Saturday, July 19, 2008

Why Our Manufacturing Jobs Are Leaving (Hint: It’s Not Free Trade)

OK, pose the following question to anyone: “why has the US lost over 3 million manufacturing jobs in last 15 years?” I’d bet good money that the answer will be free trade or maybe NAFTA. It’s just common knowledge. Duh. As paleoconservative Pat Buchanan puts it “Between January 2002 and January 2007, the gargantuan U.S. trade deficit set five straight world records…If this is the fruit of a successful trade policy, what would a failed trade policy look like?” (1) Or Barack Obama who agrees with Pat on approximately nothing is actually in perfect harmony here “It's a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart.” I’ve even heard Lou Dobbs isn’t a fan. I guess John McCain still supports free trade, but never really gives a rationale for it. That seems pretty standard these days, I mean, look at the embarrassing attempts the guy defending free trade makes in this debate. Countries like China have much lower wages, fewer labor protections and environmental standards so of course every company that can would up and leave the United States if there were no trade barriers. It’s that simple.

Well, that’s a pretty good argument with only one small flaw… it’s complete, utter bullshit. It’s actually not very hard to prove this too, which I just happen to be in the mood to do. Actually, scratch that, I’ll let renowned economist Henry Hazlitt do it for me, suppose

An American exporter sells his goods to a British importer and is paid in British pounds sterling. But he cannot use British pounds to pay the wages of his workers, to buy his wife’s clothes or to buy theater tickets. For all these purposes he needs American dollars. Therefore his British pounds are of no use to him unless he either uses them himself to buy British goods or sells them to some American importer…” (2)

For all intensive purposes the United States is the only country that uses the dollar.* Every dollar that leaves our country must eventually come back. Foreigners could buy up some manufacturing plants here, but if they move them out of the country, any profits they got from the United States would still have to be spent in the United States.

So there really shouldn’t ever be a trade deficit of any major significance. Oh, but you’re saying there are. Well two points need to be made, first in general and then specifically with regards to the United States.

In general, obviously currencies don’t leave and come back instantaneously. There will be up and down cycles. It’s also hard to account for every economic transaction-taking place between individuals in one country and another. This is especially true given there are often large black markets in even the freest economies. And lastly, well governments just lie sometimes. This all becomes obvious when you look at the CIA factbook for 2007, which says the world as a whole is running a $178 billion dollar trade surplus.** This of course is impossible.

Accounting issues only explain small discrepancies though. The United States is a very peculiar case. We just happen to hold the reserve currency of the world. To explain what this is and how it came about we have to go back to the end of World War II. After the war, the Allied governments wanted to set up a system that would facilitate international trade and prevent the hyper nationalistic protectionism of the 1930’s that helped spur the Second World War. John Maynard Keynes and Harry Dexter White designed a system known as Bretton Woods, in which every country in the American sphere of influence tied their currency to the US dollar at a fixed exchange rate and the dollar was in turn tied to gold at $35 and ounce.

Unfortunately, this system was doomed from the beginning; the problem was well, it relied on a wise fiscal policy by US politicians. In 1971, after a decade of paying for guns and butter (the Vietnam war and the Great Society) by inflating the dollar, the US government could no longer justify the $35/ounce exchange rate. Foreign investors started asking for their gold and Nixon responded by closing the gold window (effectively declaring bankruptcy).

The fixed exchange rate system was eventually replaced with floating exchange rates with no gold backing. This allowed investors to set currencies values by bidding on them in relation to each other. Now this system works in principal, but unfortunately it opens up countries to currency attacks. If a government enacts poor policies, investors can leave that currency en masse. Or powerful countries can simply defund a weaker country if they don’t like its policies. Regardless, it leaves countries vunerable as illustrated by the most famous example of such currency implosions, the Asian Financial Crisis of 1997.

To avoid these crises (and store a "risk free" currency in case of other problems), governments started stockpiling dollars in reserve to act as a bulwark in case their own currency is attacked. While the dollar was the reserve currency under Bretton Woods, as well as the 70’s and 80’s, governments stockpiles really accelerated 1990’s and 2000's when China started taking off and the fall of communism brought with it a whole host of new countries who, lacking Soviet support, needed to start stockpiling dollars.

