Trump, Trade, Threats, and Tariffs

This morning I woke up to the ABC News headline “Ford CEO Says Trump Threats Won’t Change Small Car Plans.”  Having spent the last 7 years hammering together a new theory of economics in order to make sense of the historic success of protectionism, I could not help wonder if the marketing of tariffs is in need of a public relations makeover.   In a nutshell, using tariffs as a “threat” to keep domestic producers from fleeing is misplaced, because it does not address the price advantage foreign competition has over domestic producers in the first place.  Instead of focusing on the specific behavior of individual companies–a hopeless task in the long run–sky-high tariffs must be sold as a macroeconomic solution across all industrial sectors as a reward for restoring national security and prosperity.

Let’s break down some of the key aspects of this proposition by first clarifying two types of tariffs.  Traditionally, tariffs were either categorized as revenue generating for the federal government or as prohibitive (high enough to prevent the import from being competitive on the domestic market).   The revenue approach could make sense for a geographically limited imports such as a rare earth mineral, or something that does not present a threat to the industrial base, such as coffee.  It is critical to protect industry, because all growth, including service sectors rely on industrial gains (e.g. the traveling salesman gasoline and automotive costs). Or in exaggerated terms, there was no service sector before the invention of farming tools, because we were all subsistence farmers.

But for this discussion, of interest is the protective tariff which would allow the full restoration of all industrial sectors.   For example, a tariff on TVs would be prohibitively high so that all TV manufacturers would out of necessity have to set up shop on US soil in order to remain competitive.  The same logic applies to countries such as Mexico, because the Mexican worker loses by intensive exports (he can no longer consume what he produces).   In my interpretation of healthy macroeconomics, the producer must rely on the purchasing power of his nation’s citizens in order to avoid a return to the dark world of English subsistence wages in the 1700s which the classical school of economics struggled to make sense of and gave Marx a foothold to destroy capitalism, or to a world of plantation economics where cotton exporters did not need to rely on the purchasing power of their slaves.  Thus in modern practical terms,  a car manufacturer will create plants in each respective country in order s create the needed purchasing power to sell the cars domestically. Mexico, in my opinion, needs to focus on education which promote engineers and scientists to support such macroeconomics.   This is real wealth production, not the black magic of free trade theorists which relies on a deeply defective understanding of money known as the Quantity Theory of Money in my view.

The core issue sky-high protectionist tariffs solves regarding daily headlines is the inability of tax breaks to compete with radically different wage differentials between nations.  While a tax break may be a temporary micromanagement bandage, I would suggest a 10 to 1 wage differential cannot be compensated by tax reductions which might reflect a 25% cost saving on the bottom line.  For example,   a domestically produced product valued at $200 which can be produced overseas for $20,  still remains noncompetitive at $150 following a massive tax break.  Note also protectionism restores the tax base instead of cutting it.  The foreign manufacturer who presently pays no domestic taxes would be forced to  contribute to the domestic tax base by establishing shop here at two levels (i.e. corporate tax and workers wages).

In short, the tax-driven approach in my view cannot in the long run restore the critical aspects of healthy domestic wage dynamics, worker mobility, and sector size adjustments; this is something only tariffs can restore, because as I’ve argued elsewhere money is a purely domestic phenomenon reflected in domestic cost of production.   As a result, instead of “threatening” our wealth producers with “punitive” tariffs, it’s time to “reward” all industrial sectors with “protective” tariffs across the entire industrial base.   Manufacturers from around the globe will establish shop here and ensure a healthy a competitive environment.

As always, critique welcome.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Trump’s Economic Reality Show

When President Obama reminded us that the presidency is “not a reality show,” it is probably a safe bet that a good deal of the Establishment would agree with him. And who can blame them? Their TV station is tuned to a completely different channel than the rest of us are watching. While the followers of Trump’s Economic Reality Show, in countless decimated industry sectors such as steel, have been watching the brutal reality of having a 30 year career ended with the inevitable dislocation and foreclosure, The Establishment’s Reality Show consists of shopping for imported designer handbags, tailor-made suits, and the sweet pleasures of martinis at swank bars dotting some of the most expensive real estate in the country without having produced even the smallest form of real wealth in the form an industrial good. And should a small sense of guilt creep in while stirring the olive, each episode of the Establishment reality show ends with the textbook mantra, “free trade makes the whole world richer.” In other words, saving $50 on your next TV set really was worth giving up your income and homestead for.

