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Although it's claimed that the "Great Recession", where the United states came close to financial collapes, has ended, the economic problems which caused it still contine today (2017). This article's title: "Depression 2007-" reflects the view that the Greate Recession was and is a "depression" somewhat anologous to the great depression of the 1930's. situation "
There are multiple and diverse Causes of this Depression many of which are not well known or well understood by the public. Unfortunately, we had no politicians or economists with reasonable, thoughtful, and comprehensive proposals as to what we should do to end it. However, some of President Donald Trump's proposals (such as balancing foreign trade and restricting immigration) broke new ground and would help solve some of the problems, but unfortunately, other Trump policies (such as decreasing taxes, not reducing "entitlements", and unnecessary infrastructure spending) are counter-productive. The proposals one saw (and still sees) are usually directed at solving only one of two of the major problems, and many of these proposals are not even good enough to solve that problem or include how to prevent the solution of one problem from exacerbating other problems. An example is the proposed solutions to balance the federal budget. See Fix One Cause N.G.
While it's claimed that the 2008 recession ended during 2009, the high unemployment rate and trade imbalance that lingered on into 2017 and there was hidden unemployment due to discouraged workers no longer seeking employment. It feels more like an extended depression. If the economic crisis worsens significantly in the future, as seems likely, historians are likely to call this a "depression" or more specifically "the second great depression" or "the greater depression". New York Times columnist Paul Krugman called this a "depression" and so did I (the author).
Financial collapse and/or depression had been predicted in the US by a small minority of writers for over the past 25 years, but financial collapse came close to happening in the middle of 2008. In spite of trillions of stimulus and bailout money, we were still in serious trouble, the results of which may be much worse than what has already transpired. The warnings of a forthcoming depression were pretty much ignored over the 25-year period (starting in the early 1980's) and then it actually happened. Warnings of a worse scenario of U.S bankruptcy/hyper-inflation are being made by a few today (2017) but they are also being mostly ignored.
One major cause of the problem is the trade imbalance. At the peak of the imbalance (in mid-decade of the 2000's) exports from the US were only a little more than half the imports, while balanced trade would require that exports equal imports. And it got a little worse year by year (with a few exceptions) until 2008 when a faltering economy resulted in Americans purchasing fewer imports. Debt was and is at record levels and is rapidly increasing. But in 2010, consumer debt stopped increasing while government debt soared. This sort of thing couldn't and can't go on forever and must sometime come to a halt. When it does, we will wind up in more severe depression which will not be easy to escape from.
The situation today is more dire than it was at the start of the great depression of the 1930s. Then the U.S. had vast reserves of oil underground, it's industries were pretty much intact, and its smaller population could be supported on far less fuel and food. While there was excess domestic debt in 1929, there was nothing like the extreme burden of foreign debt and trade imbalances that exists today. In addition, there are today the huge, mostly unfunded, future entitlements like Medicare, Social Security, and various pension funds, which didn't exist then. Also, the government in the 1930's was financially stable and not at risk of bankruptcy like it is today. Thus the eventual consequences of the current depression are likely to be much more severe than the depression of the 1930's.
But these more severe consequence haven't hit us yet. They've been postponed by both our social insurance and foreign support (by loans, etc.) of service jobs in America. First let's look at social insurance such as unemployment insurance, social security (including disability insurance), Medicare, food stamps, etc. When the funding for these benefits plummets, the social consequences for the people who loose benefits are likely to be just as bad (if not worse) than that of the great depression of the 1930's.
Secondly, when the foreign loans and foreign purchases of assets in the U.S. plummets, unemployment may skyrocket reaching say 25%. And it's likely to remain there for a while if not get worse and thus be worse than the Great Depression of the 1930's. See First Example: All Exportable Manufacturing Goes Offshore.
What has kept the US afloat has been the ability to borrow huge sums of money at low interest rates which are sometimes below the inflation rate. This case is negative real interest rates. Investors are in effect paying the debtors (mainly the government) to hold their money and enable borrowers to effectively borrow at no interest (or even negative interest). How can this happen? Why don't investors go elsewhere to other countries to invest? It's simply because the other countries, like the United States have been just as financially irresponsible as the US, if not more so (in some cases).
Thus as of 2017, the suffering inflicted on people from the current depression is not yet as severe as it was during much of the great depression. A major difference in the two depressions is that it wasn't too difficult to recover from the 1930's depression since all that was needed was to stimulate the economy in various ways. But that doesn't work for the current type of depression characterized by depletion of natural resources, overpopulation, a huge foreign debt, loss of manufacturing capability, globalization, and other factors. As compared to the 1930's, there are many more and diverse causes of the Depression
See also trade deficit statistics A major cause of the existing depression is debt. While the mortgage debt crisis (or bubble) was the direct cause of the initial crisis in 2007, the loss of manufacturing to foreign countries where labor costs are lower, results in higher unemployment which exacerbated the mortgage debt crisis since people without good paying jobs often couldn't pay their mortgages. Note that for every manufacturing job lost, a few other jobs are also lost since the service sector is dependent on the production sector. While statistics may show that the U.S. is still very strong in manufacturing, such statistics are misleading Since many goods we buy are counted as made in U.S.A. when they are actually only assembled in the U.S.A. from mostly foreign made components. Also, most foods and fuels are counted statistically as manufactured goods, etc.
In the short term, the impacts of foreign trade imbalance are much ameliorated by borrowing money from foreign countries. This helps pay for social benefits (such as unemployment insurance, welfare benefits, and disability payments) as well as providing funds (and imports) needed to keep workers in the service sector employed. But in the long run, when the debts come due and can't be paid, there is bankruptcy awaiting, including the likely bankruptcy of governments in the United States: federal, state, and local; or the equivalent of bankruptcy via hyper-inflation.
Trade imbalance is not the only economic problem we face but it's one of the major ones. The pre-2008 phony prosperity in the U.S. was not being primarily fueled by us making things of value but by us consuming vast quantities of imports that we couldn't pay for (and this problem still continues at a somewhat lesser pace). More precisely, to pay for our imports we both borrow money from foreigners (by selling them bonds and mortgages, etc.) and also sell our assets to them. See Economy In Crisis. This pays for a little over a third of the what we import while our exports of both goods and services help pay for the remaining 2/3. This situation would be even worse if it were not for our trade surplus in services (much of which is computer software). Look at the labels on goods in stores and you'll see that most of the manufactured goods we buy are no longer "made in USA". And even what is "made in USA" often contains substantial foreign content. Another way of getting imports without really paying for them is to print money .
When you buy a foreign made import in a retail store, not all the money you spend goes to foreigners. A significant portion of the money you put down stays right in the U.S. since it pays for the cost of operating retail stores, transporting goods, profits, taxes, etc., and sometimes the cost of designing/programming goods. If all the money we spend on imported goods left the US, we might likely have already suffered a severe financial collapse by now. The US dollars that do get to foreigners are much more than what they want to spend buying goods made in the U.S. So if these dollars aren't spent here, what happens to them? The foreign-held dollars, representing what we pay foreigners for goods, flow back to invest in the US, especially in our stocks and bonds, including government bonds. So with foreigners helping finance the operation of our government, taxes may be reduced, giving the U.S. consumer more money to spend on imported goods. Thus, foreigners buying our stocks and bonds provide foreign exchange for us to spend on imports.
So when you buy imported goods for cash (not on credit) and say to yourself that you aren't going into debt to pay for them, think again. Some of the money you spend is money that you have because your taxes are reduced because foreigners loaned the government money to pay what you should have paid in taxes (if the government ran without a deficit as it should). But you may think: Maybe the government did go more into debt so that I could buy this, but it's the government's debt, not mine. Well, who is responsible for paying off the government's debt? You are! And we all are! Of course the government debt may never be paid off should the government suffer financial collapse (including possible hyper-inflation) and/or repudiate its debt but this course of action may be more painful in the long run than actually paying off the debt.
A major cause of the trade imbalance is free trade.
Balance, Exports-Imports 1960-
Foreign Trade Deficit - Index to Historical Series U.S. International Transactions 1970-2000 - USA Census
The imbalance of trade, including services reached a peak from 2005 to 2008 of roughly .7 trillion dollars per year. Then it fell to a low of under .4 trillion by 2009 due to both a decrease in imports and increased service exports from the US. Then during 2010-2014 it held steady at about .5 trillion. trade deficit statistics. But when one takes inflation into account, the real trade deficit has been somewhat decreasing after 2010.
The US has been increasing its net exports of services which includes spending by foreign tourists in the US and income from US-made software and movies widely used (or seen) in foreign lands. See Services. We import services when we spend money visiting foreign countries or use telephone answering services in foreign countries.
But our surplus in services is far too low to make much of an impact in our huge deficit in goods. During the early 1990's the surplus from services cut the good deficit roughly in half. But in 2005-9 it only reduced the goods deficit by about 10%
How long have foreign trade deficits been going on? See table below: (and graph of exports-imports 1994-2010 (at calculatedriskimages.blogspot.com))
Information on data sources and methodology are available at Official Source US Export and Import Statistics - Foreign Trade - US Census Bureau
U.S. Trade in Goods and Services - Balance of Payments (BOP) Basis Value in millions of dollars. 1960 thru 2014 Balance Exports Imports Period Total Goods Services Total Goods Services Total Goods Services 1960 3,508 4,892 -1,384 25,940 19,650 6,290 22,432 14,758 7,674 1965 4,664 4,951 -287 35,285 26,461 8,824 30,621 21,510 9,111 1970 2,254 2,603 -349 56,640 42,469 14,171 54,386 39,866 14,520 1975 12,404 8,903 3,501 132,585 107,088 25,497 120,181 98,185 21,996 1980 -19,407 -25,500 6,093 271,834 224,250 47,584 291,241 249,750 41,491 1985 -121,880 -122,173 -294 289,070 215,915 73,155 410,950 338,088 72,862 1990 -80,864 -111,037 30,173 535,233 387,401 147,832 616,097 498,438 117,659 1995 -96,384 -174,170 77,786 794,387 575,204 219,183 890,771 749,374 141,397 2000 -372,517 -446,783 74,266 1,075,321 784,940 290,381 1,447,837 1,231,722 216,115 2005 -714,245 -782,804 68,558 1,286,022 913,016 373,006 2,000,267 1,695,820 304,448 2006 -761,716 -837,289 75,573 1,457,642 1,040,905 416,738 2,219,358 1,878,194 341,165 2007 -705,375 -821,196 115,821 1,653,548 1,165,151 488,396 2,358,922 1,986,347 372,575 2008 -708,726 -832,492 123,765 1,841,612 1,308,795 532,817 2,550,339 2,141,287 409,052 2009 -383,774 -509,694 125,920 1,583,053 1,070,331 512,722 1,966,827 1,580,025 386,801 2010 -494,658 -648,678 154,020 1,853,606 1,290,273 563,333 2,348,263 1,938,950 409,313 2011 -548,625 -740,646 192,020 2,127,021 1,499,240 627,781 2,675,646 2,239,886 435,761 2012 -536,773 -741,171 204,398 2,218,989 1,562,578 656,411 2,755,762 2,303,749 452,013 2013 -478,394 -702,587 224,193 2,279,937 1,592,043 687,894 2,758,331 2,294,630 463,700 2014 -508,324 -741,462 233,138 2,343,205 1,632,639 710,565 2,851,529 2,374,101 477,428 U.S. Census Bureau, Foreign Trade Division, U.S. Trade in Goods and Services. NOTE: (1) Data presented on a Balance of Payment (BOP) basis.
In the 1960's we had a trade surplus. Although there was a deficit in services (we imported more than we exported) it only reduced the surplus in goods by roughly 1/4. Then in the early 1970's the deficit first appeared but it alternated: in one year there would be a deficit and the next year a surplus. When there was a deficit, it was only a few percent of our exports. Then in 1977 the deficit took a large jump reaching 18% of exports. Fortunately, by 1980 the deficit was only several percent of exports. But then in 1983 it jumped to 22% of exports and by 1985 it was 45% of exports. But it came down again, and by 1991 was only 5% of exports. Then the trade deficit drifted up again, reaching 35% of exports by 2000 and 50% of exports by 2003. In 2006 it was still 50% but decreased to only 27% in 2010 and to 25% in 2012.
The trade deficit includes both good and services. And the U.S. has had a surplus in services since around 1970. The trade deficit would be significantly worse if it were not for this service surplus. For 2006, the trade deficit was 52% of exports but the deficit for goods only (not counting services) was 82% of goods export. In other words for goods, we not only imported what our goods exports enable us to buy, but also imported an additional 82% which we couldn't pay for by exporting goods. We had to "pay" for this 82% by borrowing from foreigners, selling them our assets, and by running a surplus in services.