Hopefully you can see where this is going. The dollars are no longer coming back to the United States. We buy toys from China and oil from Saudi Arabia and cars from Japan and electronics from Taiwan and cocaine from Mexico and they turn around and stuff those dollars in their central banks. This does two things; first companies no longer have to buy anything from the United States, they can simply outsource their factories and then sell the dollars they collect to the host countries central bank and thus our manufacturing sector is hollowed out. Second, it gives the US government a license to print just about infinite money with out producing inflation.

So now we can have guns and butter part deux but with out the inflation. How wonderful! Unfortunately, as Herb Stein once said, “things that can’t go on forever don’t.” The dollar currently makes up 63.8% of foreign reserves with the euro in a distance second at 26.4%. Unfortunately, as you’ve probably noticed the dollar is sinking in value like a rock. We are printing so much money that central banks are becoming nervous and diversifying into the euro and other currencies. Eventually, if our dollar continues to sink they will pull the plug and all those dollars will come rushing back to the United States. If this happens, the dollar will hyperinflate overnight.

While we may very well be starring a crisis in the face, free trade has nothing to do with it. And free trade certainly has nothing to do with our dwindling manufactuing sector. Anyways, we really don’t even have free trade, as NAFTA and the WTO are managed trade agreements that have plenty of tariffs and subsidies snuck into them. As Milton Friedman said when Charlie Rose asked him about the proposed Central American version of NAFTA “I discovered it was a thousand pages long and every page has exceptions to free trade. It’s not a free trade agreement.” (3) Still, what we have isn’t rampant protectionism either. However, if we just throw up a bunch of tariffs right now other countries would simply retaliate (or possibly sell off their dollars) and prices would rise with out our manufacturing sector returning. It would be Smoot-Hawley all over again. It’s that simple.



*There are technically 10 small countries that also use the dollar (usually secondarily to another currency). However, since the dollar is usually secondary and the countries are small this has a relatively small effect on trade balances. In addition, the fact these countries use the dollar is simply more evidence of the whole dollar hegemony problem.

**The CIA doesn’t have data on seven small countries and a few have old data. However, every country with old data has a deficit/surplus fewer than 100 million dollars and similar estimations can be made for the seven exclusions which include the likes of North Korea. These discrepancies certainly wouldn't even get close to adding up to 178 billion dollars.


(1) Patrick Buchanan, Day of Reckoning: How Hubris, Ideology, and Greed are Tearing America Apart, Pg. 203, Thomas Dunne Books, Copyright 2007

(2) Henry Hazlitt, Economics in One Lesson, Pg. 70, Laissez Faire Books, Copyright 1979

(3) Milton Friedman, An Hour with Nobel Prize-winning economist Milton Friedman, Charlie Rose, PBS, 12/26/2005

Thursday, July 17, 2008

Is George Bush the Worst President Ever? No, but not for a Lack of Trying

Fewer and fewer people these days would dare say George Bush has been a good president. His approval rating is hovering around 30%, worldwide it is even worse, many staunch Republicans like Chuck Hagel, Gordan Smith, Patrick Buchanan and Bob Barr have turned against him, there have been hundreds of books and documentaries lambasting him, Keith Olbermann and Dennish Kucinich among others demanded he be impeached and even my super conservative roommate is completely fed up with him. I posed this question to him "whenever you think we should do something and then Bush comes out with a similar proposal, does it make you question your assumptions?" His answer: an emphatic "yes!"

Bush has certainly been bad. The wars in Iraq in Afghanistan have so far yielded 4677 deaths and possibly many more suicides as well as countless Iraqi casualties. The reasons for the Iraq war turned out to all be false. His administration failed to stop 9/11 or catch Osama Bin Laden. His policies have vastly increased the number of terrorists as well, defeating the whole idea of a “war on terrorism.” The deficit has skyrocketed leading to high inflation. The economy is also extremely weak making the possibility of 70's like stagflation uncomfortably high. Government spending has increased quicker under Bush than at any time since the Great Society. Of all the embarrassing things he has said, the most ridiculous was probably his attack on John Kerry in one of the debates for "pretending to be fiscal conservative." Sorry sir, you are pretending to be a fiscal conservative. OK, back to the transgressions; the Patriot Act set fire to the 4th and 6th ammendments of our constitution allowing federal agents to search your home while you are not there, with out a warrant and with out even telling you they were there. The Military Tribunals Act is a direct assault on Habeus Corpus, the water boarding, renditions and other torture scandals, the miserable response to Katrina, the Scooter Libby scandal, and then there was that ridiculous attempt to put retroactive immunity into a funding bill earlier this year. There are plenty more, but you get the idea.

