How National Debt Drives Out Jobs

Many Americans are concerned about the loss of good jobs. In the manufacturing sector, especially, jobs have disappeared in favor of lower wage retail jobs. The reason is in the expansion of government indebtedness and increasing tax burdens.

In a free market money system such as existed under the gold standard and theoretically ought to exist today under the free floating currency system, if a nation imports an increasing amount, its currency ought to fall in value. Thus, if US plants close and move operations to Asia, then demand for the dollar declines and demand for the yuan or the yen increases. As the demand for the foreign currency increases, the foreign currency becomes more valuable and the dollar becomes less valuable. As the dollar becomes less valuable, it buys less foreign merchandise. Moving overseas becomes less attractive because goods sold in the foreign currency become more costly. So firms stop moving overseas and some return here.

That has not happened in the current Federal Reserve Bank/US treasury regime since the Reagan years. Rather, increasing trade and current account imbalances have not lead to a lower dollar. Rather, the yuan and other currencies have been stable against the dollar, resulting in increasing demand for merchandise manufactured overseas. As a result jobs have moved overseas. This is a process manufactured by the federal government and the Federal Reserve Bank in tandem with foreign central banks.

That is, there has been de facto pegging of foreign currencies against the dollar. This is done through purchases of the national debt. As the national debt is sold, foreign buyers including the Japanese, Chinese, Saudis and Europeans, purchase it, in so doing purchasing dollars with foreign currency in order to buy the debt. This keeps the dollar stronger. If foreign holdings of foreign debt were to be sold, the dollar would collapse. Or, if as seems to be happening now, foreign governments stop purchasing escalating quantities of debt, the dollar will weaken.

Because the dollar has been propped up, US jobs have moved out of the country to a greater extent than they would have were the dollar not propped up. The effect might be large. No one knows the damage that the de facto pegging has done to higher end US jobs.

Added to the mix is the Federal Reserve Bank's persistent monetary expansion. Despite the ongoing purchase of the national debt by foreign dollar supporters, the Federal Reserve Bank also has been purchasing national debt. Inflation since 1980 has been close to 4%, which in earlier decades would have seemed very high but has resulted in the curious belief in recent years that 4% inflation = 0% inflation. The Republicans have not helped in this regard, mistakenly claiming that the monetarist policies of Paul Volcker were due to a choice made by Ronald Reagan. That is not exactly right, because Jimmy Carter appointed Volcker and Reagan was elected because the public was angry about economic declines brought about by Volcker's monetary policies that ultimately stopped hyper-inflation. It is true that the Reagan administration permitted Volcker to continue these policies for two more years without forcing the Keynesian notion of "supply side economics" advocated by the Republican establishment in those years.

Inflation increases the degree to which foreign governments subsidize the US economy. This in turn facilitates consumption, which stimulates demand for retail sales and new homes. It does not stimulate sustainable business growth, though. Ultimately these policies will fail. In the long run, much of America will find itself unemployed, and it will take decades to rebuild a free economy, if all Americans haven't been brainwashed by the ideologically socialist school system by then.

In 1970, the real hourly wage in the United States was roughly the same as it is today. This is a dismal performance, for before the establishment of the Federal Reserve Bank and for five or six decades afterward real wages in the US increased 2 percent per year. This was especially true during the period when there was (a) no Federal Reserve or National Bank and (b) there was the highest amount of innovation in history, between 1836 and 1913. In contrast, the real wage became stagnant at the very time that President Richard M. Nixon (R) abolished all constraints on inflation and encouraged the Fed to inflate in order to boost the stock market and ensure his reelection. The boost-the-stock-market measure of the economy that began in the 1920s was perpetuated during the longest period of real wage stagnation in history, from 1970 through today.

Despite the stagnant real hourly wage, low population density regions such as the Hudson Valley and Catskills have seen massive construction of retail operations that in 1970 were primarily seen in dense suburban areas. That is, less profitable retail operations have been made profitable by two forces. The first, increasing efficiency due to Wal Mart's, McDonald's and other firms' innovation, is very much in the tradition of laissez faire capitalism. The second, low interest rates due to the Federal Reserve Bank's inflationary policies is more in the tradition of the Soviet Union's central planning agency, Gosplan. The results of the second force will be the same as in the Soviet Union.

That is, economic growth has not proceeded because of sustainable demand but because of monetary expansion. Thus, much of the American economy now depends on an unsustainable economic bubble. The bubble has been due not only to the Federal Reserve Bank but also due to foreign governments, who have bought into the curious idea that they benefit from having their workers work at very low wages in order to subsidize US consumption.

Income taxation re-enforces the lack of economic growth. Innovation depends on entrepreneurship, but entrepreneurship depends on the accumulation of capital. In the 19th century, entrepreneurs from low-income backgrounds like John D. Rockefeller could start from nothing and save a year's pay in three years, as Rockefeller did. He used that seed money to purchase a store, and then sold the store to purchase an oil refinery. In the 21st century, half or more of a middle class person's income goes to tax--sales tax, property tax, income tax, state tax, gasoline tax, etc., etc. As a result, the savings rate has been diverted to greedy teachers and bureaucrats who do not create value. Few "progressives" have ever compared the performance of Rockefeller and the American education establishment. Since 1970, literacy, numeracy and other measures have declined as ever more money is thrown at government schools. Between 1865 and 1913, the per barrel price of oil fell dramatically as Rockefeller and his organization innovated relentlessly, vastly improving the American standard of living. It is the education establishment that is greedy. They destroy and do not produce. Rockefeller by comparison was an altruistic saint.

The misallocation of resources and people is vast. It is ironic that the Democratic Party, which is responsible for framing these policies under Franklin D. Roosevelt, is the same party that claims that there is no environmental "sustainability" due to the suburbs or that over-expansion of suburban malls harms the environment. This is the fruit of socialistic planning by the Federal Reserve Bank and the central government. A capitalist economy would have done a much better job of allocating resources between current and future generations. Americans today would be much better off and would have bright prospects, but would not have as wide an array of retail merchandise or jumbo homes.