Thursday, September 23, 2010

When the Tide Comes In

“Workers at a Honda plant in China recently went on strike over wages and work conditions. The Chinese have had enough of slaving in factories for $30 per week while Americans sit home on their couches, collect $400 per week in unemployment benefits, and consume the goods that the Chinese make. Chinese manufacturers are now being forced to increase the wages they pay to workers and these costs will be passed on to American importers of Chinese goods like Wal-Mart.” This according to the National Inflation Association will lead to all sorts of economic problems for the USA in the form of higher cost of living and inflationary prices.

I prefer to take longer look at events such as a growing third-world economy and China’s policy regarding international monetary markets and the value of their currency.

The Chinese are finally experimenting with the value of their currency, the Yuan, by allowing limited float like every other currency in the world. Floating currencies change in value relative to other currencies such as the US Dollar, and they reflect a country’s economic strength and can help balance trade. It works like this. Under the communist regime, the Chinese economy was weak just a few decades ago. The Communist Party determined to embrace capitalistic investment in their country and their lower wages and lack of regulations made them more competitive than US and European manufacturers. So, Chinese manufacturing grew and their economy gained strength which would under normal international monetary policies lead to a stronger Yuan. But, the Chinese authorities until recently would not allow their currency value to float in the world currency market. If the value of the Yuan is allowed to gain strength against the US Dollar, Chinese goods become effectively more expensive for US consumers. The stronger Yuan also makes US goods and services more affordable for Chinese consumers. The net effect of a stronger Yuan would be less Chinese imports into the US and more US exports into China, and for the USA, a smaller trade deficit.

For organizations like the National Inflation Association, increased prosperity in China is seen as a negative for the US economy. I have a substantially different view of these turns of events.

As a life-long conservationist, I have been saying for decades that environmental laws and regulations in the USA are driving businesses offshore. To be sure, cheap labor in Asia and other locations has been a huge competitive disadvantage for a number of industries in the United States. But, many people have failed to take into account the high costs of cleaning up our waterways, reducing air pollution, and preventing hazardous waste from entering our ecosystems. Do not get me wrong; I am a strong supporter of cleaning up and protecting our nation’s air, water, and soil is important, and within limits, it is worth paying more for goods and services to live in the cleanest environment the world has to offer. But, the unintended consequence of our stronger environmental legal and regulatory framework has been to substantially increase the cost of generating power, manufacturing goods, providing services, and growing food for the world. Some of those higher expenses have been mitigated by improved technology and more efficient production methods. But, it is an incontrovertible fact that cleaning up our environment has caused a lot of industry to move to countries that do not value their environment as highly as we do.

Indeed, the globalization of the economy and the associated increases in pollution in third-world countries is because some countries would gladly sacrifice their environment for jobs and prosperity for their people. In response, the environmental activist industry has gone international as well. The problem with the environmentalist’s message is that they believe those third-world countries should shun industry and thus prosperity in favor of maintaining their pristine environments. What the environmental community fails to recognize is that prosperity is the environment’s best friend.

If you think about it, the only reason the USA has the cleanest air, water, and soil in the world is because Americans could afford, and therefore agreed, to pay more for goods and services in order to clean up our land. To put it another way, look at the polling data on American concerns about the environment when the economy takes a downturn. When we are in a recession, Americans show much greater concern about job creation and much less interest in new environmental restrictions. This was recently demonstrated when the Cap and Trade Bill effectively died in the Senate because people saw the bill as a job killer. At this point in time in most American’s minds, jobs are more important than the environment. It is not insignificant that, even in the face of the largest oil spill in history in waters of the United States, Americans chose jobs over a bill designed to reduce our reliance on oil and other carbon products.

For decades now, I have told people who were concerned about the increased pollution associated with the industrialization of the third-world to relax. “Once those people have a taste of prosperity, they will become interested in cleaning up their land, water, and air,” I would say.

There was a time when Chinese workers beat a path to the $30 a week manufacturing job. But, now they have a television and a computer with internet access. They see the world news and they begin to compare their situation with others around the world. “If Americans can get $400 a week for doing nothing, why can’t I get a higher wage for making the goods those Americans are buying,” they reason. And, now that they have a job and some level of economic security, organizing into unions and contemplating going on strike is much more palatable than it was ten years ago. And so prosperity will spread across the third-world and with prosperity and increased economic security there will be a greater desire to breath in cleaner air, to have safe drinking water, to not have toxic chemicals oozing from the soil, or fish dying in the rivers. I believe we will see a grassroots environmental movement spring up in these third-world countries, just like it did in the USA back in the sixties and seventies. But, it won’t be because some extreme environmental group made them feel guilty for having a little prosperity; it will come from within because of increased wealth and economic security.

And the really good news to come out of all of this is that, in time, higher wages and more environmental awareness resulting from increased prosperity will result in more jobs coming back to the United States and more lucrative markets for US products overseas. The old adage about how an improved economy is good for everyone will be enhanced to read, “When the tide comes in, all the ships—big and small—float a little higher in cleaner water and under clearer skies.”

