Global trends in economics and trade | Commentary

By Hugh Holland

The Emma Maersk is the world’s biggest container ship. It was built in Denmark. At 1,300 feet long, it is 300 feet longer than an aircraft carrier. This massive, automated ship with a crew of only 13, shuttles weekly from Asia to California with 15,000 FULL shipping containers. It goes back to China with mostly EMPTY containers. How did that happen? This paper reviews the factors that evolved to create the 40-year decline of US manufacturing, and the rise of Asian countries, especially China.

The United States of America emerged from WW2 with almost no damage to their homeland. They had huge pent-up post-war demand for consumer goods and they wisely invested in major projects such as the interstate highway system to employ 16 million veterans returning from WW2. Without competition, the US became enormously profitable, then wealthy, then complacent, then arrogant. Essentially, they were spoiled by prosperity. Quality began to slip. As Europe and Japan recovered from WW2, ironically with help from the USA, they began to compete with US quality and cost.

In 1978, two wealthy industrialists (the Koch brothers) formed a small group of billionaires on the extreme right of the Republican party. From 1981 to 1989, that group had an overwhelming influence on the economic policies of the Reagan Administration, that was referred to as “Reaganomics”. For 40 years, they systematically eliminated election campaign contribution rules so they could buy elections and change tax codes to benefit the already wealthy. In 1988, they founded a lobby group known as Citizens United that won a Supreme Court case that effectively removed any limits on election campaign contributions. As late as 2018, the Koch brothers spent $400 million to elect “their” senators.

During the 1980s and 1990s, the compensation gap between executives and workers grew much more rapidly in the US than in Japan and Germany. Today the US has 614 billionaires and the income ratio of the top 10 per cent to the bottom 10 per cent is 19:1 in the US, 9:1 in Canada, 8:1 in Germany and 5:1 in Japan. What ratio provides the best balance between incentive and social harmony?

Growing inequity prompted US industry-based unions to push for a more equitable share of the profits, making US costs increasingly uncompetitive. Japan had company-based unions and Germany had union reps on their boards, so those unions made more reasonable agreements. The Toyota union will not bankrupt Toyota. To protect and grow shareholder profits, over 300 US companies began to outsource manufacturing to lower-wage countries that were paying one-fifth of the US rate per hour with no benefits. South Korea, Mexico, China, and Bangladesh experienced rapid growth in manufacturing. Those lower wage countries maintained their relative cost advantage and developed their manufacturing skills to equal or in some cases surpass the USA. Chinese and Mexican workers were happy to get $5 per hour because it is was much better than the $1 per hour 10 years prior.

The theory was that displaced workers would “transition to higher-skilled jobs”, but the necessary investments in re-training and portable health care were continuously opposed by the Republicans.

So while US workers lost their well-paying jobs and their employer-paid health insurance, US shareholder profits and executive compensation grew even higher. Some US health insurance executives made $30 million per year; as much as 1,000 minimum-wage workers, 100 medical doctors, or 100 Ministers of Health in developed countries. The stock market is not a good indicator of economic health. Today, 85 per cent of US stocks are owned by the top 10 per cent

The International Monetary Fund rejects the theory of trickle-down economics. It argues that increasing the income share of the poor and the middle class increases growth, while a rising income share of the top 20 percent results in lower growth. In other words, economies work best when most of the people can afford to buy what they need, not just the top 10 per cent.

Trickle-down economics assumes that when companies get more cash, they will hire more workers and expand their businesses. It also assumes that income tax cuts give workers more incentive to work, increasing the supply of labor. But both of those assumptions depend on confidence in other domestic and foreign policies. Reagan cut income taxes from 70 per cent for those earning $108,000 or more to 28 per cent for those earning $18,500 or more. He cut the corporate tax rate from 46 per cent to 40 per cent, but raised other types of taxes. Twenty-eight per cent of $108,000 leaves $77,600 for other expenses; 28% of $18,500 leaves $13,320.

Today’s global problems such as pandemics and climate change simply cannot be solved without strong government revenues. And cutting taxes only increases government revenue up to a point. Once taxes get low enough, cutting them further will decrease revenue instead. Cuts worked during Reagan’s presidency because the highest tax rate was 70 per cent. They have a much weaker effect when tax rates are below 50 per cent. Reaganomics would not work today because tax rates are already low compared to historical levels. Today, corporate taxes in the US are at 21 per cent, and to try to compete with the US giants most of Europe is at 25 per cent, Japan is at 22 per cent, and Canada (the most exposed to US tax rates) is at 15 per cent.

