Localism Saved by Globalism, Cont’d

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Mark of New Jersey

Mark is a Founding Editor of The League of Ordinary Gentlemen, the predecessor of Ordinary Times.

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19 Responses

  1. Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.1 trillion. What will happen when those assets are depleted? Today’s recession is the answer.

    Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

    Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?

    At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

    This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

    One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

    Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world’s population.

    Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

    If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)

    Pete Murphy
    Author, “Five Short Blasts”Report

  2. Avatar Sam M says:

    It’s interesting to see old industrial cities like Buffalo come up in discussions like this. We tend to see them now as final vestiges of regional and even local culture. Buffalo has chicken wings and pierogies and old Polish guys sitting around talking about the good old days. Pittsburgh has the old mill towns, sandwiches with french fries on them, and even (as oft discussed in the New York Times) a pronounced local accent.

    But of course, places like Pittburgh and Buffalo were as much built by trade and globalism as they were destroyed by same. (If they have, in fact been destroyed.) People in Pittsburgh will be glad to tell you what an economic powerhouse the place used to be, and rattle of a list of all the grand things steel from the Homestead Works helped build. Things like the Empire State Building. And, er… Europe. And anyone who has studied the place will be equally quick to tell you how the mills gave rise to one of the truly unique places in the modern world. A city made up of almost 100 distinct neighborhoods, some based on ethnicity, some on economics, some on chance. Either way, whether you like the culture of the city or not, one certainly developed. People care so miuch about it, in fact, that they continually wring their hands about whether or not it can survive.

    But… how did it end up with a culture in the first place? The fine fellows in “I’ll Take My Stand” use Pittsburgh to signify all that is stultifying, even horrifying, about modern industrial culture. Just look at the poor mill worker versus the glorious milk maidens in “The Hind Tit.” Just look at the ominous warning about how Birmingham might become the next Pittsburgh.

    But again, Pittsburgh, built by competitive advantage, natural rsources and a whole lot of bizarre politics, managed to develop a culture. As did Buffalo. And they did so in a world that was far more globalized than the world that came before them.

    Doesn’t that count for something?Report

  3. Sam – that is an excellent, excellent comment.Report

  4. Avatar Bruce Smith says:

    Most of the debate about global free trade seems unproductive to me because of the use of the word “free”. Ricardo’s trade theories were deficient in the sense that he assumed “level playing fields” between countries. This is often not the case and is why we use the generalized terms “developed” and “undeveloped” countries. A “developed” country will carry a high value legacy of “embedded” costs such as particular wage levels and the whole of government provision costs which include current revenue and capital costs as well previous debt costs all of which have to generally be supported by taxes, etc. The legacy “embedded” costs of an “undeveloped” country will have a lower value. The pricing of goods and services has to “embed” each countries respective costs as well as the profit margin the market can bear. The productivity of labor and machinery in “developed” countries is not as yet able to absorb it’s legacy costs in order to price at “undeveloped” countries levels. This is despite, for example, America having one of the world’s highest productivity ratings. When we pay for a professional’s services on an hourly basis we may think that rate high but do have to moderate this view on the basis that there are other running costs in addition to that professional’s individual salary. Why we cannot transfer that viewpoint to evaluating the merits of global trade I think has more to do with capitalist opportunism and greed for wealth both on the part of capitalists and consumers. Real wages in America have been driven down because of the pressures from cheap imports often backed by manipulated currencies and overall aggregate demand has consequently been reduced now that the temporary lifeline of credit debt has been exhausted. The American economy is being hollowed out. Only when countries acknowledge that they must partner on trade for mutual benefit will matters improve. This will generally involve a common understanding that having a well balanced economy in terms of the spread of production of goods and services is a healthy objective. It does not preclude the recognition though that comparative advantage exists nor that it is a good idea to encourage competition on goods and services between countries whilst acknowledging that hollowing out of a particular country’s goods or services sector is not beneficial. This is why I argued in my previous post that the use of protectionism, balanced and open trade were all legitimate policies according to the circumstances of a country. It was appropriate for America to have high tariffs whilst it grew its industries to compete with the British. America was an “undeveloped” country at one stage. In order to successfully partner policy negotiation between countries has to be between the highest levels of sovereign government in each country which means the federal or central state. This does not preclude consultation and mandates at the local level. Intrinsic to partnering negotiation, however, has to be the recognition that constraints have to be placed on global financial industries in each country in order to avoid opportunism, recklessness and policy manipulation under-mining policy agreements. The financial industry will always support its desire to make as much profit as possible and will use amongst other things, for example, the tool of “shorting” a country’s currency to enforce this. It is usually short-sightedly used to force a government to abandon a policy of increasing aggregate demand by reducing taxation on the Middle Class and increasing it on the Rich.Report

