The total Trade Deficit since 1993 is $5 Trillion. In 1992, the trade deficit was growing at a rate of $ 160,000 per minute. By 2000, that had grown to $840,00 per minute. By 2006, the daily deficit per minute reached $1.7 million. It continued to grow in 2007 and 2008.
This trade deficit is at the heart of all of our economic problems, and neither monetarism (printing money) nor Keynesianism (deficit spending) will fix our problems unless we attack the trade deficit problem. And at the root of the trade deficit is the oversupply of labor.
Market economics boils down to one relationship: supply and demand. Goods and capital are in demand, and labor is the supply. What happens when a gargantuan shock suddenly happens and doubles the amount of supply?
Most people still have not come to grips with the most fundamental reality change in the current era of globalization — the fact that the global labor force has virtually doubled in size in the last 15 years.
When India, China, and the former Soviet bloc entered the world marketplace under the banner of "Globalization" in the 1980s and 1990s, they brought with them a total of 1.47 billion workers.
This was a huge supply shock. The result was downward pressure on wages in the United States (and other developed countries):
And downward pressure on prices worldwide:
And finally, downward pressure on interest rates worldwide:
As the doubling of the global labor supply drove down wages and prices in the 1980s and 1990s, inflation-targeting Central Banks responded by lowering interest rates further and further until now when rates have gone to zero, and yet we are facing the threat of deflation. The Central Banks' problem was they were thinking in terms of national economies, not the global economy.
Interest rates represent the price of credit:
Interest is therefore the price of credit, not the price of money as it is commonly—and mistakenly—believed to be.
In other words, as governments lowered interest rates, they artificially reduced the cost of credit, leading to more borrowing and the buildup of debt:
The multi decade debt boom begins to surge in the early 1980s, at the same time as the government deficit, trade deficit, and at the same time that inflation and interest rates began to collapse. And at the same time that Asia and Latin America began to abandon socialism and import substitution.
In short, what has happened in the global economy has been a massive supply shock. This supply shock has generated an over-abundance of labor, and generated credit bubbles which led to an over-investment in capital and housing. The result? Massive glut and deflation.
We need a Global Minimum Wage in order to rebalance supply and demand. The industrialization of Western Europe, Japan and the United States could never have occured without the Labor movement and the welfare state, which allowed workers to purchase the goods that they were making.
This reminds me of a vignette I read in a book several weeks ago. It was the story of a company in the U.K. that closed shop to ship its jobs over to Asia. The workers in the U.K. and the town the plant was built in had agreed to massive concessions to the company, including tax breaks and benefits reductions. And the labor cost represented only about 10% of the cost of making the good. But the company shipped the jobs overseas anyway. A couple years later, the company's sales were plummetting because no one could afford to buy its wares. The company's stock price plunged and it was forced into bankruptcy due to low sales.
In other words, today's CEO's cannot see even as far as Henry Ford, who paid his workers $5 a day, an unheard of sum at the time. What needs to happen is that the purchasing power of the workers in developing countries, particularly exporting countries, must rise. Consumers in the U.S. can no longer be used in order to absorb the world's supply with more debt. The U.S. already has more debt than it can handle. Consumers elsewhere, in Asia, Latin America, and Eastern Europe, must pick up some slack. But they are not earning enough to do so. By setting a global minimum wage, and global labor and welfare standards, we can move in this direction.
The labor movement is still thinking nationally but the economy is global. It might resort to protectionism but this will only lead to contraction all-around as we saw in the 1930s. The real solution is to take the labor movement global. Unions are concentrated country by country and focused, rightly on their own members. But unions and their allies must also look at the big picture and the long run. We are in a global economy now, and it is in Labor's interest that there is no oversupply in cheap labor. Only by raising the standard of living of workers in developing, exporting countries, enabling these workers to be consumers as well as producers, can we restore the balance between supply and demand and end our dependence on debt.