Should any of us cast doubt about the reality of Establishment’s TV hour and get the crazy idea to challenge the logic of modern economics built on Stone Age barter as I have (see Just Measures tab), you should be forewarned that academia has blocked the cave entrance with super computers running general equilibrium models assured to intimidate the most daring and capable among us. But as any software developer will remind you, your models are only as good as the assumptions you’ve programed into your code. Engineering a bridge is no different. Else your bridge will collapse. And so too it is economic theory. An economy with out factories is one that can only be duct-taped together by long term deficit and war-time spending. A financial crisis is a logical consequence of excessive duct taping, if one understands factories ARE the economy and finance ultimately depends on industrial wealth production to survive. Finance is nothing more than bookkeeping to keep track of IOUs (industrial loans) needed to produce industrial goods. Because you can not borrow if you cannot produce, finance hits a dead without industry in the long run.

China is producing record billionaires because of its industrial base, not because of finance or the endless adjustments of interest rates. So while the Chinese started their own reality show whose first episode consisted of tossing out mainstream economic textbooks, a new reality show is beginning to emerge in the likes of political new comer like Paul Nehlen. Take a look at his brief reality show:

http://www.paulnehlen.com/truth-or-dare-paul-ryan-asks-tattooed-harley-riding-insurgent-wisconsin-challenger-paul-nehlen/ (see video)

Surprisingly, Trump’s Economic Reality Show has its origins in our Constitution which Daniel Webster argued was design to stop free trade with manufacturing powerhouse Great Britain. The reality show episodes continued with Lincoln and the GOP until the 1960s when the last episode aired.

What then does Trump’s Economic Reality Show amount to in my view? Simple. Bring our factories home with tariffs and watch prosperity explode. The other channel is playing out a show which ends with a financial crisis emerging that not even even the Establishment will be able to protect its duct-taped acquired wealth from.

So I ask my reader, how presidential is it to encourage the exportation of our factories which are our only true source of prosperity and security? Say what you want about political missteps in this race, but none compare to  the deindustrialization of our country and destruction of American livelihoods, and national security to boot: http://www.manufacturingnews.com/news/2016/Trusted-Foundry-0531161.html

Happy viewing…

Van Geldstone

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The Great Globalist Miscalculation

Version 5.0  (7/14/2017)

Can a radical reinterpretation of GDP and trade deficit numbers explain voter rage and the failure of establishment ideology and academic economics?  I believe it can.  As far as I know this is the first argument of its type.

Since I’ve never been a stickler for precise numbers, I’m going to round down the US GDP to $18 Trillion and focus on a portion of the 2016 trade deficit.  In particular, I will round up our trade deficit with China to $400 billion to keep the math simple for the moment. Thus, as the mainstream business editor will point out, our trade deficit amounts to not much more than 2 percent of our GDP.  Hard to imagine voter outrage driven by an 2% shift in GDP.

Who would have sleepless nights over this drop in the economic bucket? I would. As an engineer whose new model of economics restores the traditional cost of production based on wages, I take a completely different perspective to adding apples to oranges (foreign wage content vs domestic wage content embedded in an import).  Let’s for argument’s sake simply assume the average Chinese factory worker makes $2 per hour and the average American factory worker makes $20 per hour in the hopes of getting a rough sense of the magnitude of the problem.  As a result the logic runs as follows:

Labor content of Chinese exports into USA:  $463Billion/$4k Chinese yr salary = 115 million man years

Labor content of USA exports into China:  $116Billion/$40k American yr salary = 3 million man years

In other words, Chinese imports shell shock not 2% of the GDP, but more in the range of 25%  (115 M x $40k = $4.6Trillion/$18T)  .

With nearly 50 million Americans near the poverty level, perhaps this is not such a far fetched suggestion to make.

For good measure, lets add Mexico to the equation of economic ruin.  Here we assume the same $2/hr wage as was the case with China.

Labor content of USA exports into Mexico:  $231Billion/$40K = 6 Million man years

The labor of Mexico has to be adjusted due to the fact that Mexico reexports materials we ship them (metal for a car).  Let’s be conservative and assume that this is true of 50% of our exports to Mexico.

Labor content of Mexico exports into USA :  $294Billion – $115Billion \ $4K yr salary = 45 million man years.

This, using the same logic above, is roughly another 10% body blow to GDP.  Add the two together and you have 35% GDP economic body slam.

Let’s now focus on an EU country that has been in the news lately: Germany.  Using the same methodology we see the following and here we assume the German wage is roughly in the same ballpark as an American factory worker.

Labor content of German exports into USA:  $114Billion/$40k German yr salary = 2.8 million man years

Labor content of USA exports into Germany:  $49Billion/$40k American yr salary = 1.2 million man years  .

