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A reader responds

July 16, 2008

Pete Murphy is author of the book, Five Short Blasts, and presents compelling reasoning on why our economic health is not simply the China factor. His comment follows:

Our enormous trade deficit is rightly of growing concern to
Americans. Since leading the global drive toward trade liberalization
by signing the Global Agreement on Tariffs and Trade in 1947, America
has been transformed from the weathiest nation on earth – its
preeminent industrial power – into a skid row bum, literally begging
the rest of the world for cash to keep us afloat. It’s a disgusting
spectacle. Our cumulative trade deficit since 1976, financed by a
sell-off of American assets, is now approaching $9 trillion. What will
happen when those assets are depleted? Today’s recession may be just a
preview of what’s to come.

Why? The American work force is the most productive on earth. Our
product quality, though it may have fallen short at one time, is now on
a par with the Japanese. Our workers have labored tirelessly to improve
our competitiveness. Yet our deficit continues to grow. Our median
wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with “free trade.” The concept of
free trade is rooted in Ricardo’s principle of comparative advantage.
In 1817 Ricardo hypothesized that every nation benefits when it trades
what it makes best for products made best by other nations. On the
surface, it seems to make sense. But is it possible that this theory is
flawed in some way? Is there something that Ricardo didn’t consider?

At this point, I should introduce myself. I am author of a book
titled Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw
in Globalization and Its Consequences for America. To make a long story
short, my theory is that, as population density rises beyond some
optimum level, per capita consumption begins to decline. This occurs
because, as people are forced to crowd together and conserve space, it
becomes ever more impractical to own many products. Falling per capita
consumption, in the face of rising productivity (per capita output,
which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population
management (especially immigration policy) and trade. The implications
for population policy may be obvious, but why trade? It’s because these
effects of an excessive population density – rising unemployment and
poverty – are actually imported when we attempt to engage in free trade
in manufactured goods with a nation that is much more densely
populated. Our economies combine. The work of manufacturing is spread
evenly across the combined labor force. But, while the more densely
populated nation gets free access to a healthy market, all we get in
return is access to a market emaciated by over-crowding and low per
capita consumption. The result is an automatic, irreversible trade
deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.’s trade data for proof of
this effect. Using 2006 data, an in-depth analysis reveals that, of our
top twenty per capita trade deficits in manufactured goods (the trade
deficit divided by the population of the country in question), eighteen
are with nations much more densely populated than our own. Even more
revealing, if the nations of the world are divided equally around the
median population density, the U.S. had a trade surplus in manufactured
goods of $17 billion with the half of nations below the median
population density. With the half above the median, we had a $480
billion deficit!

Our trade deficit with China is getting all of the attention these
days. But, when expressed in per capita terms, our deficit with China
in manufactured goods is rather unremarkable – nineteenth on the list.
Our per capita deficit with other nations such as Japan, Germany,
Mexico, Korea and others (all much more densely populated than the
U.S.) is worse. In fact, our largest per capita trade deficit in
manufactured goods is with Ireland, a nation twice as densely populated
as the U.S. Our per capita deficit with Ireland is twenty-five times
worse than China’s. My point is not that our deficit with China isn’t a
problem, but rather that it’s exactly what we should have expected when
we suddenly applied a trade policy that was a proven failure around the
world to a country with one sixth of the world’s population.

Ricardo’s principle of comparative advantage is overly simplistic
and flawed because it does not take into consideration this population
density effect and what happens when two nations grossly disparate in
population density attempt to trade freely in manufactured goods. While
free trade in natural resources and free trade in manufactured goods
between nations of roughly equal population density is indeed
beneficial, just as Ricardo predicts, it’s a sure-fire loser when
attempting to trade freely in manufactured goods with a nation with an
excessive population density.

If you‘re interested in learning more about this important new
economic theory, then I invite you to visit my web site at
OpenWindowPublishingCo.com where you can read the preface for free,
join in the blog discussion and, of course, buy the book if you like.
(It’s also available at Amazon.com.)

Please forgive me for the somewhat “spammish” nature of the previous
paragraph, but I don’t know how else to inject this new theory into the
debate about trade without drawing attention to the book that explains
the theory.

Pete Murphy
Author, Five Short Blasts

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