Donald Trump's tariffs are intended to promote more manufacturing in America. Here are some thoughts about the economics of manufacturing.
Pay raises are actually the cause of much inflation, unless there is a corresponding increase in production. The total value of goods and services that an economy produces is equal to the currency in circulation. So if we increase the amount of money to be spent, without a corresponding increase in production, then the relative value of the currency must decrease.
Inflation can be caused by other factors. The economy runs on fuel. When fuel gets expensive it makes everything else expensive. The growth of a city causes inflation because it makes land more scarce, and thus expensive, and this affects most other costs.
The major cause of inflation today is actually the demographic imbalance. The Baby Boom generation is retiring by the millions. Never before has there been so many old people, relative to young people, and there are not enough young workers to take care of them. So the inflation is caused by a significant portion of the population being consumers of care, rather than contributing productive work.
Anyone who was around in the 1970s can tell you that worker strikes and inflation seem to go together. How much of a coincidence can it be that inflation and the number of people working in manufacturing both peaked at right around the same time, in 1979? Manufacturing was heavily unionized and prone to striking for higher wages. Millions of unionized and well-paid factory workers were getting paid more than their labor was actually worth, according to the Law of Supply and Demand, and the economy adjusted by way of inflation.
During my childhood and youth seeing striking workers on the picket line was a regular occurrence. Unions used to be powerful. My first job where I got a paycheck was at a grocery store. It was unionized. If the management fired someone and the union wanted them back, they would get them back. The turning point against unions in America was Ronald Reagan's firing of striking air traffic controllers in 1981.
Does anyone remember Britain's strike-inflation spiral of the late 1970s? The winter of 1978-79 is known as the "Winter of Discontent". Workers in one industry would successfully go on strike for higher wages, and that would only encourage workers in other industries to do the same. The resulting inflation was stopped only by Margaret Thatcher in Britain, followed by Ronald Reagan in America, purposely inducing a nasty recession because that was the only way to stop the inflation.
Recessions are not always entirely a bad thing. First, recessions act as a correction to what was wrong with the economy to begin with. Second, recessions eliminate jobs that don't come back but it is jobs that are not really the needed anyway. Does anyone remember when there were people who bagged your groceries and pumped your gas for you?
Pay raises, to keep up with inflation, and cost of living adjustments form a never-ending spiral. The raises and upward adjustments are actually what causes the inflation that they are intended to compensate for.
The economy is actually working against us, forcing us to "swim against the current" to keep up. If a company is selling a product or service, and it develops so that the product or service is no longer needed, or if it develops so that your job is no longer needed, it is considered as making progress.
But yet if workers are not paid enough the consequences can be even worse. A century ago was the "Roaring Twenties", a time of great prosperity. The excess industrial capacity, left over from the First World War, was turning out a fantastic amount of consumer goods, from cars to radios.
The good times were not to last. Industries were naturally trying to maximize profits by selling products for as much as possible while paying their workers as little as possible. The trouble is that the economy was relying on the workers to buy the goods that they were producing, and they weren't earning enough money. Goods were just piling up in warehouses. Factories began cutting back on production, meaning that workers had even less money, and it spiralled into the Crash of 1929.
The crash was devastating. It led to what is known as the Great Depression. Only a few intellectuals in the west even knew what Communism was. But this crash of Capitalism was what made Communism into a major world economic system, as an alternative to Capitalism. Germany, the Weimar Republic, was devastated by the crash. A new political party had the idea of absorbing unemployment by drastically expanding the armed forces and getting factories back to full production making military equipment for them. The party was known as the Nazis and the rest is history.
A very moderate amount of inflation is generally considered as desirable. Most governments aim for about 2% annual inflation. This is because it provides a cushion against deflation, which is even worse than inflation, because, if prices are dropping there is no incentive to make anything because by the time it is sold it may sell for less than what it cost to make it.
The reason we have such difficulty with reaching the right balance of what to pay workers is complexity. Our economy is complex, in fact it is as complex as we are. This makes it difficult for anyone to see the "big picture" of the economy. Every economic transaction involves a buyer and a seller, meaning that the buyer and seller are of equal importance. But it is much easier to see either the right, favoring the seller, or the left, favoring the buyer, than to see the big picture.
If a shoe store emphasized that the left shoe was more important than the right shoe, but another store down the street advertised that the right shoe was more important, we would consider it as nonsensical. But shoes are simple and we can see that both shoes are of equal importance. The economy is not so simple and it is much easier for each person to see either the right or left, rather than the big picture.
Plainly and simply, workers must be paid enough to be able to buy the goods and services that they are producing. If they are not paid enough it will result in recession and possibly an economic crash. Notice that America's three market crashes in the last century, in 1929, 1987 and, 2008 all came near the end of two conservative Republican presidential administrations. But if workers, as a whole, are paid too much it will just result in inflation.
We tend to zig-zag instead of having the economy proceed in a straight line. We go too far left, and then compensate by moving to the right, except that we go too far to the right, and so on.
Religion is also part of it. Humans are designed to believe in something and if we don't believe in God we will just believe in something else. How many people have you known whose nation or political ideology is really their "religion"? This causes us to take an economic strategy, that might have been good advice at one time, and cement it into dogma.
I basically support what unions are about but yet my feelings about them are mixed. Since unions may be coming back why don't we review the mistakes that they made the last time around.
The first mistake was unrealistically high wages. This is what caused the rampant inflation during the 1970s. Millions of well-paid unionized industrial workers were getting paid more than their labor was really worth, according to the Law of Supply and Demand. The economy adjusted by way of inflation. How much of a coincidence can it be that inflation and the number of people working in manufacturing both peaked at right around the same time, in 1979.
The second mistake was just being ridiculous. I once worked in a unionized factory where everyone had a specific job description. A worker was not allowed to do another worker's job. One day some bolts had to be taken out of a machine. Any of us could have gotten a wrench and removed the bolts. But it was the job of a specific worker and we had to wait for that worker to get back from lunch. It didn't make sense.
The third mistake was organized crime. Unions became a haven for organized crime. How many construction unions were there where the union assigns work, and the union boss is the dictator, and if anyone doesn't do what the union boss says then they don't get work?
America's southern states are traditionally less unionized than the north. But that is because of the power of names. The Union was the enemy during the Civil War. But a "union" and a "confederacy" actually means the same thing. A union would be better called a confederacy.
Geopolitics is a factor in unions in western countries. Back in the old days the western countries generally had to lean leftward, which favored unions, because of the global ideological competition from Communism. It is no coincidence that the wealth gap in America, the difference between rich and poor, was at it's narrowest in 1973, at the height of the Cold War. The presence of the Soviet Union is actually the best thing that ever happened to unions in the west. But it is no longer there and unions shouldn't expect to have the power that they once did.
A major factor in the return of unions is simple demographics. Baby Boomers are retiring by the millions and there is not enough young workers to take their places. It is why there is inflation, these millions of retirees have to be taken care of but are no longer doing productive work. Another reason for inflation is certainly that governments have an interest in making internal combustion driving expensive, in order to push people toward electric vehicles.
The outside world is much more developed, relative to the west, than it used to be. If workers keep going on strike for higher wages, it won't get them what they want it will just get the industry to relocate to where they don't have to deal with unions. But one thing that industrial workers in the west do have going for them nowadays is the high cost of shipping. The advantage of making things where it costs less to make them is negated by the fact that it costs more to ship them.
Maybe some foreign competition isn't always a bad thing. What would happen if domestic automakers, for one example, didn't have any foreign competition?
During my youth, postponing or changing plans because of car breakdowns was a regular occurrence. It was much more common to see cars broken down by the side of the road than it is now. But then cars suddenly seemed to get much more reliable, and breakdowns are now much less common. Cars today are not so much better, just last longer and are more reliable.
How can this possibly be?
Automakers want people to buy new cars. Buyers want their cars to last as long as possible. The trouble is that if automakers make cars that last a long time then people will buy fewer new cars. If automakers made cars that last forever then they would be putting themselves out of business. The idea that they purposely make cars that will not last forever is not new, it is called "planned obsolescence".
But then came the emergence of the Japanese auto industry. Japanese cars were lasting considerably longer, and breaking down less often, than domestic models. Could it be that "planned obsolescence" didn't translate into Japanese and domestic automakers had to drop that policy to stay in business?
How else could cars suddenly get so much more reliable?
That can only mean that, not only were automakers purposely making cars less reliable than they could be but also, at some level, there must have been collusion among automakers that were supposed to be competing with each other to bring about better cars.
Maybe some outside competition is necessary to keep manufacturers on the level and making the best possible products.