Thus we have a very rough delta of 1.6 million jobs lost to Germany.  A drop in the bucket compared to Mexico and China.    The trade deficit with Japan is roughly of the same magnitude ($132B imports from vs $63B exports to).  The focus on Germany and Japan is therefore misplaced.

Feel free to be as precise as you desire by taking profits into account, land rent, and anything else you an dream up, but I don’t think it will make any real difference.  I’m hoping an astute reader will tell me I’ve put the decimal in the wrong place, because these are very scary numbers.  Frankly, I’m stunned by them.   As an engineer I view these magnitudes as those of a nation headed for the economic abyss (no industry, no prosperity).   Selling more beef and pork to China ain’t going to cut it.    Wheeling and dealing won’t work either, because all sectors are impacted (only sky-high tariffs across all sectors can restore proper domestic wage mechanics need for worker mobility and productivity measures).   Unlike us, “China gets it.”

There are several additional implications.   It means the Mexican worker cannot consume a huge portion of the fruits of his labor.   This is the classical school subsistence wage story of the 1700 and 1800s again (plantation economics).  It also pulls the rug out of the capital account argument as a panacea (i.e. Chinese return the dollars back to the USA by buying Treasuries, homes, etc).  To see this, you simply have to image that the $1 dollar worth of imports that displaced the $10 of American labor cannot undue the damage by returning the $1 dollar and reinvesting it, because it only restores 1/10 of the damage it inflicted.

Finally, free trade throws a wrench into the gears of a sound government taxation model.  To see this, imagine a highly simplified economy consisting of bakers, cheese producers, and a government sector building the roads between bread and cheese factories.  Each sector makes up 1/3 of the economy.  The bread and cheese output is sufficient to feed everyone.  Thus the government can tax away 1/3 of the bread and cheese to feed themselves and provide the roads in exchange.    Eventually, the politicians fall under the spell of a free trade economist and allow very cheap bread and cheese to be imported, putting the domestic industries out of business.  Two thirds of the economy is unemployed.  The government in order to “stay in business” and feed itself floats bonds (creates debt) which it uses to buy the imported bread and cheese for itself.  The cheese and bread importer buys these bonds to maintain the currency manipulation which gave it the price advantage in the first place.   Since the government does not tax the importer (this is the definition of free trade) and no longer has a healthy tax base (2/3 of the economy is unemployed), it has no means to pay the bonds off.    Nor will the rich have anywhere to hide their financial assets from this Weimar hyper inflation scenario waiting to happen (print money to pay off the bonds).    Game over.

So how does one manage to inflict such damage against a superpower?  You simply carry a bigger stick.  Consider China’s GDP from another perspective. China had roughly 100 million workers in manufacturing 2009 (a quick search). Let’s fudge the number in the hopes to be conservative in our estimate: Say 60% are at the level of the hinterland (i.e. blacksmiths). This leaves 40 million using modern technology, and thereby achieving modern productivity levels. That’s roughly 3 to 4 times the USA number. As an engineer I would argue that means China’s GDP is 3 to 4 time the size of ours.  If that sounds crazy, simply look at raw industrial output in terms of quantity of steel, chemicals, concrete, or anything else you can think of if you doubt this.  The academics suggest China’s GDP is just barely bigger than ours.  If that is true, how then do they explain this story:

https://www.washingtonpost.com/news/wonk/wp/2015/03/24/how-china-used-more-cement-in-3-years-than-the-u-s-did-in-the-entire-20th-century/

UPDATE (7/8/2016): One of my heroes in this struggle to save American prosperity is Richard McCormack and his excellent website. Serendipitously he posted the following excellent analysis of China’s manufacturing #’s after I posted this essay: http://www.manufacturingnews.com/news/2016/China-Manufacturing-Employment-0630161.html

If this analysis is anywhere close to being accurate, then I suspect America is heading for an economic train wreck of epic proportions. With federal, state, and local spending in the ball park of $50K per full time American worker, it is government spending, not industrial wealth production, holding our duct-taped economy together. When that party comes to an end, watch out.

Nor is history is on the side of the academics.  Daniel Webster argued the primary purpose behind the creation of the Constitution was to stop free trade (tariffs could  not be laid under the Articles of Confederation).  Lincoln and his party were  protectionists (nationalists), while the big dollar cotton plantation owners were the party of free trade (globalists).

This analysis also implies that even my “balanced-trade-friends” who have been raising the red flag over the damage done by free trade for years, are not really  on the same sheet of music as I am.  I am singing this song by myself, because as I attempt to show with a simple example in the link below, even balanced trade can cause great damage.  Thus protectionism (sky high tariffs) becomes a matter of necessity.

How did we end up in such a fantastic mess?  The answer: There has never been a sound theory of economics (see “Just Measures” tab).  As an engineer, this is the root cause analysis.  Superpowers have risen on the backs of its industries which they historically have protected. A nation’s wealth and prosperity stems from 200 years of genius hidden behind the industrial, chemical, and electronic revolutions. The blue collar worker becomes a member of a middle class by leveraging fruits of this rare genius in the form of productivity gains in a closed economy. In other words, a waitress who dropped out of high school is able to enjoy the comforts of a car built on cutting edge science and technology.

Let’s take that first step down that road, and begin with an analysis found in  traditional macroeconomics text book GDP equation measured in dollar amounts:

Y(GDP) = C (Consumption) + I (Investment) + G (Government Spending) + X (Exports) – M (Imports)

This equation is a bit trickier than it appears.  The Consumption component includes purchases of imports.  So the net impact of a trade deficit amounts to zero.  I’ve cited a mainstream analysis of this detail at the end of the article.

Though there is nothing wrong with a clean textbook analysis of the equation, I feel the equation itself suffers from a serious problem.   In prior essays, I’ve attempted to expose what I perceived as serious logic problems with the Investment portion of the equation.  Here I will focus on the imports variable M in the equation and reintroduce my interpretation of China’s GDP.

Before we look at the numbers, let me try to illustrate my key point of concern.  Let’s use a very simple model of a nation that is a closed economy (no imports or exports) and has a GDP of $4Trillion.  We will take Government and Investment out of the discussion to keep it simple for the moment.

GDP = Consumption=$4T

In short, this closed economy consumes what it produces as one would expect.

Now let’s allow a low cost foreign competitor into the equation so to speak. Say the foreign competitor produces half of everything the nation produced ($2T) at a half of the cost ($1T).  What would the new equation look like?

GDP=Consumption ($2T domestic remains + $1T Imports) – Imports $1T = $2T

The effect of these imports is not zero in my opinion as a textbook leads you to believe, because imports generally speaking displace the domestic competitor , thus we went from $4T to $2T.   Half the GDP vanished as a result.  But if the textbook interpretation is to believed, the sky is the limit in terms of imports.  We could have something like this:

GDP=Consumption ($4T domestic goods + $10T imported goods) – Imports ($10T) = $4T

In other words, a $10T deficit has no impact on the economy.    I reject this logic, because the equation implies the domestic and imported goods are non-competitive (e.g. geographically limited goods).  In reality, the whole point of cheap imports is to put your apparently inefficient neighbor out of work.

If this is really a model of unemployment, then where will these unemployed workers migrate too?  One place might be government jobs which could mask the industrial decline.

GDP = Consumption $3T-Imports $1T+Government $2T = $4T

In this case, real industrial wealth production is vanishing (shifting to government services) and all is still seems fine with the GDP.   What response would a trained economist offer us?  He would remind us that his textbook recognizes there will be winners and losers in the game of free trade, and that the winners gains will exceed the losers losses.  The winner will have to compensate the loser in some form or another.  Unfortunately, without an industrial base producing real wealth there are no winners left.  And even if there were some winners holding on for dear life, the magnitude of 100 million man years of damage is beyond any compensation scheme imaginable.

Nor can the populist approach of “deal making” stop the ruin in my opinion; only sky high tariffs across all sectors can save us.  The reasoning behind this position is described in detail in my “Just Measures” essay, but for brevity sake one can imagine the entire economy as a rotating kaleidoscope consists of 10s of thousands of pieces of colored glass. The changing image represents the endless sector size adjustments taking place to meet the constant churn of consumer demand, along with shifts due to competition.   In simplistic terms, the pieces of glass (industry sectors) can only tumble properly  in a closed economy because industry productivity gains and resulting short term unemployment rely on measures of domestic wages reflected in cost of production and worker mobility to function properly.  The populist approch of fixing a few pieces of glass will fail if my analysis is sound, because the each piece glass depends upon another.  In addition, the populist goal of balanced trade does not undo the damage done by 10 to 1 wage differential.

How many manufacturing  jobs (direct and indirect) might we create by closing the economy?  I’ll take a shot from the hip and suggest 15 million (simply divide man years by 10 again since purchasing power dictates the limit).    Keep in my these are not “ordinary” jobs.  They are the core foundation of a national economy.   All other sectors are spawned from manufacturing.  Recall the impact of the farm tractor on subsistence farming to grasp the basic idea.  The farm tractor (industrial jobs that create productivity gains) freed up farmers to move to new sectors (e.g. book publishing, etc).

