Robert Brusca, FAO Economics, New York

This is an excellent in-depth analysis and overview of what is really going on by Robert Brusca.

David Leonhardt and Yaryna Serkez article of April 10, “America Will Struggle After Coronavirus…” (link) is such a misuse of facts it may as well be the ‘Fake News’ that Trump speaks of. If liberals want to score points on these issues they are better off sticking to the facts as we know them and as we can understand them rather than trying to spin them into a paean of Democratic class warfare (Oh, look how the rich have benefited and the poor and suffered! Bad Republicans! Evil Republicans!).

Particularly offensive is the authors’ declaration…“In effect, each household in this bottom 90 percent is sending a check for $12,000 to every household in the top 1 percent, year after year after year.”  No that is wrong.

What is happening is that we are reaping what we sow. Remember there was a time Democrats controlled the Senate. Chuck Schumer could have named whoever he wanted as a ‘currency manipulator’ (unfair trader). He named no one. Democrats never ever got behind the notion that trade was unfair and was leaching some of the best blue collar jobs from America. They drank the “Free Trade’ Kool Aid…as did Republicans.  David Leonhardt…where were you then, when blue-collar America needed you?  Instead of stopping the carnage you have come to the game too late with the wrong analysis blaming Republicans (The rich) because American pursed a policy you supported and never really objected to. Instead you and other Democrats are trying to find a way to demonize Donald Trump who has opposed what exists and what has not been free or fair trade and is committed to change it. To quote Mr. Trump…’sad.’

I know that Democrats would like to have us believe that everything Mr. Trump does or says is a lie or exaggeration or an untruth or that he does it for self-interest or because he is a Russian mole. But the painful (to Democrats) truth is that he is the guy who took up the mantle of dismantling unfair trade NOT Democrats. 

Oh I understand Mr. Trump has significant liabilities as well. I do not point to him as a savior (especially not at Easter time). But he nailed the trade issue and problem. Solving it is still going to be difficult but at least we are no longer in denial. And once we as a nation come to grips with that the economy can develop free of that as a defining issue-if we solve it. Maybe the fear of a pandemic and distrust of China will be enough to bring more of the supply chain home?    

What actually happened was that we had something we called ‘Free Trade’ that everyone loved and accepted until Donald Trump came along to bash it and accused China of being an ‘unfair’ trader.  Trump has since been joined by many other international voices that had been too timid to be raised until the US went first. He has exposed China’s ‘Belt and Road’ policy as the developing country debt trap and as the asset seizure machine it really is.

He has pressured China for change, some of which he has gotten some of which he is still seeking. Democrats have trashed him for his method which is using tariffs that raise costs to Americans. But you know you can’t make an omelet without breaking a few eggs- right?  And who thought a Republican would be the one to take on those forces and break those eggs? Aren’t they supposed to be ‘in the pocket’ of US businesses and multinational corporate interests?  Aren’t Democrats supposed to be looking out for blue collar workers?  How did all that get turned on is head?  No wonder Democrats are angry. But it is hard to take your anger out on yourself.

‘Free trade’ unlocked cheap Chinese labor and whose jobs did that take? It took relatively high-pay low-skill middle class jobs contributing to the effect of lowering the average wages for the working man and woman in the US. It’s not just that workers went so long without getting raises but that the high-pay jobs simply evaporated driving the average wage lower.  The effective availability of Chinese labor drove down the return to labor globally and raised the return to capital helping to create the trends you bemoan.

Since the US does not protect labor and jobs as Europe does, the US is a case study in ‘factor price equalization.’ China’s cheap labor drove down wages in America toward China’s level. It also set in motion a new trade theory as China was and is set to dominate global trade. It does not want reciprocal trade. It wants to dominate trade. New, even labor saving technology, poured into China as China embraced robotics even more than the high-wage US.  Why? The reasons here are many but among them are the poor college-major  choices made by Americans that left the US workforce bereft of the skills needed to run the modern factory. Higher labor and other costs in the US meant that robotics in the US would not deliver that same low costs that they delivered abroad.  

All this starved the US of high wage jobs and kept wages low. The US trade deficit grew. Foreigners, among them Chinese, continued to buy US treasuries mostly having no interest in any other investment position in the US. Direct foreign investment made little sense because US costs were so high. But buying US treasuries kept the dollar strong and kept US costs high helping to reinforce the competitive position of the overseas investor nations.

This was part all along of the currency manipulator scheme that was allowed to run amok. And the more US wages are depressed the more that prices also are depressed. Technology and the internet reinforced that trend and the results are clear and easy to understand. Want higher wages? Pay more for imports. That is part of the message. The economy is a general equilibrium machine. It will react to the forces that are put in play. If we allow our best jobs to leave America will make do with lesser jobs, lesser pay lesser income and weaker prices and lower inflation overall. If it means depending more on debt that will happen as long as foreigners continue to pump funds in.

As long as America buys these goods foreigners will invest surplus savings here that Americans can leverage to buy their exports. This is a model of high American consumption and high foreign savings. Foreigners are not interested in ‘comparative advantage’ because they do not want to use their trade surplus to buy anything from America. They are building up their savings. This flow of goods and savings/investments will help keep interest rates low encourage more debt and take any pressure off the US government to balance the budget. It is a perpetual motion machine of debt and a low income trap until it ends…badly, of course