Economic misconceptions I am tired of hearing

Copyright 2011 by John T. Reed

China owns us. They own our debt and all that.

China is the owner of $1.1 T of U.S. debt (as of January 2011). The total U.S. debt is $14.29 T (April 2011). The percentage owned by China is therefore $1.1 T ÷ $14.29 T = 7.7%.

Is that the most of any country?

No. The U.S. owns about $10 T of the total U.S. debt—nine times as much as the Chinese own. Does it not matter because we “owe it to ourselves?”

That would be one of the most idiotic statements ever made about finance. The federal government owes that money to buyers  of U.S. bonds, mostly banks, insurance companies, college and university endowments, and the savings of individuals from school kids to seniors who rely totally on those bonds for their income and necessities of life. Many money managers are required by law to only invest in U.S. government bonds.

Can China push us around because we owe them a trillion dollars?

It’s a two-way street. We are one of the most important customers for their manufactured goods and our businesspeople invest in their country and modernize it.

Will China soon own a much larger percentage of our debt? I doubt it. They seem to be on the verge of their own financial crisis. Their still-continuing one-child policy has caused them to have 250,000,000 fewer people and 40 million too few females. The female problem comes from the fact that 40 million Chinese married couples preferred that their only child be a boy to the point where they aborted female fetuses or murdered female infants.

That has made their population disproportionately old and prevented 40 million men from finding wives. Those may be just cold statistics to you, but they are both very serious problems which don’t need any other problems like a financial crisis added on top of them.

Does China seek more U.S. debt? I don’t think so. Quite the contrary. They seem very unhappy and concerned about it. They should be. We cannot pay it back. They have lately been buying gold and other commodities all over the world to avoid buying more U.S. bonds. They have talked about more use of Special Drawing Rights. They want a new world reserve currency but cannot figure out how to create it. They would rather put their money elsewhere but they are having trouble finding a better alternative. So acquiring more U.S. debt appears to be the opposite of their goal.

So quit worrying about more China purchases of U.S. bonds. If you insist on worrying, worry about them selling those bonds, which would likely cause U.S. inflation. Indeed, the Chinese are reluctant to start selling them because that would reduce the value of the ones they had not yet sold.

Woe is us. We don’t make things any more. Our manufacturing has moved overseas.

Bullshit! It is true that much manufacturing has moved from the U.S. to other countries. Most people say that is because of low wages in foreign countries. It is partly that, but also the extra costs imposed on American businesses by our environmental laws, labor laws, litigious society, unions, anti-business laws and regulation, and real estate prices.

To an extent, our manufacturing did not move overseas. It moved out of Northeastern and Midwestern anti-business, unionized states to Southern, pro-business, non-union states.

In terms of the dollar value of manufactured goods, the country that produces the most manufactured goods by far is the United States. Japan is second. China is a distant third. (UNIDO report March 29, 2011)

Productivity is the most important statistic

The U.S. is the second most productive country after Luxembourg. That is, we are the 2nd best at producing income per person. That stems from a variety of factors like use of machines and computers, work ethic, education of work force, use of free market incentives, and so on.

This fact results in a “spoons” mistake often being made about U.S. manufacturing. Nobel-Prize-Winning economist Milton Friedman once watched  thousands of Indians work on a consturction project in India with shovels. He asked why they were not using bull dozers and backhoes and such. “Oh, you don’t understand,” he was told. “This is a jobs program. By using shovels, we provide more jobs than we would with powered equipment.”

“In that case,” Friedman said, “they should use spoons.”

Many jobs have left the U.S., but we are still number one in manufacturing. How so? We make more with the latest greatest equipment while many of those cheap labor foreign countries are, essentially, using spoons to do things we do more efficiently with far fewer workers.

The goal is not number of jobs. All of America could be put to work overnight if we switched to spoons, but most of the companies using them would then go bankrupt because they would be too inefficient. The correct goal is quality of life. We do more with less which raises our standard of living.

We may not be number one in raw number of manufacturing jobs. China probably is. They’d better be. They have a billion people who need a job. But we don’t want to be number one in raw number of manufacturing jobs. What we want is to be number one in the value of the manufactured products we produce and number one in productivity (GDP per person).

Our best way to do much better at those would be my miracle jobs and miracle growth programs. In short, get government out of the way, in which case our productivity and quality of life will rise dramatically farther above the rest of the world—including China.

Since productivity is GDP per person, and government workers contribute zilch to GDP, you can see how lowering our number of government jobs and anti-business regulations would explode upward our productivity and quality of life.

John T. Reed

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