Who knows what the ratio of workers to bosses is in the country, but let’s guess it might be around 50:1. If this number is close, then it becomes easy to understand why a small group of the electorate complains about a faceless, nameless, harassing bureaucracy through thousands of “small” cases dispersed throughout the land, while much of the electorate just isn’t moved enough to demand that their elected officials do something about it.This is a cancer eating away at our freedom and peace and happiness, and this also works to degrade our economic growth and progress when attention is diverted from inventing and developing new things.
My case was a “small” case, easily forgotten, but abuses abound all around us, all the time. To me, the most famous case was that of pilot extraordinaire, Bob Hoover. A WWII fighter pilot shot down over the Med, incarcerated by the Germans, on his third and successful escape, he stole a German plane and flew to freedom. He was back-up to Chuck Yeager flying the chase plane when Yeager broke the sound barrier. Post-war, he worked in the industry developing the latest fighter planes, and later worked the airshow circuit flying a routine that enthralled the public. While doing his show in Oklahoma City in 1992, two FAA personnel observed him, and two months later filed a report with the FAA that Hoover looked like he had a “cognitive deficit.” The FAA claimed an emergency and revoked his pilot license. Two and a half years later, after huge outpourings of disbelief and anger from hundreds of thousands of pilots across the country, and no matter that Hoover had performed 33 airshows successfully overseas; after Congress had demanded that the FAA change its order, a courageous FAA Administrator returned him to flying status. This case prompted various pilot organizations to fight for legislation requiring due process in such matters, and legislation passed in 2000 set up the rules that government must now follow on enforcement matters with pilot due process procedures in place. Today, it is known as the Pilot’s Bill of Rights.
Kevin McCarthy, the House majority leader in early 2017, said that the Federal Register hit 97,110 pages in President Obama’s final year. The Competitive Enterprise Institute estimates that federal regulations cost the American people $1.89 trillion every year, that’s more than 10% of the GDP, or roughly $15,000 per American household. The Obama administration also burdened the public with 583 million hours of compliance over the past eight years. That averages to nearly five hours of paperwork for every full-time employee in the country. This from The Wall Street Journal’s “How the House Will Roll Back Washington’s Rule by Bureaucrat” by Kevin McCarthy, 1-25-17.
To summarize, government regulations eat away at economic process and freedom, and need to be periodically reviewed, and citizens’ due process rights must be protected. Whether they result from vaguely written Congressional laws to be defined by administrators, or whether Congress meddled in something they had no business meddling in, becomes a mute point. Regulations are a potential danger to all of us. To most thoughtful, caring, and intelligent workers caring out the duties of government, and not wishing to tar you with a broad brush because of an overzealous few, I must say that the more centralized planning becomes necessary for modern government, we should all be aware of the dangers that increase the more we adopt Marxist principals of state-control of the economy.
11 - BARRIERS TO FREE ECONOMIC GROWTH
3. TARIFFS AND DECREASED FREE TRADE
I start this chapter first with my conclusion about international trade: Free trade across international borders benefits everyone, period, and end of discussion.
The rest of this chapter reviews many nuances brought to light concerning international trade. I’ll try to cover most of these nuances. But first, let me discuss China. The China situation is an almost unbelievably huge thing that when discussing international trade, has to be broken out of the usual trade discussion and examined in great detail, and studied in depth for what it means for the U.S.
Therefore, I offer my analysis of China looking at where I think they stand regarding trade with the U.S. and what this means to them and to us. I believe it is necessary to understand their history to gain insight as to how they see the world through their eyes. I give you my feel for the opportunities and the problems China has, as well as my assessment of their economic progress.
Let’s start with our negative trade balance with China. China is a country with 1.4 billion people that wishes to advance economically, and the only way that can happen is through wealth created from beneficial trade with the rest of the world. The U.S. has become its largest trading partner, and a huge amount of their profit has gone to buy our debt, which we have incurred in huge amounts from spending money we don’t have, thanks to our spendthrift politicians and enabling Congress. The result being that our consumers benefited from the cheap goods from China available to buy at very low prices. And they made a lot of money allowing them to make huge economic advances.
On the negative side, by the end of the Obama years, about 2/3rds of our factory jobs had been lost, with either permanent closures, or from moving overseas. China was only one of the countries running a negative trade balance with us. Our trade balance had been running negative for a period of years, and not only because of trade with China, but a whole host of countries that were importing more into the U.S. than we were exporting out. Politicians, pundits, columnists, TV commentators, and others have various views on the subject, pro and con, and these views ran over all the place. Some wanted high tariffs on imports, others arguing for free trade across our border, and on it went.
Following WWII, essentially all industrialized countries except for the United States, had been devastated. The U.S. hadn’t had any destruction, and we had built up a huge manufacturing capability for the war effort, and from 1946 on we were in a position to meet much of needs for the rest of the destroyed world. The U.S. made and exported goods everywhere, and for many years ran a positive trade balance. Some countries struggling to advance their economies might have negotiated trade agreements with the U.S. favorable to them, often by restricting our imports to them, even while many times we didn’t bother to restrict any imports from them into our country. For years we steadily increased our wealth, and these various countries advance economically, as well.
Before the end of the war we, Canada, Western Europe, Australia, and Japan, and others convened a convention at Bretton Woods, New Hampshire, to make the rules for international trade. The goals of this meeting were to ensure a foreign exchange rate system, prevent competitive devaluations, and promote economic growth. Under this agreement, currencies were pegged to the price of gold, and the U.S. dollar was seen as a reserve currency linked to the price of gold. From this followed the International Monetary Fund (IMF) and they made currencies convertible for trade and other current account transactions. After twenty years though the dollar became very strong, leading to the collapse of the agreement.
Today, legacy trade agreements favoring many countries in Europe, as well as Japan, and add on countries like South Korea, started running large negative trade balances with the U.S. Our politicians overlooked this for years until the negative balance started to worry some. This might have been addressed through negotiations but was mainly ignored up to the Trump presidency.
Meantime, trade with China after the Nixon/Kissinger visit in 1973 that began the process of opening up China was hugely successful and trade boomed. But while trade agreements made with countries prior to 1973 basically included countries which were capitalistic and generally like us, could enter trade agreements where we operated with similar rules, with China everything was different; China was communistic, and the state controlled everything and owned the banks, the real estate, and had a monopoly on making all the laws and rules.
While it is the duty of every country to seek advantages favorable to their country, in the past we were all of the same mindset. On the other hand, China had its own rules favoring of course, them, and over time they introduced all kinds of illegal things that benefited their country in trade and disfavored t
he western countries. When I say illegal, I’m talking about stealing proprietary manufacturers’ secrets by spying and at times breaking in to their computer systems and stealing secrets, and the like. Other times they would buy a foreign product, reverse engineer it, and then sell their copy at a lower price all over the world. Then they vastly increased their steel and aluminum product, subsidized by their government, and sold it worldwide at a low price gaining huge market shares everywhere.
While presidents up to Trump might complain about trade issues, it was just easier to talk about it but do nothing. Then came President Trump. He said the international trade situation had to change. Like the bull in the china shop, his negotiating style appears to be a lot of yelling wanting everything, then settling down and negotiating for some of the things. So, as I write this, there is no telling how these negotiations will go.
Before I go further, here is the bottom line on running trade deficits, more imports enter the U.S. than we export out and this results in a flow of dollars out, then the dollars get spent by re-entering the U.S. and the foreigners buy either our debt, or our assets. For example, a country’s central bank might buy U.S. Treasury bills and bonds. Because our politicians have run up massive deficits financed by the Treasury selling bills and bonds, when foreigners buy these up, they are really financing our spendthrift ways. This may be good for us now, but remember, anyone incurring debt will eventually have to pay it back. Foreigners might also buy some of our assets. This might be our corporations, and real estate such as land, apartment complexes, shopping centers and the like. Buying our assets is akin to a farmer wanting to live a higher life style so he sells a few acres of land off. Should he keep doing this, eventually he will no longer own land and, in the future, will have to rent. At the end this chapter I borrow a piece first written be Warren Buffett explaining how, if this selling of assets ran out of control, we would eventually be selling our whole country away. So, running a negative trade balance has both good and bad aspects.
I wish to tell you about a tour through China I recently took. I was with a group of 30 or so, with a native Chinese guide. We were there 21 days and covered 6,000 miles, and virtually were all over the country, plus our guides lectured us on Chinese history, and gave us a great understanding of Chinese people today.
The United States had a huge presence in China during WWII, combating Japanese troops, and attempting to get bases from which the island of Japan could be reached by our bombers. The Japanese had been meddling and/or fighting the Chinese from around the beginning of the 1900s, and by 1935 invaded Manchuria, which is the northern part and includes Beijing. Meeting almost no resistance they continued south and took the whole of eastern China. They committed horrible atrocities. Meantime, China was in a civil war; the “nationalists” versus the communists, led by Mao Tse-Tung. Mao won in 1949, and he sealed off the country, and made several huge mistakes. The first was his vision to create a sea of people to spread all over the world. In 1949 when he took over, China’s population was 400 million. Today it’s 1.4 billion. His next big mistake was his Great Leap Forward where he thought the country could be the number one world power if China produced the most steel, so he ordered everyone to forage for steel and melt it down in their back yards, and then send it in to the central government. This resulted in deforestation of China; they lost 70% of their trees. Then there was the Korean War. At the end of WWII, Stalin conceived of the idea of world domination, which would mean fighting the United States, but to be cautious he decided to start a small war to test American resolve. This took place in Korea. To fight, he sold armaments to China and induced them to do the fighting. This was 1950. A truce in 1953 ended hostilities. Then Stalin compelled the Chinese to pay off their war debt be sending food to Russia. Meantime, Mao had established communes with small groups of farmers in each, and told them to produce as much as possible, and to gain favor, the communes soon began exaggerating their food production numbers, and now Mao thought he had an abundance of food and could easily afford to give much food away to Russia. This was another part of the Great Leap Forward, which was intended to bring their industrial base up to the worldwide standard. Unfortunately, paying Russia back with food basically gave all of China’s food away for two years, and this resulted in 50 million Chinese starving to death or committing suicide. When other top people around Mao realized his huge mistake, they tried to oust and replace him. Mao, getting paranoid and seeing enemies all around him, then took all the college-aged young out of school, and told them they no longer needed to be educated, and they were sent to the communes to learn from the peasants, and he put them in army uniforms with red arm bands (The Red Guards) and told them to kill all the intellectuals and professors, and any rich landlords and the like, and this is known as the Cultural Revolution. Another 50 million were killed.