Trump’s tax cuts are exacerbating the income inequality kicked off by Reaganomics and are increasing US national debt. Biden’s tax plan would raise taxes progressively on individuals with income above $400,000 and raise corporate taxes from 21 per cent to 28 per cent. It would reduce national debt. After 40 years of Reaganomics, it would help to restore balance between incentive and social harmony. Biden’s tax rates would help other countries to raise the money needed to deal collaboratively with today’s most serious global problems. And Biden plans to restore US engagement in those global efforts.

US military spending is three times China and 10 times Russia. Republicans have been quick to increase military spending which does nothing but provoke a response by Russia and China. Russia cannot afford to compete in conventional weapons, so they focus on nuclear and cyber weapons. And while the US is blowing their budget on the military, China is spending on education and health care to create a more flexible and resilient workforce, and favorable trade with the 77 per cent of the world’s population in Asia and Africa. The US still leads in many areas of research, but front-line workers can no longer afford most US-made products and health care. Workers must rely on cheaper imported products. So, the US is now littered with thousands of boarded up factories, retail stores, and shopping malls. Canada was also collateral damage with many lost manufacturing jobs from US companies located here.

The US likes to blame lower-wage countries for their loss of middle-income jobs, but they did it to themselves with complacency and greed. Chinese and Mexican companies cannot “steal” American jobs. It was US companies that outsourced the jobs to enhance profits. China, Mexico, and Canada do not ship a single thing to the USA that has not been requisitioned by the USA. US tariffs on Chinese steel and Canadian aluminum and lumber are intended to stop US companies from ordering those products, but it is US buyers that ultimately pay for the tariffs, again with a disproportionate impact on US workers.

People voted for Trump for two reasons: because he promised to shake up the hyper-partisan gridlocked two-party politics in Washington, and because he promised to “make deals” to bring back the lost jobs. But wealthy US shareholders were not about to let either thing happen. Now that they have the upper hand, they like the gridlock that prevents changes that would be more favorable to workers.

The following chart shows nominal GDP in $US billion for fpur of the world’s top 10 economies. It shows the result of their economic policies from 1980 to 2019. The People’s Republic of China was founded in 1949 as a hardline socialist country. The chart shows China’s dramatic climb up the economic staircase after their 1978 economic reforms embraced capitalism. US nominal GDP went from being 13 times China in 1980 to 1.5 times China in 2020. China’s GDP is expected to overtake the US by 2030, or before. Canada ranks number 40 in population and consistently ranked number 8 to 11 in GDP.

Ironically, the US Republican party is made up of a counter-intuitive mix of billionaires at the top and disgruntled and confused workers at the bottom, who don’t seem to understand what happened to them. That, in a nutshell, is why the world’s biggest ships are bringing FULL loads of goods from Asia to the USA and going back EMPTY.

China has gone through more than a century of internal turmoil. What is clear is that China’s past three presidents have stabilized the country and embraced a capitalist economy with dramatic success. What they now crave most is respect. There appears to be some level of democracy inside China’s current single-party authoritarian government, and Trump’s insults have only riled the nationalists to pressure President Xi to respond, and to strengthen China’s resolve.

The big questions now are, “What is the best way for the world’s 75 smaller democracies to deal with an autocratic economic powerhouse? And will China’s economic success eventually move them closer to democracy?” And as the people get more educated and prosperous, will they want more to say about how they are governed?

References

Trickle-down economics eventually defeats itself – Reaganomics would not work today:

https://www.thebalance.com/reaganomics-did-it-work-would-it-today-3305569

https://www.thebalance.com/trickle-down-economics-theory-effect-does-it-work-3305572

China – GDP 1980 to 2020:

https://mgmresearch.com/china-gdp-data-and-charts-1980-2020/

A Citizens United win in US Supreme Court removed financial restrictions on election campaign advertising by corporations and unions, giving more control and benefits to the wealthy, since only 10 per cent of US workers are unionized:

https://en.wikipedia.org/wiki/Citizens_United_(organization)

The PRC – 70 years of economic history:

https://www.visualcapitalist.com/china-economic-growth-history/

Don’t miss out on Doppler!

Sign up here to receive our email digest with links to our most recent stories.
Local news in your inbox three times per week!