It’s time to get your head out of your textbook (and  your ideology), before it destroys our country.

As always, critique welcome.

Further reading:

Noah Smith’s textbook interpretation:

https://www.bloomberg.com/view/articles/2016-12-28/trump-s-trade-chief-peter-navarro-makes-a-rookie-mistake

It is also not obvious how debt enters here, but again Noah Smith does a nice job introducing this issue in the following link

https://www.bloomberg.com/view/articles/2016-03-22/u-s-s-huge-trade-deficit-will-come-due-someday

The Establisment is not the party of Lincoln:

https://rescuingeconomics.wordpress.com/2016/04/12/the-establishment-is-not-the-party-of-lincoln/

Why balanced trade is not a panacea:
https://rescuingeconomics.wordpress.com/ca-crusoe/

A new model of economics to make sense of the historical success of protectionism:
https://rescuingeconomics.wordpress.com/just-measures/

Is modern capital theory flawed (money and machines; saving and investment myth)?
https://rescuingeconomics.wordpress.com/money-and-machines-economics-done-wrong-2/

See my Kindle Book: Just Measures by Van Geldstone.

Van Geldstone

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The Establishment Is Not The Party of Lincoln

What key political principle divided the Democrats from the Republicans prior to the Civil War? Answer: Free Trade. Lincoln and his party of the industrial North were protectionist. Democrats under the influence of big dollar cotton were free traders. This critical ideological distinction lasted roughly until the 1960s. If this isn’t a red flag for microeconomics and free trade theory, I’m not sure what would be.

But don’t take my word for it, consider McCleary’s speech in a passage from my book:

In Honorable James T. McCleary’s speech to the House of Representatives in 1904 “Protection, Our Proper Permanent Policy”, illustrates the point: …from section 3 of the Democratic national platform: “We declare it to be a fundamental principle of the Democratic party that the Federal Government has no constitutional power to impose and collect tariff duties except for the purposes of revenue only.”   (McCleary. 1904. 4)

…the Republican Party made its declaration in the following language: “We believe that all articles which cannot be produced in the United States, except luxuries, should be admitted free of duty, and that on all imports coming into the competition with the products of American labor there should be levied duties equal to the difference between wages abroad and at home.”   (McCleary. 1904. 4)

Thus, from a historical perspective, modern [establisment] conservatives have become traditional economic Democrats.

McCleary also unearths the powerful speech “Shall the Republic Do Its Own Work?” given by the silver mining industrialist and Senator from Nevada John P. Jones in 1890 which nicely paints the economic contrast between the North and South: “Without mechanical and manufacturing resources and capacity, no people can maintain prosperity or independence.” (McCleary. 1904. 31)

“… Free-Trade would banish those establishments and would exchange skilled mechanics for cheap doorknobs or cheap cutlery.   It would reject the knowledge of useful arts in order to save for the moment a few cents a yard on woolen cloth or cotton ties or a few cents a pound on tin plates.   Protection secures the arts and Protects the artists.   It transforms ignorance into knowledge, indifference into zeal, inertia into activity, impotence into power.”   (McCleary. 1904. 33)

“… Free Trade brings the watch.   Protection brings the watchmaker; Free-Trade Free-Trade brings the machine, Protection the machinist; Free-Trade brings the engine, Protection the engineer.   Given the men, we cannot lack the machines.   Having the art, we shall not want for the article. Possessing the producer, we shall not want for the product.   Between them, who shall hesitate as to which is the more valuable to the country?   Men found communities, machines do not; men constitute a society, machines do not.”   (McCleary. 1904. 33)

“… When the South declared war it was found that its people could create nothing of practical utility.   Their orators and stump speakers, who led them into the war, could spin “yarns,” but not of cotton; they could weave sentences, but not wollens.   They could make speeches, but could not make engines.   They could make verses, but not vestments.   They could write flaming essays on courage, but could not make a gun or canister of powder.   They could organize armies, but not industries. They could inspire their troops with enthusiasm, but could not supply them with blankets.”   (McCleary. 1904. 31)

“… looking only to the moment and never to the morrow, permitted iron, coal, and other valuable minerals in illimitable quantities to lie inert and useless in their fields.”   (McCleary. 1904. 31) “… Their soldiers suffered for want of proper clothing, some of them even dying of cold, and many, especially toward the close of the war, wearing uniforms made from rag carpet.”   (McCleary. 1904. 31)

“… Had it not been for their slaves they would have been without food.”   (McCleary. 1904. 31)

So what would Lincoln do? Please consider:

http://www.economicpopulist.org/content/its-economic-theory-stupid-5588

Thus the root problem we face is a failure of economic theory. So for those intrepid enough to ask themselves what precisely is wrong with economic theory, please consider:

https://rescuingeconomics.wordpress.com/just-measures/

In the end, the establishment’s economics is not Lincoln’s economics, and it is for this, and only this reason, we are in decline. China understands this. Maybe it’s time we do to.

