Rebuttal: The Capital Times (Madison, Wisconsin) Editorial We are not generally credited with knowing more about the economy than anyone else, but this editorial makes us look quite knowledgeable.
Businessman Warren Buffett, who is generally credited with knowing a whole lot more about the economy than anyone else, including Fed Chairman Alan Greenspan, is terrified about the size of the U.S. trade deficit.
The first clause of that statement is quite untrue, and it has to do with the complicated differences between markets and economies.
Mr. Buffett is an investor, meaning he earns money off of the internal profitability of corporations. He invests in markets.
Economies are the aggregate collection of all markets, governmental spending, and banking considerations, and about the latter two Mr. Buffett has little expertise.
Milton Friedman, who actually does know a whole lot more about the economy than anyone else, including Warren Buffett, will make the distinction for me.
"The behavior of the market doesn't correlate in any significant way with the behavior of the economy. It's a mistake to imply that it does. The only thing you can say about the market is what J.P. Morgan said about it. He was asked and said. 'The market will fluctuate.' In 1954, I delivered a lecture in Sweden under the title, 'Why the American Economy Is Depression-Proof.' I have seen no reason since then, and see none now, to change that conclusion."
You're welcome.
The deficit has reached record levels: Last year, the U.S. imported $670 billion more in goods and services than it exported. As Buffett notes, that creates a situation where Americans no longer control their own destiny because foreign investors own so much of this country's debt. Referring to the $670 billion trade deficit, Buffett recently wrote, "That is a staggering figure and one that has important consequences. The balancing item to this one-way pseudo-trade - in economics there is always an offset - is a transfer of wealth from the U.S. to the rest of the world. The transfer may materialize in the form of IOUs our private or governmental institutions give to foreigners, or by way of their assuming ownership of our assets, such as stocks and real estate. In either case, Americans end up owning a reduced portion of our country while non-Americans own a greater part. This force-feeding of American wealth to the rest of the world is now proceeding at the rate of $1.8 billion daily, an increase of 20 percent since (2003). Consequently, other countries and their citizens now own a net of about $3 trillion of the U.S. A decade ago their net ownership was negligible."
It may be considered a poor decision to combat a problem without understanding the cause. Blaming free trade for the trade deficit is on the level of a third-world nation blaming free media for refugees fleeing to the sanctuary of American liberty.
Choice determines the superior option, but liberty determines the number of options.
Without free trade, foreign products and workers are better than American products and workers. With free trade, foreign products and workers are better than American products and workers, only now it's legal to patronize the superior option.
Yet nearly unintelligibly to rational individuals, protectionists blame free trade for these disparities. They blame the freedoms that allow foreign products to enter the homes of Americans by no force but the demands of Americans.
Americans import goods because they are higher quality and affordable, even with the protective tariffs that are supposed to assist domestic production. American businesses export labor because foreign workers are willing to do unskilled work for less than American workers are.
A global society manifests these realities. Protective trade policies may coerce businesses into maintaining domestic factories, but efficiency and competition will drive them to find ways to move them abroad. The reality that protectionism cannot combat is that foreign products are more alluring to American consumers than American products are.
Why is this? American regulations, including minimum wage and labor laws, create a situation in which the costs necessary to maintain an unskilled labor force in America exceed the costs to maintain one in a foreign country. These regulations, coupled with protectionist policies, shield these inefficient workers from the competition that would otherwise force innovation. As a result, product quality falls.
Now, should we ignore the demands of American consumers for lower prices and the need for American businesses to lower costs to sate this demand? Rational people say no, and that the desirable course of action is to make the American market more competitive vis-à-vis foreign markets, rather than clamoring for the imposition of artificial and illusory preventions of business activity.
This can be achieved with an implementation of several reform policies, including open immigration (immigrants are the most willing to do the menial labor - they come from the countries to which we're exporting the jobs), minimum wage reform, and deregulation.
When the American labor market improves, one doesn't need to prevent businesses from exporting jobs as an artifact of free trade. They'll be happy to keep them here.
The elimination of our inefficiencies will eliminate the demand mechanisms fueling importation. The elimination of excessive importation will eliminate the trade deficit. The elimination of the trade deficit will eliminate subsequent subsidies and other policies that contribute to the sinking of the American dollar. The elimination of these economic ills, ideally, would eliminate the need for editorials such as this.
While most of the media continue to promote the fantasy that free trade policies are good for the economy, Buffett takes a dramatically different - and far more realistic - view.
He sees a future in which America will be "perpetually paying tribute to their creditors and owners abroad," and he suggests, "A country that is now aspiring to an 'Ownership Society' will not find happiness in - and I'll use hyperbole here for emphasis - a 'Sharecropper's Society.' But that's precisely where our trade policies, supported by Republicans and Democrats alike, are taking us."
The lack of free trade policies may have more damaging effects than free trade policies, as foreign competitors exploit the superior markets to the financial harm of the American market. Let us not forget that the rise of the Asian market vis-à-vis the U.S. market occurred as a result of product superiority, not any provision of NAFTA.
We now buy Japanese cars and electronics nearly exclusively, not because of trade policies, but because the products are simply demanded while American companies in these fields cannot compete for the same reasons they are now hastily planting factories all over the Third World.
Free trade thrusts these issues into the faces of Americans. While misguided Luddites like the writer of this editorial blame free trade for these problems, reason leads us otherwise.
Free trade, for any of its faults, shows us where America is lacking in the world economy. Every American business that ships a job off to India teaches us that our unskilled labor force is uncompetitive. Every product imported shows us that our domestic production is so atrocious that Americans - the most patriotic people on Earth - don't even want to buy their own products.
