January 7, 2016

An example-based reason the U.S. must unfetter it's economy

Oil prices continue to falter. In Canada it has contributed to the changes from a Net Exporter to a Net Importer and a trade deficit, despite favorable trade for those seeking Canadian goods. Unfortunately, too large a percentage of those goods, appear to be oil.

It points out a national need to compete in other areas such as manufacturing, or service based industries. Sadly, Canada has not seen the productivity gains over the last decade required to compete in those areas. That means that Canada's economy will continue to be soft until the productivity situation is rectified or oil prices rebound.

The lesson is that over-reliance on one particular industry or commodity is dangerous. Basic economics would indicate that nations should specialize in whatever area(s) they excel and rely on trade with other nations for other items. This specialization provides the most benefit to the most people. But diversification, as in a stock portfolio is prudent to stave off shocks. What if your nation was the best in the world at manufacturing buggy whips? Those became obsolete a long time ago. If you did not have other industries to rely on, your economy might be in terrible shape. The point is, specialization is important but it should not be in any single industry.

For example, OPEC countries will eventually feel the shock when oil becomes a less valuable commodity. The United States has benefitted from it's heyday in the mid 20th century as the world's manufacturer in that it had a very diverse manufacturing base. While the percentage of the world's manufacturing has declined, the basis for it is still there - the challenge is entirely on the cost of manufacturing side (a productivity/labor issue). The United States is also blessed with resources, some of which they appear loathe to use or produce (e.g. coal, shale oil). Nevertheless they are blessed with geography, population, resources and infrastructure to remain a diverse economic producer.

What they face instead are self-imposed constraints on what they will produce, and how they will produce it. Energy is not encouraged to come from the most efficient methods (oil, coal, nuclear power). Production is often hampered by higher labor costs than in other nations and results in a constant disequilibrium of net imports, and the offshoring of jobs and the net loss of domestic spending power and ultimately demand. There is also a perception that a service based economy, a post-industrial economy is not only inevitable but also sustainable. But at a micro-economic level people will always require food, shelter, heat, clothing, and transportation. Those all involve manufacturing or construction. Medical services and financial services would be the biggest service based industries. Those do not translate internationally for trade as easily as the manufacturing-based industries. It's not impossible for a bank to go international. It's not impossible for drug companies and other medical innovations (e.g. artificial hearts) to be made available for export.

There is no magic formula on what is the right mix of economic activity. But the simple notion that an economy should be diverse (i.e. specialize in more than one single area) just seems like common sense.
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