Community Preference (Part 1)

As the globe’s a population has grown, our definition of community has changed. Nevertheless certain relationships are still the same.The health and welfare of my neighbors matter more to me than the health and welfare of people who live far away.

  1. An outbreak of SARS in South Dakota matters less to me that an outbreak at my son’s school.
  2. An economic depression that puts all my neighbors out of work will likely hurt the value ofmy house and lead to an increase in crime in my neighborhood, more than would be the case if the economy tanked only in Florida or Indonesia.
  3. If I buy my goods from a local merchant, he may then hire me as his accountant. There is a valuable feedback loop.

Now let’s add trade to the equation. If I’m a good accountant then I can relieve my neighbors from the task of doing their own taxes, which would free them up to grow food or make furniture – things I am not good at. We are all happy doing our own thing and buying each others’ stuff. If this sounds like the 1950’s or 1750’s – it should.

When we trade with partners outside of our community, all of these positive feedback loops can evaporate. So what is our “community”? Europeans might say theirs is Europe. Ours would be North America. This would mean that we would have to accept that if North Americans couldn’t make something at a reasonable price then it simply wouldn’t be on a store shelf. We could trade with Europe but their goods would be at a price disadvantage (tariffs) and we would have to be able to pay for them with money earned from our exports to them. We must give local producers huge advantages over foreign ones in order to protect and produce positive local feedback.

If we don’t produce enough oil (for example) to satisfy domestic needs then we will have to adjust (reduce) our consumption behavior using every tool available. We must stop borrowing to buy foreign luxuries.

Two Big Losers

WalMart – any entity that sells goods across the country and allocates all the profit to a remote community must be frowned upon or forced to pay a sales tax that is higher than a local merchant pays. If a chain store sells goods made mainly outside the community then those sales taxes must be huge because their sales simply suck money out of the community.

China – any sovereign nation that sells but does not buy from my community will have to figure out a way to balance their books with us or they must be denied access. They can trade with other nearby friendly countries. Good luck.

What this evokes is an old-world set of conditions where foreign slave laborers no longer exist in our economic space. Countries that don’t have pollution laws, restrict wage rates or disallow labor organization will be trading with each other – not us. Our iPods may cost more unless we use American ingenuity to automate their production (using American workers).

What we must repair is the link between domestic economic activity and employment. Rich people are disconnected from the poor (or the middle class) because they no longer need to hire any of them. There is no positive feedback loop when it comes to domestic consumption because it may just lead to foreign hiring. That was never true in the 1950’s.

Between the second quarter of 2009 and the fourth quarter of 2010, real national income in the U.S. increased by $528 billion. Pre-tax corporate profits by themselves had increased by $464 billion while aggregate real wages and salaries rose by only $7 billion or only .1%”

Everyone reading this will say I’m crazy to think that we could turn back the clock – just read Friedman’s  book, The World is Flat. You can’t stop two billion people from selling you their goods and labor (almost) for free. We have airplanes and the web – we can order foreign stuff through Amazon and hire programmers online. Taxes and borders still matter and I can change a lot of behavior with good policy.

I’ll explain how in Part 2.

 

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