A Real-Time Account of Free Markets Eradicating Poverty

factoriesA few months ago we had a post, along with a video animation, on how free markets wipe out poverty and boost the overall standard of living. Lest one is inclined to think that it’s “just a theory”, read this recent account (“China: A Billion Strong but Short on Workers”, WSJ, 5/1/13) that puts that notion to rest. It’s yet more proof that free markets aren’t an ideology, but rather the natural order of things when government gets out of the way.

Following are excerpts from the above-mentioned account:

“Ms. Cui is contributing to China’s tightest labor market in years, putting upward pressure on wages that already are rising in the double digits annually.”

“The average monthly income for migrant workers rose 12.1% from a year earlier.”

“Creating jobs in hair salons and insurance companies, instead of in steel mills and soccer-ball factories, helps fuel growth in the world’s second-largest economy.”

“When the bra maker set up a factory in southeastern China’s Jiangxi province more than a decade ago, hundreds of people lined up outside looking for work. Today, the manufacturer for Wonderbra and Elle Macpherson Intimates struggles to find enough workers to operate its production lines at full capacity.”

“For years Top Form competed for labor with factories moving inland to take advantage of lower costs.”

 

How Free Markets Help the Poor

(To watch a video animation of the following, click here.)

Do you know what’s by far the most powerful force in lifting the poor out of poverty and raising the incomes of everyone else? Free markets. The government getting out of the way and letting businesses flourish results in jobs and rising wages.

No, it’s not labor unions that make wages rise. They only help a relatively small segment of workers at the expense of everyone else. If anything, they impede business creation. And that’s a tragedy, because the more businesses there are, the more competition there is for labor.

In order to attract the best workers and prevent them from working somewhere else, business owners are forced to raise wages and benefits. The result is an overall rise in the general wage rate and standard of living.

Let me illustrate. Start with a poor country. There are lots of people either unemployed or working in the agricultural or low-wage informal sector. But then the government opens the area to foreign or domestic investment. A shoe factory moves in, and people get jobs. Because it’s low-skilled labor, the jobs aren’t high-paying but they pay a lot better than what the people were earning before.

More factories move in and more people get jobs. And then, another factory moves in and finds that it’s having a hard time hiring good labor. So how does it attract workers? You guessed it: it’s forced to raise wages.

But it doesn’t stop there. In order to prevent their workers from going to the other factory and to hire new workers, all of the other businesses have to raise their wages as well. The average income and standard of living of the population go up.

In addition to enjoying higher wages, the people are learning new skills. There are more semi-skilled and even high-skilled people around. That attracts the attention of industries that require higher-skilled labor, like assembly plants and parts manufacturers. They pay even higher wages in order to attract top talent. Pretty soon more of them move in, and the low-skilled manufactures can’t compete so they move out, to other areas of the country where low-skilled and low-wage labor is still abundant. Then the virtuous cycle begins there, too.

This is happening in places like China and India. Just a few of decades ago southern China was poverty-stricken. Now it’s becoming a bustling and prosperous high-tech metropolis, thanks to this process of businesses competing for labor, and ultimately thanks to the government’s decision to let the free market flourish.

A similar thing happened in America as well. To once again get low unemployment and rising wages for the poor, the government has got to get out of the way.

*** Update – May 6, 2013 ***

The above is by no means just a theory. It’s what’s happening in practice. All of the above is reflected in this news article.

Following are excerpts:

“Ms. Cui is contributing to China’s tightest labor market in years, putting upward pressure on wages that already are rising in the double digits annually.”

“The average monthly income for migrant workers rose 12.1% from a year earlier.”

“Creating jobs in hair salons and insurance companies, instead of in steel mills and soccer-ball factories, helps fuel growth in the world’s second-largest economy.”

“When the bra maker set up a factory in southeastern China’s Jiangxi province more than a decade ago, hundreds of people lined up outside looking for work. Today, the manufacturer for Wonderbra and Elle Macpherson Intimates struggles to find enough workers to operate its production lines at full capacity.”

“For years Top Form competed for labor with factories moving inland to take advantage of lower costs.”

 

Romney/Ryan the “True Progressives”?

The Economist magazine has an article on how to reduce inequality while maintaining economic growth. They call it “True Progressivism”. Among their prescriptions are:

* Eliminating tax subsidies for the wealthy like the mortgage interest deduction
* Means testing of entitlements, which Republicans always propose but Democrats always shoot down
* Cracking down on teachers unions
* Ending government bailouts of big companies

Wow – who would have thought Romney/Ryan are the “True Progressives”?

Not unexpectedly, in the article The Economist doesn’t t admit that the above prescriptions are much closer to the Romney agenda than the Obama agenda – in fact they’re anathema to the Obama agenda.

What’s wrong Economist? Can’t you bring yourself to say that in order for these things to have a shot at happening, Romney/Ryan are the way to go?

Waiting with baited breath to find out who The Economist endorses this time.
Update: Wouldn’t ya have guessed it: they endorsed Obama.

Predictions: Did it Happen?

