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THE JETHRO PROJECT
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- How to Fix the Economy
- By Byron A. Ellis – December 08, 2009
Unemployment has often plagued the American economy and, in fact most, of the world’s economy. In 1945 David Francis asked if full employment was possible. He noted “if it was possible for all to have jobs in wartime, why cannot the same be done in peace? In contemporary America, however, it appears that due to lack of administrative capacity it is not possible for all to have jobs in war or peacetime.
Jobs depend on the demand for goods or services. For instance, if there were no demand for meat, the services of the butcher would not be needed. According to economic theory, demand depends on income and prices. Furthermore, the level of demand increases with high income and low prices. Income accrues from technological advances and efficient production that lead to comparative advantages and positive trade balances with the rest of the world.
When a country’s trade balance is consistently negative, there is a drain on income. Figure 1 below indicates that for the United States (U.S.) net exports, which is exports less imports, has been consistently negative as far back as 1993. This trend of excess imports is a clear indication of inherent structural problems within the U.S. economy that fiscal and monetary stimulus alone is unlikely to solve.
Figure 1 – Net Exports
Table 1 lists the top 10 trading countries with which the US has a trade deficit. The largest deficit is with China from which the US imports deflation. Most of the other countries are oil-exporting nations.
Table 1 – US Trade Deficit: Top 10 Countries
Country Name |
|
|
|
-22,101.18 |
-165,801.04 |
|
|
-4,559.67 |
-32,617.42 |
|
|
-4,129.90 |
-30,304.30 |
|
|
-2,117.85 |
-19,027.69 |
|
|
-1,966.36 |
-13,304.10 |
|
|
-1,933.10 |
-9,840.67 |
|
|
-1,668.01 |
-15,870.37 |
|
|
-1,504.21 |
-13,757.92 |
|
|
-1,328.85 |
-6,702.57 |
|
|
-1,275.62 |
-7,938.30 |
The importation of deflation is a two edged sword. On the one hand, it lowers purchase prices for consumers; and, on the other hand, it tends to eliminate local manufacturing capacity. Thus, countries that import excessive deflation are unable to globally compete and will continue to experience high levels of trade deficits and unemployment.
It is clear, therefore, that the US needs more than fiscal and monetary policies to achieve robust economic expansion, and hence high level of employment.
The US needs what professor Farazmand calls administrative capacity in government, educational and the private sector. If this capacity does not come soon, the US economy and national security will slowly degrade.
What must the US do?
The US must strategically work to reduce the trade imbalance. However, begging China, or any other country, for export restrains will not work.
Professor Jude Howell argues that developmental states, such as China, Singapore, Hong Kong, Taiwan, and South Korea, have political and policy elites committed to economic growth and transformation. These elites have the power, authority and legitimacy to promote developmental agendas for the benefit of their citizens. Howell also notes that the elite in developmental states are competent in the sphere of economics, technology and managerial capacity.
Developmental states, at the administrative level, are constantly assessing and exploiting comparative advantages in global markets. Additionally, they are continuously engaged in building relationships with other nations, seeking markets for their products and for raw materials. China’s strong outreach to Africa and Latin America is typical example.
Unlike the U.S., developmental states are less ideological. In the U.S. the adversarial political system leads to the maximization of political ideology rather than economical gains. The health care is a typical example.
Like developmental states, the US must reassess how to effectively use its resources to gain comparative advantages in global markets. For instance, does an aggressive world military stance lead to advantages in global markets or merely reallocates scare resources to non-productive activities. It is estimated that the cost per soldier per year in Afghanistan war is one million dollars.
Likewise, the cost and alternatives to imprisonment should be seriously evaluated. The U.S. Courts reported that in fiscal year 2006, it cost up to $24,443 to keep a federal inmate incarcerated for 12 months; the cost of a college education at most state institutions is far less than the cost of incarceration. The U.S. has the highest documented incarceration rate in the world, over 2 million behind bars. Idling potential factors of production behind bars at an approximate cost of $25.0K per inmate does not seems to be an effective policy, particularly for petty crimes.
It is imperative to review the U.S. internal strategy for capacity-building as well as current costly foreign and domestic projects that do not produce beneficial outcomes. War expenditures could be reallocated to research and development and incarceration maintenance could be used for educating and training U.S citizens.
Similar to developmental states the U.S. must place the interest of its citizens first, above the interest of global corporations. It must create incentives for a renewal of the American entrepreneurship at all organizational and regional levels from Appalachia to the Central Cities. The U.S. must also compete globally in labor-intensive entry-level industries. Entry-level industries could help former inmates, under supervision, readjust to society. It could also provide employment ladder for many unemployed Americans.
Additionally, there should be a greater effort in sponsoring out-of-the-box energy enhancing technologies to reduce energy costs. In the public administration arena, government agencies should use the balanced scorecard performance framework to aligned business activities with the vision and strategy of economic growth and full employment.
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