Friday, September 10, 2010

Caveat Emptor

“Caveat emptor” is a Latin phrase meaning “Buyer beware.” It is a principle that every consumer should adhere to for their own benefit and protection. It is a concept at the core of how micro-economics quantifies consumption decisions made by people.

The need for buyers to beware is as old as the Devil’s temptation of Eve and then Adam and it has been a sad part of human nature ever since.. There have always been snake-oil salesmen and conmen who would sell you the cure for whatever ails you, the Brooklyn Bridge, or some land in Florida that turns out to be a swamp. Nowadays, it is the email you get from a Secretary of the Treasury of some banana republic who just happens to have $12 million dollars he would like to share with you if only you would provide your bank account numbers and other personal information.

We are all taught to be skeptical consumers. Phrases like “Too good to be true,” or “There is no such thing as a free lunch” are burned into our psyches. We all have a deep seated mistrust of salesmen, and as wary consumers, we do our research on products before we buy them. Well, at least, I thought this was all true.

It turns out we are not very smart consumers, so we need the government to step in and protect us poor unwitting souls. Enter the Food and Drug Administration, the Consumer Products Safety Commission, and the Federal Deposit Insurance Corporation to protect us from ourselves. Not that these agencies don’t serve a valuable role, but when does government protection slip over the line into the realm of a nanny state that treats us all like babies and severely limits our consumer choices.

Recently, our Congressman, Tom Perriello, touted the final implementation of the Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD) and his roll in drafting the legislation. First of all, you have to love the acronym—Credit CARD. Unfortunately, that is often the most thought that goes into legislation written these days.

While the nation is still reeling from the effects of the Great Recession, much of the blame for our economic woes are now being laid at the feet of the banking industry. “We bailed out the fat-cat banks and now they are not loaning money, thus the economy is not growing,” we hear some say. Never mind the fact that it was federal government mortgage policies that required banks to loosen the credit requirements for home loans and that is what led to the sub-prime mortgage defaults that started the Great Recession. There can be no doubt that bankers share the responsibility for coming up with products like “liar loans” and Wall Street packaged up these bad loans and sold security interest in them to consumers thirsting for a higher rate of return. Everyone can share a little blame for the collapse, but the federal policy was the root of the problem.

But, how do we reconcile the desire to have banks loan more money on the one hand with more restrictive regulation of the banking industry on the other hand. And is more readily available credit really good for the economy? Should the American consumers borrow our way out of the recession like the federal government tried and failed to do with the stimulus bill? Was it all the fault of credit card companies that consumer credit card debt in America went from $69 billion in 1986 to $1.8 trillion in 2006?

It is irrefutable that some credit card companies charged interest rates that were too high and they lived off consumers who spent money liberally, but paid it back with the Minimum Payment. Some of those credit card companies created their own delinquency problems by adding excessive late charges and penalties on to balances that caused the borrower to spiral into default. But, it is not as though somebody held a gun to the consumer’s head and made them buy that flat-screen television and all the other luxury items that put them in debt up to their eyeballs.

I worked at a bank back in the 1980’s when credit companies had liberal credit policies and were mailing pre-approved credit cards to college students. But, it did not take a new law to correct the problem. It was the market system that led to a correction. Credit card losses and bankruptcies are bad for business and the appropriate response of credit card companies was to tighten credit requirements and not be so liberal in their issuance of credit cards. Obviously, memories are short term and the credit card companies thought the economy would just continue to grow us out of our excess spending habits and now the chicken has come home to roost once again. But, instead of allowing a market correction to take place, Washington has come to the rescue with a new set of onerous regulations that will increase the cost of credit cards.

But since credit card standards are tightening up again, guess who will be paying for the new credit card regulatory compliance? That’s right, those of us who did not rack up tens of thousands of dollars in debt, those of us who pay our bills on time, those of us who exercised fiscal responsibility in our personal finances, we will be the ones paying for this new regulation. Many of you diligently guard your credit rating. You take responsibility and pay back what you borrow from others, including the banks. And because of your responsible actions and because you practice the principle of buyer beware, you most likely had a credit card with a low interest rate and no annual fee. You most likely use your credit out of convenience only and pay the balance in full each month. Good for you if you do.

But, now, we are inundated with television and radio ads that advise us all that we have a right to make the credit card companies charge off up to one half of our credit card debt. However, that “right” only applies to those who owe more than $10,000 and to those who are delinquent on their payments. It is an upside down and crazy world that rewards bad behavior by punishing those who acted responsibly. “Buyer beware” has become “What me worry?” And “There is no such thing as a free lunch” has been embellished with “unless you eat at fine restaurants and stiff the credit company when they send you the bill.” Perhaps we should move from “Caveat emptor” to “Electoris emptor.” November is coming.