When inspecting the above table, you may note that in 2008 our exports of goods were little more than half of our imports. This doesn't sound good but the actual situation was even worse since many of the goods we export contain imported components. Thus if exports of "American made" goods only counted the components "made in U.S.A." as "exported", exports would be considerably smaller. But the government doesn't collect such statistics so we don't know the numbers. However, the foreign-made components of exports do get counted as imports so the "Balance" part of the table likely represents reality even thought the "Exports" part doesn't.
There's another statistic which is the "balance of payments" plus net international investment income payments. It's called "current account balance". Americans earn profits from foreign investments and foreigners also earn profits from investments in the United States. In the past, America earned more income from abroad than they paid to foreigners so this tended to help improve the trade deficit. In 2007 these income payments still showed a modest surplus in favor of the U.S. but as foreign investments in the U.S. expand due to the trade deficit (which provides foreigners with U.S. dollars to invest in the U.S.), this surplus may unfortunately be expected to become negative.
Besides the manufacturing sector of the economy there is the service sector which includes all types of services: from doctors, lawyers, real estate agents, and teachers to fast food workers and janitors. And what about agriculture, construction, and mining? Can't these sectors provide jobs and support our economy? Not without manufacturing (see Service Sector Supports Economy and manufacturing In order to import manufactured goods on a sustainable basis (without going into debt to pay for them) we need to balance trade by 1. increasing our exports to pay for the manufactured goods we import and/or 2. manufacturing the goods ourselves that we now import so that we would no longer need to import them.
If we go for exporting more, what should we export? Construction is done on site, usually employs local labor, and isn't easy to export. With our high population consuming food, there is not much agricultural surplus to export, and what there is for export (such as rice) just about balances our imports of food. For mining, the US exports coal, but not nearly enough to pay for our imports of petroleum (which ranged from nearly half of our petroleum consumption at the start of the 20th century to a quarter of our consumption today, 2017).
But can we export services? Well, we already export more services than we import. Our service exports (besides tourism) are dominated by computer software, mainly Microsoft's Windows operating system. This is not because the US is better or cheaper at developing computer software but because Microsoft has a monopoly on its operating system since much hardware will only work (or work well) under Windows. That's because much computer hardware has been programmed to only run under Microsoft and doesn't run well (if at all) under competing operating systems such as Linux. The hardware companies often will not disclose the computer codes that are needed to control the hardware so that Linux, etc. could fully utilize them. This has permitted Microsoft to maintain its monopoly but it might be changed by laws requiring such disclosure. Thus if Microsoft's monopoly should be broken in the future, the U.S. export surplus in services could turn into a deficit.
So the most feasible solution to the imbalance of trade appears to be a large increase in manufacturing for both export and to reduce imports by making in the USA, items that we now import from other countries. But this is much easier said than done. How can we manufacture if the costs here are significantly higher than certain locations abroad? The obvious answer is that we can't. But it's possible to balance trade by instituting protective tariffs which is the opposite of free trade. It's sometimes deceptively claimed that the U.S. is still very strong in manufacturing. See Manufacturing Statistics May Be Misleading
To revive manufacturing not only requires protective tariffs. One need is better (and often less) government regulation and taxes. See Government Over/Under-Regulation.
It also requires manufacturing know-how, much of which has unfortunately been lost as manufacturing jobs have been exported. One might think that all that is needed to obtain this know-how is to hire engineers from the top universities. But alas, they have been trained mostly in theory (which is also valuable) but are unlikely to know the nuts-and-bolts of manufacturing a certain product that we no longer make here. Only the people that once made it knew that (and of course the foreigners that are now making it know how to make it) And even if one does copy what is being done abroad (if one can avoid the problem of foreign patents that the U.S. recognizes, and find out trade secrets) one is just a copy cat of existing technology and is not on the forefront of new developments.
But couldn't one look at a book and find out about the design and manufacture a certain product? No, the reason being that (with rare exceptions) such books simply don't exist. No one writes them, except in some foreign countries, especially the former Soviet Union. The industrialization of the Soviet Union was faced with the same type of problems that the U.S. will now face with reindustrialization. The Soviets originally lacked the know-how to design and manufacture world class technical goods like automobiles, machine tools, railroad equipment, etc. So they started out just copying foreign developments and then tried to improve on them. They established engineering schools that taught the technology of a particular industry. For example, they had aviation colleges, railroad colleges, etc. The U.S. instead focused engineering education on theory like Electrical Engineering, Mechanical Engineering, etc. Instead of emphasis on theory the Soviet Union industrial colleges produced textbooks that described and analyzed the technology of a particular industry. Their textbooks often presented mathematical formulas based on the principles of simple mechanical and electrical engineering considerations. They also had textbooks that presented mainly theory similar to textbook in the U.S. This type of education is useful not only in manufacturing the hardware for a particular industry but for understanding of the hardware by the workers that work in the industry (such as say aviation workers and railroad workers -- or airline pilots and train drivers many of which had degrees from such industry colleges).
Thus if a country doesn't have a developed industry in a certain area (for example in the U.S. the electric locomotive and electric rail transit industries) then if one had recent technical books about them (showing details such as electric circuits) like the the Soviet books did, then one could use such books to help design such equipment and revive the manufacture of them. But alas, we have no such books and the old ones from the Soviet Union are much out or date, even if one can read Russian. However, the railroad colleges still exist in Russia but they've been renamed "universities" and some new textbooks.
However, in general, Russia has been losing it's manufacturing know how similar to the situation in the U.S. as Russia is importing more and more manufactured good from other countries such as China which borders on Russia. For example, Russia's high-speed electric trains are being imported from Germany. But Russia is paying for such imports by exports of oil and gas and not incurring huge debts to pay for imports as the U.S does.
So getting back into manufacturing is not only about how to manufacture goods, it's also about the intelligent and efficient design of goods. And it may require a study of foreign technology. It will not be easy.
But what if manufacturing is not revived but we are forced to balance trade because foreigners refuse to loan us any more money (or the like, such as demanding exorbitant interest rates).? Then there would still be demand for imported manufactured goods due to rich people willing to pay high prices for them but we would have to create net exports of other goods to pay for them. What would we export more of?
Well, we could increase exports of food to help pay for imports. The results would be less consumption of meat and much more malnutrition/hunger. It's not clear if there would be less obesity, since poorer people tend to eat cheaper foods with more carbohydrates and less fruits/vegetable resulting in more obesity. But people who were extremely poor might not have enough money for even such a poor diet and would loose weight. So it works both ways.
While there might be enough food to support the current population if food were equally distributed or rationed, the extreme unequal distribution of income and lack of rationing would mean that many poorer people would suffer hunger and/or malnutrition, or due to high food prices would need to become homeless due to high land rents. This, along with less health care would likely significantly reduce life expectancy and transform the U.S. into more like a third world country.
Furthermore, the service sector of the economy would be mostly dependent on agriculture production which is only a small part of the economy. But the non-agriculture portion of the manufacturing sector, which formerly supported much of the service sector, would be mostly gone. Thus unemployment would be much worse (than it was around 2010) for a U.S. economy based mainly on agriculture.
There would be also be less imports of fuel, which would become very costly: people would drive a lot less, vacation near home, car pool more, and be unable to make long commutes to work. Would there be a revival of public transportation (including mass transit) which is now heavily subsidized? With governments facing bankruptcy (if not already bankrupt) such subsidies would likely decrease. This would tend to decrease transit use. The fact that today mass transit is little more energy efficient than the auto (see Does Mass Transit Save Energy) would tend to work against a mass transit revival.
Thus failure to revive manufacturing would result in severe austerity, including high unemployment and hunger for some. But there would be some positive ecological effects: less greenhouse gases put in the atmosphere and less population due to lower life expectancy. But on the negative side there would be a decrease of environmental protection due to both less funding and possible weakening of environmental protection laws due to the demand for jobs as well as less enforcement due to lack of funding. Overall, it's better to revive manufacturing with emphasis on quality rather than quantity. Such a revival requires more government regulation which can be counterproductive if not well done.
One way to get away without manufacturing (except for natural resource processing like oil refining and food processing) would be to greatly reduce population so that we would consume less food and thus have more food available for export while still being able to have adequate diets for all. Also, with less people, we would need less imported manufactured good and thus wouldn't need to export as much food to pay for them. Decreasing birth rates take a long time to reduce population and this needs to be combined with far less immigration. In the natural world of wild animals, overpopulation leads to starvation as a solution to the problem.
This starvation solution is not a good one, based both on humanitarian and practical grounds: people are likely to revolt and try to seize the wealth of the rich before they will submit to mass starvation. But this is not so easy to do as much of the assets of the wealthy are in other countries and they may also leave the U.S. before they loose their assets. Also, taking the assets from the wealthy will not help that much since the rich are not really as rich as is generally assumed. Also savings are needed for investment which under capitalism is mostly provided by the rich. Under socialism such savings would need to be provided by the government. In both cases such savings ultimately comes from reducing the standard of living of the workers but the government may be able to save with less overhead costs (such as the luxuries of the rich). See Capitalism?.
This question is not well poised since it might mean: How many jobs have been lost due to the historical development of the trade deficit over the past years as compared to the number of jobs we would otherwise have if over the same years there was no trade deficit. Or it might mean: How many new jobs would be gained if we eliminated the current trade deficit, and this is strongly dependent on what methods would be used to to eliminate this deficit.
Historically (the first case above) the trade imbalance costs American manufacturing jobs since we have to borrow money to buy what we don't make here and if we made the goods here it would provide jobs that foreigners now have in making goods that will be shipped to and sold in the U.S. But this only part of the story. Not only have American manufacturing jobs been lost, but in addition, the service sector jobs that were once supported by this lost manufacturing should have been lost also.
However, most of these service sector jobs that should have been lost weren't really lost at all (one might think of them as "recovered") due to the borrowings by the U.S. from foreigners so that we could purchase imports (the goods that were formerly manufactured here). But unfortunately, this large-scale borrowing is unsustainable. While most of these borrowings are ultimately used to purchase foreign goods, they also support a substantial part of the service sector. How? Here are some examples: The government sells bonds to foreigners and uses the money to pay government workers (who work in the service sector of the economy). These workers spend much of their wages on other services, etc., etc. Or the government borrows money to pay pensions, health care, and other entitlements. These beneficiaries spend much of this money supporting the service sector, etc. Or people take out mortgages on their homes with much of the mortgage money coming from foreigners and with much of this money being spent in the service sector (by both the homeowner who takes out a mortgage and by the people who make profits in real estate from the money provided by the mortgage).
But the service sector jobs that were "recovered" by borrowing from foreigners can be lost again: Suppose we solved the trade imbalance by reducing the buying of imported goods until trade balanced. Note that here we just reduce consumption and don't make up for the lost imports by manufacturing more here. In this scenario we wouldn't need to borrow money from foreigners anymore to pay for these imports and the service sector jobs which this flow of foreign money supports would simply disappear. Thus, trade becomes balanced but many more jobs are lost in the process. For this method of eliminating the trade imbalance, it thus implies that the trade imbalance is saving jobs, not destroying them.
The amount of jobs lost by the above scenario could then amount to a value equal to a few times the trade imbalance since every manufacturing job supports a few service workers and importing via borrowed money is something akin to keeping the manufacturing jobs here. This is because importing provides the goods, just as if they were made here and the borrowing part of importing provides the money to spend just at if it were earned here by factory workers. So it's something like having the manufacturing done in the U.S. except there is no factory work to do in the U.S. and the result is an increase in debt due to the money borrowed to pay for the goods. This borrowed money goes to support the service sector just like money earned by factory workers helps support the service sector. Of course, the amount of money borrowed may not be enough to support the same number of service sector jobs that were lost due to lost manufacturing.
But there is another method of elimination the trade imbalance that will create more jobs: If at the same time as reducing imports, we brought back manufacturing to make the same goods here, then we would gain back the lost manufacturing jobs and the service sector jobs they once supported. So if the trade imbalance is solved by just buying less imports, then jobs are lost, but if it's solved by restoring manufacturing, then jobs are gained. Solving it by some combination of these two scenarios will give intermediate results that may produce a net gain or loss of jobs.
Thus for the current situation (2014) it's mainly the manufacturing jobs that have been lost, the value of which is roughly equal to the trade deficit. But in the long run when the trade deficit is no longer sustainable, service sector jobs will be lost with the value of the lost jobs equal to few times the trade deficit. That is, unless we can return manufacturing to the U.S. or be blessed by some unlikely miracle such as solving most of the other significant Causes of the Depression.
There are many Causes of the Depression Much has been written about these (and related) problems in both books, magazines, newspapers, and the internet. The books and some internet websites are often more of an alarmist nature than what one finds in newspapers and magazines. But there is real cause for alarm.
But what seems to be lacking in all this literature is the failure to cover the big picture in it's entirety in one book, including all its causes. This includes the problem of depletion of natural resources in the US such as oil, and comparing the current depression to past historical events such as the great depression of the 1930's, Russia's economic catastrophe in the 1990's, etc. The deindustrialization of U.S., including the loss of engineering know-how and patents, needs coverage too including the severe difficulties to be faced in possible reindustrialization of the U.S.
There is so much to cover that it likely requires at least a new, well researched book. Even the subtopic of deindustrialization could fill a book by itself. This article is by no means long enough nor comprehensive enough to adequately cover the many faceted aspects of this depression. But it hopefully will provide a brief look at all the major causes.
There are many kinds of debt: government, business, mortgage, and consumer. For federal government debt (almost 18 trillion in 2014) see Federal Government - Historical Debt (Table: 2000-current) or (Index to various tables: 1790-current). In addition, there are lower debts of state and local government. Besides government debt there is consumer debt, including mortgage debt. In a broader sense, debt includes unfunded entitlements including both public and private pensions and medical benefits. The public part of this includes both unfunded entitlements of future costs of social security (7.9 trillion estimate in 2011) and Medicare (37.9 trillion estimate in 2011). See The Entitlement Deficit: America's Other National Debt by FreedomWorks and United States public debt - Wikipedia, the free encyclopedia
There are pluses and minuses to being in debt, depending on inflation and interest rates. For many years, the government has been able to borrow money at interest rates which are lower than inflation. This case represents a negative "real rate of interest", where the value of the money which pays back the debt being not only worth less than the value of the debt (at the time it was incurred) but also less than the value of the debt plus the interest incurred on such debt. Of course, older debt which has a higher interest rate often has a positive real rate of interest. Thus the existing negative real rate of interest means the the government can effectively borrow money at negative interest which means that the lender is paying the government for holding the loan. Thus the government makes money on this. The downside is that the amount of government debt has still increased, and should interest rates go up, the real rate of interest may turn positive. As bonds mature, the government may have to borrow money at a higher interest rate (with a positive real rate of interest) in order to pay back such bonds when they mature (or when the bond-holder cashes in the bond early (where this is allowed)).
The U.S. has a annual GDP which exceeds the 10 trillion-plus of national debt. Thus a naive person might think that it will not be so difficult to pay off the national debt since we have so much GDP to use to pay it off with. But this is a fallacy for two reasons:
Most GDP can't be used to pay off debt since it's needed to produce GDP. For example, a worker works and makes things that represent GDP but in order to work the worker must eat food, live somewhere (rent, etc.), travel to work, etc. and all of this is consuming GDP to keep the worker alive and healthy. Thus a worker must consume GDP in order to create GDP and if the worker is struggling, s/he could possibly even be consuming more GDP than s/he creates. Such a worker has no surplus income to use to purchase say a home or pay back a previously incurred debt.
Debt is paid off using the surplus GDP that the is left over after spending much of the GDP to produce GDP. But in many cases such a surplus is non-existent and the debt is thus increasing. The U.S. economy is behaving like this. It's income is its GDP but it has to spend all of this GDP in order to support it's people so they can work and produce this GDP. It thus has no surplus GDP to use to pay back the national debt.
In fact the situation is even worse than this since not only is there no surplus, but deficits are increasing and we are going much deeper into debt. This situation was exacerbated by past government bailouts, the stimulus package of 2009 and guarantees. Thus, not only does it take all our own GDP to support us, but we must use part of the GDP of foreign countries to help support us by importing much more than we export.
Of course, if we could learn to live more frugally and save, perhaps we could turn this around and have some surplus GDP to repay the debt, but it would require a lot of sacrificing austerity over a long period of time (likely decades). Ironically, the economic stimulus packages encouraged just the opposite.
Since about half of our debt is held by foreigners, to pay back the debt will require a huge increase in exports. It also means re-industrializing America to make things here instead of importing them as well as exporting goods made in U.S.A. Thus if we just reduce our consumption of services we can't just say that now we have surplus services that we are not using and export those services. How would we, for example, export the services of retail clerks? What we would need to do then would be to retrain our surplus service employees to manufacture goods that are easy to export. This illustrates a second obstacle of using GNP to pay off the national debt: Much of the GDP, including many services, are not suitable for export. An exception is the huge export of computer software (considered to be a service) by the U.S. (mainly by Microsoft).
One often sees the claim made that manufacturing is still strong in the United States since statics indicate it is. But such statistics mislead people who don't understand the detailed definition of such statistics. One problem is that they include goods that are mostly just assembled in the USA using foreign-made components. Another problem is that many good are manufactured (such as many foods) but we don't think of them as being manufactured.
Some goods are actually only partly made in the U.S.A. but the statistics report them as being made in the U.S.A. An unusual example of this concerns gasoline. Of the petroleum imported into the U.S., over 75% is crude oil (see Transportation Energy Data Book, U.S. DOE, Chapter 1: Petroleum). But all of this consumed imported crude oil is counted as made-in-U.S.A. since the crude oil is input to oil refineries and chemically transformed into refinery output of gasoline, diesel fuel, etc. These are called "petroleum products" which come from imported oil but are deemed to be "manufactured" in the U.S. (by oil refineries) and are consumed in the U.S. Thus while such gasoline (for example) contains 100% foreign components (imported crude oil) it is technically made in the U.S.A.
Thus we count as "made in U.S.A." goods that are mostly foreign made but only assembled here. In 2013, more and more computers were being reported as being made in the U.S.A. when what was really happening is that they were merely being assembled in the U.S.A. from foreign-made components. See Lenovo Paves the Way for Made-in-America Computers as North Carolina Facility Ramps Up Full Production
Another problem lies in the definition of manufacturing. Many people think of manufactured goods as what one buys in non-food retail stores. But manufacturing statistics also includes most foods one finds in a market: milk, fruit juices, frozen foods, canned foods, baked goods, cereals, etc. In other words food processing is classified as "manufacturing" and the processed foods in the market are counted as "manufactured" goods and they are mostly "made in U.S.A.". This processing (manufacturing) is pretty much immune from being offshored since the raw food is produced in the U.S. and transportation costs (round trip) to process it elsewhere would be high, especially in view of the problems of spoilage and refrigeration if some foods were shipped to foreign countries for processing. So when one notices that most everything in retail stores is not "made in U.S.A." anymore, but then sees statistics that say a lot of stuff is still being made in the USA, they fail to understand it.
Since the U.S. needs to export more so it can pay for imports, one may wonder if the "captive" manufacturing that we do (such as food processing and oil refining) is exportable. Well, we already export a lot of petroleum products and our exports of them are nearly equal to our imports of them. But since we import about a quarter of our petroleum, increasing petroleum product exports requires a corresponding increase in imports of crude petroleum, although the refining that we perform adds value. Regarding exporting more processed food, this requires growing/producing more food and unfortunately we don't have much of a food surplus. So exporting more processed foods could result in importing more of other foods and would likely be a little help in improving our foreign trade deficit.
So the claim that we have lost most of our manufacturing jobs is true if one excludes agriculture and mining "manufacturing". In other words, if one excludes food processing, lumber mills, oil refineries and the like. There seems to be a lot of problems with manufacturing statistics, including estimates of productivity and much more research into this is needed to understand what is actually going on.
Some might claim that since the United States is (supposedly) very wealthy, we can thus readily cope with economic adversity, such as by raising taxes on the wealthy. But we (and the rich) are not nearly as wealthy as we (or they) think. It turns out that most of our so-called wealth is really just agreements as to the future distribution of income.
For example, consider government bonds. They entitle the bond-holders to cash the bonds in the future and receive money from the government. But how will the government get the money to pay back these bonds? Supposedly it will tax people in the future in order to pay back the bond debt. Thus if I have a bond, I have (in effect) an agreement that in the future someone will earn income, pay tax on it (including non-income taxes) and then transfer the appropriate amount of tax money to me or my heirs (via the government). This is all about the future redistribution of income and not a store of wealth (like gold or commodities in storage). Someone will supposedly earn money in the future and pay it to me via way of future taxes. A bond, of course, doesn't specify exactly who will be taxed in order for me to cash the bond. It could be that many people will be taxed in order to pay back my bond. Thus while people and organizations count the government bonds they hold as wealth, they really are not wealth at all but just agreements (implied promises) on the future redistribution of income in favor of the bond holders.
What about stock? It is much the same as the above for bonds, only the payment in the future is from corporate income rather than taxpayer income. The stocks have market value alright, but this value is (or should be) just the expectation of dividends in the future to be paid out of expected future corporate earnings (see Stock Value is its Dividends. Thus the stock represents a future redistribution of corporate income in favor of the stockholder. One might argue that this is different than government bonds because the real assets of the corporation (less it's debt) are owned by the stockholders. Thus in theory, should the corporation go bankrupt, it will sell it's assets, pay off other claims, and then give whatever is left to it's stockholders. But in reality, stockholders almost always receive little or nothing if a corporation fails since the "other claims" (including the higher priority claims of bond-holders) eat up all the remaining assets of the bankrupt corporation.
The case for corporate bonds is much like that for stocks. A major difference is that the bond holders have a higher priority claim on corporate assets in case of bankruptcy. While bonds still represents an agreement as to future redistribution of income (the bonds supposedly to be paid back out of corporate earnings) there is more real property behind them. Even so, in many corporate bankruptcies, the bond holders receive much less than the face value of their bonds.
Then there's real estate assets. Part of the real estate assets are represented by mortgages but one shouldn't try to double-count by (for example) claiming that a million dollar mortgage on a home represents a million-dollar asset and then also count the home as an asset, thus obtaining a total of two million dollars of assets.
Mortgages are debts which represent a future commitment of the homeowner (or business) to pay stated amounts of money to the mortgage owner. In other words future household or business income is to be redistributed and given to the banks (or other mortgage owners).
But what about the value of real estate itself (such as unmortgaged homes or home owner's equity)? For urban housing, one valuation would be the future stream of net rents from the property (after deducting maintenance expenses and property taxes, etc.). If the property isn't being rented but is being used by the owner, then the rent is imputed rent that represents the benefit to the owner of using the property. But what do future rents amount to? Rent can be divided into rent for the land and rent for the buildings and other improvements to the land.
For land rented to a future tenant, land rents represent a redistribution of income from this tenant to the property owner. That's because land is a gift of nature and didn't require any human effort to created. Land rents are charging for the use of something created by nature by a person who claims to "own" it.
And what about credit card debt? The owners of that debt consider it wealth but it is also just agreements of future redistribution of income from the debtor to the bank (and the bank stockholders, deposit holders, etc.).
So from the above one sees that most wealth, isn't really wealth at all but is just various legal agreements about the redistribution of future income. For debts owed by by persons, they obviously can't use all of their income to pay off debts, since they have to spend some (or even most) of their income on living expenses. Thus they use "surplus" income to pay off their debts so the redistributions of income in such cases is more precisely redistributions of surplus income. Of course if the debtor is out of work or has a low paying job, there may be no surplus income to pay off debts with, the debtor goes into default, and most (or all) of the alleged wealth disappears (although the "wealth" was never really there in the first place).
If someone who is broke claimed to be wealthy because that person says he/she expects to make a lot of money in the future, you would just laugh at such a ridiculous claim. But the situations mentioned above are similar to such an absurdity.
While most wealth may be phoney per above, a lot of it is represented by real objects, which are deprecating in value. There is wealth in infrastructure: roads, airports, utilities (gas, water, telephones) and much of this is government owned. There is also much wealth in luxury goods such as yachts, luxury cars, mansions, vacation homes, etc., much of which is of little use in solving our dire economic problems. Gambling casinos represent assets that are parasitic on society.
So called wealth is held both by individuals, governments, and trusts (like pension and retirement funds). For individuals, one measure of personal wealth is the net worth of each family (or sometimes, each adult person). This is the amount of assets (including the value of their home) minus debt. While some people have negative net worth, several percent of the population has a net worth of over a million dollars (as of about 2010, see Wikipedia).
Much of personal net worth is in real estate and much of this is the "value" of urban land. This is considered valuable since one can exact "land rents" from future tenants ,and even claim that future owner-residents will receive the future benefits of "imputed rent" of the property. While owner-residents don't actually pay land rent, the federal government statistics on GDP is based on the assumption that they do and calls this "imputed rent". It may also be called "Owner's Equivalent of Rent" which is estimated by the U.S. Bureau of Labor Statistics.
The housing bubble of the late 2000's happened in part because people just couldn't afford the high land rents that they paid as part of their mortgage payments. So a large part of the real estate wealth is hoped for future land rents exacted from the persons that will live on the land (either as tenants or owners) in the future. Will they actually pay it? If (as is likely) the depression gets worse and lasts longer, they may not pay much of it.
Thus the useful net worth of persons is grossly overstated. To personal net worth, one should add government net worth. This would be especially important for a full socialist government that owned most of the means of production (such as factories). Again, the net worth of government is its assets minus its debt and with many trillions of debt, the net worth (per Wikipedia) is claimed to be negative.
