to subsidize workers in one sector?

Next is the argument from resource allocation, which includes the resource of labor. With a tariff, you are artificially keeping resources in a sector that is not efficient. Instead of keeping factories and equipment and people involved in steel production, it would be better to re-allocate those resources into something we do better or into some place where there is more need, perhaps in nursing or manufacturing rubik's cubes.

Of course, transitions do not happen instantly and some people fall through the cracks. If you look at history though, American society made a huge transition from 1900 to 1950, from a society in which 70-80% of the workforce was farmers to one where a much smaller percentage works in farming.

The facts and even the theories are far more complicated than something I can scrape together into one short essay here, but as to whether 'economists' are crazy. I might point out that one of our leading progressive voices in the last decade is the economist Paul Krugman. Like most people, they are trained to see the world in a certain way. The ruling ideas are taught and passed down. It's kinda hard to unseat them, but to a degree, it is a free market of ideas too.

[TheKentuckian]

26. This was a scheme sold in no small part by appealing to American exceptionalism and greed

that had nowhere to go but down for the average American in the mid to long term.

See, the people were easily convinced that by opening up trade with less developed nations would remove to yoke of tedious labor from Americans, would allow the rest of the world to pull it's self up by the old bootstraps so we wouldn't have to be bothered to send aid to starving kids in far away countries, we'd be freed up to do more advanced and mentally challenged duties thus creating new frontiers for the world to follow America to, by seeding the world with our wealth and good old American ingenuity we'd spread freedom worldwide using the power of capitalism, and of course we'd all get cheap products and make a mint if we invested into advancing freedom and opportunity to the globe.


In other words we got suckered into giving up what we had for pie in the sky that never was in the pipeline for nothing by appealing to our collective ego and from crib to coffin conditioning to make the big score. It would almost work but with the strip mine mentality after each round of develop, seed, degrade the economy that seeds the next is sucked dry which fails to really improve the lot of the average person but the movers and shakers get to gold plate their pockets.

[flvegan]

41. Depends upon the point the "economist" is trying to make/prove.

And from what side of the discussion they're trying to make it.