Jump back three years ago, October 8, 2008, on the eve of Barack Obama’s election to president. An article in the American Spectator by Peter Ferrara reviewed a newly released book by Steve Moore, Art Laffer and Peter Tanous, titled The End of Prosperity.

Writes Ferrara,

The book explains in full detail the economic disaster that will befall America if it takes a sharp left turn to neo-socialism under the leadership of the far left President Barack Obama, the ultraleft Speaker of the House Nancy Pelosi, Senate Majority Leader Harry Reid with 60 liberal Democrat Senators, and their pal the ultraliberal Howard Dean heading the Democrat party.

He continues,

One of the insights of the book is that a major factor already tanking the stock market and leading foreign capital to flee America is the threat of the economic policies promised by Obama. Obama proposes increases in every major federal tax, on savers, investors, employers, small business, big business, and anyone who would start a business. Obama also promises to add additional federal spending of almost $1.5 trillion over the next four years ….That would be on top of all the spending increases already scheduled for our exploding entitlements and other programs. Obama also promises a massive increase in regulatory controls….These retrograde economic would ultimately produce a deep, long term decline in America’s standard of living, particularly for the middle class and working people. America would actually fall behind countries around the world.

Ferrara indicated that what happened under President Carter was a precursor to what was to happen under Obama:

The poverty rate actually started increasing in 1978 during the Carter years, eventually climbing by an astounding 33%, from 11.4% to 15.2%. A fall in real median family income that began in 1978 snowballed to a decline of almost 10% by 1982. Average real family income for the lowest income 20% declined by 14.2%. Indeed, during the Carter years (1977 to 1980), real income declined for every quintile, from the lowest 20% to the highest 20%.

So, three years later, here in October 2011, were the predictions of Ferrara, Moore, Laffer, and Tanous correct?

If you were an Obama supporter, you would have laughed off their predictions as being absurd. But how wrong you would have been. Their predictions were excruciatingly on target. As discussed three posts below, the poverty rate is the highest it’s been since 1993. And average real family income has declined to levels not seen in 15 years.

Seems, though, that the authors were a bit off on their prediction that Obama would add additional federal spending of almost $1.5 trillion over the next four years. It turns out that Obama has added at least $3 trillion in additional federal spending in three years. (The amount by which our national debt has shot up during that time.)

Ferrara’s article was presciently titled: Prepare for the Worst.

The Obama-Pelosi-Reid episode is proof positive if you let big-government policies flourish, the consequences are tragic. We need new leadership. Fast.

Obama Nation: Lower Living Standards, Rising Poverty

The Dow ended down almost 400 points today. But that’s not the real measure of prosperity or how the U.S. economy is doing. The real measure is per-capita income – i.e. income per person or the quantity and quality of goods and services per person. That’s what separates us from third-world countries. Our per-capita income of course is a lot higher, and over the decades it has increased faster. It’s also what separates us from Europe. Western Europe’s average per-capita income is equivalent to that of our lowest-income state (Mississippi). Europe’s per-capita income used to be equal or higher than ours, 40 years ago. But their welfare state has taken its toll – slower economic growth over the decades since, which really adds up.

But the welfare state is really taking hold here in the U.S., especially under Obama who has raised government’s share of the GDP from about 20 percent to 25 percent, and who has added more to our national debt in two-and-a-half years than George Bush did in eight years (which was bad enough as it was).

And it shows: our per-capita income here in 2011 has fallen to 1996 levels. That’s scary – usually per-capita income rises over time. It may fall during recessions, but then during the rapid economic growth that usually follows recessions, per-capita income spikes up.

In this Obama economy, however, post-recession growth is anemic. It was less than 1 percent at last count, which is slower than population growth, meaning there are fewer and fewer goods and services per person. Normally after deep recessions, growth is in the neighborhood of 5 to 8 percent. But when it comes to the economy, Obama doesn’t know what he’s doing (assuming he genuinely wants to help the economy, in contrast to many hard leftists who want to see growth come to a halt).

What more evidence do we need to show that big government solutions don’t work? They only make our standard of living decline. The main driver of rising per-capita income isn’t government, but the people outside of government who are producing the goods and services. It’s government’s job to make sure there are good ground rules. But too often, they go overboard on the rules, and coerce too much out of the private sector.

Another frightening bit of news: the percentage of Americans living below the poverty level is the highest since 1993.

What more evidence to we need to show that poverty is alleviated by private-sector-driven economic growth, and not clumsy government programs? It’s the latter that exacerbate poverty.

If government programs were the main alleviators of poverty, then practically all third world countries would now be first world, given that most of them have socialist governments. But they’re third world precisely because of their bloated governments. It takes months or years to just get permission to open a business in many of those countries.

So poverty in America reaches an all-time high, even though Barack Obama was expected by the economically naive to bring it to an all-time low.

Hopefully the Obama experience will squeeze that naïveté out of some of them.

Yes, the main cause of poverty is a shortage of goods and services in society. That’s what separates us from a third world country like Haiti. Yet now, goods and services per person are decreasing. Of course we’ll never become like Haiti (except perhaps in certain pockets like Democrat-controlled inner cities), but our standard of living will be a lot lower than what it could have been, had we had fewer economically illiterate people running our country.