So how could such a dismal track record not ordain Bush Jr. as the worst president ever? Well, when you're competing with our 42 previous presidents, you've got a strong handicap to start with! Richard Nixon comes to mind right away. In my honest opinion, Watergate was about the best thing he did. However, the worst of all time belongs to a guy who inexplicably manages his way into most historians’ top 10 lists : Woodrow Wilson.

Woodrow Wilson, wait, let me think... oh yeah, World War I, League of Nations, decent president. Well right on the first two, not quite so much on the third. Many historians have called him an "idealist" for the 14 Points he proposed after the conclusion of World War I. The truth is less appealing, for starters, the man was a die hard racist whose favorite film was D.W. Griffith's Klu Klux Klan adoring The Birth of a Nation. And as one might expect from an extreme racist, upon being elected he almost immediately went about segregating the executive branch.

However, being a bad person doesn't necessarily make for a bad president. Ty Cobb was one of the most miserable human beings that ever lived, but he could sure play baseball. Unfortunately, Wilson’s ugly side was more evident in his policies than his character.

We'll start with his economic policies, which were in some ways prescient (being in favor of centralization), but were also disastrous. He brought us both the Federal Reserve and the Income Tax. You can argue that these are legitimate now (I wouldn't), but economists almost universally blame the Federal Reserve for causing the Great Depression. Some, like Milton Friedman blame the Fed for mismanaging the crisis, others like Murray Rothbard blame it for creating it.

Still, all we have is that he was a racist and his economic policies turned out to be disastrous a decade after he left office. No, those reasons alone won’t do the trick. The reason Wilson was the worst president in history was all about World War I.

In 1914, Europe brought upon the world the worst war we had ever seen. The American people were almost unanimous in wanting to stay neutral. Wilson played lip service to this sentiment, even using the line "he kept us out of the war" to get reelected in 1916. However, Wilson wanted the US to have a seat at the peace conference. (1) He wanted to "make the world safe for democracy." The only way to do this was to get the United States into the war. In many ways he was the first neoconservative (except they don’t like the whole League of Nations idea).

To do this he’d need a reason though. Many believe today the cassus belli for the United States to enter World War I was when 128 Americans died after the Luisitania was sunk on May 7th, 1915. However it was actually two years later when almost simultaneously Germany foolishly sent the Zimmerman telegram to Mexico (who was in the middle of a civil war) recommending they retake Texas and reopened unrestricted submarine warfare. Wilson decided this was unacceptable and asked the congress to declare war on Germany (which they actually did back then).

However these were ridiculous reasons on their face. The Zimmerman telegram was bad, but basically meaningless given Mexico’s state of affairs. And was losing a few ships worth hundreds of thousands of American lives? Wouldn’t going to war require more ships to go through dangerous waters? Furthermore, it was blatant hypocrisy. Wilson had no problem with the almost identical policy Britain had in blockading (and starving) Germany.

Wilson went ahead regardless though, and to gain public support for the war he launched the first propaganda ministry in the history of the United States. He set up the War Industries Board that could only be described as fascist. Its job was to control the prices businesses charged, ration resources and bully anyone who resisted into compliance. He censored newspapers, jailed dissidents, initiated the first draft since the Civil War and sent over 4 million Americans to the muddy, rant infested trenches on the Western Front. 117,000 would not return. (2).

Yet somehow it got worse as soldiers returning home brought with them the Spanish flu, which killed another 675,000 Americans. And if all this were not bad enough, his “idealism” failed in every way possible. The 14 Points predictably broke down as the Allies wanted revenge for the brutal four-year war. The League of Nations was all he got through, which the United States didn’t even join. In the end, what Wilson claimed was the “war to end all wars” was only that for 20 years when we were blessed with World War II (the war to end that theory). Unfortunately the peace treaty Wilson wanted so much to be apart of, the vicious Treaty of Versailles, had a lot to do with the Nazi’s coming to power (along with the Great Depression the Federal Reserve helped create).

If the United States had stayed out of World War I, it is certainly possible that the First World War would have ended in a bitter stalemate, which neither side would have wanted to repeat. Instead, one side was humiliated and forced to pay massive reparations. The Nazis capitalized on the discontent the Treaty of Versailles brought as well as Germany’s economic woes to come to power in 1933. While we can never know for sure, it’s certainly plausible that if the United States had stayed out of World War I, we would have never heard the name of Adolf Hitler. Jim Powell strongly defends this argument in his book Wilson’s War. It’s not to say World War II and the Holocaust were Wilson’s fault, but the unintended consequences of his reckless actions should be lessons for everyone today. And it’s still safe to blame him for the 117,000 dead Americans as well as the horrible precedents he set. Afterall, he was the first one that foolishly thought the United States should be the world’s policeman.