Without free trade, what shall we do as foreign goods become increasingly desirable? Should we forbid American consumption of them until black market imports become the new breeding ground for organized crime? Should we subsidize American businesses until their inefficiencies cause federal deficits to sink the U.S. dollar? Should we impose protective tariffs that fund American inefficiency until our innovation grinds to a halt? Shall we close our eyes as the world's largest economy falls down the global ladder because it simply can't compete?
The solutions are not easy ones, but economic blindfolds aren't long-term solutions.
If America is to remain a prosperous and independent country, Congress is going to have to stop approving trade agreements that benefit multinational corporations but undermine the interests both of the United States and of developing countries, where the free trade regimen has led to wage stagnation, environmental devastation and the worst sort of labor and human rights abuses.
Protectionism is conducive to neither prosperity nor independence. American businesses make money when their products are desired, but they are not going to be desired when they can't compete with foreign firms. American workers benefit from the wealth of American corporations, but they can't benefit when the firms are losing money. Americans enjoy independence because their economy is self-sufficient, but they aren't self-sufficient when their products come from overseas.
The problem is the products are coming from overseas because American products just aren't good enough. This inferiority prevents both prosperity and independence. Protectionism eliminates the competition that illustrates the inferiority. We can either lose prosperity and independence through protectionism, or gain them back through free trade.
Economics really isn't that complicated. It requires a small degree of study, but study is certainly superior to ad hoc quotations of Warren Buffett.
The problems abroad of environmental devastation and labor abuses are not only not problems, but legal according to the legal traditions of the third-world countries within which they occur.
If the corporations were operating within the United States, they would be legally prevented from such abuses. It is a mistake, however, to view the working conditions of foreign workers through the scope of American working conditions. Americans would never work under such conditions, simply because competing employment offers perquisites of commodious living that are more alluring. However, third-world workers have no such options, and thus American factories are the best option.
Socialists scoff at the notion that foreign workers "choose" factory employment, postulating that their decision is incompletely volitional because of their dire economic circumstances. This may be true, but it certainly doesn't change the fact that factory work is still the best available employment, and any limitation of free trade would keep them from this best option.
However, it is in the interest of Americans to support a consolidation of these interests, where it is financially desirable for American businesses to operate here as it is socially desirable for Americans to work here.
CAFTA would effectively extend the current North America Free Trade Agreement - which includes the United States, Canada and Mexico - into Latin America and the Caribbean. The idea of extending NAFTA, which has led to the loss of hundreds of thousands of U.S. jobs, done serious harm to many sectors of the agricultural industry and contributed mightily to those trade deficits that so frighten Warren Buffett, ought to terrify any thinking American.
Thinking Americans neither find scapegoats for problems nor base their global fears on Warren Buffett's. NAFTA may have allowed the loss of U.S. jobs, but U.S. regulations led to the loss of U.S. jobs. Why? Without the regulations, U.S. workers wouldn't represent an excessive burden on the financial statements of U.S. companies thus sparking the search for more affordable labor.
We should aspire to an economic situation where we are confident in our production, workers, and innovation. We should face trade fearlessly, knowing that American products are the best in the world.
We don't now. That is the greatest travesty of all.
Now, we face our own inferiority with delusional demagogy. We animadvert outsourcing, yet refuse to ask why our workers aren't good enough. We animadvert our trade deficit, yet refuse to ask why no one wants American products.
It is, among other things, antipodal to American traditions. Our athletes do not respond to Olympic losses with the proposed dissolution of the IOC. We compete because we build upon our weaknesses; we improve because we know what we lack.
Neither is free trade an invented concept created by greedy legislators and unctuous businessmen. It represents the lack of artificial inhibitions, likewise as free speech is not a creation of the Constitution but rather the exercise of natural liberty. Free trade is competition on a global scale.
Liberty is invariably informative. Free press leads the poor abroad to seek the Western alternatives. Free speech leads thinking Americans to heterodox opinions. Free trade leads American corporations to foreign workers and American consumers to foreign products.
Why must we allow the disparities to exist? Why are the mechanisms that illuminate the disparities considered the enemy?
The disparities exist naturally, and free trade allows the pursuit of the superior alternatives. Why are we more concerned with the allowance of human liberty rather than our intrinsic inefficiencies that free trade only highlights?
Ignorance is never bliss. Does a world without NAFTA change the fact that consumer prices fall with the employment of foreign workers? Likewise, does a world without Reuters change the fact that there are places in the world where dissent is permitted?
It certainly terrifies workers and farmers in Central America, who have been actively organizing against the initiative. But the corporations that seek to increase their profits through friendly trade rules will be pouring millions into a pro-CAFTA lobbying effort.
It should terrify Americans that the economy that once produced the greatest products, technology and workers in the world does so no more. This decline is not a product of NAFTA or any other convenient red herring.
Any car enthusiast will tell you American cars have been inferior since the 1970s. Any technophile will tell you American technology has been inferior since the mid 1980s. Any global businessman will tell you American workers have been inferior since the 1960s. These are not the results of free trade. They are the results of regulations that retard economic progress and allow foreign nations the open door into our securities, holdings, and economic landscape.
If Americans want to control their own destiny, they must control their own markets. To control their own markets, the American market must dominate. For the American market to dominate, deregulation must allow it to compete on the "same playing field", in that infamous statist phrase, so that it can vanquish the competition as it once did easily.
Those on both sides realize that American products and workers have become less competitive. We can either stop free trade and maintain our lack of competitiveness, or we can face the music and do something about it.
Protectionism is denial of reality. Perhaps to protectionists, reality is the greatest terror of all. For the optimists, God bless NAFTA for showing it to us.
