Benson's Economic
& Market Trends
Comparative
Advantage:
"Destruction of American Industry"
Richard Benson
February 27, 2004
I would be the first to champion the benefits of Free Trade based
on legitimate Comparative Advantage. As a graduate student at
Harvard, I had the privilege to pass on Wisdom of the Ages
and Sages to the bright undergraduate youth. David
Ricardo had a beautiful idea and classic cases of his vision
of Comparative Advantage were carefully used in every economic
text, such as: Country A has lush farm land with fertile soil
and lots of sun and rain, but is landlocked. Country B has rocky
land and a cold climate but happens to be close to some of the
richest fishing grounds imagined. Low and behold, Country A has
grain and dairy farmers and Country B has fishermen. They trade
and everybody is clearly better off! Case closed, QED!
Now, with this lesson in mind, the Larry Kudlow's of Bubble Vision
will "shout down" anyone displaying common sense by
asking a curious question regarding America's jobs going offshore,
as someone who is ignorant of any classical training in economics.
(If Kudlow & Cramer were "off-shored" it would
be good for investors but very bad for future reruns on Comedy
Central).
Where there is true and honest Comparative Advantage, there
are clear benefits. However, the true Comparative Advantage is
not always clear and the outcome is not always simple, except
perhaps for the naive. Indeed, it is naïve to believe that
just because there is "trade" or cross border activity
taking place, there is Comparative Advantage at work. Every economic
activity relies on exchange; not all are a Comparative Advantage.
Now that I am older and after having been "roughed up"
by many years on Wall Street, I find it wise and prudent to keep
learning, rather than teach. We've learned that some Comparative
Advantages should not be "bragged about." Certain small
European countries and Caribbean Islands are known for their
bank secrecy laws and customs that give them a Comparative Advantage
in attracting investment money from tax cheats, drug lords, and,
of course, "quiet hedge funds." Arabs seem to know
how to have a near monopoly of turning "sand into oil"
without creating wealth or industry. Under the watchful eye of
the U.S. military, the farmers in Afghanistan are proving that
they can grow the opium poppy better than anyone else as long
as the drug hating religious fanatics, the Taliban, are held
at bay. Columbians seem to have a clear Comparative Advantage
in growing, refining, and distributing coca. (Most countries
have their special thing they are really good at but they don't
necessarily want this printed in their travel brochures).
China does have some natural resources, such as unlimited,
cheap, bright and hard working labor, and an artificially undervalued
currency. When you combine the two, China uses this combination
as a mercantilist "carrot" to attract foreign capital,
and as a "big stick" to smash foreign industry. Calling
this combination "Comparative Advantage" is not what
David Ricardo had in mind - he'd be turning in his grave
if he knew what was happening.
The United States has both a comparative and absolute advantage
in "smart bombs." In reading history, it is clear that
no one can bomb or invade like America. We have actually invaded
more countries and islands than anyone can remember, and we currently
have troops in more countries than the average American knows
even exist. We are the World's Super Power and military might
is our biggest Comparative Advantage. The U.S. has only a
slight Comparative Advantage in political leadership. As Samuel
Clemens noticed, America has the best politicians money can buy.
In the economic arena, America is clearly the leader in generating
garbage, Co2, and political hot air. If anyone has been in New
York City during the month of August, or in Washington anytime
Congress is in session, they cannot fail to notice the pungent
vapors. Indeed, "trash," including Hollywood and the
music industry product, is one of America's most sought after
exports! With the internet and "read-write" drives
for CDs and DVDs (that the Asians make and sell to the U.S),
movies, music and computer software, are now free to copy. Only
the Americans are foolish enough to pay for them!
Most notably, one of America's recent Comparative Advantages
is accounting firms that are willing to help clients perpetrate
fraud for big money. Both the bankruptcy of Enron and the collapse
of Arthur Anderson showed that accounting firms performed miracles
in making revenue appear from nowhere under GAAP. Now, KPMG has
shown that soliciting for tax fraud is far more profitable, but
less honest, than the oldest profession. Clearly, the U.S. investment
community, mutual funds, major corporations, and accounting firms
have been showing a Comparative Advantage in "animal spirits
of cooking the books for fraud and profit." Financial
engineering is so much more profitable than engineering real
products.
It is in these amoral times that we need to take another
close look at the fraudulent and regular use of the Comparative
Advantage label to justify extraordinarily mean and anti-social
corporate behavior. Look from the distance at the U.S. economic
recovery. Notice the stirring of activity in Venture Capital
and Private Equity. Take another look. Venture Capital and Private
Equity are not backing the next new mega wave in technological
breakthroughs. New technology that would give America a real
future Comparative Advantage is not being bankrolled! Time and
time again, the business model getting funded is: Don't build
the new factory in America. Build the new factory in China or
Asia. Just have Americans involved in the design, marketing,
and distribution of the products. Just Think! Labor Arbitrage
is Alan Greenspan's Real Productivity Miracle!
It honestly looks like the Venture Capital community
is out to make sure that in an election year there will be more
jobs sent to Asia than created in the United States. This must
make the President, Secretary of Treasury, Secretary of Commerce,
the Fed Chairman and Carl Rove just bust open with Patriotic
Pride! There is no Comparative Advantage here. The new factory
would be the same in China or America. The workers in the factory
have similar skills but the only real difference is that in China,
the workers are not only hungry, they're starving! The Chinese
will work 7 days a week for $.50 cents to $1 an hour with no
benefits for social security, health care, vacations, a pension,
or worker safety. China has an estimated hundred million unemployed
and under-employed workers who would love to take American and
European jobs. America will run out of manufacturing jobs long
before China runs out of workers. In America, the going wage
would be 10 to 20 times higher including all benefits. If you
are a Profit Maximizer and all you care about is short-term returns
on capital, it is a "no-brainer" to fire Americans
and fast track the new factory to China. What is going on here
is pure and simple Labor Arbitrage facilitated by low shipping
costs for high value added products.