So while George Bush has certainly been bad, Woodrow Wilson still has him beat in my book. Luckily for George W, he’s got six months left to screw things up even further. Good luck George.


(1) Tom Woods, The Politically Incorrect Guide to American History, Pg. 123-124, Regnery Publishing, Copyright 2004

(2) Jonah Goldberg, Liberal Fascism, Pg. 108-113, Random House Inc., Copyright 2007

Wednesday, July 16, 2008

The Real Death Toll in Iraq

Alright, it's time to get a bit more serious than Brett Favre, much more serious. As of July 14th, 2008, 4119 American soldiers and 314 troops from other nations in the "coalition of the willing" have been killed in Iraq since the war started on March 20th, 2003. An additional 30,349 have been wounded although some estimates put the real number closer to 100,000.

Yet as awful as those stastics are, they are really much worse. According to CBS, in 2005 alone 6256 American soldiers and veterans commited suicide! This shouldn't be that shocking giving the revelations in 2007 of the cockroach infested building 18 at Walter Reed as well as the well documented effects of post traumatic stress syndrome. Nonetheless, it's just as horrifying.

What makes an accurate estimation of the number of suicides among our veterans even more difficult is that CBS had to fight tooth and nail to get this information and to my knowledge hasn't been able to get information for 2004, 2006, 2007 and so far in 2008. This is nothing new for the Pentagon, they typically won't even let the media see the coffins of those killed in action. Still, it would probably be safe to assume that the epidemic is even more widespread today as soldiers are serving a third and fourth tour as well as longer tours.

However, I will be generous in trying to extrapolate a rough estimate and use the 6256 suicides as a baseline for each year. We can then look at what the suicide rate should have been among the armed forces by looking at the national average. There are surely many demographic differences that should be accounted for, but I'm just looking for a rough estimate. In 2005, 32,637 people committed suicide in the United States, or about 0.0011%, although among males it was about 0.0017%. Since the military is predominantly male, let’s use the 0.0017% to find what should be the average (1). While the suicides are predominantly among veterans that served in Iraq, the data obtained by CBS are suicides among the armed forces, so I will use that total. Since most of the armed forces have not seen combat in Iraq, again I'm being generous. Regardless, there are currently 1,380,028 men and women in the military (2), so there should be about 2346 suicides per year. The difference between 6256 and 2346 is 3910. I think it is reasonable to attribute the increased suicides to the war, which has been going on for about 5 1/4 years. So 3910 X 5.25 = 20,528 estimated suicides attributable to the war since it began! Add that to the 4119 soldiers who were killed in action and we arrive at a grand total of 24,647 deaths.

Again this can not be verified given the information I have access to and a much more thorough study would have to be taken to come up with a more supportable number. However, this is a story that has barely made it into the public and needs to be reported on more, although I should give credit to CBS who did a story on it back in November.

We must also not forget the huge cost for the citizens of Iraq. The official number of Iraqi dead is around 93,778 and probably much higher. According the Opinion Research Business the number could be over a million! Many more have been forced to leave the country, the infrastructure is still heavily damaged and the nation is stuck amidst terrible ethnic strife. It's nice that a tyrant like Saddam Hussein is gone, but with no WMD, no connection to Al Qaeda, and the enormous human and financial cost, if we haven't yet done it, it's time to admit we made a horrible, horrible mistake.

(1) U.S.A. Suicide: 2005 Official Final Data, American Association of Suicidology, http://www.suicidology.org/

(2) Active Duty Military Personnel by Rank/Grade, Department of Defense, August 31, 2007, http://www.defenselink.mil/

Tuesday, July 15, 2008

Madden Curse Strikes Again

At the risk of reducing the creditability of my blog, writing about this whole Brett Favre debacle is simply irresistible. I myself am a huge Favre and Green Bay Packers fan. I started watching them back in 1995, the first year he won the MVP. The second season was even better as the Packers beat New England 35-21 in Super Bowl XXXI. Since then I have watched him put up great numbers, the Packers win a lot of games and both of them combine to rip my heart out in the playoffs year after year. Overtime interceptions are totally weak.

