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Globalization

Why Should We Care about Globalization?
Globalization is important because it has become the primary economic force in, well, the globe. All the governments of the free world, as well as the imprisoned world, have fully embraced a rush toward taking advantage of the apparent naiveté of the American government. In its all-out pursuit of policies implying that “the marketplace that can do no wrong”, American policy makers have opened the floodgates in the seemingly insatiable thirst for ever-lower prices in return for American jobs. They call it “free trade”. But is it? What exactly is “free trade”? Is this a good or a bad thing? Old school free trade is fine (see Free Trade on this web site). But the new and improved free trade that is spoken of today is simply a code word for labor globalization.

Fundamentals: Globalization is defined here as the process of international integration of the markets of the world. Using this definition, globalization has been occurring since trading began. What makes it different today is the rate at which it is occurring largely due to an American invention called the Internet, and the focus on labor integration, which should really be avoided if we value stable countries.

“Free Trade” Revisited
Globalization and so-called “free trade” are closely linked (see Free Trade on this web site). We can see how traditional free trade works with products, and it can make sense provided a country decides it is in their best interest to introduce foreign competition into select domestic markets. All the costs of production have been factored into the price of the product and the market is used to compete on price. From the previous Free Trade example, assume that the Costa Rican taxpayers have revolted and the subsidy is eliminated. In response, the US removes its tariff and the new market price is $75. Then Costa Rica decides to set their price at $60 because they want to take market share back from the US. The US Company was already riding at a low profit margin, so they keep their price the same. Bottom line: US bananas cost more than Costa Rica bananas and Costa Rica gains back some market share from the US company. Isn’t free trade great? Well it used to be…

Time passes and some bean counter at the US company figures out the reason why Costa Rica can afford to produce bananas at such a low price –
the cost of living in Costa Rica is much lower than the US, and therefore so are BEC wages. The US company toys with buying land in Costa Rica to compete with the Costa Rica company by effectively outsourcing their production, but they find that the net effect would not provide higher profits because they would be paid in those pesky pesos, so they abandon that approach. Besides, the Costa Rican government has the interests of their citizens in mind and doesn’t take kindly to foreigners taking away jobs on Costa Rican soil. Not so for America – ever wonder why?

Here Come The Cheaters (Again!)
Since they can’t compete on price very effectively, they come up with another plan to increase profits by reducing costs in other areas. Specifically, the employees in the Accounts Payable Department at the US company are much more expensive than their counterparts in Costa Rica (This is no surprise – Costa Rica is not a rich country. Their medium of exchange is much lower than in the USA). What if the US company could outsource their Accounts Payable Department, basically swapping out US jobs for Costa Rican jobs? The Costa Rican company could never get away with such behavior because their government looks out for their citizens. But the US company can get away with it because in America, the multinational is valued higher than the electorate.

The “New” Free Trade – Labor Globalization
Let’s analyze what just happened. Basically, the US company was able to lower costs by taking advantage of the natural disparity in the cost of living / wages between wealthy and emerging economies. Rather than the price being competed from the cost of products as has been done traditionally, they have “short-circuited” the process by “competing” earlier in the supply chain. Some might call this “clever”, others cheating. Regardless of what it is called, it has devastating consequences for America. There are two big winners (the multinational and the poorer country) and one very, very, very big loser (America).

So this is not “free trade”, it really has nothing to do with trade other than the fact that the market spans countries. Why would we trade for something we already produce - labor?
This is not trade it is really price-driven labor substitution. What’s really going on here is that the medium of exchange has been warped in favor of the multinational at the expense of the American workers and small businesses. Remember that a free market has a consistent medium of exchange. If multinationals can now “cheat the system” by taking advantage of this natural disparity in wages between nations, then we really do have a whole new ballgame – and its not going to be pretty for America. This is not a free market – it is a rigged market.

The Inevitability of Globalization
Americans are constantly battered with the myth that globalization is “inevitable”, an unavoidable natural consequence of modernization. Not quite knowing how to counter such a silly statement, our eyes glass over and we nod our heads slightly, as though we too see the wisdom in this mystical nonsense. The fact of the matter is this: multinationals and the US government is railroading policies that support labor globalization at an alarming rate. This isn’t happening “naturally” at all – it is through the concerted efforts of multinationals seeking to reduce labor costs and a government hell-bent on making it as easy as possible for them to do so. What is the vehicle for this plot? The World Trade Organization is to blame. This is an organization whereby US presidents, under the authority granted to them by congress, regularly produce international laws that threaten the very sovereignty of the United States. You are electing “public servants” who are enacting labor policies that directly harm your ability to earn a higher standard of living. Under these so-called “free tade” policies, you won’t even be able to keep your current standard of living, let alone increase it.

The Three Vanishing Tiers of US Labor
Suppose all US workers are divided into three categories as so:

Earning Category

Annual Wages
High Skill
Above $200,000
Middle Class
Up to $200,000
Minimum Wage
Up to $15,000


The first taste of labor globalization that had a dramatic impact on the economy was on the lowest tier, the Minimum Wage category. In the last quarter of the 20th century, American companies started hiring illegal aliens to perform menial labor, primarily to work in agriculture fields and to perform housekeeping work. Government turned their head and pretended this was okay since most Americans didn’t want these jobs anyway. Today the effect is that early entrants into this job market (teenagers and college entrants) can no longer find work of any kind. So this lower tier is gone. The next tier to go was the Middle Class. It used to be that Americans could get fairly well paying jobs in the trade market performing labor tasks such as construction work, painting, auto repair and landscaping. These types of jobs are no longer available, again due to the US government’s refusal to address the immigration issue by enforcing existing laws. The final category (High Skill) cannot be easily replaced, and that was the rationale for aspiring Americans to allow all of this to occur. Or can they? Turns out they can, but not without help from big business and big government (see InSourcing on this web site).

What is the common thread throughout all of these demises? Clearly the atrocious approach to immigration policy in the USA has contributed, but there is a deeper economic factor at play –
corruption at the highest levels of government.

Who’s Minding the Store?
When trading between countries, we assume each country is looking out for the best interest of the citizens of the country. But what if they’re not? What if instead they are looking out for the stockholders of a multinational? What if instead, multinationals seek to gain the best possible scenario regardless of what the best interests are for America? What if those in government we trust to be looking out for our best interests are instead pandering to multinationals in return for campaign contributions in the millions? Or perhaps for the simple reason they believe it will enhance their personal “portfolio”?

Are You Better Off Now?
We have seen free trade in action in the form of NAFTA. Has this form of so-called “free trade” made anyone “better off”? Let’s compare the affected parties:


Party

Benefits
Costs
United States
* Cheaper goods
Many fewer jobs
Mexico
* Many more jobs
* Many more Products sold
None


It is clear that when a richer country enters into a “free trade” agreement with a poorer country and they compete for labor, the richer country always loses. We can see there was a trade-off for the US in terms of cheaper goods for fewer jobs. For Mexico however, it was all pluses – there was no downside. Nothing was given up in return for the benefits they continue to receive to this day. From the perspective of the richer country, this path only goes in one direction – down. The richer country must ALWAYS LOWER THEIR STANDARD OF LIVING IN RETURN FOR CHEAPER GOODS while the poorer country benefits in every way. Now this same pattern is being repeated on a global scale with China, India and almost every other country in the world. The US has become the “Robin Hood” of the world, taking jobs from American citizens and giving them to the poorer countries of the world. I don’t recall the electorate voting on this issue… in fact, various US government departments regularly change labor policy with no input whatsoever from the American people.

How about individuals? Well
the really rich get really richer because they can cut costs, thereby increasing profits. In addition, they can feel really good about themselves because they are “helping the poor” (this explains why Bill Gates wants to import highly skilled labor to replace American jobs). The really poor foreigners benefit because they take jobs away from the rich countries. So where does that leave you and your family? The next generations? This is a question we have to ask ourselves.

Everyone wants Cheaper Prices, but at What Cost?
Ask yourself – are you better off? Even if so, is society better off? Even if so in the short run, definitely not in the long run. What about our children’s future prospects for work? So why is this allowed to happen - because someone is benefiting from the transaction? That someone is NOT the American people. That someone is the multinational.

Americans used to believe this was okay because the kind of jobs outsourced were somehow “undesirable”. But this is no longer true. Every type of job from minimum wage through highly skilled labor now has a legal and efficient means of being both exported from and imported into the USA (see
Insourcing and Outsourcing on this web site).

If Not via Globalism, How Will Poor Countries raise their standard of living?
The answer? True representative democracies like the early US (not the US of today).

A Loss of Control
Due to globalization, we have lost our means of production. When we lose the means of production, we lose quality control as well. Melamine is not milk, but many multinationals apparently believe it is. In a “free global market”, free trade is a “buyer beware” proposition. Another consequence is the loss of the capability to “bounce back”.

The Illusion of Wealth – The Asset Myth
Hey but I’m a stockholder in many multinationals! So I support lower prices and higher profits for multinationals because my 401k plan is loaded with stock from these companies. Really? So how’s that working out for you? Due to the rampant corruption and incompetence in both government and multinationals, the entire financial system of the world is bordering on complete collapse. Turns out these “profits” were a lie all along – they were only worth something based on the “Greater Fool Theory” – that someone who is a greater fool than me would someday buy my “assets”.

What About Unions?
Are unions to blame? Unions may drive up labor costs in a domestic market, but in a global labor market, they are irrelevant. It wasn't unions that drove the sweatshops of American clothing manufacturers and relatively high paying engineering jobs to foreign shores, it was much, much cheaper labor (engineers never even had unions). While it may be tempting to blame unions, the reality is that even the cheapest American wage is at least an order of magnitude higher than the nearest global competitor. You do the math. In a global labor market, American labor of all types, union or not, has a common enemy and that is cheap foreign labor.

Be careful in you calls for “free markets” - you might just get what you wish for. If you confuse support for
domestic free markets with that of global free markets you immediately price even yourself out of virtually every market in the world.

Summary
In the world run by multinationals, they are trying to get countries to sell cheap labor. This has a devastating impact on the electorate of the country buying these cheaper services. These naïve countries (e.g. the USA) are in effect sacrificing their own labor pool on the altar of lower prices. So now we pay a very large price for the “opportunity” to buy slightly cheaper products. The problems with this grand scheme are many:

1. We no longer have the
jobs necessary to buy these cheaper products
2. Any increase in consumption spending goes directly to the producing foreign nation. There is no
multiplier effect, so no “boost” is seen in the American economy
3. Dollars leave America
4. No
savings can be tucked away because no profits are realized by Americans
5. No
investment in our own economy (again because no profits are realized by Americans)
6. Since America has
lost its means of production, the private sector can no longer spend its way out of a recession

Get Ready for a Rough Ride
Since Americans are too accustomed to trusting their government to become politically active, today’s so-called “free trade” policies that involve labor result in a one-way transfer of capital from the rich countries to the poorer countries. The only possible outcome is a temporary higher standard of living for the developing nation and a MUCH lower standard of living for the developed nation.

But when the developed nation’s economy collapses because there is no longer “rich” consumers to buy the goods the poorer countries now produce, we all go down together! As a direct result,
the collapse of the World economy is eminent – it is only a matter of time. Is there hope? Only if we act as quickly as a congressman voting for a bailout.

So what are YOU going to do about it?