Friday, 9 March 2018

Ross's Bad Economics

Before becoming Trump's Commerce Secretary, Wilbur Ross ran a big financial speculation fund. You might think that meant he had a good grasp of economics, but his arguments supporting Trump's tariffs call that assumption into question. 

Last weekend, Ross went on to US TV screens, to justify Trump's trade war. US pundits have pointed out that the last time the US introduced steel tariffs, under George Bush, it ended badly, because it increased US costs, making US industry even less globally competitive, which caused the US to lose rather than gain jobs. But, economic nationalism of the Trump variety, as much as with the Brexit variety, does not survive on the basis of an appeal to facts and logic, but from its appeal to ignorance and bigotry, and for what appear to be obvious, simple and immediate solutions. It is the stuff of the snake oil salesman, whose wares, a surprisingly large section of gullible people are not only prepared to swallow, but who, for a long-time, even after its bad side-effects have been demonstrated, continue to want to believe is doing them good. As Barnum is wrongly credited with saying, "there is one born every minute." 

So, Ross went on to the TV screens with a can of beer to make his point. Assume that a 25% tariff is imposed on steel imports, Ross said. What effect would it have on the can of beer? He went on to argue that the steel in the can constituted only a fraction of the cost of the can of beer, because the main cost comes from the beer in the can, not the can itself. I can't remember the actual costs he outlined, but for simplicity of argument, let's say that in a can of beer costing $1, the steel in the can constitutes $0.10. In that case, Ross's argument is that increasing the cost of the steel by a 25% tariff means only an increase from $0.10 to $0.125, an increase in the price of the can of beer of only 2.5%. 

But, the fallacy of this argument should be immediately apparent. Yes, the main cost component of the can of beer is not the can, but the beer in the can, but Ross has failed to account for any effect of rising steel and aluminium costs on the price of the beer itself! Beer does not just magically appear in the can from nowhere, it has to be produced, and shipped, along with all of the components of the beer. The underlying cereal crop that provides the malt for the beer has to be grown, and, in modern agriculture, that involves large amounts of agricultural machinery, all of which requires significant quantities of steel and aluminium for its construction. Indeed, the machines in the engineering shops that produce the agricultural machines, also require large amounts of steel and aluminium in their own construction, as do the machines that produce those machines! 

Once the cereal crop is harvested, it has to be shipped by road or rail to the millers to be turned into grain, before it can be turned into malt. Again, the trains and trucks that ship the cereal require huge amounts of steel and aluminium for their construction, as again do the machines that are used to produce the trains and trucks, not to mention the rail tracks, roads, bridges and other constructions that the trains and trucks require to get from A to B. And, once the cereal has been transported to the millers, the millers require mills to turn the cereal into grain, which again requires large amounts of steel and aluminium for the construction of the mill, and for the construction of the machinery in the mill, and usually for the storage containers in which the grain is contained, and so on. 

Then the grain must be malted, and these same kinds of processes are undertaken of shipping grain, and then shipping malt to the brewers, all involving the same kinds of costs, all of which are inflated as a result of the increase in the cost of steel and aluminium, which forms a large part of the cost of producing the various machines, and transport systems required. 

Ross might argue that many of these costs are historic costs that, the steel used in the construction of the combined harvesters used to produce the cereals, or used in the trains and trucks to ship the cereal, grain, malt or beer has already been bought and incorporated into those things, but as Marx pointed out, and as every practical business person should know, the value of a commodity is determined not by its historic cost, not by what was paid for it, at some time in the past, but by its current reproduction cost, by what has to be paid, today, to replace it. Farmers do not base the price of cereal on what they paid for a combined harvester ten years ago, but on what it will cost them today to replace it when it wears out. Usually, those prices fall, because rising social productivity causes the value of commodities, such as combined harvesters, to fall, but a 25% tariff, or tax will immediately have the opposite effect. 

And that is true for all of the other material inputs. Beer requires hops, it requires yeast, and it requires sugar and water. All of the argument in relation to the cereal crops, and its transformation into malt, applies in the same way to all these other inputs, whose prices are similarly affected by a rise in the cost of steel and aluminium. And, those are not the only inputs. To produce the beer, breweries also require energy to heat the water, and so on. The production of the energy again requires large amounts of steel and aluminium, whether in the construction of power stations and the equipment in the power stations, or in the construction of electricity grids to transport the electricity, or in the construction and provision of various pipelines to transport oil and gas. All of these things require steel and aluminium, and do so on a much larger scale than is required for the production of a beer can itself. Unlike a beer can, for example, a large part of the cost of say a truck, does comprise the steel used directly in its production, and the same for a train, a train track, a combined harvester and so on. 

Increasing the cost of all these things involves increasing the cost of producing all of the things required to produce the material inputs into the beer that goes into the can, and thereby increases the cost of the can of beer way beyond Ross's suggestion that it is only the effect on the price of the can itself that is affected. Indeed, the cost of the steel used in the production of a truck, or combined harvester might be such that, as happened with the US car industry, the last time steel tariffs were imposed, it makes the US producers of those things uncompetitive, so that US farmers have to import EU produced combined harvesters, or trucks, and so on. A few inefficient US steel capitalists might benefit from Trump's protectionism, but US machinery producers would then lose out to EU, or Japanese machinery producers, whilst US consumers would simultaneously lose out, not just from the resultant loss of jobs, but also from the rise in US prices of trucks, trains, agricultural products, transport, beer and so on. 

And, this brings us to the final input, the labour-power used to produce the beer, but also required to produce all of the other inputs required for the production of the beer, and their and its transportation. As the steel and aluminium tariffs increase the costs of agricultural products, transport and so on, so that increased cost of living impacts on all US workers. It means the value of labour-power, the current reproduction cost of labour-power rises, which ultimately means that the market price of that labour-power, wages also rises. But, the increase in this cost, is not like the increase in the other costs. As Ricardo and Marx demonstrated, higher wages do not increase the value of commodities, because the value of commodities is determined by the quantity of labour required for their production, not the value of that labour (power). The new value created by labour depends on the quantity of it undertaken, and nothing has changed in that regard. What has changed is the amount of labour-time required to reproduce the labour-power consumed in production. It means that a smaller portion of the new value created can go to profits, and a larger portion has to go to wages to reproduce the labour-power, as the cost of living has risen. 

But, in modern economies, capitalists and their state do not like generally falling profits caused by rising wages. So, whenever workers get higher wages to offset such rises in the cost of living, the capitalist state, via the central bank, tries to allow the capitalist firms to claw back the higher wages in higher money prices for the things they produce. They do that by increasing the amount of currency in circulation, so that businesses can increase prices without cutting back production. The effect is that although the value of the commodities does not rise, as a consequence of the higher wages, the money prices of commodities do. In other words, the central banks try to restrain the effects of higher wages on profits by promoting inflation. 

The problem for an economy like the US is that, at a time when US workers wages are starting to rise anyway, because labour shortages are once again starting to arise, and when the higher wages, and higher number of workers being employed is starting to cause a rise in demand for wage goods, which encourages US firms to increase their capital so as to be able to meet that rising demand for wage goods, the vast oceans of liquidity that the Federal Reserve has pumped into circulation over the last thirty years, but which currently sits in astronomically inflated assets such as shares, bonds and property, whose bubbles are set to burst, is already there, waiting to flood out of those over inflated assets, and into general circulation, sparking off a new inflationary spiral. 

Trump, Ross and the other economic nationalists running the White House claim that they are acting in US workers interests. The same refrain is given by right-wing economic nationalists everywhere, whether it is from the Tories/UKIP in Britain, over Brexit, Le Pen in France, or Putin or Erdogan in Russia and Turkey. It is not surprising as they are all part of the same right-wing nationalist, national-bolshevik, ideological trend. Trump and Ross claim that they are only acting to protect the US from unfair competition from others. But, it is nonsense. For one thing, the US exports more steel to Mexico than Mexico exports to the US, yet Trump had initially proposed imposing tariffs on Mexican and Canadian steel. 

He has now provisionally given Canada and Mexico exemptions, probably because of growing opposition within the US itself, and because given the US's obligations under NAFTA, any such action would have immediately been struck down in the US courts, just as previously Trump's Muslim travel ban was struck down by the courts. Trump's real target, for maximum populist appeal was China, but the truth was that China accounted for only 2% of US steel exports, and would hardly have been affected! Now Trump and Ross want the EU to kowtow to the US, and follow the US in destroying its own economy, by promising the EU that they could gain exemptions from the tariffs if they did the US bidding by imposing tariffs of their own on Chinese steel imports! That is almost as deluded as the kind of economic nationalism you get from the Tory Brextremists. 

The US talks about unfair trade, but the reality is that for the last 70 years, it has been the US that has been the biggest beneficiary from unfair trade relations, founded upon the role of the US Dollar as world reserve currency. For more than a decade, US politicians seeking easy populist votes have branded China a currency manipulator, but what did that amount to? China pegged its currency, the Renminbi to the Dollar. In other words, it was as good, in practice, as if all trade between the two countries was conducted in Dollars. So, with effectively the same currency used to price US and Chinese goods alike, any change in prices was then a consequence of rises in productivity/efficiency in one country relative to the other. That hardly sounds like grounds for accusing one partner or the other of currency manipulation, therefore, does it? 