China’s war history is terribly sad. From the 13Th century when Ghengis Khan invaded from the north and conquered China, to recent times when Russia fought from the north, and border incursions by India occurred from the northwest, and Britain from the southeast (Hong Kong), to Japan invading from the east, is it any wonder that China is very focused on building up its military?
China had a border dispute with Russia in 1969 resulting in a nine-month shooting war, and while we in the west all thought the communists had a monolithic and unified bloc of Russia and China, together set to take over the world, Henry Kissinger saw it differently. He looked at this and saw opportunity. He conceived of the idea to help split China away from Russia. This inspiration led to the historic visit in 1973 by President Nixon. Their visit led the way to the opening up of China to the outside world. Mao died in 1976, and since then, China has been on a roll, making great economic progress. First came the change to let farmers sell their excess crops for profit. Before Mao, people trying to escape would go to Shenzhen, across the bay from Hong Kong, and try to swim across the bay. As China opened up, factory owners from Hong Kong found they could build factories in Shenzhen and get labor from the farmers that were making two dollars a month, who were happy to now get paid 200 dollars a month. The sleepy fishing village of Shenzhen that once was 1,000 is now 12 million.
Before 1973 there were no high-rise buildings in China. I was shocked to see high-rises all over the place. In all the cities.But first, a little geography lesson. Beijing is the political capital in the north along the seal. Shanghai is also on the sea, is the financial capital, and is halfway down and where the Yangtze River, which divides the country north and south, empties to the sea. Hong Kong is in the south and where a lot of goods are traded. Population is crowed in the east, while the west has little population and is mountainous and forested.
All the cities are quite modern, and not that different in looks from our cities. But they are huge and numerous. Modern highways cross all over the cities, there are bullet trains (one we rode in got up to 191 MPH), and jet airliners crisscrossing all over the country. Most of the people we saw dressed just like us. But here is the real situation. Out of the 1.4 billion, about 400 million are fairly modern, and hard working at jobs not unlike us in the U.S. And the country is just a hair smaller in land size than the U.S. But unlike us, on top of these fairly modern 400 million, is another 1 billion peasants and farmers farming on one-acre plots.
China is desperate to modernize. Though they are near self-sufficient in producing their own food, to get up to modern standards and away from poverty, they have to trade. We are their main trading partner, and they need us to gain wealth and solve so many of their problems. We have benefited greatly in our trade with them gaining huge amounts of consumer goods at very low prices. And every Chinese person I met on the street were delighted to meet me, many smiling, allowing us to photograph them, especially the adorable little children. Some would offer me tea and cookies. By the time I left, I had the sense that the Chinese people loved us Americans. But not the Japanese.
But China has a huge problem. It is a communistic country with a central plan
ning and a self-perpetuating ruling government of communists, controlled from the top, with no real input from the grass roots bottom, and the government owns all real estate in China. They think they can introduce a little capitalism and then be like us, but without property rights, freedom, and rule-of-law, along with protection of everyone’s civil rights, I have trouble seeing how it might economically develop. The government owns all the banks, and there apparently is corruption all over with developers seeking favors from local politicians to get land rights to build high-rise apartment houses everywhere, and now there are 60 million unoccupied apartment units in the country. So, I have to believe they have run up huge debts, and they must be in a real estate bubble.
The good news is that the communist party today only has 80 million in it, or about 6% of the country. The bad news is that Hitler only had 7% in his Nazi party. While Hayek said, “when the allure of communism fades, it turns to Fascism,” which is where it appears Putin in Russia is headed. While no one knows how China will go, my sense is that the Chinese love us, I see a shift in Chinese policy where they see more benefit in furthering their relationship with the U.S., rather than continuing to support North Korea. Because they hate the Japanese, they have to fear the possibility that if North Korea forces hostility with the South Korea (and the U.S.), the U.S. might be tempted to give the “bomb” to Japan and South Korea, and that would scare the dickens out of China.
So, after this diversion from the international trade situation of the world, let me say that trade differences with western nations can probably be solved through negotiations. With China, they need us and we need them. Unlike Russia, which appears to becoming a nuisance and a troublemaker, I sense China has more interest in helping its people. I truly hope so, and for now, let us be optimistic about the future. Let us develop cooperative engagement on many fronts, negotiate away illegal trade practices, and let us get our house in order and end the endless run-up of debt.
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