Van Geldstone

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The Last American Steelworker

So there you are, the last American steelworker standing in the unemployment line in the not too distant future. Close behind you are the metallurgists who worked at your abandoned mill. Next to them are dozens of engineers who managed processes and the facility at which you worked. Further along in the line are the truck drivers who supplied the plant with various material. Appearing a bit lost are the assembly-line workers who built those very trucks. Dozens of electricians are gathered in the midsection of the line. The suppliers of electrical components are mingled among them. The delicatessen owner and his employees who worked down the road and fed the steelworkers dinner are not too far behind. The refrigeration technicians who serviced the deli’s coolers are with them. The food suppliers are mixed in the crowd somewhere too. And on and on it goes.

Does such a scenario strike you as far fetched? Probably not if you are directly involved in the steel industry, but perhaps you run a boutique on South Beach and the last thing on your mind is smelting. Yet, steel and boutiques may be closer linked than you suspect. I will argue in a series of articles cited below that the boutique’s future may ultimately depend on the financial investments of your rich buyers, whose long term prosperity unwittingly rests on America’s industrial base.

To begin to understand the national implications of such a threat, take a few minutes out and read Richard McCormack’s article “Steel Industry CEOs Warn Of A Possible Sectoral Collapse Due To Surging Imports” ( http://www.manufacturingnews.com/news/2015/Steel-Industry-CEOs-Warn-Of-Possible-Collapse-0331151.html ) in which he quotes Rep. Mike Doyle (D-Penn.) as saying the Chinese and others are playing us like chumps. As an engineer who has studied economic theory and history for six years, I would like to suggest that chump-o-nomics only scratches the surface of the matter. Instead, I propose something much more radical to explain the mess we are in: there has never been a sound theory of economics.

Unfortunately, with the respect that academia commands in America, common sense is probably going to prove insufficient to bring an end to chump-o-nomics. To mount a serious challenge to modern free trade theory, one needs a new model and the willingness to step into the minefield of logic on which the impeccable mathematics of mainstream textbooks are built. But such a debate must not be restricted to academia. It must also engage the American public, because the last American steelworker probably does not have the time or passion to take on academia by himself. Sure, his common sense tells them him it was cheap steel imports which ended his 30-year career, took his home away from him, and destroyed his city, but this again amounts to a superficial understanding. Deep below the surface of economic and political ideology where no one dares to dig is a 200 year old idea which has infected the minds of many great thinkers to this very day. More mysterious than the Knights of Templar, and shielded by cryptic sounding theorems such as Hecksher-Ohlin, Rybcyznski, and Stopler-Samuelson, free trade theory will probably never find its way into the national discussion without a whole new approach.

So for these reasons, I have attempted to distill economic theory, history, and a new model into its simplest form so as to give every American a chance to engage in this debate. Though it may appear that I have ventured outside of my engineering discipline, I would suggest when interpreting an economy as a machine, engineers are perhaps more aptly suit to overthrowing economic theory than one might suspect. Why? Because engineers by their very nature think in terms of machines.

In a nutshell, if you want to save your steel mill, boutique, and your country in the process, you will have to arm yourself with an intellectual solution that is more complete and more powerful than your sophisticated opponent’s who is more than happy to send your factory overseas. It is therefore my goal to provide you with the starting point for such an argument so that you may finally understand the roots of your destruction:

The delusion of numbers:
https://rescuingeconomics.wordpress.com/2016/04/15/trade-deficit-delusions/

The new model of economics:
https://rescuingeconomics.wordpress.com/just-measures/

Ideology blinds us:
https://rescuingeconomics.wordpress.com/2015/05/28/getting-your-head-out-of-your-ideology/

The rich are not immune:
https://rescuingeconomics.wordpress.com/2015/05/18/free-trade-fast-tracking-the-destruction-of-the-1/

Various critiques of all schools of economics (includes why fair trade is impossible):
http://www.economicpopulist.org/content/myth-middle-class-economics-5665

More Steel tragedy: http://www.manufacturingnews.com/news/2016/steel-industry-in-trouble-0429161.html

Because I cannot shift the debate alone, I need your help to shape and spread the message. As a result, I welcome critique from all sources. If your critique make senses to me, I’ll gladly stand corrected. If you feel something is not clear or too complex, let me know. If you think I’ve not been unfair in a particular critique of a particular school, again, let me know. The goal is not to nurture egos, but ultimately get to the ultimate truth in economics.