However, despite being a big fan, I have to remain objective. Lately he has been exerting what can only be referred to as diva like tendencies. I remember reading in a Sports Illustrated in 2001 that there were rumors next season (2002) might be Favre's last. Well seven years of fence sitting went by before he finally retired in March of this year and now guess what, he is unretiring. How could a guy who is so decisive on the field (even when that involves throwing the ball to the other team) be so indecisive off it? I mean, I can kind of understand waiting months into the offseason before deciding to come back, but unretiring and even being willing to play for another team after 16 seasons in green and gold; say it isn’t so Brett. How could this be?

The answer may lie with Shaun Alexander in 2007 who had a poor, injury riddled season after winning league MVP and leading the Seahawks to the Super Bowl. Two years later he’s not even a Seahawk. The answer may lie with Michael Vick who spent almost the entire 2004 season injured after going to the pro bowl the previous year and is now in prison. It may lie with Marshall Faulk in 2003, the year he fell off the map. It may lie with the piss poor season Daunte Culpepper had in 2002 after throwing and running for 40 TD's in 2001. What did these poor fools all have in common? They all graced the cover of Madden's career ruining video game the previous year.

When it was announced this year that a then retired Brett Favre would be on the cover of Madden 09, speculation ran wild (well not really) that Favre may actually avoid the Madden curse. Others predicted that perhaps Aaron Rodgers would lead the Packers to a 19-0 Super Bowl win or maybe the tractor the media tells me Brett spends his entire offseason on would break down, but few could have predicted this mess. The Madden curse has struck again in its most creative guise yet!

The whole thing looks like a no win situation. The Packers said Favre could come back as the highest paid backup in sports history, which is ridiculous. He wants to be released, but the Packers don’t want him in the NFC. And since the only teams interested are probably Minnesota, Tampa Bay and maybe Chicago there’s no simple solution. Even if the Packers honored Brett’s request, could you imagine him in one of those fruity, purple Viking uniforms? Ughh! So while I'd love for them to resolve this and Favre to come back and win the Packers a fourth Super Bowl, hopefully if that doesn’t work he’ll just stay retired. That way at least John Madden won't be able to gush about how much fun Brett Favre is having.

Monday, July 14, 2008

Why Would I add My Name to the Blogosphere?

That is the question I’ve asked myself many times since the idea of blogging emerged in some rarely used part of my mind. The odds of my blog ever being read en mass are extremely unlikely. There are already countless blogs out there as well as online versions of every magazine, newspaper, news network, university, think tank and activist group out there. many of which actually pay people to write. I guess it boils down to something even more selfish than wanting to be read and make money from spending a few hours here and there silently opining in front of my computer: I want to do it.

Perhaps this luring temptation was best put by Christopher Hitchens when asked why he wrote, "...it was sort of decided for me, I think. I believe it's true with anyone who makes it their life. It isn't what you do, it's what you are, in other words, that somehow you've always known." (1) That's a little extreme in my case, but there is surely something irresistible about writing down your thoughts and leaving them out there for everyone to see. It's strangely therapeutic.

That's not to say that's it's solely a self-soothing sort of exercise. I would love to be read widely and influence people. I do have strong opinions and believe strongly our country is heading in the wrong direction and most intellectuals are off base with their solutions. It's almost as if I have a duty to fight what's happening even if it's only in an unread blog on one of umpteen blogging sites. And hey, it could be the start of something bigger. As an old Chinese proverb says, “every thousand mile journey begins with the first step.”

There's one last reason that is probably the most important of all. It's often said that teaching is the best method of learning. Well I, and surely many of my friends, am getting tired of interjecting my politics into a random talk about which team had the best draft. Unfortunately, people don’t always want to hear your opinions about what caused the Roman Empire to collapse and sometimes I can’t resist. Writing solves this dilemma. It is like teaching a nonexistent person. It allows you to see your own thoughts and evaluate your own arguments. I've often found logical fallacies, blatant omissions and other flaws in my reasoning after putting pencil to pad (or fingers to keyboard). If nothing else, writing will allow me to question my assumptions and clarify my opinions. Basically it should make me more smarter. And that in itself makes writing worth while.

(1) Christopher Hitchens, Conversations with History, Conversations with Christopher Hitchens P. 3 of 5, http://globetrotter.berkeley.edu/Elberg/Hitchens/hitchens-con3.html