  5. Bruce, your “developed” vs. “undeveloped” analysis doesn’t explain why America’s worst trade deficits (in terms of the per capita trade deficit in manufactured goods – in other words, divided by the population of the nation in question) are with other highly-developed nations like Japan, Germany and Korea.

    Of our top 20 per capita trade deficits in manufactured goods, only seven are with relatively poor nations (those with purchasing power parity per capita of less than $20,000 per year). But 18 are with nations more densely populated than the U.S. – most of them far more densely populated. Our largest per capita trade deficit in manufactured goods is with Ireland, a nation with per capita purchasing power partity on a par (aliteration not intended!) with the U.S., but a nation twice as densely populated. China is only number 19 on the list.

    Population density is, by far, the most dominant factor in driving global trade. Any trade policy that doesn’t take population density into consideration is doomed to failure and, for a nation like the U.S., is guaranteed to yield an enormous deficit and loss of jobs.Report

  6. By the way, I forgot to mention that our per capita trade deficit in manufactured goods with Ireland is 25 times worse than that with China.Report

  7. Avatar Bruce Smith says:

    Pete. Thanks for your comment. I think your per capita deficit argument is backed up tangentially in one sense by the thinking of William J. Bernstein in his very interesting book “The Birth of Plenty: How the Prosperity of the Modern World Was Created”. In his book Bernstein states that once farming techniques and technology had enabled a certain stage of food production sufficiency it permitted people to leave the land and move to the city where the increased population density fostered a greater exchange of ideas which led to more rapid scientific and technological break through. The “urbanization effect” if you like. I still think for the purposes of global trade it still generally makes sense to trade restriction-free with countries that are of similar development level for the stimulus effect of competition. However, I believe that it is up to each country to decide on its global trade policy. The British, for example, actively resisted the imports of manufactures from Flemish weavers whilst doing everything they could to establish a strong weaving trade in the UK. They did this because they perceived weaving to be an important major industry that provided good vertical market integration with British wool production. Moving on to your argument that population density directly affects the level of consumption and hence aggregate demand I’m not so sure I fully understand your argument. Firstly, I would argue that if you don’t have space for stuff you don’t necessarily stop buying things. You might spend more on personal services like travel, or buy second homes in other countries as the British do in France and Spain. I recognize on this last point there is a travel distance parameter involved. Secondly, if American productivity levels are high why is there the need to import so much from countries at similar development levels. I guess social cache is one reason but new technology and to some extent superior quality for the money (Japanese cars) would be the main drivers. This would tend to suggest that education and motivated teamwork are also major factors in a country’s export success. Backing this up to some extent is a new book just published in the UK called “Spirit Level: Why More Equal Societies Always Do Better.” by Richard Wilkinson and Kate Pickett which makes the case for social equalism as far as income discrepancies are concerned. They correlate a wide divergence on incomes between rich and poor with the degree of social dysfunction in a nation especially with regard to mental health. The Anglo-Saxon economies come high on the list of income discrepancy and social dysfunction with America first and Britain second. Countries with lower income discrepancies and social dysfunction are Japan and the Scandinavian countries. Germany and Austria also score well which is probably due to the social market economy which was put in place after the Second World War and largely based on the ideas of the economist Wilhem Ropke who was a Distributivist.Report

  8. Avatar E.D. Kain says:

    Bruce, once again terrific post. I think property distribution and capital distribution tie directly into the concept of income equality, which is why distributism (or distributivism) is such an important concept as we move forward in our economy. The question for me becomes the best way to implement this…Report

  9. Avatar Bruce Smith says:

    Thank you Erik. On the question of implementation of a re-capitalisation of the poor and middle-class. I am taking it that you mainly mean financing it on a rapid and large scale, although organisational structure is highly relevant to financing. I believe on financing it’s a question of financial formulas and political will. Right now I take the corporate state view that it can be done faster and bigger with both central state and private finance involved. This is one reason I see more of a role for the Federal state in Distributivism than you do. You can take the Mondragon route but it is slow. On organisational structure it seems essential to me to focus on ensuring that innovation, creativity and entrepreneurial skills are at the forefront of any changes. I think though these issues make it an excellent topic for ideas as to how it can be done quickly on a big scale that reflects individuals views on the roles of the state and the market.Report

  10. Bruce, Pete – Interesting stuff, really. Thank you for the comments. For what it’s worth, my follow up post (“Extricating Oneself…”) steps back a bit from my arguments above and in the earlier post. I think there’s ultimately something to the idea of a national trade policy of whatever nature being appropriate in certain countries, but the US and UK, to name two, are not those countries. I’d be much interested in your thoughts on that…Report

  11. Avatar E.D. Kain says:

    Interesting concept Bruce. I think you are right to some degree since we have such an impossible task when it comes to dismantling federal power, that to work with it rather than against it in order to implement distributivism makes sense. The problem is always implementation, though, and there are major hurdles when dealing with the massive bureaucracy that comprises the federal govt…Report

  12. Avatar Bruce Smith says:

    Mark. I get my cue for each country having the right to formulate its own trade policy from the work of Ha-Joon Chang, the Cambridge economist, Friedrich List, the nineteenth century German economist and Alan S. Blinder, the American economist. I really do believe that each country has to make up its own strategy and pay attention to the needs of each sector of its economy. For example, there was the lovely story in the media last year that because China makes most of the semi-conductors that go into American computers and telecommunication equipment including the defense forces’ equipment these chips could be “calling home” with classified information. There was supposedly a CIA organized enquiry but no report has been released so nobody really knows whether this was just mischief making on somebody’s part or a serious threat. Signing up to a blanket trade treaty can clearly be problematic for your defense systems it would seem if you don’t have your wits about you. (As an aside it occurred to me earlier today the Chinese Communist Party could be said to have their wits about them in not allowing an out-of-control Wall Street to grow up in their country !) Anyway it strikes me that all countries would be better off Partnering with each other to attempt to strike mutually beneficial deals which could involve a mixture of protectionism, balanced trade and open trade according to sector. It could involve a “developed” country being willing to have a an overall trade deficit with an “undeveloped” country as part of its aid package. Its “deficit” aid package might be a “loss-leader” to develop infra-structure in order to enjoy more profitable trading with that country at a later date. I appreciate the bureaucracy involved in all of this and the dangers of “capture” by unscrupulous organizations but it would be foolish to pretend this doesn’t exist already. The one thought that should always be to the forefront of any negotiations is that fair open trade competition is important to retain for the sake of price, quality and innovation.

    In the case of the US and UK economies I don’t really buy into the idea that they can just become “patented ideas” and service economies. ( See Alan S. Blinder’s work on out-sourcing of jobs.) It seems better to me to have balanced economies not least for the sake of defense and also how many of us actually have the stuff of inventive genius anyway !Report

  13. Bruce, just to illustrate the effect that an extreme population density can have on per capita consumption, consider Japan, a nation ten times as densely populated as the U.S. Their per capita consumption of dwelling space (housing) is less than a third that of the average American’s. (And there is nothing exhorbitant about the average American’s home.) They live in tiny, cramped quarters not because they like it but because there isn’t room for anything else. Thus, the per capita consumption of all products and labor involved in building, furnishing and maintaining their homes is directly affected. The same is true of the per capita consumption of vehicles, both in terms of number and size. Also, consider the per capita consumption of recreational boats. In Japan, it’s so low as to be virtually non-existant. The same is true for golf equipment. (Think about it: there’s no room for golf courses.) Even the per capita consumption of infrastructure is low.

    You might think that the consumption of other, smaller products would pick up the slack, but it doesn’t. The per capita consumption of personal computers also declines slightly with population density, while the per capita consumption of phones (fixed and mobile) is flat.

    The net result is low per capita employment in producing goods and services for domestic consumption, making densely populated nations utterly dependent on exports to provide employment for their excess labor.