In any case, thank you for taking the time to consider a new idea.

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Getting Your Head Out of Your Ideology

The fundamental problem with political and economic ideology is that it requires an enemy.  Unfortunately, as I will argue in detail, the resulting spirit of contempt embedded in our politics ultimately blinds its participants from finding real solutions to very real problems.   So while Christ told us to love our enemies, the Left directs its hatred toward the capitalists who clothe and feed them, and the government-adverse Right has all but forgotten that America rose to superpower status behind government laid tariffs.  In other words, neither ideology has it correct, because both will ultimately lead to the flight of the industrial base.  The Chinese thus are doubly fortunate as corporations flee the tsunami of regulation put upon them by capitalism’s haters, or flee foreign wage levels the free market worshipers have exposed them too.  What the Left and Right seems to have forgotten is that contempt or neglect of corporations is ultimately contempt or neglect of  the constituents who work at these corporations.

The consequences of this dynamic are the road to economic ruin, because the industrial base is the fundamental source of prosperity.  In addition, industry is the engine for economic growth (rising standards of living) derived from the productivity gains that are associated with industrial, chemical, and electronic advances.  To grasp the core idea here, simply imagine a nation of subsistence farmers.  One day a genius builds a farm tractor which amounts to a revolutionary productivity gain in farming.  The vast majority of farm labor is then freed up to pursue new production possibilities (e.g. automobile construction).   New production output with the same population means a rising standard of living.  As I have argued in “Just Measures” (see site tab), this dynamic can only properly take place in a closed economy.   A new theory of economics and money was constructed in that essay to support such a radical proposition. In the end, this growth process implies all sectors of an economy ultimately rely on the industrial base. Therefore if you allow the base to be removed with free trade, then all other sectors will collapse with it.

Thus left without a sound theoretical economic model, both ideologies are forced to rely on one dimensional catch phrases. The Right with its heroic notion of rugged individualism seems to have forgotten that the Articles of Confederation without its power to lay national tariffs was not sufficient to allow rugged individualist to flourish.   A statesmen following the revolution made this observation:

“In the comparative condition of the United States and Great Britain, not a hatter, a boot or shoemaker, a saddler, or a brass founder could carry on his business, except in the coarsest and most ordinary productions of their various trades, under the pressure of this foreign competition.   Thus was presented the extraordinary and calamitous spectacle of a successful revolution wholly failing of its ultimate object.   The people of America had gone to war, not for names, but for things.   It was not merely to change a government administered by kings, princes, and ministers for a government administered by presidents, and secretaries, and members of Congress.   It was to redress their own grievances, to improve their own condition, to throw off the burden which the colonial system laid on their industry.  To attain these objects, they endured incredible hardships, and bore and suffered almost beyond the measure of humanity. And when their independence was attained, they found it was a piece of parchment.   The arm which had struck for it in the field was palsied in the workshop ; the industry which had been burdened in the colonies was crushed in the free States ; and, at the close of the Revolution, the mechanics and manufacturers of the country found themselves, in the bitterness of their hearts, independent — and ruined.”   (Mason. 1884. 21-22)

The great German-America protectionist Friedrich List, writing in the 1800s, endorsed the idea freedom was not a sufficient condition for economic prosperity:

“… for history shows that nations have sunk into poverty and misery despite the labor and economy of their citizens.” (List. 1856. 211)

In fact, one only need consider the success of China to realize that freedom is not only not sufficient, it is not even a requirement at the political level. Or perhaps a more fundamental question is in order: Why hasn’t rugged individualism saved us from the mess we are presently in?

The Left on the other hand seeks solutions in the old worn out story of soaking the rich. In new speak, the 1%. This is simply Marxism in new clothes. Failing to understand that in a closed economy the industrialist grows rich by raising the standard of living of their workers through the cited industrial gains, the Left simply ends up slaying the goose that laid the golden egg. For example, if the cost of a first generation bag phone drops from $1000 to $100 for powerful smartphone, the industrialist has effectively put at a minimum of $900 in the pockets of every working American, along with sophisticated advances (unmeasurable wealth increases) to boot. This subtle aspect is far more relevant to national well being than any tax we can put on the industrialist’s estate.

