Wednesday, February 28, 2007

Economics and America

Economics has been called the "dismal science" since it is associated with so many tragedies - when an economy declines, people really get hurt. The theories of economics try to explain why these tragedies, and also the economic success stories, happen. During the past 50 years, as the availability of useful data has improved dramatically, the science of economics has become far more accurate and useful for decision-making.

Few would dispute the basic theories of economic science. When the price of an item rises, fewer people can afford to buy the item. When a useful item becomes less available, the price of the item will go up. When competition is limited, prices will tend to be higher than they would be under unlimited competition. When people develop skills that are in demand, the value of their labor increases and their wages rise. These and other basic theories are about as provable as the the theory of gravity, and most people understand them even if they never spent a single day in an economics classroom.

What makes economics so controversial is that it explains how people become winners and losers in the economy. When individuals are winners, they tend to appreciate how economics works to their benefit. When people are losers, they tend to wish the rules were different and they often work to change the rules to their benefit. The discussion then centers on whether or not the rules are "fair" - and "fair" is a very subjective, emotional term.

The current discussions about outsourcing boil down to a debate about what is fair. When a Chinese company starts manufacturing widgets and sells them for $1.00, the American widget manufacturer may find it cannot even manufacture a widget for $1.00 in cost. Soon all the business will move to China and the American manufacturer will close or shift to another product. However, many Chinese workers will move from a subsistence farming environment to work in the new widget plant, and their standard of living will improve. Other Americans who buy widgets will pay less for them and thereby have money to spend on other things. But the Americans who previously made widgets will have to find a new job. The circumstances that seem unfair to the American widget worker seem eminently fair to the Chinese widget worker. "Free Trade", which just occurred in this example, created many individual winners and losers.

Those who are smart enough to evaluate economic data and derive general principles from it believe that free trade results in the most "good" for the most people, although some people are definitely hurt by it. When the standard of living goes up in China, many millions of people can now afford more expensive purchases. The big question then becomes "where will the items bought by the Chinese come from?" We would like to see a lot of U.S. content in those items, but we will have to earn the right to be a supplier to these Chinese people. To do that, we need to produce goods that the Chinese cannot produce, or cannot produce competitively. These are going to be high tech industrial products or products with significant intellectual content. We will either provide them or we will become the losers in the competition of free trade.

That's the challenge that we face in America. Compete or slowly fade. We know from the example of Japan that simply having low wage rates does not ensure long term competitiveness: Japan did not maintain its competitiveness after its wages reached parity with ours, and Japan is now facing serious economic issues. China will some day reach the same decision points, although it presently is benefiting significantly from its relatively low wage rates. (As are American consumers who purchase well-made Chinese goods at low prices.) China will not be the low-cost producer forever, because their overall standard of living will rise.

How do we compete? Be better educated, more inventive, and more productive (working smarter) than our competitors. Eliminate the waste in our economy - people talent and resource utilization that provides outputs of little value. And put our social programs on a firm footing, whatever it takes - taxes, benefit adjustments, or new kinds of social organizations. We can compete very well in the world economy if we understand the challenges we face and do what is necessary to keep our society the envy of the world.

There are plenty of nay-sayers, people who have lost faith in America's competitiveness and want to turn inward. They forget that we have great advantages to leverage. Our land is huge and fertile, with great water resources - a wonderful agricultural machine. Our infrastructures for transportation and communication are well-developed. Our great colleges and universities can provide whatever learning experiences our new economy demands, but we first need to internalize the idea that when workers at all levels in all organizations are more educated, they will be more productive and flexible. And lastly, we have a free society with a long history of meeting great challenges. With leadership, our citizens will rally to meet the challenges of the 21st century.

The laws of physics tell us that when an asteroid is on a trajectory to impact earth, we had better do something about it. It's not possible to change the physical laws of gravity and inertia that will bring that asteroid right to the projected target. The theories of economics, and our own knowledge of history, tell us that nations that get lazy and complacent, overspend, and underestimate their competitors are ultimately overtaken by those who are eager to succeed, use their resources wisely, and aggressively pursue their objectives. America has no place to hide, no doors to close, no way to "go it alone". We just need to get busy. Will we?

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