March 24, 2011

The American Roadmap (Part 2 of 3)

(Continued from Part 1)

Every great nation in history has existed from a position of strength. It’s often been said that the only price liberty will accept is blood. But what underlies great nations has always been a sound economy. America’s rise to power, like Britain’s before it, and Rome’s and future powers like China and Brazil and India, relied or will rely on a sound, robust economy. An ability to defend the nation, an ability to care for the downtrodden, an ability to go to the moon ALL depend on the wealth of nations. That wording is chosen deliberately because the wealth of nations, a work by Adam Smith postulates that market economies are the most productive and socially beneficial economies for their societies.

A strong economy needs industry, people and natural resources to create wealth. Any vision for America must be predicated on the principle that the United States requires a robust economy and a healthy industrial and agricultural base that serve as the bedrock for other facets of the economy such as a financial sector and a service sector. A vision based on mercantilism, seemingly being leveraged currently by the Chinese, is not sustainable on its own. Nor is it a vision that should necessarily be pursued. International trade is necessarily dependent on production of goods and services worthy of trade.

Such an environment is possible only if government is to step aside on subsidies and regulation of what to produce and how to produce it and only regulates to a legitimate extent base considerations like worker and consumer safety. The country will produce what the market demands, given the unfettered chance to do so. It has always been this way and will always be this way. Opportunity creates the initiative and drive to succeed. That in turn enables creativity and innovation.

What the government must do is simple. Enable that environment and ensure that the environment that enables industry is sustainable. That means ensuring that there is a level playing field across all nations where labor is not five cents an hour versus ten dollars an hour. Such labor market distortions will continue to chip away at America’s industrial base. The same is true for the level of business taxation. If labor costs and taxation are too high in America, what business would consider operating in that production environment? Either one with a monopoly or one destined to fail. Not dealing with nations that manipulate their currency or exist on unreasonably cheap labor is one possible solution. Conversely hiding our heads in the sand will not work either. The United States is a country rich in resources and talent. To put up barriers and exist on internal supply and demand alone is to forgo the opportunities of the world. It is also harmful to the freedom of choice of consumers. Isolationism is not desirable, nor is it even optional in today’s ever-shrinking world.

That leaves free trade. Free trade is an admirable goal, but free trade with a nation that underpays its labor relative and lowers business taxes to the United States is ultimately a one way street. Economic theory is predicated on both supply and demand. If demand is entirely on one side (America) and supply almost exclusively on the other, which way do you suppose the money will flow? Without a source of inflow to replace that lost money, a nation, just as an individual will eventually end up broke.

Free trade needs to be coupled with like markets involved in a free exchange of goods and services in similar business environmental circumstances. When nations are grossly misaligned on policy – extremely cheap child labor versus a very high minimum wage – such free trade is harmful. What is needed is smart free trade where not countries but companies compete on a relatively level playing field, and mechanisms government manages that keep that field level and markets open.

But that is not the vision.

Continued in Part 3

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