So overall, the net worth of the U.S. (and it's citizens) is a lot less than many think it it. In other words, we are not nearly as rich as we think we are and when the claim is made that trillions of wealth has disappeared, most of it was probably never actually there in the first place (except on paper).
Who will be hurt by the loss of much of this phony wealth? Well, the rich will loose the most since they hold much of this wealth, but they will be hurt the least since they will still have enough wealth left (in most cases) to live comfortably. However, the poor depend on benefits like social security, welfare payments, unemployment insurance, etc. and much of the assets of these entities is also phony. Thus such payments would need to be drastically cut back, resulting in much hurt for the poor.
It's sometimes claimed that we are now a service economy and thus manufacturing isn't all that important to our survival. But actually, the service sector in the U.S. depends on the declining production sector to support it. Also borrowing from foreigners and selling them our assets helps support the service sector, but this temporary expedient is not sustainable. Most of our "GNP" (Gross National Product) is in the service sector and the output of this sector has been growing while the manufacturing sector is declining as goods formerly "made in USA" are replaced by imports.
In order to live we must produce real goods, especially food, clothing, and shelter. This also includes the materials necessary to repair clothing and shelter. Some things we produce are not essential, but can be traded (or sold) for more essential goods (food, clothing, and shelter). Even if we are thrifty and keep things for a long time, they will eventually need replacement or repair. And even repair requires production of repair parts.
If we don't manufacture certain types of goods in the U.S. then the only other way to get them is to import them. But there is one problem with this: Where do we get the money to pay for them? The sustainable way is to export the same value of goods and services to other countries so that we can use the money obtained from exports to purchase imports under conditions of balanced trade. Unsustainable methods are to borrow money from foreigners, sell them our assets, or just print money.
With modern technology, people who produce things create much more value in material goods than they themselves need. Thus their excess production is shared with both workers in the service sector of the economy and by the non-working population (retirees, children, housewives, inmates, etc.). The owners of the capital used in production usually also get a substantial share too (via profits).
What is the service sector? If you hire a mechanic to work on your car or a plumber to work at your home, you are directly employing someone in the service sector (for a brief period of time of course). Sales clerks/associates, doctors, lawyers, ministers, and janitors are also in the service sector. Our taxes support many people in the service sector such as teachers, policemen, soldiers, bureaucrats, etc. Many occupations belong to both the service sector and the production sector. When a plumber repairs a pipe in a factory he is working in the production sector. When he repairs a pipe in your home he is working in the service sector. Government statics tend to over-count people in the service sector and might erroneously count the plumbing repair in a factory as a service if the plumber is not employed by the factory.
A rich person may support several people in the service sector while a poor person may support only a small fraction of a person in the service sector. On average, each person directly requires the services of less than one other person in the service sector since otherwise there would have to be an infinite number of persons in the service sector. For example, if each and every person required one person in the service sector to provide them with services, you would have the following impossible situation: person-1 requires service person-2; this person-2 in turn requires person-3 (in the service sector); person3 requires person-4, etc. There is no end to this series, resulting in an infinite number of people in the service sector which is clearly impossible.
As mentioned above, people working in the service sector also need others in the service sector to provide services for them. If every person directly required 2/3 of a person in the service sector then it is trivial to show that there will be twice as many people in the service sector as in the production sector. In the above scenario, each production worker requires 2/3 of a service worker, but that 2/3 of a service worker in turn needs the services of 4/9 (2/3 x 2/3) of a service worker and so on ad infinitum. The total number of service workers engendered by the production worker is thus the sum of an infinite (but convergent) geometric series which is equal to two in this case. Since incomes are far from equal (resulting in more services for the rich), the example is overly simplified but it does illustrate the general concept.
As productivity increases in the production (non-service) sector, each production worker can support more service sector employees. Computers and automation contribute to increased productivity in the production sector and to a lesser extent in the service sector. However, fossil fuel energy resources are being depleted at a rapid rate. As a result, energy becomes more costly which tends to decrease production sector productivity. Reducing pollution also tends to decrease productivity (at least in the short run). Thus one can't assume that in the future we are bound to increase our productivity in production so that the ratio of service workers to production workers will keep increasing.
While two service workers per real production workers may seem too low, it's just an example. There are probably more service workers today than there should be due to wasteful activities such a gambling, medical treatment where the costs outweigh the benefits, government inefficiency, etc. Also, there are less production workers than there should be due to loss of manufacturing jobs to foreign countries. Another example would have every worker need the direct services of 3/4 (r=0.75) of a service worker, resulting in s=3 service workers per production worker, etc. For any r, s = -l + 1/(1 - r) based on the formula for the sum of a geometric series.
A theoretical economist might object that the above model is not based on supply and demand curves, but actually it is (sort of). In a closed economy there is a supply and demand curve for every good and service and the intersection of such curves will determine the quantities of consumption of goods and service for which the ratio of service workers to production workers may be found (after utilizing other data).
But it's not quite this simple. Each person (in theory) has a utility function where a numerical utility value (a number) is a function of his consumption of goods, services, and savings. Each person should allocate their income so as to maximize their utility function
However, people don't know their utility function very well (most have never even thought about it) nor do they have a lot of knowledge about the various possibilities of purchasing good, services, and investments (negative investments being loans). So they don't usually reach a solution that actually maximizes their utility (but it may come close). But using such utility theory (in theory) would result in determining a service workers to production workers ratio. However, people have little choice when it comes to paying taxes to support government employees, most of whom do services which the taxpayers pay for whether or not they want such services performed. So a correction to the above calculation would need to be made to account for this.
Let's examine in more detail the case of two service workers per real production worker who makes real goods in manufacturing, agricultural, and construction. Consider a closed economy of 3 workers: one production worker and two service workers. Each such worker in this simple model may represent a large number of actual workers in the real world (for example, a million). Each of these 3 workers produce a wide variety of goods or services. It's possible to operate this economy based on simple barter (without money). The production worker produces all the real goods needed by himself and the two service workers. This model assumes egalitarianism where each worker allocates a third of his output to each of the two other workers and keeps the remaining third for his own use. Thus the production worker keeps a third of his production for himself and receives a third of the services created by each of the two service worker.
To be more realistic, assume that each worker has a dependent with which the worker's income (non-monetary in this case) is shared. Thus the production worker makes enough goods to support 6 people: 3 workers (including himself) and 3 dependents. If the production worker should loose his job and stop producing, there are no real goods for any of these 6 people to live on and they are now without any means of material support.
Now let's introduce money into this 3-worker economy. Each worker gets the same income and buys 1/3 of the output of each worker by giving 1/3 of his pay to each of the other 2 workers while paying himself 1/3 of his pay.
What about taxes? Well, part of the work of the service workers is providing government service to the 6 people in this economy. Everyone buys services from the service workers, including government service. One differences between buying personal services and government service is that buying government services (via taxes) is mandatory, whether or not one wants, needs, or gets the service. Thus some of the total services that are purchased are mandatory and really represent taxes. The same type of situation holds for material goods. Workers are required to buy material good that are for common use (government owned) and this is also a form of taxes. It's assumed in this model that such taxes are a fixed percentage of income for all 3 workers.
It may seem strange, giving 1/3 of one's pay to oneself, but remember that each worker actually represent perhaps millions of workers so that paying oneself is actually paying many other people. Note that the wages of these 3 workers represent the GDP of this economy. The GDP of the production worker provides the material goods to support the two service workers. So one unit of GDP of production enables the creation of 2 units of GDP of services resulting in a total of 3 units of GDP for each unit of production GDP. It's like a "multiplier" effect.
Now consider what happens is the production worker loses his job. In such a case the unemployed production worker can't pay the service workers and while service workers can still pay each other, this situation is unsustainable since there is no material goods for them. One sequence of events that finally results in both service workers losing their jobs also, is as follows: With the one production worker out of work, 2/3 of a service worker gets laid off since the production worker has no income to pay his 2/3 of a service worker. Then with the 2/3 service worker out of work with no income for here to hire service workers, 4/9 of a service worker (2/3 x 2/3) loses her job, etc., etc. The sum of this geometric series is just 2 which shows that both service workers lose their job. No one has a job anymore because the production worker lost his job.
What would actually happen is that these 3 people would seek material goods from outside their isolated economy. But how would they pay for them without exports, and what would they export?
Suppose that the production worker's job has been moved (exported or outsourced) overseas. It may be possible to borrow money from outside this 3-worker economy so that it can purchase foreign-made material goods. If this borrowing just pays the unemployed production worker his previous salary, everything will be fine (until repayment of the debt falls due). He then can use 1/3 of this borrowing to purchase foreign material goods for himself and also continue to pay each service worker 1/3 of his wages so that they too can purchase material goods from outside. The service workers continue to pay each other and themselves for the services they use.
Note that for each unit of GDP provided by the loan, 2 units of GDP are created by the services provided by the service workers. (the multiplier effect). But if at some point further loans are not available from outside, then each dollar of loan lost causes a $2 decrease in GDP.
My article on Human Energy Accounting provides more discussion regarding the special role played by service workers.
There are two major conclusions: One is that the large service sector can't be sustained unless there is a production sector somewhere to support it. Without the production sector, there would be no food, clothing, housing, buildings or transportation for the service sector. The second is that borrowing from foreigners to enable us to buy foreign-made goods also support perhaps twice as much GDP in the service the service sector than the amount of the loans (multiplier effect). When we can no longer borrow this, these service sector jobs disappear.
Previous to this, it's been shown how the service sector of the economy depends on the production sector. But the converse is also true although it's of lesser significance. In the modern world, production workers need service workers to provide them with services. But while they need service workers, one may argue that they are not absolutely essential since production workers might be able to provide services they need for themselves. This includes the case of a housewife (or house-husband) providing services for one's spouse. However, in such a case one could classify a homemaker-spouse of a production worker as being service worker (in whole or in part). But in the modern world, some services need very specialized service work which most production workers or spouses couldn't handle. For example: airline pilots, doctors, scientists, etc. Thus one could argue that service workers are essential.
How many production workers are supplied with services by one service worker? Going back to the example of one production worker supplying goods to two service workers, one sees that one service worker only supports a half of a production worker with services. So if that service worker's job were to be exported to another country one-half of a production worker would lose his job. But to avoid discussing half-persons, let's assume that 2 service workers get their jobs exported to another country. Then a production worker would lose his job. But if that production worker could do services for himself so that he effectively becomes 1/3 of a production worker and 2/3 of a service worker, there is no loss of production jobs. Note that the original 3-worker economy becomes a 1 worker economy, with the same 1:2 ratio of production to service workers. Also, since less capital is usually needed per service worker, it may be possible to find another service worker to replace the two service workers whose jobs were exported. Another consideration is that while it's common for production worker's jobs to be exported, many service workers jobs are non-exportable. For example, how does one export school teachers jobs to another country to perform the same work of teaching the same students?
Thus the impacts of a service worker losing her job are not as severe as that of the production worker losing his job and the rule that service workers are dependent on production workers is or more significance than the converse. But since the dependence works both ways (but is not fully symmetrical), production workers and service workers are thus inter-dependent.
An example would be a factory closure in a town where the economy of the town was supported by the factory. The result is that all the service workers there lose their jobs since there is no production (and factory workers) to support them. You can't just say that after the factory closes that this town needs new production workers and import them back into the town to support the service workers. The factory is gone and there is no place for the production workers to work at. But the other way around is different. If a number of service workers leave town and leave the factory employees without the services they need, then it should be easy to import new service workers from elsewhere back into the town to provide the needed services for the factory workers (and other service workers). Thus the dependence of service workers on production workers is much more significant than the converse (in most cases).
The above analysis showed that for a closed economy the service workers depend on production workers for their jobs. The world itself is a closed economy but a single county is not, because it is likely to engage in foreign trade with other countries. But for a non-closed economy, does the service sector depend on the production sector. The answer is generally yes but there special cases which are exceptions.
For example, an island country (with an non-closed economy) may have many foreign tourists visit it and spend their money there. It is thus exporting tourism and provides services for tourists (lodging, meals, excursions, etc.). If the tourism is large enough, this island nation could exist just by the export of tourist services in order to earn money to import real goods needed by its citizens. From the point of view of just looking only at the island's economy, the service workers need few (if any) production workers on the island since it can import goods produced by foreigners elsewhere. But the service workers are still dependent on these foreign production workers. Thus, whether or not the service economy depends on the production economy depends on the scope of the question: for the whole world it's true but in some causes it may be false when the scope is just an isolated country that mainly supplies services for foreigner. What is the situation for the United States?
For the U.S., we do have a surplus in the export of services (much of it computer software) but it's not nearly enough to support our net imports of manufactured goods and oil. Thus, for the U.S. economy today, the claim that most of the service sector depends on the production sector is true, at least for a sustainable service sector. While the service sector in the U.S. was once actually fully supported by the production sector (and depended on it), today much of it depends on borrowing money from foreigners so that we can buy their manufactured goods and thereby help support our service economy. This of course is unsustainable since the U.S. can't maintain its high rate of borrowing for too much longer.
