Monday, November 15, 2010

Who's Steering the Boat?

Help one another for we are all in the same boat.

Chinese Proverb

In 1405, Chinese Admiral Zheng began the first of seven voyages of exploration and conquest in the western Pacific and South Seas. Eighty-seven years later, Columbus sailed the ocean blue. He had to “pitch” his idea to Queen Isabella who granted him enough money to build four ships to cross the ocean on a westerly route to India. Admiral Zheng had a fleet of over 300 ships and a crew totaling 28,000. Columbus had a crew of about 150 on all four ships.

The largest of Columbus’ ships was about 100 feet long. Zheng’s longest ship was over 400 feet, slightly smaller than a modern US Navy frigate. It functioned like a small city, carried an Army, horses and provided relative luxury. Columbus Spartan ships provided an atmosphere that led to near mutiny.

Never heard of Admiral Zheng? Well, maybe that’s because the new emperor decided the venture was too expensive to continue in 1433. He decreed that anyone who built a ship with more than two masts would be executed. Just as Europe was beginning to expand its influence through colonization of North and South America, Africa and Australia; the Chinese shut out the rest of the world.

British economist, Angus Maddison, estimated that in the mid-14th Century, GDP per capita in Europe and China were about the same – around $600 in today’s dollars. Over the next six centuries (to about 1950), China’s GDP per capita remained about the same. During the same period, Western Europe increased by 600 percent. Such is the impact of free trade, liberal institutions and openness to innovation. China, by remaining closed to the rest of the world, missed the industrial revolution and failed to grow. Even today, the majority of Chinese live in poverty.

The U.S. has engaged the nations of the world in international trade to our benefit and theirs. While we continue to lead the world in pharmaceuticals, technology, food production and financial services, Europe and the developing world have benefited from U.S. consumers purchasing everything from Japanese electronics to French wine to Italian shoes.

President Obama’s trip to Asia has been widely covered by the press. There was lots of discussion about the weaker dollar, Chinese currency manipulation, quantitative easing, etc. I suggest you do not let all the noise detract from the President’s core message: The world’s exporting nations cannot continue to rely upon US consumer spending to support their economies.

This is not a blog about economics. However, I would like to offer an arithmetic lesson. GDP is the sum of government and consumer spending plus private investment plus net exports. So, if you live in a net exporting country (Australia, Canada, China, Germany, Korea), your GDP can grow with less government and consumer spending than a net importing country (the US and the rest of Europe). Got that? Exports good!  Imports bad!

So, when the President mentions “global imbalances” that’s what he is talking about. We have been “imbalanced” on this score for about 30 years.

Our trading partners complain that the Fed’s policy will weaken the U.S. dollar making their exports less competitive. While the weaker dollar will, over the long term, increase our total exports, it will also be painful for U.S. consumers. Commodities – primarily food and fuel – will increase in price. Other impacts are less well understood. The Fed’s program has never been tried before; so, there are bound to be some unintended consequences.

Meanwhile back at the ranch, we are going through our own balancing act. Households have become net savers again. Burned by the recession and scared to death of losing our homes and livelihoods, we are paying off credit card debt and saving for retirement. That reversal has benefits for individuals, families and the financial stability of our economy. But, it does little to pull us out of the doldrums.

The final – and biggest – balancing act is the responsibility of government. Will the new Congress get our house in order? Will the President tack to the middle? Who knows? The President’s commission chartered to balance the budget has some ideas. Some very painful ideas. The pundits pronounced their plan dead on arrival. But no serious economist or budget expert thinks we can get on track without lots of pain. The politicians all promise to balance the budget, reduce taxes and leave entitlements alone all while we are fighting two wars overseas. But, it simply can’t be done.

So, the long and short of it is that we are in for a lot of pain. Higher taxes, reduced entitlements, reduction or elimination of popular government programs, lower defense spending and on and on.

But, you knew all that, right? Why am I telling you this? Well, it’s because there’s something missing.

Politicians warn that our profligate spending will result in a massive debt burden for our children and grandchildren. But, no one has laid out a vision of the future for the generations that succeed us. Why go through all the pain if we can’t see a better world on the other side of this crisis? Someone (gee, maybe a President) needs to provide us a believable picture of what life in the United States of America will be like in 2030 or 2040.