The practice of Labor Arbitrage on the massive scale that the
Bush Administration is fostering, will accomplish a number of
things. First, those with massive wealth will find relatively
low cost goods readily available. Second, those who rely on a
wage or salary will be extraordinarily fortunate if their job
is not "off-shored." Third, the wages and standard
of living in countries like China will rise, but the standard
of living in America and Europe will fall. For those of us who
actually need to work to pay the bills and to service our massive
mortgage and credit card debt, this is not a pretty picture.
Indeed, it should not be a happy time for banks, auto companies,
and the GSEs who really think that American workers will be able
to pay back their massive debt.
Even though my formal educational training should make me a greedy
amoral economist or businessman, my experience has led me to
understand how "Virtue is Its Own Reward." Virtue is
good business! If everyone had good jobs and could pay the rent,
feed their families, and, most importantly, pay their cable bill,
there is peace. When the peasants have a loaf of bread to eat,
we should feel safe in our beds at night. When they don't, watch
out!
Current economic teaching is focused on returns on capital, and
maximizing consumption. No thought is given to labor. It is simply
assumed that "jobs always happen." Unfortunately, the
economic system is interdependent, like an ecosystem. Lowering
consumer prices is good, but as jobs are destroyed the whole
living economic system dies.
Being concerned that the members of my extended community and
my country have meaningful things to do, and can earn a living
and provide for their families, is perhaps of equal value as
putting the consumer and corporate profits first. Running an
economy that puts the consumer above the worker, inevitably fails
as workers stop working. American CEOs have forgotten that a
consumer without a job is not a consumer at all. A consumer without
a job is likely to be bankrupt, and last year we had a record
1.6MM of those.
I am also a great believer in Joseph Schumpeter's importance
of "creative destruction" as one of the most important
aspects of capitalism. Creative destruction allows bad firms
to fail so that the labor and capital can be freed up for more
profitable growth companies to get the scarce resources and put
them to productive use. (If Japan knew what this was about,
their financial mess would have been cleaned up long ago).
One of America's amazing strengths is its ability to create
a massive financial mess, clean it up, and move on. (America
will soon have the opportunity to show the world if we can clean
up the biggest debt binge in the History of the World). However,
thinking about the best of Schumpeter, we have come to notice
that while change is good, the rate of change can be fatally
destructive. Too much of almost any good thing can kill you.
Massive Labor Arbitrage, on an unprecedented basis, has nothing
to do with Schumpeter's genius. What Labor Arbitrage is doing
is "gutting, hollowing out and closing down, American
manufacturing forever." This time, our national resiliency
will be sorely tested as America is facing the destruction
and collapse of American Industry!
Indeed, current economic policies may not be wise for
those politicians looking for a job in November. Present policies
will likely threaten America's wealthiest citizens and Fat Cat
CEOs. When the stock market crashes again, and jobs become really
scarce, we'll need to put a guard house at the mountain road
entrance to Aspen, raise the bridges at night in Palm Beach,
and arm each doorman on the Upper East Side of Manhattan with
an Uzi to keep out the hungry mobs. Many Americans are old enough
to remember the riots in America and it is highly likely that
we will see them again. Jobs may be more important to social
stability than home ownership, and social stability may be more
important than cheap Chinese imports for the rich.
For American industry, helping the Chinese working man sounds
noble to CEOs and the Fed Chairman, because it puts short-term
corporate profits as the most important goal of society. However,
helping the American worker may not only be virtuous, but for
the super rich, CEOs, the President, Congress, and, our un-elected
Governors of our almighty and all wise central bank, creating
jobs may become a matter of enlightened self-interest, otherwise
known as survival. Given America's self-inflicted economic wounds,
my gut tells me that the dollar still has a long way to go down
around the world to slow the U.S. job flight and get foreign
tourists, once again, to travel here.
If the President is serious about getting elected short of another
war, using the drop in the dollar is the only card left he can
play to goose the economy. Carl Rove will tell George that Dick
Cheney should have a serious talk with John Snow and Alan Greenspan.
If John doesn't want to end up like the last Secretary of Treasury,
he needs to go back to Japan and China to cut the political deal
Carl and Dick worked out. In order to revalue, China may get
Taiwan. Japan will likely be allowed to buy enough Treasuries
so that the American taxpayer will pay for the retirement of
all Japanese pensioners. The U.S. has already given Japan access
to one of Iran's oil fields and Japan may demand more.
The Federal Reserve Chairman certainly needs to order extra paper
for more of those new multi-colored bank notes, if he wants that
reappointment as Chairman of the Fed. If the President wants
to be elected to a second term, he has got to let the dollar
go NOW to get some job growth by September when the last employment
report comes out prior to the election, or rejection, on
November 2.
Finally, the European politicians are in agony and threatening
in the press that they will do something about the dollar. With
the Euro having tested 1.30 and likely to test 1.40 - 1.50 against
the dollar in the future, the European leaders are also facing
the full frontal assault of Asia's factories and 100 million
unemployed workers. Europe doesn't need or want this currency
war. America's trade and budget deficits may be our deficits,
but we have made them Europe's problem! It looks to me like before
the summer is over, Europe will be cutting interest rates and
using their new high speed Euro printing press too! If that doesn't
work, I wonder if they will be the ones to go for tariffs on
China. After all, Europe has workers who vote, too!
Richard Benson
February 27, 2004
President
Specialty
Finance Group, LLC
Member NASD/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
eMail: rbenson@sfgroup.org
______________
321gold Inc
|