Manufacturing is the mainstay of the U.S. production sector. The non-manufacturing production sectors consist of agriculture, construction, and mining. Since both agriculture goods (food, etc.) and mining products are exportable, exports of them can be used to exchange for imported manufactured goods. But construction is not exportable. This means that a country that has a large surplus of agricultural or mining goods (such as oil) doesn't need to manufacture much (if any) since they have a large volume of non-manufactured goods for export. For example, some oil-rich countries can do well without any manufacturing (at least until the oil runs out). But the U.S. isn't one of them as most of our oil has been already pumped out of the ground.
But these three non-manufacturing production sectors depend on the outputs of the manufacturing sector. The machinery used in these sectors is of course manufactured. Thus one can (in addition to claiming that most of the service sector depends on the production sector) claim that much of the service sector depends on manufacturing.
Although mining and agriculture are considered non-manufacturing, the outputs of these industries are often put through a manufacturing process and statistics report this as "manufacturing". For example, while crude oil is not manufactured, refining crude into gasoline, jet fuel, etc. in an oil refinery, is considered manufacturing. Processing of mined ores into pure metals (or other chemicals) is also considered to be manufacturing. For example, smelting of metallic ores.
For agriculture, the output is often put thru a manufacturing process. Logs are sawed into boards in a sawmill. Wine is made from grapes at a winery. Freezing or baking of food for the supermarket is manufacturing. Etc. For construction, it's the inputs that are manufactured:lumber, cement, steel beams, etc.
The manufacturing of the outputs of agriculture and mining are often not feasible to outsource and this manufacturing remains in the United States. Inputs to construction is a mixed situation with high priced items such as home hardware items often being imported.
But there's another category of manufacturing needed to support these 3 sectors. It's the provision of capital goods to mining, agriculture, and construction. It turns out that as of the late 2000's the exports of such capital goods from the U.S. exceeded the foreign imports into the U.S. In other words, the U.S. had a favorable trade balance but foreign competition is intense the the U.S. has been losing market share. See Agricultural Equipment - International Trade Administration and CONSTRUCTION & MINING EQUIPMENT - International Trade.
So for some types of manufacturing we are holding our own and are not losing jobs to foreigners (at least not yet) other sectors of manufacturing like consumer goods have a very unfavorable trade imbalance. So overall, we are just not manufacturing enough in the U.S. to support our existing service sector. This leads to unemployment in the service sector, but the unemployment would be much worse if we were not for the importation of manufactured goods using money borrowed from foreigners. This going into debt to obtain foreign manufactured goods is of course unsustainable and when it comes to a halt (as it eventually must) unemployment in the service sector will greatly increase. Thus in order to survive as a developed country, we should revive manufacturing but it won't be easy. If We Don't Revive Manufacturing we may expect severe austerity.
At the same time, manufacturing is costly, including costs to the environment. Thus manufactured goods need to be of high quality and last longer so as to reduce the need for so much manufacturing. Thus, if manufacturing returns to the U.S. it should be of lower volume, but of higher quality with the goods easy to repair. But the current widespread importing of goods instead of manufacturing them ourselves will eventually lead to the destruction of the economy of the United States. One may also criticize the production of unneeded luxury good like yachts, recreational airplanes, etc.
"The service sector depends on the manufacturing sector" ?. Is this true? It's not true in general per the examples above of countries exporting minerals (including oil) and food/lumber, etc. to exchange for imported manufactured goods. It's also not true for some small countries where the major "export" is tourism (like Cuba). But for the U.S., which imports about a quarter of it's oil but has balanced international trade in food, it seems to be true, at least in the long run. In the short run we can support the service sector by borrowing from foreigners, but this is not sustainable.
"Free Trade is a major component of what is known as "globalization" which is a broader concept than just "free trade". But "free trade" is the main part of "economic globalization" (see Wikipedia). "Free trade" means that trade between nations is unimpeded by tariffs, import quotas, and other restrictions.
In the early 1990's the author believed in free trade, meaning that the U.S. and other countries should not impose tariffs to impede the free exchange of goods in foreign trade. I believed in the model presented in most freshman economic textbooks showing that everyone is better off if each country specializes in what it does best (comparative advantage). If one country is good at growing apples and another good at growing bananas, then they should exchange apples for bananas without any tariffs to restrict such trade. Elementary economic textbooks show that everyone is better off this way.
Unfortunately, the economic textbooks I read (including ones I looked at recently) didn't consider the case of free trade where capital is also transfer from one country to another. This can mean poverty (including homelessness) in the country that is losing capital. Another consideration is the cost and skills of labor. Some places in the world that have low wages, a skilled workforce, little corruption or governmental red tape, and are open to foreigners supplying capital goods, tend to attract production out of the U.S. and other developed countries (offshoring). In such a case the exporting low-labor-cost country has a comparative advantage in most everything and has a huge trade surplus (such as China). One way to examine what happens is to consider an extreme hypothetical examples.
Outsourceable manufacturing means manufacturing that the U.S. once did (or now does) but that is feasible to move to other countries (that is, to outsource). "Outsourceable manufacturing" excludes the "captive manufacturing" which isn't feasible to outsource such as processing foods grown in American or the processing of minerals (such as oil) produced in America.
Consider the following somewhat extreme example: Suppose that the population of a country consists of production workers (manufacturing, mining, agriculture), service workers, dependents, and capitalists. Dependents include retired people receiving pensions since the currently working people need to support them. Capitalists are the owners of capital used for production and services and includes stocks, bonds, and pension funds that hold stocks and bonds. But the persons who make the decisions about the deployment of capital and outsourcing options are not just the capitalists but also the top executives of corporations controlling capital.
Production workers are subdivided into outsourceable manufacturing, non-outsourceable (captive) manufacturing and non-manufacturing production workers. The last two categories of workers would include farmers, miners, oil extraction workers, and the people who process such resources (food, oil, etc.) and work in the U.S. Their jobs are pretty much safe from being lost to foreigners (outsourced).
The outsourceable manufacturing workers are dependent on the capital of the capitalists their livelihood. Assume that all of this capital is readily mobile and can be transplanted to foreign countries where wages are low and thus where capital will garner more profit. If it is so moved to foreign countries, then all the outsourceable manufacturing workers that don't own any substantial amount of the capital are deprived of their means of existence. However the captive manufacturing industries (and their employees) remain in the U.S.
Not only that, but the people in the service sector which depended on the above outsourceable manufacturing sector are also out of work. See Service Sector Dependent on Production Sector. Only the capitalists that happened to be invested in the outsourceable manufacturing sector are better off since they now make more profit on the low-cost foreign production. They will also be able to purchase more services on their higher profits. But by no means will they be able to employ the huge service sector that lost their jobs due to the outsourceable manufacturing workers loosing their jobs.
If this extreme example were the U.S., then no goods of the outsourceable manufacturing industries are made the US anymore and the foreign-earned profits made by some of the capitalists are used to pay for imported foreign goods for them (perhaps only a few percent of the population) and for say a few time times their numbers in the service sector. While there would also be others still employed in agriculture, mining and construction, plus the work processing minerals and agricultural products (often classified as manufacturing) a majority of Americans are unemployed/underemployed and the capitalists that make income from their ownership of capital (much of it now deployed in foreign countries) plus the other people still working just don't have enough income to pay sufficient taxes to support the masses of unemployed with sufficient benefits. Thus the huge number of unemployed will have to do something drastic to survive such as be willing to work for the low wages of the low-wage countries (that have taken away American jobs) so that capital will return to the US. These wages are so low that many workers may have to live in slum housing or live in tent cities (homeless). Crime is likely to be high.
The above scenario seems extreme and what will actually happen may not be as severe. But to a substantial extent, much of it is already occurring. This example clearly shows that if one moves capital out of the U.S. (and doesn't replace it in the U.S. with other capital or export much more agricultural production by say drastically reducing population), then U.S. workers become poorer. It is sometimes said that laid-off manufacturing workers should obtain jobs in the service sector, and many of them have done so. But Service Sector Dependent on Production Sector showed that as capital is exported, there is less real income from manufacturing to support the service sector. Thus if such a laid-off manufacturing worker does obtain work in the service sector, it is likely to result in someone else loosing a job in the service sector and/or in depressing wages in the service sector.
In a way, the above scenario is overly optimistic because in reality, foreigners own U.S. investments and take interest and profits out of the US resulting in the net value of profits returned to the U.S. from the foreign investments of Americans is now negative (after subtracting the amount paid to foreigners from their investments in America). Only a partial impact of the above scenario has hit the U.S. so far since we are borrowing money from foreigners and selling them our assets to temporarily avoid the consequences of loss of manufacturing.
With globalization (mainly free trade) manufacturing tends to go to the countries with the lowest wages and laxest regulation. But what explains the difference in wages between countries? In general, rich countries have high wages and poor countries have low wages. But there's a lot more to it. High productivity per worker tends to mean high wages unless the worker isn't given most of the benefits of high productivity due to high profits of the company he works for, high housing costs, etc. When calculating productivity (the amount of labor per unit output) one must take into consideration the amount of labor used to create the capital (machinery, computers, etc.) used by industry.
However, productivity as a whole doesn't just depend on the amount of capital (modern machinery, computers, etc.). It also depends on the quality and quantity of natural resources including land (and the minerals/oil/natural gas in the land), climate, water supplies, forests of trees for lumber, etc. Since natural resources are finite in quantity, their productivity per persons is also dependent on population. A lower population will have more such resources per person and thus be more productive (at least in the mining and agricultural sectors of the economy). Overpopulation will result in less productivity such as trying to farm marginal farmland. There's also a secondary problem of overpopulation which is due to people residing on land that otherwise could be used for agriculture. Another factor is government and social conditions. High productivity requires educated literate people and well as good governments that effectively provide security for people and industries, and which are reasonably efficient and not excessively corrupt.
Thus wages will tend to be higher if a country is rich in natural resources, not overpopulated, and has a substantial amount of highly productive machinery in it's industries. Being rich in natural resources is partly a matter of luck. Some countries are lucky to have a lot of oil in the ground, but if this oil wealth spurs high population growth, as it has in some Arab countries, the eventual result may be poverty due to overpopulation when the oil runs out. Being well industrialized is in part due to savings which tend to be higher if the country is rich in natural resources but there are exceptions, such as Arab countries which didn't develop industry since there was so much oil money flowing in from exporting oil that they didn't need to do so. They saved by investing in foreign countries but didn't use their funds (yet ?) to develop their own industry.
The United States was once very rich in oil, natural gas, and minerals (but they are becoming depleted). It's still rich in farmland, climate and water (which is running low due to excessive pumping out ground water from wells). The U.S. was in the 20th century, heavily industrialized, but has lost many of its industries to the low wage industries of foreign countries. It has traditionally had high wages and minimum wage laws which tend to support such wages but which can't compete with some much lower foreign wages.
While for many other countries, wages are high like the United States, there are so many overpopulated and resource-poor countries that one expects that the sharply lower wages in other countries will extend into the long range future of the next hundred years or more. Thus one can't wait for foreign wages to rise to bring wage equality to the world.
What happens in a country if some jobs are highly productive while others have very low productivity? A current (2011) example is China. The low productivity job in the countryside there pay very low wages. For a substantial increase in wages, these low-paid workers are willing to move to the cities to take higher productivity jobs, but such wages will still be far less than in high-wage countries. Thus the very low wages of the low-productivity jobs drives down the wages for high productivity jobs, permitting the owners of high-productivity industries to make high profits by paying lower wages.
This concept is that under conditions of free trade, jobs tend to go to the country that has the lowest wages, the least government restrictions, and the lowest taxes. In other words, capital is invested the countries where goods can be produced at the lowest cost thus maximizing profit. There are some "exceptions" to this rule but in general, the "race to the bottom" rule applies.
It's sometimes claimed that if country L has Low wages but country H has High wages, that it's OK for country H to lose jobs to county L since then country L will then have foreign exchange to purchase high tech goods from country H to provide high paying job in country H. This compensates (perhaps only partially) for the loss of jobs by country H to country L. But does it really work this way? Usually not. This is because the high tech jobs are often outsourceable too, especially if country L has educated engineers (and others) able to run the high-tech operations. The high-tech know-how can also be exported from country H to country L by the company that moves its manufacturing from country H to L. Such a company gets its skilled employees to train the new employees in country L how to do the complex tasks required and may even move its research and development from country H to country L.
Another "exception" is not really an exception since it's what may happen over time. The country L that gets new jobs may eventually become as rich as country H so that eventually its wage rates go up so that that there is no longer any motivation to outsource the jobs that were outsourced many decades ago. But it may be too late for country H to get the jobs back since it has lost its industrial know-how, patent rights, etc. And in the meantime, new low-wage countries may have appeared of the scene that are feasible for outsourcing. So there still remains a motivation to continue to outsource jobs.
Still another exception would be if there is perfect competition for jobs between H and L and that the workers in H are willing to greatly reduce their wages so as not to loose their jobs. Factors that work against that are unemployment insurance, savings, welfare benefits, possible availability of other jobs, high housing rents, etc. But in a fantasy and "adjustable" world, the workers in H would accept much lower pay, landlords would reduce rents so as to be affordable (and mortgages would be foreclosed), property taxes would be lowered since landlord income had been reduced, government would reduce wages of government employees, etc., etc. But this is not completely fantasy since if country H can't find the money to pay for importing manufactured goods and at the same time maintains free trade, it may be forced to do something like this to maintain the livelihood of all of its citizens.
Assuming that countries H and L above have different currencies, would changing the currency exchange rates between L and H stop the export of jobs from the high wage country H to the low wage country L? Well, it would have some effect, but first, before discussing this it's important to realize that exchange rates are normally determined by supply and demands and can't be arbitrarily changed.
For example, support that a bank that does foreign exchange decides to go against the market rates determined by supply and demand. If the bank sell a certain currency too low (in exchange for another currency) then it will have a buy that currency at a higher market price to replenish it's supply of it and this will be a losing operation. It will also be a loss if it buys a currency at too high of a price since will have to get rid of it at a lower market price. If, on the other hand, it tries to sell too high or buy too low, another foreign exchange bank competing with it will offer better deals and it will lose business.
Thus going against the market is a losing game, except there's a special case where it doesn't seem like a losing game. That's the case for China today which is accused of selling (exchanging) their currency too cheaply so as to get more foreigners to buy goods there (goods exported from China to America, for example). How can they do this without severe losses? Well, they can sell Chinese money cheap and instead of getting it by buying it at a higher price, they can simply print Chinese money and sell it at a low price to Americans for dollars. While this may bring more American dollars to China and enable them to sell the U.S. more goods, it's still a losing situations for China. Why? Because instead of doing this they could just print the money and use it for their own purposes (and not exchange it for dollars). They could, for example, use this printed money to reduce taxes, thus putting more money in the hands of Chinese consumers who would buy Chinese-made products that would otherwise be shipped to America. Of course printing money in both the above scenarios tends to decrease the value of their money and of all bonds and other investments denominated in their money and printing money is thus not without costs. The actual printing itself is almost without cost since it's done on computers. See print money .
But now back to the unusual case where it's actually possible to manipulate exchange rates. Consider the following hypothetical example. Suppose that workers in country L are willing to work for a wage that will only provide a standard of living half that of country H. Further, neglect all transportation costs. Will jobs go from country H to country L?
Factory owners in country H can move their factories to country L where the workers only expect half the standard of living. They could pay them in H's currency and then sell them the goods and services they need for living from country H accepting payment also in H's currency. Note that there is no exchange of currency at all. But since workers in L will accept a lower standard of living, the factory owners only need to pay them half as much for the same production, thereby saving labor costs. One may object to this model since workers in L may prefer to buy some of their consumption goods from other than county H such as from their own county L. But such voluntary choices by workers in country L to buy non-H products only goes to improve their perceived standard of living, allowing the factory owners to pay them even less and increases the incentive to move jobs (and factories) from country H to country L.
There is a lot more to say about the above model but an obvious tentative conclusion is that jobs will tend to migrate from a high standard of living country to a low standard of living country where the "standard of living" means the standard of living for workers at prevailing wage rates. According to this simplified model, it makes no difference what the currency exchange rates are since currency isn't exchanged.
By making the model more realistic, one can show that the exchange rates do have some effect. But in cases where there is a huge difference in the accepted standard of living for workers, the more realist model will show that jobs will still tend to migrate to the low wage country.
This paragraph is a digression. In the above model one could assume that most of the production of the moved factory in country L is sold back to country H. But when the factory leaves country H and the workers there loose their jobs, they and the service workers that they supported in country H, no longer have incomes to purchase goods made by the new factory in country L. However, there are so many other people in country H that can still buy from country L that this effect will have little impact on sales of the new factory in country L. But as more factories move out of country H to country L, this impact will start to take effect, unless it's countered by country H being able to borrow money from country L (and other countries) so as to (temporarily) maintain their purchasing power for imports.
One unrealistic assumption of the above model is that all consumer goods and services provided to the factory workers in country L can be obtained from country H. One thing the workers in L can't do is rent an apartment in country H; they are forced to rent in country L. They are also forced to use the utilities (water, electricity, gas, etc.) of country H, as well as use many services such as educational and health provided in country H.
But let's continue with this unrealistic assumption for the time being. Consider an example of doubling of the exchange rate in an attempt to make country H pay twice as much for goods from country L whereas country L could then get goods from country H at half the price. In the original model, this has no effect since everything is paid in the currency of country H. But if money is exchanged, it would seem that there's a big effect, but if one adheres to the original model there isn't. So let's assume the the payroll for wages in H-currency is first converted to L-currency before being paid. Then workers get their pay in their local currency L and spend it on goods from H where the currency gets converted back to H's currency and given back to country H.
First, since the workers at this factory in country L buy all their goods and services from country H and all these are now half-priced if they use their own currency, they can now double their standard of living. But since they are still willing to work at half of H's standard of living, they can be paid half as much in currency L. In this scenario, wages and prices are still the same as before in currency H but both wages and prices are halved in currency L. So changing exchange rates had no effect.
Now let's correct the unrealistic assumption that workers at this factory in L buy all their goods and services from country H (or if they don't, they get a better deal on them). Consider housing rents for example. For a worker who rents and doesn't own their own home, if their rent stays the same (in their own currency) but they only earn half as much, then they'll need to spend more time working to pay their rent. The situation is similar for the monthly cost of utilities, etc. So unless their rents drop (by 50%, if they were previously at the same level in country L and in country H) they will tend to have a standard of living less than half of what county H has, and they are not willing to work for such a situation (per assumptions). Thus to correct this, the factory will need to increase their wages, making the products of the factory more expensive to make thereby making the output of this factory less competitive leading to reducing its exports to country H. This would tend to favor the return of lost jobs to country H.
So based on more realistic assumptions a big shift in exchange rates will have a significant effect. But recall that it was previously mentioned that exchange rate are generally set based on supply and demand for currencies and thus can't be arbitrarily changed. So the conclusion is that, except for some special cases such as China, attempting to tamper with exchange rates is futile in an attempt to balance trade and prevent loss of jobs to low-wage countries.
While the above scenario was realistic, the following scenario is where all production jobs are outsourceable. We know this is not the case but it provides a clear example of the multiplier effect of money borrowed from foreigners which . This scenario will show that a country that doesn't produce anything real can nevertheless have a high GDP (Gross Domestic Product). While this scenario is fantasy, it illustrates the trend that is now happening in a substantial part of the U.S. economy.
Suppose a major country has a strong service economy but doesn't produce any real goods. But to get real goods (like fuel, food, automobiles, computers, etc.) it imports them from other countries. To simplify this model, assume that it neither exports nor imports services. So how does it pay for its importation of real goods to live on? It just borrows money from foreigners (and also perhaps sells them its assets such as businesses and real estate). Of course this is unsustainable since it's unable to export anything to pay off the increasing debt, but it's possible for a limited time due to an assumed still satisfactory credit rating. (Note that the U.S. sovereign debt rating was downgraded by Standard and Poors in 2011.)
Let's say it borrows a trillion dollars a year from foreigners to support itself. What is its GDP? If only real goods counted as GDP, it would have zero GDP since it doesn't make any real goods. But the trillion dollars could be spent on paying service workers so one might think that it would thus have a GDP of a trillion dollars. But this is wrong because service workers themselves need services and they would thus employ other services workers who in turn would employ still other service worker. The simple mathematics of this is derived in Service/Production Ratio: Geometric Series.
One way to understand this model is to assume that the trillion dollars of loans all goes to the government which pays it all to government employees (service workers, since a capitalist government is assumed). Then these government employees spend most of of their income on paying private sector service employees and spend the rest of their income on purchasing imported real goods to live on. There is no need for any taxes since the government gets all it needs by borrowing. The non-government service workers spend their incomes just like the government service workers. Everyone is buying imported goods and domestic (done in U.S.) services.
Now suppose the service-worker/production-worker ratio was 3. But how does one use this ratio since there are no production workers? Well, the government workers are being given money (a trillion) by foreigners which gives them a claim on foreign production. They may thus be considered as equivalent to production workers, since they have the income that production workers would have if they produced a trillion dollars worth of goods. With the ratio of 3 assumed above, this will support 3 times as many private sector service workers as government employees. Now assume that there is no significant wage differences between the private and public sector service workers. This means that the government service workers will support 3 trillion dollars worth of private sector service work. Thus the total GDP of this economy is 3 trillion dollars (1 for government and 3 for private but the 1 trillion of imports subtracts from GDP).
Without the above explanation, it might seem unreal that this hypothetical nation could borrow a trillion dollars a year, and without producing anything real, use this to create an additional 3 trillion dollar service economy (in addition to the trillion dollar service economy directly resulting from the borrowing). This service economy is completely dependent on borrowing. If it couldn't borrow, none of it would exist: there would be no service jobs and the economy would die.
This hypothetical (and fantasy) model is important because much of the U.S. economy is similar to it. Same for the economies of other countries that are surviving by relatively huge amounts of borrowing from foreigners, such as Greece. It's an example of the multiplier rule for foreign borrowing to support a service economy. Such borrowing supports a few times more service-sector GDP than the amount borrowed. Thus when such borrowing comes to and end, as it eventually must, the GDP of the borrower drastically drops, throwing many more people out of work. One could reason this without using the above model, but this model shows a clear cut example of it.
So what would happen if the U.S. could no longer borrow money from foreigners. Well, if the U.S. couldn't borrow money to buy imported goods, it could sell off more of its assets to foreigners as it's now doing (2011). But eventually this comes to and end too. And then what? The trade deficit is a rough approximation of the money we obtain from foreigners to support part of our service economy. It's roughly 4% of GDP. So if we had to eliminate the borrowing and assets sales that are the result of the trade deficit, GDP might drop 3 x 4% or 12% (using the multiplier rule assuming a 3:1 ratio of service workers to production worker as explained above). The effect on unemployment would not only be the 12% drop in GDP but the loss of the direct employment supported by the borrowing from foreigners, amounting to 1 x 4% or 4% of GDP. Thus the resulting increase in unemployment would be about 16% of GDP (12% + 4%). This then would increase the official unemployment rate to perhaps 25% (9% [unemployment in 2011] + 16%). This is of course a very rough estimate.
In a closed economy, if someone is not doing a good job and gets fired, someone else normally gets the job and there is no change in employment. Now suppose that due to an increase in productivity, someone is laid off. If the productivity increase is due to buying machinery to replace the worker, then jobs are created due to the work of manufacture and design of such machinery. But suppose that the person is laid off due to figuring out how to be more efficient without having to buy any more machinery. In this case production costs drop, and if the industry is competitive, prices (on average) should drop also. The lower prices mean that the public has more money to spend buying other goods and services and this gives someone else a job. If the industry is monopolistic, government regulation is supposed to force the lowering of prices when costs drop. Even if the cost savings go entirely to the owners in the form of increased profit, the owners now have more money to spend which should result in the creation of another job. Another outcome could be that due to lower prices, people decide to work less since they need less money. Someone who doesn't really need to work may quit their job and thus provide a job opening for someone who does need to work.
The above analysis is obviously oversimplified. Actually some combination of all of the above outcomes may take place due to someone losing their job due to productivity improvements. One also needs to consider wage rates. If a high wage worker gets laid off, the savings may be enough to hire two or more lower paid workers. Exactly what the economic impact occurs when a certain person loses a job is unknown but one may attempt to estimate the approximate probabilities of various outcomes. When you read here that a new job is created, it actually means that there is a significant probability that a job will be created. It is also possible that no new job will be created or that more than one new job will be created (including part-time jobs).
What this implies is that productivity improvements which directly result in someone losing their job are likely to create a job somewhere else and thus be socially beneficial since more is being produced with less labor. Society now has more income to spend, hopefully on improving the quality of life such as more leisure time, more teachers, etc. Unfortunately the increased income might be spent on vices such as recreational drugs and gambling. But hopefully it will be more wisely used.
Now let's look at what happens if someone is laid off due to moving the capital and machinery one works with out of the country resulting in hiring a foreigner working in a foreign country to do the same work for much less pay. Assume also that the good made by this foreigner is now exported from his country back into the U.S. as a import. If the price of the manufactured good drops, then consumers have some more money to spend.
In order to sustainably purchase this good from abroad, we need foreign currency and to get such currency, we need to sell foreigners our goods and/or services. But in actuality, most transactions take place in dollars so the above is tantamount to saying that if we give foreigners dollars for their output, then they should use those dollars to buy our output. This way trade balances and one may think of it as barter: we get goods from them and in return we send them an equal value of goods that are made in U.S.A. "Goods" as used here should include services as well.