But, on that basis, continually rising levels of productivity and efficiency in the Chinese economy, as it invested in real capital accumulation, and gained form the economies of scale and improving infrastructure, and relatively declining levels of productivity and efficiency in the US economy, which pumped money into financial and property speculation, and consumption, and the consequent paying out of large revenues in dividends, rents and interest, rather than in real capital accumulation, and investment in modernising its infrastructure, meant that China was bound to see the prices of its exports to the US continually decline, and vice versa. It meant that, inevitably, Chinese exports to the US increased massively compared to US exports to China. And, as the US then found itself paying for its consumption of all these imports by borrowing more and more money, and as the Federal Reserve put a floor under US asset prices, such as the US stock and bond markets, it became a no brainer for China to use its vast new cash flow, from all these exports, to use to lend to the US so that it could continue to buy Chinese imports, and in the process, China picked up more and more US financial assets, whose prices were guaranteed, and indeed were turned into a one-way bet. 

In other words, it comes down to a basic economic reality that like the industrial capitalists of Britain in the early 19th century, Chinese capitalists put their profits back into real capital accumulation, which made them ever more efficient, whilst US capitalists – and the same has been true of UK capitalists – who had now become simply parasitic money lending capitalists (share and bond holders), who live off their rents and interest, and from the speculative capital gains made in the stock, bond and property markets, had used their revenues for this latter activity, rather than for real capital accumulation, in the way the old landed aristocracy had done, in Britain, during the 19th century. The US economy, like the UK economy, is paying the price for it, and now those same financial speculators in the US want others to pay for their decades of decadence. 

China's real crime, in pegging its currency to the Dollar, was not currency manipulation, but its refusal to allow the US to get away with currency manipulation itself so as to pay for its extravagance. After WWII, the Dollar replaced the Pound as the world reserve currency, which meant that most global trade was conducted in Dollars, and countries that wanted to settle debts and so on, to buy oil or other globally traded products priced in Dollars, had to first obtain Dollars so as to do so. To obtain Dollars effectively meant that you had to export something to earn the foreign currency. It was not possible to simply print more of your own currency, such as Pounds, and use them to buy Dollars, because the exchange rate between the Dollar and the Pound, as with other currencies, was fixed, and both were related to gold, whose price was artificially fixed at a price of $30 an ounce. 

The only country, for whom this did not apply, of course, was the US, because they already had Dollars, and could simply print more of them. When the US, during the 1960's, engaged in the hugely costly Vietnam War, alongside the huge rise in government spending that went with Johnson's Great Society programme that massively expanded the size of the Welfare State in the US, it did so, in large part by simply printing Dollars to cover the cost of the government spending. This increase in currency temporarily offset some of the effect of rising wages in squeezing profits, by causing inflation to rise, so real wages rose by less than nominal wages, and real profits, thereby fell by less than nominal profits. A large part of the increased liquidity went into buying all of those goods and services that the US needed to import from other countries. In so doing, it facilitated a further blowing up of the US trade deficit, and at the same time pushed US inflation out into the economies of all these other countries that exported their goods and services to the US, and in return got this increased flow of US Dollars. 

The consequence was that it was as if the US had been provided with a magic money tree. It could buy whatever goods and services it required, and pay for them with increasingly worthless paper Dollars. The extent of just how worthless they had become was shown, when the official fixed price of gold was dropped, as it rose during the 1970's from $30 an ounce to $800 an ounce! For decades the US had been able to use this increasingly worthless Dollar to obtain the goods and services it required, but meant that the countries that exported to the US simply obtained these worthless Dollars, which bought them fewer and fewer US goods and services. In 1971, that situation reached a level, whereby DeGaulle insisted that they would no longer accept these worthless Dollars, but instead wanted the gold they were supposed to represent, at the official rate of $30 an ounce. The US, of course, could not agree to such a request, because it would have meant a huge outflow of gold from the US, if every other creditor demanded payment, in gold, at the official rate. So, Nixon broke the link between the Dollar and gold, whilst also making it illegal for US citizens to hold gold. It meant that the Dollar fell significantly in value, and the global monetary system was thrown into chaos for a decade, until the system of floating exchange rates was introduced, which has essentially allowed the US to continue destroying the value of the Dollar so as to be able to continue to pay for its imports with such devalued Dollars. 

The crime of China, as far as the US is concerned, therefore, is that rather like DeGaulle before them, they have refused to allow the US to get away with currency manipulation, by tying the value of their currency to the Dollar. The biggest currency manipulator in the world is the US, for example, by its gigantic QE programme that pumped trillions of dollars of currency into circulation, thereby destroying the value of the Dollar relative to other currencies. The biggest proponent of unfair trade, by such means is the US itself.

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