Moreover, we need more than a vision, we need a plan. To be competitive in the global economy, we need better educated children, less reliance on foreign energy, investment in R&D and a business environment that encourages innovation.

How do we get there? What are the key elements? What’s the plan? How much will it cost? Where will we get the money?

Or, to put it another way, WHO WILL LEAD?


  1. The NY Times had a budget balancing calculator recently. People should give it a try. It is amazing how much eliminating our ill-advised, far flung "wars" would do to help. Add to that scaling back our entitlements and you really don't even have to raise taxes. Reducing government is the Tea Party mantra but why are so many gung ho still on the military? Ron Paul has the answers. And, he would lead if people wanted to follow. So, for me, the question is what will it take for people to realize who the best leader for them will be? Or, put another way, what forces are at work to keep people in the dark so they will not vote for the best leader?

  2. As usual, John, right on the money. From 1405 to tomorrow you paint a fascinating picture of the world economic situation. Who will lead, indeed?

  3. ▾ Exports Good Imports bad
    • I was always under the impression that one should ‘export’ ones product to dispose of excess production, and ‘import’ only out of necessity.
    • Building a nation on exporting or importing, instead of self sufficiency only robs each other of jobs and increases transportation costs.
    • As China empties our bank account and makes us destitute, they will have killed their golden goose and their economy will stumble until they turn inward and look at the phenomenal markets they already have in the billions of poor there. Or maybe, they’ve already thought of that and the draining of our wallets is their cunning plan to conquer the world?
    • Osama Bin Laden said that America would fall because of it’s weak financial policies. Islam is waiting for that day and actively encouraging it by engaging us in wars we don’t want or need. We fall for it every time.

    • China gets its products to us by using it’s cheap subsidized shipping methods, like Chinese owned container ships, and its own USA EMS mail system. Able to ship almost anything directly to your door in 10 days at low cost, they operate as your local Walmart online store, except they don’t collect sales tax, no workers comp is paid on the manufacture, and no American jobs are involved.
    • Chinese businesses have latched onto using Ebay to sell here and they do not collect taxes; even the CEO of Ebay is currently campaigning against the collection of sales taxes by Ebay, saying it will increase prices. Now, if the CEO of Ebay doesn’t understand the importance of the collection of local sales taxes, then our total system is doomed.
    • Until the tax collection system is reformed, there can be little hope of an economic recovery, as there are far too many leaky holes in the current tax bucket. And of course, there will be little reform with this dysfunctional Congress, hell bent on blocking any progress in any direction.
    • The rest of the world uses the VAT (Value Added Tax) or GST (Good & Services Tax) to collect it’s revenue, yet America is unable to lurch forward mainly because of ignorance of how it works. Allow me to briefly explain it’s workings.
    • A vendor must register to obtain a VAT license/registration number. This allows him to collect a sales tax, much like our current system, except this is collected on a Federal level and not locally. All other taxes are abolished.
    • The sales tax is collected on everything that is sold, goods and services, almost no exceptions. A log must be kept of all collections. To make the example easy, we’ll say a 10% VAT is levied, so our business sells $1000, and collects $1100, $100 being the tax.
    • In the course of doing business, purchases are made, and of course, sales tax is paid on these purchases. Lets say we make $500 in purchases, so pay $550 in total, $50 being VAT.
    • At the end of the month The sale VAT $100 & purchase VAT $50 are recorded on the VAT return, and as $50 more was collected than spent, that $50 is sent to the government.
    • Elimination of moonlighting businesses, elimination of cash jobs, better record keeping, a lowering of the sales tax rate, and a huge increase in revenue for the nation while streamlining the taxation departments are the major benefits of this system, but so many politicians are terrified of it through ignorance. Their education, if possible, is vital to move forward.
    • The increase in revenue from VAT will pay for many of the ills of the nation.
    • How do we get there?  What are the key elements?  What's the plan?  How much will it cost?  Where will we get the money? Five questions so linked together, but with the current systems of government in place, so difficult to answer. No one is focused, and the nation swings from left to right far too frequently. Unless we come to grips with these questions, Islam or China will totally dominate us!