Monday, August 22, 2011

The Fed Is Responsible for US Jobs Exiting to China

Gerald Celente of Trends Journal and Trends Research Institute just e-mailed with a special report about the exodus of jobs to China.  Celente takes a protectionist tack, with which I profoundly disagree. He writes:

"Libertarians and “free market” economists praise Wal-Mart’s low prices achieved by offshoring, but these prices do not include the costs of the decimated state and local tax bases that are destroying American cities, the costs of the high unemployment and the personal depression, crime, and income support programs. These and other costs are expenses imposed on third parties by the movement of American jobs abroad in order to maximize profits...

"Free trade works, if it works at all, only when capital and technology remain in the domestic economy and find their best use or comparative advantage. Offshoring is the contradiction of free trade. It is the pursuit of lowest factor cost and absolute advantage."

The basic statement of free trade, comparative advantage, is still valid.  There is no reason for an ongoing exodus of jobs under a free market system where there is no paper money system to artificially inflate the dollar at the expense of workers.  This has occurred since 1913, especially since 1970.

The dollar is used as a reserve currency around the world, not just in China. Its reserve currency status elevates its value. There are $10 overseas for every dollar here, with central banks around the world holding trillions in treasury bonds.  If the foreign dollar holdings were to be exchanged and the treasury bonds sold, as happens with bubbles, the dollar would be worth less than its current value. This happened to the pound in the early 20th century.  Americans would be poorer, but manufacturing would return here. A Faustian bargain.

Under a libertarian system, a metallic standard, overseas investment would depreciate the dollar, eventually forcing overseas investors to repatriate their investments.  The flow of gold or silver would pose a market-based mechanism to limit expatriation of investment. This has not happened in our state-dominated economy because of the paper money system and the limited ability of planners like Bernanke and Geithner to function independently of special interest pressure.  Such pressure would not evaporate under a tighter degree of regulation. New forms of regulatory privilege would emerge. The current system is the result of government intervention and Progressivism.  When the Sherman Anti-trust Act was passed in 1890 and the Fed established in 1913 firms were far smaller, there was less monopoly, there was no possibility of unlimited expatriation of capital, the average real wage was rising (unlike since 1970s, when the gold standard was removed) and although there had been depressions in the Gilded Age, they were milder and briefer than the post-Fed depressions and recessions in 1920, 1930, 1974, 1978 and today.  Where does the investment capital to invest overseas come from? The Fed. It is not a libertarian free market phenomenon.

Celente's suggestion, to impose regulatory limits on where and how capital is deployed, would create impediments to investment and cause a stock market crash because of increased riskiness and regulatory controls. Small as well as large investors would be hurt.  This is what occurred in the early 1930s, with the Smoot Hawley tariff contributing to the Depression. 

Creating paper money with one hand and then imposing regulatory controls with the other disrupts expectations. Investment capital flees. New irrational bubbles form. Rather than expand firms’ investment here, investors would find overseas firms in which to invest.  Many US firms would leave the country. Why stay here? The wonderfully educated work force? A stable government? Low taxes? I don’t think so. Voluntaristic solutions work better than state compulsion by planners with human hence limited mental capacities and motivations.  

No comments: