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From my new blog:
http://jacquelope.wordpress.com/201...g-of-american-jobs-adds-to-the-national-debt/
Foreign outsourcing of American jobs adds to the national debt.
By The Interchangeable Carbon Blog
Or, more specifically, a large trade deficit adds to the national debt.
Yeah, that debt. The one that you keep hearing Conservatives screaming about on TV, the one that they keep saying will bankrupt the United States.
For the uninitiated, we’ll start with the basics. See that DVD player? Notice how it’s Made in China? That’s the product of foreign outsourcing. The company that sold that DVD player to you sent the jobs to make that device to a factory in China – that was a manufacturing job outsourced to another country, with the finished product being sold here in the United States. You’ll hear the word “import” – that’s what this means. Goods produced by outsourced labor in China, Mexico or India, are imported into the United States and sold here. Imports are “making it outside America and selling it in America”, while exports are “Made in the USA and sold elsewhere”.
Outsourcing work to another nation isn’t inherently bad in and of itself, especially when other countries outsource their work here so that, say, you’re making iPads in factories in the United States to sell to China (exported goods) while China makes DVD players to sell here (imported goods). But what makes foreign outsourcing so bad is that everything we buy in America is being produced by labor that is outsourced to other countries, and very little is being produced here at all.
Basically, America is importing far more than it is exporting. As a result, we have a massive trade deficit. Let’s define “massive”. Massive means that our trade deficit this year, as of this day on September 2011, is $360 billion and growing.
So now we understand the superficial mechanics of our trade deficit. How does this contribute to our national debt?
Well, let’s just say that a certain very large tribe has $1,000,000 in total tribal wealth. They live in nice modern 1-family houses and as a result they have upkeep costs to pay. One of their members, Susan, has a lemon tree in the back and she runs a lemonade stand at the local open air farmer’s market (my analogy for the global market). She sells lemonade known to deliver a mule kick right dead in your taste buds. It’s made from fresh lemons and clean, filtered water for $0.50 per 8 ounce glass or $1.89 per 2 liter bottle (the latter being the typical price I see at the local store when things are not on sale). Now let’s extend the analogy a bit by saying her tribe demands that the water is filtered so people aren’t drinking nasty and potentially unsafe tap water, and they also demand that the 2 liter plastic bottle is made from Polyethylene terephthalate (PET) which is the safer and perhaps more expensive type of plastic bottle. Plus there is the issue of maintaining their lifestyle of houses that are better than run-down shacks. Logically, the aforementioned prices reflect in part the lifestyle requirements, the cost of Susan getting and maintaining a water filter and the cost of using a less toxic type of plastic in her 2 liter plastic bottles. (That is basically what it’s like to manufacture goods in America under US Government regulations.)
Susan, as a result of this, has a large following. Made by Susan is a sought after brand, known for being clean, safely packaged, and having a taste that’ll knock your socks right out of your shoes. Many people in Susan’s tribe have jobs tending her lemon tree and the water filters, as well as carrying the lemonade to the market.
Now, let’s introduce a tribe down the road who also owns a lemon tree. They have little wealth to speak of and their tribe mostly lives in run-down shacks given to collapse under a breeze, or even just under their sheer weight and shoddy construction. Their industrious guy, Roger, also makes lemonade, and he doesn’t bother with filtering his water. Roger opens a lemonade stand at the same farmer’s market as Susie. He also uses some form of Polystyrene-based plastic which is considered quite bad because it is made from Benzene, Butadiene and styrene, which are all known or suspected cancer-causing agents (carcinogens), which can break down and work its way into the lemonade. Oh and his lemon juice is a bit watered down, so he gets more for his product. Let’s just say that, due to these production shortcuts, he can offer his lemonade at a jaw-dropping $0.05 per glass and $0.20 per 2 liter bottle. Woah is right. It’s not as delicious as Susan’s lemonade, nor is it nearly as safe to drink, but boy is it cheap. Mind you, these prices aren’t a problem for Roger’s tribe, because with the profits from these sales, they can upgrade their shacks to sturdy huts that’ll withstand a wolf’s sneeze (but not a moderate storm).
First what happens is people start slowly switching from Susan’s lemonade to Roger’s. The youngsters who don’t really care if Susan’s lemonade is made of purified water and makes their taste buds sing, will be taken in by Roger’s cheap prices. The old folks who have become fans of the quality of Susan’s lemonade won’t switch, not ever. But the young ones and other newbies coming into the farmer’s market will look first at the big sign saying “$0.05 per glass! $0.20 per 2 liter bottle!” and they will not even bother to look at Susan’s lemonade stand. As a result of this precipitous loss of customers, Susan’s profits – analogous to America’s exports (lemonade being the exported good) – start declining, and fast.
However, Susan’s tribe has ample wealth reserves. The sales (analogous to the concept of exports, and to this point also a trade surplus) have added greatly to the tribe’s wealth. They started out with $1,000,000; now in part because of all those sales (and other factors), they have $5,000,000.
Soon, word gets out about Roger’s production practices: the unfiltered water and relatively unsafe plastic bottles, and the lemonade aficionados start pelting Roger about the watered down taste of his lemonade to boot. This amounts to the very slightest of speed bumps for Roger, because the aficionados were never going to go with his product after having noticed right of the bat that his lemonade didn’t taste as good. Also a few wise youngsters and out-of-towners will switch over to Susan’s traditional kick-butt brand of lemonade. However, the vast majority of people are going to want to get the most out of their money, and in a superficial way, Roger fits the bill.
Soon after this, Susan’s tribe – the people of her country, by analogy – start visiting the farmer’s market and they realize they can get lemonade cheaper by buying it from Roger. Whoops. Now they’re importing lemonade from Roger. Then, of course, Susan’s fellow tribespeople gripe when Susan needs less tribe members to work producing lemonade.
Oh, crap. Now Roger, on the other hand, has more work than he can handle. He needs more people in his household to join in. Susan, looking at losing her business, opts to pay Roger’s people a little more than Roger can afford, to make their lemonade at Roger’s house, which Susan can sell back to her household by taking her own little cut off the top. Susan’s tribe members complains (hypocritically, mind you) that the tribe leaders need to step in and do something to stop the invasion of Roger’s lemonade. Susan, who has been getting drunk off the heavily spiked free trade kool-aid, says that this is called “protectionism”. She warns against “protectionism”, saying that if Roger’s lemonade isn’t kept out of the tribal households, that Susan will simply be out-competed and driven out of business by cheaper foreign tribal competition.
Now imagine that the leaders of Roger’s tribe do exactly what Susan’s tribal members suggested. That is, to declare that all goods being sold to Roger’s tribe from other sources must have a fee attached, raising the price of that good for anyone within his tribe to purchase. Say it’s a $0.75 fee. That means every $1.89 “Made by Susan” 2 liter bottle that comes in, is raised to $2.64, for any member of Roger’s tribe that buys it. But if they buy Roger’s lemonade it costs $0.20 per 2 liter bottle. Seriously? Seriously! In the world of international trade, this is called “protectionism”, or more specifically, a tariff, and this is what China does to American goods to keep us from exporting much of anything to them. But we don’t do it to Chinese imports. Go figure. Why does China, aka Roger, engage in protectionism and tariffs? Because when their people, or their tribe, produce their lemonade for themselves, they create jobs, but when they import that lemonade, they put people out of work.
But Susan is hip to the concept of “creative destruction” (more on that in another blog). She knows all about the power of innovation. Or so she thinks. She decides that Roger can’t compete against her quality, so she grows a grapevine and an orange tree. Before Roger knows it, Susan has abandoned the lemonade market in favor of the orange juice and grape juice market. Due to improvements in efficiency and productivity, Susan can get these premium products to market at $.40 per 8 ounce glass and $1.69 per 2 liter non-lead glass bottle. “Made by Susan” rises again and she tells her tribe that innovation is the key to competition.
What happens next is downright predictable. Roger starts growing grapevines and orange trees, and before you know it, he’s got orange juice for $0.10 per 8 ounce glass and $0.30 per 2 liter glass bottle. Oh and the bottles are made of cheap lead. Rinse and repeat, Made by Susan gets beaten out of the market by Made By Roger.
Now to give the free trade mentality the benefit of a handicap, let’s say Roger now uses filtered water and non-lead bottles. (China, which is the subject of the analogy here, would not.) His production costs go up, as does the price of his product – to $0.12 per 8 ounce glass of orange juice or grape juice, and $0.33 per 2 liter glass bottle. Now he offers a premium, non watered down product. This costs you the buyer $0.15 per 8 ounce glass and $0.40 per 2 liter bottle. Why is his product still so cheap even though he is matching Susan quality for quality? His tribe’s wage requirements, that’s why. Now they’ve upgraded from those sturdy huts to adobe-style buildings.
Rinse and repeat to the next fruit juice product. At some point along the line, Susan found that Roger was selling all his fruit juices in environmentally safe and health-conscious bottles, using pure filtered water. All of her quality advantages have been nullified and at a cheaper price to boot. Susan is now like the real life Pillowtex Corp: she’s flat out of business. Just like she said she’d be if Roger’s lemonade wasn’t subjected to what the world of global trade calls “protectionism”. Now all of the fruit juices that Susan’s tribe drinks is “Made By Roger”.
So let’s revisit that $1,000,000 in wealth that Susan’s tribe had started out with. Susan’s tribe amassed a great deal of money because of her juice sales, to peak out at $5,000,000 under her watch; more money comes into the tribe from other areas, too. But after Roger overtook Susan with cheap grape juice and orange juice, Susan’s tribe began to buy more from Roger than they sold to Roger, or to anyone else for that matter. This pattern soon repeats itself for every single product that Susan’s tribe ever makes: they eventually come to import it from Roger, who can make it for cheaper.
Now let’s rinse and repeat this with Joey’s tribe, Lisa’s tribe, Xavier’s tribe, Donald’s tribe and Paul’s tribe. All of these tribes are now selling goods to Susan’s tribe, and buying almost nothing in return. As a result of selling to Susan’s tribe, all these other tribes have moved up from straw shacks to 19th century level semi-modern homes.
Susan’s tribe is now spending its cash to all these other tribes in exchange for their goods. This, in international trade, is called a trade deficit. The math is as obvious here as it is for your average household: when you spend more than you take in, your wealth (assets above and beyond liabilities) declines. Eventually, given enough time, Susan’s tribe goes from a positive $5,000,000 to a negative $1,000,000 – as in $1,000,000 in debt.
This is the unavoidable end result of a large trade deficit, which is what Susan’s tribe suffers from. However, other intervening factors can speed up the inevitable. For instance, members of Susan’s tribe start losing their jobs as a result of importing Roger’s products. A handful get jobs carrying Roger’s fruit juices home, of course, but the majority of workers who made fruit juices and carried them out to market, lost their jobs, and there’s nothing else for them to do. So now Susan’s tribe is spending money supporting them instead of them making their own money to support themselves. This only increases their debt even faster. Now suppose there are two other tribes, call them Jason’s tribe and Tony’s tribe, who are at war, and Susan’s tribe has to spend their own money sending tribe members to stop the fighting from burning down the farmer’s market. That just makes things all the worse. Susan’s tribal debt soars and soars.
Of course, as you can imagine, at some point, the other tribes around the area decide to cut Susan’s tribal credit card and call in their debts. Susan’s tribe is declared insolvent. Her tribe is no longer buying anything from any tribe.
In case you haven’t put it all together: Susan’s tribe is the United States.
Epilogue:
Oh but wait. Susan’s tribe is by far the biggest customer of Roger’s tribe. And Joey’s tribe, Lisa’s tribe, Xavier’s tribe, Donald’s tribe, and Paul’s tribe. Now with Susan’s tribe being bankrupt and out of the game, Roger’s looking to sell to Joey’s tribe, Lisa’s tribe, Xavier’s tribe, Donald’s tribe, and Paul’s tribe. But all of them relied heavily on trade with Susan’s tribe, and with many of their own tribes people fresh out of work, they’ve all got big internal problems.
In other words: It's gonna be a rough day after that at the ol' farmer's market. To say the least.
http://jacquelope.wordpress.com/201...g-of-american-jobs-adds-to-the-national-debt/
Foreign outsourcing of American jobs adds to the national debt.
By The Interchangeable Carbon Blog
Or, more specifically, a large trade deficit adds to the national debt.
Yeah, that debt. The one that you keep hearing Conservatives screaming about on TV, the one that they keep saying will bankrupt the United States.
For the uninitiated, we’ll start with the basics. See that DVD player? Notice how it’s Made in China? That’s the product of foreign outsourcing. The company that sold that DVD player to you sent the jobs to make that device to a factory in China – that was a manufacturing job outsourced to another country, with the finished product being sold here in the United States. You’ll hear the word “import” – that’s what this means. Goods produced by outsourced labor in China, Mexico or India, are imported into the United States and sold here. Imports are “making it outside America and selling it in America”, while exports are “Made in the USA and sold elsewhere”.
Outsourcing work to another nation isn’t inherently bad in and of itself, especially when other countries outsource their work here so that, say, you’re making iPads in factories in the United States to sell to China (exported goods) while China makes DVD players to sell here (imported goods). But what makes foreign outsourcing so bad is that everything we buy in America is being produced by labor that is outsourced to other countries, and very little is being produced here at all.
Basically, America is importing far more than it is exporting. As a result, we have a massive trade deficit. Let’s define “massive”. Massive means that our trade deficit this year, as of this day on September 2011, is $360 billion and growing.
So now we understand the superficial mechanics of our trade deficit. How does this contribute to our national debt?
Well, let’s just say that a certain very large tribe has $1,000,000 in total tribal wealth. They live in nice modern 1-family houses and as a result they have upkeep costs to pay. One of their members, Susan, has a lemon tree in the back and she runs a lemonade stand at the local open air farmer’s market (my analogy for the global market). She sells lemonade known to deliver a mule kick right dead in your taste buds. It’s made from fresh lemons and clean, filtered water for $0.50 per 8 ounce glass or $1.89 per 2 liter bottle (the latter being the typical price I see at the local store when things are not on sale). Now let’s extend the analogy a bit by saying her tribe demands that the water is filtered so people aren’t drinking nasty and potentially unsafe tap water, and they also demand that the 2 liter plastic bottle is made from Polyethylene terephthalate (PET) which is the safer and perhaps more expensive type of plastic bottle. Plus there is the issue of maintaining their lifestyle of houses that are better than run-down shacks. Logically, the aforementioned prices reflect in part the lifestyle requirements, the cost of Susan getting and maintaining a water filter and the cost of using a less toxic type of plastic in her 2 liter plastic bottles. (That is basically what it’s like to manufacture goods in America under US Government regulations.)
Susan, as a result of this, has a large following. Made by Susan is a sought after brand, known for being clean, safely packaged, and having a taste that’ll knock your socks right out of your shoes. Many people in Susan’s tribe have jobs tending her lemon tree and the water filters, as well as carrying the lemonade to the market.
Now, let’s introduce a tribe down the road who also owns a lemon tree. They have little wealth to speak of and their tribe mostly lives in run-down shacks given to collapse under a breeze, or even just under their sheer weight and shoddy construction. Their industrious guy, Roger, also makes lemonade, and he doesn’t bother with filtering his water. Roger opens a lemonade stand at the same farmer’s market as Susie. He also uses some form of Polystyrene-based plastic which is considered quite bad because it is made from Benzene, Butadiene and styrene, which are all known or suspected cancer-causing agents (carcinogens), which can break down and work its way into the lemonade. Oh and his lemon juice is a bit watered down, so he gets more for his product. Let’s just say that, due to these production shortcuts, he can offer his lemonade at a jaw-dropping $0.05 per glass and $0.20 per 2 liter bottle. Woah is right. It’s not as delicious as Susan’s lemonade, nor is it nearly as safe to drink, but boy is it cheap. Mind you, these prices aren’t a problem for Roger’s tribe, because with the profits from these sales, they can upgrade their shacks to sturdy huts that’ll withstand a wolf’s sneeze (but not a moderate storm).
First what happens is people start slowly switching from Susan’s lemonade to Roger’s. The youngsters who don’t really care if Susan’s lemonade is made of purified water and makes their taste buds sing, will be taken in by Roger’s cheap prices. The old folks who have become fans of the quality of Susan’s lemonade won’t switch, not ever. But the young ones and other newbies coming into the farmer’s market will look first at the big sign saying “$0.05 per glass! $0.20 per 2 liter bottle!” and they will not even bother to look at Susan’s lemonade stand. As a result of this precipitous loss of customers, Susan’s profits – analogous to America’s exports (lemonade being the exported good) – start declining, and fast.
However, Susan’s tribe has ample wealth reserves. The sales (analogous to the concept of exports, and to this point also a trade surplus) have added greatly to the tribe’s wealth. They started out with $1,000,000; now in part because of all those sales (and other factors), they have $5,000,000.
Soon, word gets out about Roger’s production practices: the unfiltered water and relatively unsafe plastic bottles, and the lemonade aficionados start pelting Roger about the watered down taste of his lemonade to boot. This amounts to the very slightest of speed bumps for Roger, because the aficionados were never going to go with his product after having noticed right of the bat that his lemonade didn’t taste as good. Also a few wise youngsters and out-of-towners will switch over to Susan’s traditional kick-butt brand of lemonade. However, the vast majority of people are going to want to get the most out of their money, and in a superficial way, Roger fits the bill.
Soon after this, Susan’s tribe – the people of her country, by analogy – start visiting the farmer’s market and they realize they can get lemonade cheaper by buying it from Roger. Whoops. Now they’re importing lemonade from Roger. Then, of course, Susan’s fellow tribespeople gripe when Susan needs less tribe members to work producing lemonade.
Oh, crap. Now Roger, on the other hand, has more work than he can handle. He needs more people in his household to join in. Susan, looking at losing her business, opts to pay Roger’s people a little more than Roger can afford, to make their lemonade at Roger’s house, which Susan can sell back to her household by taking her own little cut off the top. Susan’s tribe members complains (hypocritically, mind you) that the tribe leaders need to step in and do something to stop the invasion of Roger’s lemonade. Susan, who has been getting drunk off the heavily spiked free trade kool-aid, says that this is called “protectionism”. She warns against “protectionism”, saying that if Roger’s lemonade isn’t kept out of the tribal households, that Susan will simply be out-competed and driven out of business by cheaper foreign tribal competition.
Now imagine that the leaders of Roger’s tribe do exactly what Susan’s tribal members suggested. That is, to declare that all goods being sold to Roger’s tribe from other sources must have a fee attached, raising the price of that good for anyone within his tribe to purchase. Say it’s a $0.75 fee. That means every $1.89 “Made by Susan” 2 liter bottle that comes in, is raised to $2.64, for any member of Roger’s tribe that buys it. But if they buy Roger’s lemonade it costs $0.20 per 2 liter bottle. Seriously? Seriously! In the world of international trade, this is called “protectionism”, or more specifically, a tariff, and this is what China does to American goods to keep us from exporting much of anything to them. But we don’t do it to Chinese imports. Go figure. Why does China, aka Roger, engage in protectionism and tariffs? Because when their people, or their tribe, produce their lemonade for themselves, they create jobs, but when they import that lemonade, they put people out of work.
But Susan is hip to the concept of “creative destruction” (more on that in another blog). She knows all about the power of innovation. Or so she thinks. She decides that Roger can’t compete against her quality, so she grows a grapevine and an orange tree. Before Roger knows it, Susan has abandoned the lemonade market in favor of the orange juice and grape juice market. Due to improvements in efficiency and productivity, Susan can get these premium products to market at $.40 per 8 ounce glass and $1.69 per 2 liter non-lead glass bottle. “Made by Susan” rises again and she tells her tribe that innovation is the key to competition.
What happens next is downright predictable. Roger starts growing grapevines and orange trees, and before you know it, he’s got orange juice for $0.10 per 8 ounce glass and $0.30 per 2 liter glass bottle. Oh and the bottles are made of cheap lead. Rinse and repeat, Made by Susan gets beaten out of the market by Made By Roger.
Now to give the free trade mentality the benefit of a handicap, let’s say Roger now uses filtered water and non-lead bottles. (China, which is the subject of the analogy here, would not.) His production costs go up, as does the price of his product – to $0.12 per 8 ounce glass of orange juice or grape juice, and $0.33 per 2 liter glass bottle. Now he offers a premium, non watered down product. This costs you the buyer $0.15 per 8 ounce glass and $0.40 per 2 liter bottle. Why is his product still so cheap even though he is matching Susan quality for quality? His tribe’s wage requirements, that’s why. Now they’ve upgraded from those sturdy huts to adobe-style buildings.
Rinse and repeat to the next fruit juice product. At some point along the line, Susan found that Roger was selling all his fruit juices in environmentally safe and health-conscious bottles, using pure filtered water. All of her quality advantages have been nullified and at a cheaper price to boot. Susan is now like the real life Pillowtex Corp: she’s flat out of business. Just like she said she’d be if Roger’s lemonade wasn’t subjected to what the world of global trade calls “protectionism”. Now all of the fruit juices that Susan’s tribe drinks is “Made By Roger”.
So let’s revisit that $1,000,000 in wealth that Susan’s tribe had started out with. Susan’s tribe amassed a great deal of money because of her juice sales, to peak out at $5,000,000 under her watch; more money comes into the tribe from other areas, too. But after Roger overtook Susan with cheap grape juice and orange juice, Susan’s tribe began to buy more from Roger than they sold to Roger, or to anyone else for that matter. This pattern soon repeats itself for every single product that Susan’s tribe ever makes: they eventually come to import it from Roger, who can make it for cheaper.
Now let’s rinse and repeat this with Joey’s tribe, Lisa’s tribe, Xavier’s tribe, Donald’s tribe and Paul’s tribe. All of these tribes are now selling goods to Susan’s tribe, and buying almost nothing in return. As a result of selling to Susan’s tribe, all these other tribes have moved up from straw shacks to 19th century level semi-modern homes.
Susan’s tribe is now spending its cash to all these other tribes in exchange for their goods. This, in international trade, is called a trade deficit. The math is as obvious here as it is for your average household: when you spend more than you take in, your wealth (assets above and beyond liabilities) declines. Eventually, given enough time, Susan’s tribe goes from a positive $5,000,000 to a negative $1,000,000 – as in $1,000,000 in debt.
This is the unavoidable end result of a large trade deficit, which is what Susan’s tribe suffers from. However, other intervening factors can speed up the inevitable. For instance, members of Susan’s tribe start losing their jobs as a result of importing Roger’s products. A handful get jobs carrying Roger’s fruit juices home, of course, but the majority of workers who made fruit juices and carried them out to market, lost their jobs, and there’s nothing else for them to do. So now Susan’s tribe is spending money supporting them instead of them making their own money to support themselves. This only increases their debt even faster. Now suppose there are two other tribes, call them Jason’s tribe and Tony’s tribe, who are at war, and Susan’s tribe has to spend their own money sending tribe members to stop the fighting from burning down the farmer’s market. That just makes things all the worse. Susan’s tribal debt soars and soars.
Of course, as you can imagine, at some point, the other tribes around the area decide to cut Susan’s tribal credit card and call in their debts. Susan’s tribe is declared insolvent. Her tribe is no longer buying anything from any tribe.
In case you haven’t put it all together: Susan’s tribe is the United States.
Epilogue:
Oh but wait. Susan’s tribe is by far the biggest customer of Roger’s tribe. And Joey’s tribe, Lisa’s tribe, Xavier’s tribe, Donald’s tribe, and Paul’s tribe. Now with Susan’s tribe being bankrupt and out of the game, Roger’s looking to sell to Joey’s tribe, Lisa’s tribe, Xavier’s tribe, Donald’s tribe, and Paul’s tribe. But all of them relied heavily on trade with Susan’s tribe, and with many of their own tribes people fresh out of work, they’ve all got big internal problems.
In other words: It's gonna be a rough day after that at the ol' farmer's market. To say the least.
