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Getting The Economic Fundamentals Right
By Terrell E. Arnold
"The basic rules of economics", observed the British Economist Alfred Marshall (1842-1924), "are the common property of sensible people". That maxim seems well borne out in the common fact that the average citizen does a better job of balancing his checkbook than major government officials do with national accounts. If this writer may be permitted a try at equal economic sense, the health of any national economy depends on the effective balance of its output and employment with its needs. After better than fifty years of work on economic subjects, especially in developing countries, it is becoming increasingly obvious to me that American official economic leadership did not get this memo.
Avid advocates and practitioners of the free market system will assert, sternly, that I have lost it. But I am sorry to say that they are simply lost in the technical niceties of a failing economic strategy.
It is vital to get the economic fundamentals right. The United States is in deep economic trouble. The symptoms are obvious: We have a Federal debt that is in excess of $13 trillion. That is approaching 90% of the US Gross Domestic Product. Alongside that public debt, private debt in the US runs the total, that is, national debt up to somewhere between $55 and 60 trillion, close to 90% of the world GDP in 2010. That might be considered some financial achievement for a mere 4.5% of the world's people, but it is presently a very deep economic hole.
The remedies, albeit not popular in free market circles, are economic commonplaces. The economic elites, comfortable in the lavish flows of their personal riches, are marching off briskly in the wrong direction, because the economic road they are following is a highway to disaster for the democratic system that we hope to keep.
You might ask: Just what is the point of this rant? The basic point is that the United States economy is going downhill. Some sectors are doing quite well, but they simply are not productive enough to overcome the weaknesses or limitations of others. The net equation is: There is a growing market for jobs that is pitted against a declining market for job opportunities. The crisis-not admitted by officialdom-is simply that there are more people in need of goods and services than there are jobs to provide the income to pay for them. The problem is a linear product of free market economics, and the solution requires more than one violation of so-called free market rules.
Start with the notion-which seems lost somewhere-that the principal purpose of national economic policy is to serve the interests of the American people. Those interests are not an abstraction; they are a moving average combination of life styles, plans and expectations, incomes, expenditures, and savings.
Policies that serve some of the people all the time do not meet this requirement. That is a policy system that favors a rich minority over an increasingly impoverished majority is not valid economic policy for a democracy.
The worst feature of this situation is that our leadership has run the system in a fashion that is designed to hide the truth from most people. That actually has worked because borrowing money, especially from foreigners, to maintain the pattern of public expenditures, including sustaining social programs and the military, at least on the surface, has protected the people from the growing stresses in the national economy. Americans were simply not forced to face the fact that they could maintain their lifestyle only by going into debt, and since many people joined in that game with debt building enthusiasm, the problem of a Federal system that was living well beyond its means appears not to have been as attention getting as it deserved to be.
Let's look at some numbers. In 2010 the estimated labor force of the United States was roughly 160 million people, slightly more than half of the population. However, almost ten percent of that labor force was actively looking for work. That doesn't sound very serious especially when you consider that somewhere in the range of four to five percent joblessness is commonly considered functional full employment. Another however, some analysts indicate that at least ten percent more jobless people have stopped looking for work, are not actively in the job-seeking market, and under US rules they do not get counted in the official unemployment statistics. That means 20% or more of the American workers (more than 30 million people) are not working. Basically, one of every five members of the American labor force does not have a job.
Here is the tragic flaw in the free market economic model: At least as many jobs have gone overseas through outsourcing as are now missing from the American labor market. The free market system has served corporate production interests and needs, as well as corporate income models, shareholder interests, and let's face it, the buying habits of the American people, but it has done all of this by exporting jobs.
The problem is that the free market system is incomplete. The theoretical model is that all elements of economic activity operate in a friction free environment. Inside that model, capital, labor, technology, flows of materials and finished goods, and markets are all parts of an open system within which imbalances are temporary and largely self-corrective, because in the free interplay of supply and demand factor distortions of any kind work themselves off.
But look at the reality. American demand for goods grew with the growth of income and employment; that was prosperity. But once the jobs started moving overseas through outsourcing the balance was disrupted. The country ended up with a significant level of structural unemployment; that means the loss of jobs for which alternative employments were not readily available. Thus the country had more people demanding goods and services than it had income and employment to pay for them. Imports grew, and the US balance of trade swung to negative, beginning almost thirty five years ago.  It has not been positive since.  Moreover, international trade frictions-tariffs, duties, product restrictions, and human immobility factors prevent the system from correcting itself in any short period. The displaced workers suffer. There is no free market fix.
Over time, say free market advocates, the system will correct itself, especially if trade barriers can be eliminated. That may indeed be true. However, governments, including our own, protect themselves and their politically sensitive interests, and the prospect for anything like rapid change is limited. Moreover, assuming fixes are possible, it will take time to deal with the altered structure of the US jobs market. In the meantime, the American middle class of which the core has been skilled labor has been slowly disappearing with the jobs that moved overseas.
Little of the analysis available on this subject deals with scarcity conditions. So far as we know, the amounts and distribution of the earth's inorganic resources were fixed in the slow evolutionary processes of creation. Human habitation only incidentally matches the distribution of natural resources, and mismatches have grown with the rising sophistication of the world's industrial output and life styles. For decades the United States has been the principal global importer of energy resources as well as an importer of non-ferrous metals. Aside from agricultural and minerals, exports have moved increasingly into high tech fields, leaving the broadly skilled labor force behind. Possibly that can be fixed in time, but the fix lags behind present economic reality.
China has now taken over from the United States as the world's major oil importer, automobile market, and importer of industrial raw materials. The odds are that India will follow suit, although the Indian socio-cultural situation is more complex than that of China, and that may be a drag on change. Competition for supplies is growing as demands on shrinking sources of major materials increase. Some of those scarcity problems may be resolved by adoption of alternative materials and strategies, but the battles are on for the world's resources as they are and are now employed.
Those conditions are part of this picture because the global pattern of availabilities is more or less fixed, but demands are proving explosive in areas that face extreme resource scarcities. Those facts, over time, will determine where the economic centers of our economic universe are resident. The United States will be a major player for the indefinite future, but it will hold its own with increasing difficulty.
How income and employment will be distributed on the planet over time will emerge chapter at a time. But some key factors will not change. Exports are unlikely to grow fast enough to correct the major disparities in employment and income for the average American worker.
The solution, at least midterm, is to sustain American workers by keeping the great majority of jobs at home. Put another way, the ratio of available goods and services in the American system has to grow in favor of domestic goods and services, meaning reliance on imports must shrink. To sustain anything like the present American lifestyle, much higher levels of domestic employment are essential.
A good piece of the problem can be met by adopting simpler lifestyles. Fortunately America's poor and less well-off families know better how to do this than the rich.  Advancing age of Americans makes that calculus more urgent, because it portends a larger long term non-working population, even if the unemployment rolls can be reduced.
The required decisions appear quite straightforward, if not necessarily simple. For starters, a certain minimum level of employment is essential to maintenance of the American lifestyles, even more modest ones. While it is essential to look for new jobs to replace those jobs lost in the interplays of world trade and business decision making, it is equally essential to assure a minimum level of unemployment. Humanly and economically we cannot afford present levels of structural unemployment, even if greater reliance on domestic output may involve costs and adjustments for some American corporations and international trade firms.  The situation requires that we keep the great majority of jobs at home.
The writer is a retired Senior Foreign Service Officer of the US Department of State whose overseas service included tours in Egypt, India, Sri Lanka, the Philippines, and Brazil, as well as diplomatic inspections of US missions in most of Sub-Sahara Africa and Asia. His immediate pre-retirement positions were as Chairman of the Department of International Studies of the National War College and as Deputy Director of the State Office of Counter Terrorism and Emergency Planning. He is a regular columnist on rense.com and he presently teaches foreign affairs courses in the LIFE program of the University of Wisconsin Stevens Point. He will welcome comment at wecanstopit@charter.net
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