 

 

NPR’s Welna: Spend with Abandon … Until We’re Like Greece?

At least two things stuck out at me while listening to a portion of the Diane Rehm radio show yesterday as I drove home from a football game: the lack of economic literacy of a lot of people in America, the fact that some of those same people are reporters for taxpayer-funded National Public Radio.

(And, it’s a safe assumption that these people are good proxies for discerning the thought processes for many if not most people in the Obama administration – which explains our 9 percent unemployment and pathetic economic growth – only 1 percent currently, which is lower than our population growth, which means our per capita standard of living is declining, at least for now. Yesterday morning it was reported that no net new jobs were created for the latest quarter.)

One guest on the show in particular stands out. He’s a voice commonly heard on NPR, named David Welna. He doesn’t think that we have a deficit problem because, based on what I discern from his comments, we’re not yet facing a debt crisis like Greece. Welna seems to think that you can keep borrowing money with abandon. It’s only when the day comes when you’re so manifestly profligate that no one wants to lend to you anymore (or only lend to you at high interest rates), like what Greece is going through now, that you should think about reining in your spending.

David Welna: there (is) no deficit crisis because borrowing (is) very easy. Interest rates are extremely low. I’ve been in countries where there definitely was a debt crisis, and they couldn’t borrow any money….But that is not the case in the United States right now. …We haven’t had a recovery that’s adequate enough and that requires further government stimulus.

Diane Rehm: So you’re saying that Republicans succeeded in making the case for an artificial debt crisis?

Welna: They really set the narrative that we are broke when, in fact, right now, this is the best time the government has actually had to borrow money …

Actually the goal is to avoid a situation like what Greece is going through now, for obvious reasons (obvious to everyone except for people like Welna). We’re headed that way with current levels of spending, even without the additional trillions of dollars in additional money that Welna wants to borrow.

The federal government used to regularly borrow about 15 percent of what it spends. Now under Obama, it’s regularly borrowing about 40 percent of what it spends. Three trillion in additional debt in Obama’s first two years as president (compared with three trillion in eight years under Bush II, which was bad enough as it was). Welna, and probably Rehm, think all this is an “artificial” crisis – all a sham, and that there’s actually nothing to worry about because we’re not like Greece yet. If they had their way, we’d be borrowing 50 or 60 percent of what we spend.

While listening to the radio show, I was thinking that what if they were talking about, say, some complicated surgical procedure, even though they had no training in medicine whatsoever. They’d be laughing stocks. Well it’s the same thing – only it’s the American economy they were talking about with no training in economics whatsoever. Or, if they ever did have any training, they deserved an F.

 

Putting the brakes on rising living standards

GDP growth was revised upward for the first quarter of 2011, from 1.8 percent to a whopping 1.9 percent.

When looking at living standards, the GDP growth rate is practically meaningless if you don’t take population growth into account. And considering that the population growth rate of the U.S. is about 1 percent, that means per-capita GDP growth was a measly .9 percent.

This is scary stuff. The single biggest indicator of a country’s standard of living is the per-capita GDP average growth rate over the long term. There have been plenty of times when recessions put GDP growth way below average. But typically during the immediate-post-recession period, GDP growth skyrockets, making up for the negative growth during the recession. For example after the deep recession of the early 1980s, GDP growth shot up to 8 percent.

Yet now, post-recession (nominal) growth has been 2 to 3 percent. That’s way too slow to bring up our average economic growth rate to historical levels.

It can’t be emphasized enough how important long-term GDP growth is. It is what separates first-world countries from third-world countries. The difference between 2 percent and 3 percent GDP growth may not sound like much, but over the long term, it really adds up. Over 40 years, growing 1 percentage point higher means 50 percent higher per-capita income.

A seemingly small difference in GDP growth really manifests itself when comparing per-capita income of the United States vs. western Europe.  Some 30 years ago per-capita income was about the same. But since that time U.S. GDP growth has been slightly higher, as Europe’s massive welfare state has taken its toll. That has resulted in big differences in per-capita income; in 2010 it was $47, 200 in the U.S., whereas in Germany and France it was $36,000 and $34,000 respectively.

Regarding our slow post-recession growth, what’s going on? Obama’s economic policies, no doubt. They’re stifling economic growth, at at time when it should be flourishing. In a word, Obama is making our economy more like that of slow-growth, massive-welfare-state Europe.

The trillion-dollar “stimulus” has been a big stifler. It’s the same sort of policy that Japan tried during the 1990s in futile attempts to jump start its economic growth. But it only put itself deeper and deeper in debt, with the result that now its living standards are stagnant or falling. See this NYT article on what today’s Japan looks like, after spending itself into a hole, like Obama is now doing for the USA.

Such anemic growth post-recession is unprecedented in modern U.S. history as far as I know. And it’s because we have a president whose been successful in implementing a growth-inhibiting agenda, mainly such huge government spending. It just goes to show that government spending doesn’t spur growth. Keynesianism, as they call it, is unfortunately alive and well, but it only results in sickness.