An expensive "oops" for America
In one of my classes last week, a student noted that entrepreneurs had it easier in the 1990s than they do today. And then I came across this article that talked about how economists had made a mistake about their “free trade” theory. It was an admission from one of the “leading” economists in the field, one with a Nobel Prize, that he was wrong about free trade – one of the basic tenets and mantras of economists and corporate executives.
Basically, it was an “oops, my bad” moment. But the economists’ “oops” has had profound consequences for American entrepreneurs besides creating a huge divide between Silicon Valley and the rest of the country. Here’s why.
American wealth has been shipped to China. In the past 20 years, the Chinese have shipped to us $5 trillions of goods more than we have shipped to them – that is the total of our goods trade deficit with China. Simply put, this means that we have bought stuff from them and they have our money. This has happened because:
· Americans want cheap products and high wages. So we buy cheap goods from China and pay higher wages in industries in services, which do not compete with China or export to China
· China wants to import raw materials and export finished goods. This means that the value-added wealth is in China, which, in turn, purchases lower-value-added commodities from us.
· China insists on corporations making products in China. This not only creates jobs there, but allows China to ship products from there, and also appropriate global technology. This has resulted in a hollowing of American industry.
· Our corporate leaders are very willing to buy from China to cut costs. This has led to American wealth being shipped abroad even as corporate leaders profited from decreasing corporate costs and increasing profits and stock prices.
· From making low-end products, China is now competing at the leading edge of technology. So it will be a formidable competitor in the future, built on a base of American markets, American corporations, and American wealth transfer.
At the forefront of this immense transfer of wealth are economists like Paul Krugman with their “free trade” theories. You don’t need a Ph.D. in economics or a Nobel Prize to know that if you spend more than you make, you become poorer. And that is what we as a country have been doing for the last few decades – becoming poorer. We have been borrowing to keep up the appearances. When will the bill come due? And who will pay it?
Impact on the average American entrepreneur outside Silicon Valley. Why is this transfer of wealth to China a problem for U.S. entrepreneurs outside Silicon Valley? Most entrepreneurs are small and mid-sized businesses who sell locally. As our country becomes poorer with the transfer of wealth to China, there is less wealth here and many in the middle class have had to downsize, which has meant a smaller market for small businesses. Therefore, small businesses are increasingly at the mercy of government spending, borrowing, and tax cutting. This debt is passed on to our children. The children of the rich will be spending their tax-sheltered lives in one of the tax havens. The rest will be stuck repaying the debt. Or defaulting like Argentina.
Impact on Silicon Valley ventures. There is a difference between small-business entrepreneurs outside Silicon Valley and the Silicon Valley growth-seeking ventures. Silicon Valley focuses on emerging technologies, emerging industries and emerging trends. So far it has been able to grow because China has not yet built its emerging industry infrastructure and has not reached dominance… yet. But it’s only a matter of time, since many of these Silicon Valley growth ventures have funding from China (Zoom Video), or have products made in China (Apple and Tesla). Can China take advantage of these companies?
So why hasn’t a single Chinese economist received the Nobel Prize for Economics – given that it has managed to extract trillions from the U.S. in one of the biggest transfers of wealth in history without war or colonization? China believes in manipulated trade, and has managed to make fools of economists and countries that believe in free trade. Let’s ship our genius economists to China. Let them do to China what they have done to us.
President-Elect Biden needs to acknowledge Chinese predatory practices and come up with long-term economic policies that prevent the further transfer of our wealth to China. And he needs to point out why our long-term interests are in balanced trade – not the “free manipulated trade” espoused by Krugman and his ilk.
This means that the American entrepreneurs who cater to local markets are faced with a bleak future unless the government floods the market with “easy” money, which will have to be repaid by our children.
MY TAKE: “My bad” is not enough. Given that economists, such as Krugman who “never suffered fools gladly,” have contributed to America’s long-term decline by pushing naïve theories that transferred billions of our wealth to other countries, especially to China, left trillions in national debt to our children, and been toadies of the politicians, it is time we took sterner measures. We owe that to our entrepreneurs and to our children