To understand these historical failures of free trade, I make the case in “Just Measures” that a critical distinction needs to be made between free domestic markets (functional) versus free international markets (dysfunctional) due to the inherently domestic nature of money as the means to track labor content in an industrial good. It was this critical aspect of money as a purely domestic phenomenon that the early protectionists such as Hamilton, Lincoln, and List had overlooked, and thereby failed to construct a fully functional economic model to support their gut instincts, common sense, and historical analysis of the successes of protectionism.

In the end, ideology will not save us from the economic abyss we are speedily heading for, because an economy is a machine that operates according to laws defined by domestic money, not some economist’s outdated notion of barter disguised in modern simulations, or a politician’s misunderstanding of government’s role in protecting a nation’s industries. In contrast, Daniel Webster understood the nature of the economic problem when he suggested that the primary reason we created our Constitution was to stop free trade (Articles of Confederation did not have the authority to lay national tariffs). If the Chinese understand the economic logic of our founding fathers, maybe it is time we do too.

Footnote: For those interested in reading more in depth analysis, see Amazon Kindle Just Measures by Geldstone and the core tabs on this site. As always, critique is very welcome.

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Free Trade: Fast Tracking the Destruction of the 1%

If anyone had a fine-tuned gut instinct regarding the means to destroying the rich it was the angry economist Karl Marx.    One option he suggested to bringing the captains of capitalism to their knees was free trade, but unfortunately like most things born in an anti-Christian spirit, the results would  not be what the intellectuals had expected: roughly 94 million lives would be taken as Marxist ideology would be forced upon them in the pursuit  to eliminate corporate profits.   Tragically, only the long forgotten Marxist Maltman Barrie could grasp the proper and painless solution to English subsistence wages of 1800s that had Marx so enraged (and classical economists such as Smith and Ricardo so confused).  Barrie understood in his ground breaking epiphany that exports are harmful to the well being of the English worker.  As a result, he simply suggested that by closing the economy the worker could now consume what he produced.  But to some extent, his protectionist mindset was already old news to several generations of American protectionists, beginning with our founding fathers.   To make the point, Daniel Webster argued the primary reason the founders hammered together the Constitution was to stop the economic chaos unleashed by free trade (with Britain) under the Articles of Confederation.  In short, it gave Americans the new power to lay tariffs.  But it came with a price: Tariffs would eventually split the soul of the nation.  The constitutional question of tariffs would come to a head in the form of Civil War as the protectionist industrial North rejected the free trade ideology of the plantation owners.

Yet, more than a century and half later we find China having adopting a mercantilistic form of  Lincoln’s logic,  while we unwittingly have adopted Marx’s road to ruin.  In this theater of economic disorder, we are reassured by trade lawyers, politicians, economists, and corporate globalists that this is all for our own good (the 99%).   The economic textbooks of nearly all stripes tells us this must be true, turning American economic history and reality into an inconsequential dot, not worthy of discussion.  Unfortunately, what no one seems to be asking is on what theoretical assumptions these textbook models of economics rest.  The rigid mindset is compounded by the 1%, secure in their wealth, who are either oblivious of the looming free trade deals, or convinced they have nothing to loose.  But, I as an engineer who has devoted six years to the study of the history of economic thought and theory, will argue the 1% have everything to lose if these models are logically flawed.

The premise behind this claim is relatively simple: There has never been a sound theory of economics. The consequences are also straight forward: The destruction of the industrial base (directly and indirectly the 99%) under free trade ultimately means a looming economic crisis which will destroy the 1%, because as the 1% in China understand, it is ultimately the industrial base that secures their prosperity.  In other words, a modern economy cannot survive without industry.   Not only will the 99% go down with the sinking free trade ship, so will the 1%, because the means to protecting their wealth will not be possible during an economic collapse.  In other words, there will be no life boats left when the torpedo of de-industrialization hits.

If you doubt this, just ask the Chinese, who like the founding fathers, learned their common-sense economics from the brutal hard knocks of economic chaos that led them to the light of protectionism.  But surprisingly, in spite of all the gut instincts driving China to superpower status, there has never been a theoretical economic model to explain the historical success of protectionism and the ruin of free trade.   It is the goal of this blog therefore, to fill in the missing logic.  Critique is of course welcome, since this is a radically ambitious goal that cannot be done alone.

As a result, a set of links to help guide reader  into this new model of protectionism and its logic consequences (e.g. the risks of the Euro) are listed as follows:

Condensed Summary of New Protectionist Model

https://rescuingeconomics.wordpress.com/just-measures/

Overview of 200 Years of Flawed Economic Theory

http://www.economicpopulist.org/content/unraveling-economics-5564

Summary of Additional Links:

http://www.economicpopulist.org/content/myth-middle-class-economics-5665

Book:

Just Measures by Geldstone   / Amazon Kindle

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