    Now consider what happens when two nations grossly disparate in population density, like the U.S. and Japan, attempt to trade freely with each other. Their economies combine. The work of manufacturing is spread evenly across the combined labor force. But, because consumption is so low in Japan, the net result is an automatic shift of manufacturing to Japan and an automatic trade deficit for the U.S.

    I recently did a post on my blog in which I plotted the U.S. balance of trade in manufactured goods with our eight largest trading partners vs. population density. Here’s a link: http://petemurphy.wordpress.com/2009/03/18/population-density-vs-balance-of-trade/
    As you can see, there’s a powerful, logarithmic relationship.

    I believe that this exposes an unrecognized factor that has driven the enormous imbalance of global trade that has collapsed the global financial system. It is simply impossible to apply free trade across the board without a resulting imbalance driven by disparities in population density. The implications are far-reaching. Some application of protectionist measures are unavoidable if less densely populated nations like the U.S., Australia, Canada and others are to avoid unsustainable trade deficits. Secondly, dramatic reductions in population density in overpopulated nations like Japan, Germany, Korea, China and others would actually dramatically reduce global unemployment and boost per capita incomes. I believe that this is something that has been missing and sorely needed – an economic justification for stabilizing and even reducing global population.Report

  14. Avatar Bruce Smith says:

    Many thanks Pete for your information. I am intrigued by your theory. Emigration to the New World I think was largely driven in the first instance ( Outside of the Spanish and Virginia Charter Company gold rush and Puritan religious persecution ) by the inability of the land in Western Europe to support the increased population despite the improvements of farming techniques and technology. I guess there will be many reasons to explain why the people of certain Asian countries didn’t migrate in large numbers to America but we know the Japanese attempted expansion into China. I think though I will try another tack for you to refute, or reinforce your theory, which is don’t you need to obtain self-sufficiency data for each country ? (Maybe you already have since I haven’t read your book ) But if a country is not self-sufficient (especially in food) is this not the true reason for building up an export trade to gain currency to buy in what you are missing ? I think also I’m still hooked into some kind of “displacement consumption theory” whereby if you haven’t got space to drive, or store, your power boat you maybe look to do something else for entertainment like join a gym, or play elaborate computer games, and these activities provide employment. However, I think since human beings’ behavior is not always entirely rational once you start exporting to get currency for imports and find a ready demand for those exports then it becomes a “lifestyle”, or way of life, to make your living from it. One thing I like about your theory though is that you are making people think harder about underlying systemic reasons for societies wanting to engage in global trade. There is the tendency to see it purely as a greed for profits as opposed to a means of livelihood. Also you are making people think more about how the mechanism of trade naturally and of necessity merges economies.Report

  15. Bruce and Pete: Many thanks to you both for such productive and worthwhile comments, which do a terrific job of getting around the boilerplate arguments that so often predominate on this topic (and on political topics in general).Report

  16. Avatar E.D. Kain says:

    Absolutely agree with that statement, Mark. I have to say, thank you to the many intelligent thoughtful and thought-provoking commenters here at the League. This really adds to the site, and is some of the most dynamic and interesting conversation I’ve read on blog-threads. Bravo!Report

  17. Avatar Bruce Smith says:

    Mark and Erik. Thank you for your compliments. This blog site is a credit to you and your friends as well as other commenters. I hope its focus on how the market and state actually work and how they should work long continues.Report

  18. Bruce, sounds like this thread is about to wind down, but wanted to reply to your last comment. My theory applies only to manufactured products. Regarding the question of “self-sufficiency,” there’s probably no nation on earth that’s self-sufficient in every respect, so my belief is that free trade in natural resources is beneficial for everyone. But I also think that an excessive dependency on imports, especially critical resources, is one indication of a state of overpopulation. It’s one thing to depend on imports to provide bananas and pineapples. It’s an entirely different matter to depend heavily on imports for such a critical resource like oil, especially a very large nation like the U.S. To me, this is a clear indication of a state of overpopulation.

    Regarding the “displacement consumption theory,” the data I’ve gathered just doesn’t seem to bear it out. Perhaps this is because nearly everything becomes more expensive as a nation becomes more densely populated. And, it may explain why the savings rate is higher in Japan; it’s just too impractical to buy lots of “stuff” when there’s no place to use it or store it.

    This post has been my first visit to this blog and I must agree with Mark and E.D. above – very thoughtful discussion. I’ll be back! Keep up the good work here!Report

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