The Big-Picture Economy, Part 1: Labor, Imports and the Dollar
September 23, 2013
It is impossible for the U.S. to maintain the reserve currency and run trade surpluses.
Many well-meaning commentators look back on the era of strong private-sector unions and robust U.S. trade surpluses with longing. The Progressive consensus (articulated by Robert Reich, among others) is that unions gave the working and middle classes bargaining power that has been lost in the decline of unions.
Other commentators look back with similar nostalgia on the large trade surpluses (i.e. current account surplus) of the same era--the 1950s and 1960s.
The two trends are connected. Unions had bargaining power because the corporations on the other side of the table were generally cartels (autos, steel, etc.) that were largely domestic, meaning that they were captive to domestic markets and politics.
All these conditions have changed. Present-day U.S. corporations are global, not domestic; up to 75% of their sales and/or profits are generated in overseas markets, and a similar percentage of their workforces are also overseas, not just for cost reasons but to stay close to the markets generating their profits.
Free-trade agreements restrict attempts to protect domestic markets from overseas competition, and as a result domestic unions have essentially zero bargaining power with either nominally American firms or their global competitors in most markets. The only sectors open to union bargaining power are domestic monopolies or cartels with no overseas competition, i.e. the government, which is why the union movement is now dominated by public unions.
The trade surpluses vanished for two reasons: global competition and to protect the dollar as the world's reserve currency. This is a difficult issue to grasp, so let's do it in parts:
1. When the global exporting nations recovered after World War II, their costs of labor and production were cheaper than American industry, which was hobbled by the strong dollar. For example, $1 bought 250 yen as recently as the early 1970s. Today, it barely buys 100 yen.
2. As a result, cheap imports took market share from domestic producers (believe it or not, BMWs were once relatively cheap), and the U.S. trade balance went negative, i.e. the U.S. ran trade deficits. To settle the deficits, the U.S. had to ship gold to the creditor nations.
3. As the trade deficits expanded, America's gold holdings shrank. The writing was on the wall: continued deficits would eventually shrink the U.S. gold holdings to zero, at which point deficits would be impossible to sustain.
4. As a result, President Nixon closed the gold window and the U.S. dollar floated in a market of supply and demand.
He is correct BTW....
Read the entire piece here: