Here is the problem. We've lost our unique position in the world but are behaving like we haven't. Let me explain. Coming out of WWII the work ethic in this country was very high. People's expectations for their standard of living was not high, salaries were not too high but people were simply glad the war was over and they could start afresh. New companies were formed, factories switched from war production to consumer products, jobs were plentiful, all was good. America was alone in the world in terms of manufacturing, standard-of-living, and emerging wealth. Europe was no competition because they were busy rebuilding after the war. Japan was an emerging economic power but it would be a decade or two before they were noticed. Countries that we see as emerging power centers today, namely China and India, were stuck in the past or hindered by bad governments. The U.S. was alone and doing quite well.
The next couple of decades saw the emergence of technology. America was building televisions, radios, typewriters, cassette tape players, and all other forms of consumer products. Consumer purchasing drives the U.S. economy. The U.S. was supplying products to the rest of the world. We were also buying things from other countries. In 1960 we had a positive trade balance. That means more money was flowing into this country than was leaving. This is the best possible situation. Today we see more than $41 Billion Dollars in a single month. What happened.
Somewhere around the 1990s China and India began to put a lot of emphasis on education. Years later this began to pay off when those countries, who could produce products much cheaper than the U.S. due to very low salaries, began to develop their own products. The trade imbalance was being stimulated by high salaries in the U.S. and low salaries in China and India. We simply could not compete. We should have reacted then but we didn't.
In your own home if your income drops you normally make adjustments to compensate. You cut back somewhere such as removing the extra cost for premium channels on TV, reduce your cell phone plan, shop for groceries more carefully, drive less to cut back on gas costs, and you keep your car longer. That is if you are paying attention.
Some people react differently if their income drops. They just keep on living as they did hoping that a new job will come by or their investments will grow as the stock market behaves well. They take chances and may get bit later if things don't pan out.
Of course a negative trade defect isn't as obvious as someone in your house losing a job, but the effect is the same. It just takes longer to notice. Nobody in the government wants to bring this up because the only solution is for the U.S. to balance out with the rest of the developed, or developing world. That means salaries have to decrease, property values have to decrease, the stock market won't do as well for a number of years, we will have to work more for less, our standard-of-living will have to drop. The gap between the U.S. and China or India in terms of salary is large. Yet their level of education compared to ours has improved dramatically in the past decade. In short we are competing with other countries who are as capable as we are and they are happy to work long hours for what we would reject as income. We're in trouble.
Today there is a growing list of things being blamed for the state of our economy. Many believe that Wall Street, Big Banks, Democrats, or Hedge Funds are responsible for the current situation. I say these are simply organizations that were just trying to squeeze out as much as they could before things fell apart. I can't imagine they didn't know what was coming.
The truth is we are all to blame, some more than others. Not all could have seen what was going on but if you paid attention the data and signs were there. A country must have a positive trade balance. Don't let any mumbo-jumbo try to convince you of anything else. Years ago many said we were converting from a manufacturing economy to a service economy. Balderdash. We must product products, products that our consumers want and the consumers of other countries want too. The only way we can do that is to produce products at a competitive price here in the United States. We can do that by paying lower salaries, or by being much more efficient which means using less workers to do the same thing. However if we can be efficient then so can the other countries.
In 2007 the house behind ours was put on the market for almost $1 Million dollars. That was a sign for us. The problem was that was well over the build price at that time. In other words one could buy a piece of property and build that same house for way less than the asking price. Home prices were out of whack.We saw the writing on the wall and sold our house a few months later. We cut our spending and moved into a manufactured home in a mobile home park. We waited until the housing market crashed and bought a house. The new house was offered at a price well below the build cost. In other words if we went out and bought a piece of land and had an identical house built it would cost us more. That is good economics.
What happened to keep out salaries so high and allowed house prices to increase to such an outrageous level? I can think of two things. Both of these things are the result of not paying attention and making adjustments over the past two or three decades. We lived on borrowed money. We spent as if there was no end to the money we could earn. We were living on borrowed time hoping things would continue as they had. The second thing that stands out is the behavior of unions. The main function of unions of the long past was to protect people from unscrupulous employers who provided poor working conditions for low salaries. Those conditions exist in only a few situations these days. Unions today are working for employees of large companies where conditions, salaries, and benefits are quite good. Their only way to earn their keep is to keep pushing for even higher salaries and benefits. Instead of the manufacturers being allowed to compensate for overseas efficient companies building competitive products the unions forced the U.S. companies to increase salaries and benefits. The result is the crash we are going through now.
As far as I can see most people are hoping to get back on the same track the U.S. was on in the 1980s and 1990s. It's not going to happen. Home prices have dropped but most other costs have not. Salaries have come down because people are out of work and willing to take less to go back to work. But food, gas, and other things we use have not dropped. Sad to say we till have more to fall.
What is the way out? Find ways to manufacture new products the world wants and pay lower salaries. Home prices and rent costs will have to drop further. All salaries will have to drop which will bring down food prices and other necessities. Any attempt to keep things as they were is only going to delay the inevitable and we will be facing another crash or two in the near future.
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