Sunday, December 09, 2012

Another Economic Tidbit

I've been reading Crashproof 2.0 (Peter Schiff) and I came across another little section that struck me about the way our economy has changed over the last several decades. The section starts on page 239.

Recent Historical Perspective

Remember when it seemed like just about everything worth buying was "made in America"? Sure, certain European imports were synonymous with high luxury, things like Hermes silks and Gucci leather goods. If something was made in Asia, though, the problem was getting it home before it fell apart. Generally, speaking, American-made meant quality, while imported goods were suspect.

An interesting bit of trivia from the 1950s reveals what post-war Japan, in the early stages of its industrialization, was up against in its effort to compete with America's reputation for quality. Demonstrating inspiration and determination that we probably should have paid more attention to at the time, the Japanese actually gave one of their industrial cities the name Usa. Now they could honestly label products manufactured there "MADE IN USA." It's a flattering and amusing story, but it is also a serious comment on how hard Asian exporters had to work to make their products acceptable in American markets.

Not only did America have a reputation for quality, but it was known for low prices as well. European imports were perceived as high-priced. The work imported was almost a synonym for expensive. Being able to afford imported products was a sign of success. a status symbol. A shopper's observation that and item seemed expensive would be met with the explanation, "It's imported". Today, that would answer the question, "How come it's so cheap?"

So while at one time America flooded the world with low-cost, highquality goods, today it is a high-cost producer with a reputation for poor quality. What's significant, though, is that when america was the low-cost producer, it also had the highest wage rates in the world.

It is a common misconception that low wages are the main factor influencing prices. The reality is that low capital costs, and the absence of taxation and regulation, are far more important. When Americans saved a lot and we had sound money, real interest rates were naturally very low. That meant lower capital costs, which allowed great worker productivity. With very low taxes and minimal regulation, American manufacturers could pay the world's highest wages while they produced the world's lowest-priced goods.

Today, the high-quality, low-cost producers are all in Asia. Some countries like China have wage scales lower than those in the United States, while others, such as Japan, pay higher wages. However, the real difference is that costs of capital are lower because of higher savings rates, lower taxes, and fewer regulations. It sounds surprising, but in "communist China" entrepreneurs have more freedom than they do in America. It is far easier to go into business there than here.

Think about all the rules and regulations American businesses have to deal with. How can we compete with nations that don't impose those excessive burdens? Does anyone think that the Unites States could ever have become a great power with the rules, regulations, and taxation that exist today? Could we really have actually settled the West if wagon trains had to meet onerous government safety standards and if employers had to deal with all the regulation that are in effect today, had to withhold taxes, and had to keep track of their expenses to pay their own income taxes as well?