Friday, May 02, 2008

• Buy American! Or Not??? A General Discussion of the Economy

  I received the following as an e-mail forward about a month or so ago (according to Gmail: April 16). Then I just stumble uponed a similar concept here. I'm going to post the text of the e-mail and then I will discuss it:

  How to use Your IRS Rebate check:

  As you may have heard, the Bush Administration said each of us would get a rebate check to stimulate the economy.

  • If we spend that money at Wal-Mart, all the money will go to China.
  • If we spend it on gasoline it will go to the Arabs.
  • If we purchase a computer it will go to India.
  • If we purchase fruit and vegetables it will go to Mexico, Honduras, and Guatemala.
  • If we purchase a good car it will go to Japan.
  • If we purchase useless stuff it will go to Taiwan
  • And none of it will help the American economy.

  We need to keep that money here in America. The only way to keep that money here at home is to spend it at yard sales, since those are the only businesses still in the US.

  OK. I have several major problems with this e-mail

  1. Assumption that International trade is bad

  The statement "We need to keep that money here in America" implies that the writer believes that international trade is a bad thing. We all know that this is a belief held by many Americans, but it doesn't make it right. They completely ignore foundational concepts of economic theory from Adam Smith's The Wealth of Nations. Primarily it ignores the idea of specialization, which is the notion that when Nation A focuses on doing what it does best and then trades that product with Nation B who is good at doing something that Nation A needs and also needs what Nation A produces, both nations benefit. The United States of America does suffer from a trade deficit, but it is not nearly as bad as many might think. The USA exports food all over the world, and menial, unskilled labor as well. In return we get oil, technology, etc from all over the world.

  2. Misunderstanding of how economy works

  The e-mail presents the problem so that the uninformed reader will make the assumption that for every $1.00 spent at Walmart, $1.00 gets sent to "China". I'm going to set aside the fact that Walmart has a major "Buy American" emphasis in their supply chain, because that's not really what's at the heart of this discussion. The same assumption lies with all of the other things mentioned, too.

  So what really happens to my money when I buy at Walmart? The first thing that happens is it goes into Walmart's income, from which Walmart - a United States corporate entity - must pay taxes. From there, Walmart pays wages. From Lee Scott, all the way down to the old lady who gave you your smiley face sticker the other day, Walmart pays wages to men and women who live, work, play, and most importantly for our discussion spend in the United States. Included in their payroll expense is the FICA tax they must match for the employees - more money to the United States of America. They most likely have to pay an audit agency to help them keep their books. They probably employ lawyers and also pay insurance on everything from their property to their employees. None of this money leaves the USA.

  From there, Walmart pays their suppliers, who are most likely US corporate entities with the same burden of taxes, wages, and other expenses that must stay in the country. Oh, did I mention that having brick and mortar stores for these businesses costs money that stays in the USA? Did I mention that maintaining a website costs money that likely stays in the USA? So after all of this expense, the supplier uses what's left to pay their suppliers, who pay their suppliers, etc and on up the supply chain.

  Now, somewhere along the line, there is probably a supplier who is based in China. Then your money is in China, because at that point you probably have tariffs that go to the Chinese government. You have Chinese taxes, and wages to Chinese people. All of this goes to bolster China's economy, who turns around and trades with us and we both benefit.

  I don't have real numbers to back this up for sure, but I would hazard a guess that maybe (maybe) 10 cents on every dollar you spend at Walmart ever leaves US soil. Keep in mind that much of what I have been talking about is the economic principal of The Money Multiplier. That once money is spent, it is then taken by the recipient and spent again, and again, and again, so that the same dollar can have an impact on the economy over and over again. Our economy grows when people spend, not when they hoard, and when we spend, it gets spent again. And in no way are you sending all of your money to China by buying at Walmart or to Arabia by buying gas. Exxon Mobil, Shell, Texaco, etc, are all US corporate entities.

  3. The Deleterious Effect of Buying Only Used

  Another aspect of US corporations I didn't mention is that they are not owned by some big wig with 10 private jets and a 72 hole private golf course. They are owned by shareholders - regular every day people who have invested money in the success of that business. Most people who have a retirement plan have it in the form of stocks and bonds and probably own Walmart and Exxon Mobil or some other large corporation. These stocks and bonds depend on the success of corporations in the USA to do well. As fast as the economy grows when people spend is as fast as it shrinks when people hoard or only buy used at garage sales and whatever. Not only will the only stuff we have be old and wearing out, but the money is not multiplied nearly to the same degree as if it is put into the corporate system of the USA.

  A brief study of history will reveal that in the 1800's the reason why the USA was so much faster at industrialization and booming their economy than the rest of the world was because of the relative freedom corporations had. Great Britain, for example, had much more stringent red tape on the road to creating and operating a corporation, and it hampered their ability to industrialize as quickly as the US. Big Business is what made this country what it is today. It is the reason our economy thrives. When business is good, the economy is good.

  So stop listening to idiots like George Carlin who doesn't know what he is talking about. But unfortunately because he's a celebrity and swears a lot people listen, and he knows it. I neither endorse the message of the video I posted above (though I do think that some of the points me makes in the first minute or so about credit cards and education are good, but from there he degrades into idiocy) nor the language he uses. Please understand that I only post this as an example of how dumb some people can be.

  Speaking of credit cards. I said earlier that spending is what drives our economy - and it is. But spending should only be done within one's means. Credit cards, unnecessary loans, buying stuff on 90 days same as cash, and payroll advance places are dangerous things, for reasons most people are aware of. You run the risk of getting yourself in over your head and having to declare bankruptcy. I would advise avoiding '90-days-same-as-cash' and payroll advance places at all costs. Taking out loans and using credit cards could go either way. Do not, I repeat, do not buy everything on your credit card and pay only the minimum every month - or even slightly over your minimum. Only buy on your credit card what you have means to pay off by the end of the month. Credit cards can be good for buying things online, or for stuff like gas, but don't carry a balance if at all possible.

  But so long as people spend within their means, the economy grows and grows and grows. This is why when the media reports that we might possibly go into a recession soon, we always invariably seem to. Is it because the media has psychic abilities? No! It's a self fulfilling prophecy. People see "Possible Recession Soon" so they start hoarding their money. Low and behold, spending goes down, and we're in a recession. I think the media would find that if they start saying, "Economic Boom Approaching" then low and behold we'll have and economic boom!

  I don't at all think anyone is un-American for wanting to shop at garage sales or buy used stuff. There are a lot of good deals that can be found, so if you want to save money go for it. Not everybody can afford new stuff - like cars for example. But don't do it out of some idiotic notion that it's helping the US economy, because it's not. Especially if the people in that big white building in Washington every get their heads screwed on straight and pass the FairTax.
  

  Before I go, I would like to include the caveat that I understand the difficult effect that soaring oil prices have on our economy. When the price of oil goes up, then it's supply goes down and we enter a recession. Ultimately this is bad for the economy, but there's nothing we can do about it. It's not an economic feasibility to pursue alternative sources of energy - believe me. It won't pay for itself until someone makes a breakthrough. It's going to have to be something as impactful as the cotton gin or the steam engine. A major invention will have to happen, and until that happens we're still dependent on oil. AND even if we did reduce the amount of oil we need for gasoline, we still need it for many other things (plastic for example), and therefore would still be buying it, and by far our cheapest oil comes from the Middle East. So even if we reduced the amount of oil we use, we would not reduce our dependency on Middle Eastern oil. We would stop using our own first.

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