While this is what should ideally happen for international trade (if it is to be sustainable) what actually happens today (2010) in the U.S.A. is that much of this money we spend buying foreign-made goods comes back to the U.S. as loans to the U.S. (in the forms of bonds and mortgages, etc.) and for buying our assets (including securities, etc.). If it had been used to purchase goods from the U.S., it would perhaps create a job in the U.S. to compensate for a lost job. But since U.S. goods are generally high-priced, mainly due to high wages, this "if" is somewhat unlikely.
So what is happening is that since we don't have money from exports (selling to foreigners) to pay for our imports, we simply borrow money from foreigners (or sell them our assets) to pay for imports. This is not just a one-time debt obligation but a continuous stream of incurring debt. Per the above example, every day we must borrow money to pay for the output of the foreign worker that took away the American workers job. The amount we are in debt increases daily until something "gives", such as returning the manufacturing of it to the U.S., or finding something we can export to pay for what the worker formerly manufactured or just going without it and not importing it anymore.
But as explained above, the money spent on the now foreign-made good does return to the U.S. as a loan or as a purchase of U.S. assets and this should create jobs in the U.S. Some of it could be spent by the government to pay unemployment insurance which will also create jobs in the U.S. since the unemployed person spends some of his "income" on U.S. based services (and to a lesser extent on U.S. based goods). Thus while employment is gained back, the U.S. is left with a stream of debt to pay for it. And when we reach the point where we cannot continue to incur such an imbalanced flow of debt money to import goods formerly made by a displaced worker, then a few other people will also loose their jobs.
Loss of this manufacturing job also means that there is less capital remaining in the U.S. which will be needed for self-sufficiency in the future when the binge of borrowing from foreigners comes to an end, as it surely must as foreigners start to realize that there is slim chance of the U.S. ever paying off it's debts to them. As far as selling off of our assets to foreigners is concerned, eventually one runs out of assets to sell and America becomes "foreign owned".
Note that the above scenario doesn't happen if capital is not exported but continues to be used in the U.S. but this is not what is happening today. It's also assumed that the exported capital is up-to-date and this may mean in reality that old, obsolete production machinery in the U.S. is scraped and new capital machinery is purchased and installed abroad. This is tantamount to capital flight (the export of capital).
In the past, unstable foreign governments in the third world, the threat of revolution there, corruption, excessive regulation, and the existence of the second world (the Communist Block) which we didn't trust to invest in, deterred foreign investments by Americans. Events such as the taking over of U.S. Oil Companies in Mexico in the 1930's took a long time to forget. Today the situation has changed and foreign investment is much more attractive. If some U.S. companies in an industry are able to produce goods in foreign countries at less cost, then the rest of the industry is forced to do the same in order to compete, all at the cost of American jobs. Another detrimental factor is the various free trade agreements which have been implemented.
The richness of America was due in part to the production of real goods which we both consumed in the U.S. and traded with the rest of the world. An unemployed individual can't just go into business and manufacture goods in a competitive manner without a great deal of capital. Thus most of us are dependent on using the capital of investors to supply our livelihood. This also presents a problem for the service sector since such jobs depend on the "surplus" produced in the production sector. It's thus desirable that this capital (and new capital made to replace it) remain in the US.
How can this be done? One way is the restriction of foreign trade with tariffs. This has a downside since the lack of foreign competition may allow US manufacturers to neglect quality, efficiency, and technological innovation. Another way to encourage capital to remain in America is lower wages. Although this hurts the workers whose wages are reduced, it may be better than no job at all, or a possibly lower paying job in the service sector. Lower wages in a competitive industry also means low prices so that others obtain benefits from these lower wages. Another beneficial effect is the reduction of (or elimination of) inflation. However, low wages may be considered exploitive (and wrong) if they enable the employer makes excessive profits.
Is there any way to simply prohibit the moving of capital from the US to foreign countries? This is not easy since one method of moving it today is to simply let the plant and machinery in the U.S, wear out or become obsolete and then ship new modern machinery abroad or buy it from abroad. Would we want to restrict the export of newly made capital goods to other countries? Probably not, since much of our exports consist of such goods. Furthermore one can obtain capital goods for foreign use directly from non-U.S. countries. One way to decrease the outflow of capital is by taxation. Taxing profits made in foreign countries at a higher rate would discourage the foreign investment which engenders such profits. A major problem with all this is that if the taxes on the wealthy become too high it may encourage businesses and rich individuals to leave the United States and locate in foreign countries.
One problem has been the low rate of savings (it was even negative for a time) in the US. If we are to invest in America, we need to save up money to make these investments. High income people that have much more income than they need to live on often don't need much encouragement to save. One way to encourage savings by moderate income persons is to exempt a certain amount of interest/dividend income from taxation for them.
Another way is by "forced savings" where the government taxes money away from workers and saves it. We already have such a tax known as Social Security, except that most of the money the government takes in is used to pay social security benefits to others and is not saved or invested. Even the surplus money remaining isn't really invested either since it is used to finance government debt, the repayment of which (in terms of purchasing power) is gravely in doubt. If Social Security had not been so generous in the past to retirees, it would have accumulated a huge investment fund which possibly could have resulted in more capital (and jobs) in America.
Another policy that would be of significant help would be the reduction in world population so that there would not be the huge surplus of labor in foreign countries that drives down the wage rate. Population reduction would also help conserve energy and resources.
It is not going to be easy to restore manufacturing in the U.S. See Revival of Manufacturing?
One way to try to reduce debt is to print money to help pay it back. It provides money for the government to spend without needing to raise taxes (or reduce expenditures to balance the budget). Also, printed money can be used to buy junk securities from banks such as mortgage backed securities, thereby subsidizing banks by paying more for these securities that they are likely worth.
But there are downsides to printing money. With more money chasing a fix amount of goods, prices tend to rise. There is a long history of printing money to pay off debt and operate the government, including the early history of the United States. A most egregious example was the printing of money by Germany during and after World War I, which led to hyperinflation and economic collapse. At one point postage stamps cost over a billion marks (German currency).
Since printing money causes inflation, it means that everyone who holds money or the like, loses since it becomes worth less. This includes bond holders and debt holders who find that the purchasing power of their holdings has significantly decreased. Thus printing money isn't getting new money free. It's really a severe tax on all those the have savings denominated in dollars, in the form of bonds, bank accounts, etc. This includes social security and various pension plans (both private and government) and printing money leads these pensions plans closer to bankruptcy (if the pension plan makes adjustments for inflation in its pensions).
to-do See Peter Schiff Doubles Down on Inflation Prediction
In the U.S. today "printing" of dollars is done by the Federal Reserve (the "Fed"), an instrumentality of the federal government. The Fed is sort of a hybrid between a government-owned and privately-owned corporation. In spite of the fact that the Fed has effectively printed trillions, so far (2014) prices haven't increased all that much. The reason is that most of the "printed" money isn't in circulation (and thus isn't being spent) but it's being hoarded by banks. So with respect to the economy, it hardly exists at all (until the banks start using it).
Articles on the Internet sometimes deceptively claim or imply that the Fed doesn't print money. But it does. See How the Fed prints money without any ink Its method of printing money is to buy bonds and securities from banks and "pay" for them by creating money. It doesn't directly print money for this payment (it has no printing presses) but it simply pretends to put this payment into a bank account at the Fed which is owned by the bank that sold the Fed bonds, etc.
For example, the Fed buys a million dollars worth of U.S. government bonds from a bank (the bank may have previously bought them from the government). The bank happens to have a bank account at the Fed (which is like a banker's bank). The Fed then "pays" for the bonds by sending the bank a statement showing that a million dollars has been "deposited" (using the word "credited") into its bank account with the Fed. The bank can do whatever it wants with this fictitious money, including converting it to cash (done by the Fed by ordering the U.S. Treasury to print the money). Thus nothing at all has been put into this account even though the bank may behave as if it had. Since this fictitious money in the account is treated just as if it were real money, it thus is in fact real money. But how did it get into the account? The only possible answer is that it magically got there by the Fed's simple method of money creation: just write into the ledger (on a computer) that money has been added to an account when it hasn't.
Thus the Fed has created a million dollars out of thin air and given it to a bank in exchange for a million dollars worth of bonds. Even though the Fed put no real money into the bank's account, it does have a million dollars worth of bonds (called collateral) which in a sense backs up the newly created money in the account. However, should the U.S. government default in the future, the bonds could become almost worthless and then there would then be almost nothing backing up the bank's account with the Fed. The same goes for "mortgage backed securities" sometimes called "toxic assets" which the Fed has "bought" with its magic of money creation. Thus when you read that the Fed is going to buy government debt (or other securities) bear in mind that it pays for these items by creating (printing) money, although what you are reading often fails to say so.
What happens to this created money? Well, since 2008 it's been mostly just sitting at the Fed in the bank accounts of the various banks. The Fed pays interest to the banks on this money now (after 2008) and since the banks are skittish about issuing a lot of new loans in a depressed economy, this reserve money just sits there. But it amounts to trillions and if it were suddenly spent (by the banks lending it out to government, people, and businesses who would spend it) it could result in hyper-inflation as well as a big temporary stimulus to the economy that wouldn't solve most of the serious problems such as the trade deficit. So it's sort of a time-bomb waiting to happen and trigger hyper-inflation.
This buying up of bonds and mortgaged-backed securities by the Fed (on a huge scale) is known as "Qualitative Easing" or QE. We've already had QE1 and QE2 and QE3 in 2012 was an open end program to buy "mortgage backed securities". QE is just another name for printing money (the Fed way). At the end of 2012, QE4 started to buy up both mortgage securities and government bonds but it's being slowing cut back in 2014.
For a short review of the Fed in the 21st century see Federal Reserve (The Fed) - The New York Times
Like the causes of the great depression in the 1930's, a major cause is debt: all kinds of debt including underfunded obligations for future pensions and health care benefits, especially Social Security and Medicare. But not only is the current situation a lot different and more dire than the great depression, there's a lot more to it than just crushing debt. (Note in the list below that "due to" doesn't imply that it's solely due to; there may be other contributing causes.)
One often hears proposals to just fix one of the causes of the depression. But the depression is due to a combination of causes and just fixing one or two causes will not solve the problem. In fact, just fixing one major cause (such as debt) may make the depression worse. For example, if the government were to stop deficit spending and lay off workers, then it would severely hurt the economy since borrowing from foreigners helps pay for our imports and also helps support the service economy. But on the other hand, this high deficit spending is unsustainable and will eventually lead to bankruptcy (or the like). Thus the only reasonable way out of this dilemma is to both stop deficit spending and simultaneously put people to work making goods here instead of importing them (by rejecting free trade) so that the people who were formerly dependent on the government for support now work in the private sector producing real goods and services supported by these goods. At the same time, other causes need to be fixed such as excessive entitlements that will eventually bankrupt the government.
See Debt Statistics. While debt is a major cause of the depression, it's overly simplistic to just claim that the depression is mainly due to debt. Debt that can be easily repaid is not so much of a problem as debt that is difficult or impossible to repay. And just saying that the problem is mainly due to debt doesn't explain why and how we got into debt and how we should get out of debt without further harming the economy --something that's not easy to do.
If we were not overpopulated, there would be more land per person which would mean lower rents, lower home prices, and lower mortgage debt. It would also mean that less food would be eaten in the U.S. resulting in surplus food to export to help pay for our imports. There would also be less consumption and depletion of natural resources including energy resources such as oil. Since housing is often constructed on prime agricultural land (example: Southern California) less population means more land for agriculture. However, a smaller population might tend to be more wasteful per person and this would need to be avoided. Population in the U.S. is so high that it requires energy-intensive agriculture to feed the people and imported oil to transport them. See Population
While the U.S. overpopulation is bad, it's much worse in some other regions such as Africa, Latin America, and parts of Asia. If there were much lower population in countries that have net exports to the U.S. then their standard of living would likely be higher, with higher wages that would not pose much of a threat to taking away jobs from U.S. workers.
The causes of collapse are multifaceted and it's not just one factor, like the housing bubble. A major overall cause is the failure to understand the problems by the public and politicians, including both the left and right wings. Some fringe groups, such as "Negative Population Growth", dealt with bits and pieces of the problem. Even the work of conservation organizations was often counter-productive. They often supported mass-transit when it wasn't clear if it would actually save any energy. See Does Mass Transit Save Energy. Organizations such as the Sierra Club failed to oppose the increase in U.S. population due to immigration.
If people were better educated in economics and history, they might have elected leaders who would have prevented the collapse. In such a case there would likely be better candidates to chose from who would support austerity actions that most voters today would reject. Unfortunately, in today's situation there are no suitable candidates that such a knowledgeable person could support although president Donald Trump has got some things right.
In addition to being well educated, voters need to be altruistic and be willing to personally make sacrifices to benefit others. Otherwise one may have a good understanding of the problem but support measures that will personally benefit oneself rather than help solve the problem overall.. Also, one must be an independent thinker such as questioning the applicability of certain parts of textbook economics to the current crisis.
A major problem is the depletion of fossil fuels such as petroleum and natural gas. Such depletion makes them more expensive and results in less savings. While new technology such as fracking has temporarily increased the amount of oil and natural gas supply, it also is costly and results in energy costing more. There's also the problem of global warming which hasn't yet impacted us much, but likely will in the future. Efforts to ameliorate future global warming, while beneficial in the long run, may be costly and exacerbate economic collapse in the short run unless it's done right (such as reducing the need for travel and reducing population). See the book Peak Oil and the Great Recession
The gross inequalities of income and wealth have greatly exacerbated the consumer and mortgage debt problem. A more egalitarian distribution of income would allow many more people to buy things for cash rather than credit, and allow them to pay off their debts faster and thus less mortgage debt. See Perelman's book for examples of just how bad the inequality is in the U.S. So a major cause of debt is not just that many people are spendthrifts, it's that they have insufficient wealth due to extreme income and wealth inequality and thus have to go into debt to stay alive or live decently.
However modest inequalities may provide incentives for people to be more productive and efficient, but the problem is that inequalities are just too huge and in many cases very high incomes are not the result of very high contribution to the social good.
See Extreme Inequality Helped Cause Both the Great Depression and the Current Economic Crisis
On the other hand one may argue that it's mainly the rich who can save large sums of money which could be used to reindustrialize america and that many working people are not able to save much money for such a purpose. But unfortunately, since returning industrial production to America is not very profitable for wealthy investors, they are more apt to spend their savings on expensive real estate, buying speculative stocks, and not on reindustrializing the country.
Due to the Service Sector Dependent on Production Sector We can't even have much of a service sector in our economy unless we have a strong industrial manufacturing sector. But this sector has been declining in the U.S. See trade imbalance. A major cause is the export of American industrial jobs to countries with lower labor costs. This should have been avoided by tariffs as a last resort. Some labor unions, with their monopoly power, were also partly to blame as well as low saving rates and policies of Social Security and Medicare which should have both collected more money from workers and investing it in industries (provided they can do this efficiently and effectively).
Instead of investing in our future, the U.S. has been living beyond it's means and consuming more than it can afford. This results in a low savings rate and in importing goods from other countries that we don't really need, further increasing the trade deficit.
Included under waste is the Iraq war and government subsidy to biofuels that likely take more energy to produce than they yield. See Human Energy Accounting.
The U.S. is now dependent on many foreign made goods since the industries that once made these goods in America have shut down. While at the start of the 21st century about half of the oil consumed in the US was imported from other countries, today (2017) only about 25% is imported.
Gambling and lotteries are wasteful and expend effort that could be better used elsewhere. Many "investments" in the financial sector, including so called derivatives like "credit default swaps" are similar to gambling.
The financial sector consumes too much of GDP. This allows many in the financial sector to be parasitic on society and receive much more compensation than their contribution to society. For example, a hedge fund may be set up to take (for itself) a large percentage of the gains made by a client, while in case of losses, the client suffers all of the loss. It's like heads I win big (and so do you), tails only you lose (but I don't).
The financial sector in many respects resembles a large gambling casino where the odds are stacked against most investors (but not the "insiders", etc.). This contributes to the low savings rate in America. Retirement money in the form of pension funds are invested in what is claimed to be reasonably conservative investments that often turn out to be losers. As a result, most pension funds (including social security) are very much underfunded which will mean that retired workers will not get the pensions they have been "promised".
One solution would be for much more government regulation which would forbid investments that are similar to gambling. Investments would consist primarily of just stocks and bonds, with most so called "derivatives" prohibited. This would greatly reduce the size of the financial sector. With low cost computers, much of the work of the financial sector is automated which should result in a financial sector which operates at low cost to investor, savers, and borrowers.
Government regulation is far from optimal. For example, certain safety requirements are inefficient: for example OSHA's regulations regarding the use of ropes for protection on roofs. On very steep roofs, the weight of the roofer will always be on the rope and there is almost no jerk force applied should the roofer fall over the edge of the roof. But the regulations are written for the "worst case" scenario where there is high jerk on the rope. This requires excessive cost for many non-worst-case situations where the "worst case" simply can't happen. This is only one example out of many inept government regulations.
At the same time, there are also many cases of government under-regulation. For example, the railroads have a monopoly on a potentially efficient freight transportation system where one man can drive a train equivalent to 100 truckloads and thus has a monopoly for certain traffic (such as coal). Formerly, it was regulated (but not very efficiently) by the federal government but was deregulated in 1980. However, even when the railroads were supposedly heavily regulated, the regulations utterly failed to promote efficient use of railroad labor with railroad labor unions requiring 5-man crews operating trains with a full days pay for only 100 miles of travel. Another example is the under regulation of the financial industry which exacerbated the financial crisis of 2009.
Exploitation of poorer people by richer people is a big part of income inequality. A major source of such exploitation is land rents. Residential land rents are exacted by landlords when renting residences, since the rent charged is usually much more than just the wear and tear on the building and the taxes on the property. It's also exacted when one buys a residence and pays more that the cost of the buildings on the property and other improvements. In a sense, homeowners are paying land rent to live in their homes since the cost of the land they purchased may be paid for via mortgage payments which they pay each month. Even if there is no mortgage, the land rent costs may be allocated over the use of the residence. In fact, the government counts this imputed rent as part of the GDP (Gross Domestic Product) although it isn't anything that people produced.
The ones who gain from all this are real estate owners, speculators, and landlords, past and present, who make and made money due to rising real estate prices and rents. But not all such real estate owners and landlords have made money. Due to high real estate prices (especially during the housing bubble of the early 2000's), exploitation of people via land rents reached such high levels that many could no longer afford their housing, resulting in the crash of the housing market and financial loss to some real estate owners and mortgage holders. But since land was originally taken from the native Americans and was obtained nearly free, the land prices today reflect unearned capital gains (including unrealized gains) made by people in the past. The people who pay land rents today are in a sense partly paying back speculators who bought the land in the past and received unearned income via increasing land prices.
With lower rents (and home prices), workers could afford to work for lower wages, resulting in lower costs and thus lower prices for goods and services. American made goods would thus be lower in price and more competitive on world markets and less borrowing would be needed to finance trade deficits.
The major reason for the loss of manufacturing jobs to foreign countries has been the high cost of labor in the U.S. as compared to many other countries. Under conditions of free trade and freely exportable capital, manufacturing tends to gravitate to the countries that have the lowest labor costs. Provided of course that such countries provide good security (law and order) have good infrastructure (such as transportation facilities), have low corruption and red tape, and have little risk of confiscation of the exported capital by the foreign government.
The high cost of labor includes mandated costs paid for by the employer such as social security and health benefits. Part of the problem is the high cost of housing since if housing (including land rents) were lower, workers would be willing and able to work for less wages. Another part of the problem is workman's compensation where employers (or their expensive insurance) must pay for injuries for which they are not to blame (but where the worker is to blame). This is not justice.
Governments at all levels are mostly running large deficits today, instead of surpluses. Thus the likelihood of government bankruptcy soars higher.
Entitlements include Social Security, Medicare, and the more recently enacted health programs. We just can't afford the current schedule of benefits, and medical costs are way too high. These benefits were supposed to be self supporting by taxes on wages, but they are grossly underfunded and unsustainable. For Social Security the solution is fairly simple, just raise the retirement age by say 10 years to age 75 and be stricter when determining disabilities. See entitlements, etc. which is quite one-sided, but if the situation is only half as bad as he implies we are in very serious trouble. Be sure and check out his reference as they present a more balanced view. See also a book on entitlements .
For health benefits, perhaps the best solution is to abolish most health benefits. Needy people might receive additional money from the government to help cover health care costs, but they should be free to spend the money on whatever they think they need most, including food and housing if they need those more than medical care.
We can make more use of the Internet to help people self-diagnose their medical problems. Based on such self-diagnose, patients could be allowed to write up their findings and obtain prescription drugs if needed. These diagnoses could be rapidly reviewed by physicians with the cost of such a review paid for by the patient. The depth of the review would depend (in part) on the possible dangers of the medicine prescribed. Many people, unfortunately, would not be capable of self-diagnose. But people who have learn a lot from biology classes in school (or studied it on their own) should be able to do this.
Another cost savings would result if we did not involuntarily hospitalize people for so called "mental illness" or pay people disability benefits for being mentally ill. While brain injuries and physical brain damage (such as caused by strokes) and deterioration with age are real medical problems, it's claimed that we should not be labelling people as "mentally ill" See the books by Szasz such as Myth of Mental Illness -- Szasz (1960).
Much money is wasted via government subsidies that often benefits the rich. Some have considered certain subsidies as entitlements for the rich, such as agricultural subsidies. Subsidies were given to mass transit partly because it was erroneously thought that it saved fuel, but it doesn't. Subsidies were given for more efficient air conditioning, but the people who didn't use air conditioning at all saved the most energy but received no subsidy at all. Similar situations exist for subsidies of other appliances and motor vehicle. It would likely be more fair to just tax energy and eliminate all such subsidies.
Is capitalism one of the causes of the depression? It all depends on the details of conceivable alternatives to capitalism such as socialism. Take the example of the severe depression in Greece in the 2010's. Many consider Greece to be socialistic and Greece is in grave economic trouble, partly due to the generous entitlements offered by the "socialist" government. But take another example of socialism, the former Soviet Union. They controlled (but not fully) the economy and didn't suffer depressions (until they started making a transition to a free market economy shortly before they collapsed). Then there is China that is prospering under a sort of combined socialism-capitalism. But the reasons for their success may have little to do with their economic system since enticement to move manufacturing to China has been their low wage rates combined with an acceptable infrastructure and security.
Many people erroneously think that the Soviet Union collapsed in 1991 due to economic reasons but it fell apart largely due to nationalism in the various republics of the Soviet Union. The rupture of the economic ties between these republics contributed to the ensuing economic crisis. With the support of military forces, the elected Russian parliament was evicted and Russia converted to capitalism. See the various writings by professor Stephen Cohen. While the Soviet model was quite flawed and human rights were unnecessarily grossly violated under Stalin, it avoided the Great Depression the West faced in the 1930's.
Thus while socialism a-la Greece leads to severe depression, socialism a-la the Soviet Union avoided it. China is a special case of avoiding depression since many would claim that China today is more capitalist than socialistic. One might thus think that a good solution would be the Soviet style of socialism but with democracy. But this is unlikely to last for long since with democracy the people are apt to vote for benefits that the socialist society can't afford and wind up having to sell off the government-owned industries to pay for them, thus transitioning back to capitalism. Once the transition back to capitalism is made, it's very difficult to peacefully reverse it, since the capitalist government is not likely to be able to accumulate the surplus funds needed to buy back private property so as to restore socialism.
The problem with democracy is not just restricted to socialist democracy as mentioned above. It's also a problem in capitalist democracy where voters may also vote for benefits that the government can't afford. For example, the problems in the U.S. with future financing of social security and medical benefits.
If one looks at the public's comments on the Internet (at financial websites that display feedback from viewers), one sees how blame is frequently misdirected. Some people blame bankers and wall street, others blame politicians while still others blame the wealthy, etc. Since there are so many causes of the depression and each cause has many people to blame, there is enough blame to go around. In a sense, most everyone is to blame in some way since they either failed to do anything about the problem or did the wrong thing such as supported government policies that would benefit them personally but put the government further into debt. For example, old people supporting overly generous Medicare and social security that pays most old people back much more than the sum of what they put into it plus interest.
Here are more examples. What about the corporate executives that shipped American factory jobs overseas to Asia? This is a really terrible thing to do since it decreases the wealth produced by America and results not only in the loss of factory jobs but also the spill-over effect of loss of a few times as many jobs in the service sector. It leads to bankruptcy of the U.S. and towards "3rd world America". But if the executives hadn't exported these jobs, their companies might have gone bankrupt, leaving them and their factory workers out of jobs. Their companies competes with others that are transferring production overseas and their company must remain competitive to stay in business. Thus the blame lies not so much with the person(s) who took these actions, but with the economic-political system that made it imperative to do this in the first place. See Capitalism?
A similar situation holds for financial executives. Many did unreasonably risky things because the environment in which they operated rewarded such behavior and penalized prudence. Politicians supported going into debt to provide social security and Medicare benefits to their clients who wanted such benefits now, in spite of the risks of such debt. Thus the people who are allegedly to blame are mostly just cogs in the machine that is leading us toward economic disaster.
But just fixing blame often doesn't tell one how to fix the problem. For example, if one claims it's the fault of politicians, replacing the guilty politicians with new ones may lead to a repetition of the same problem or create new ones since to get reelected they will continue to go along with the misguided policies that their vocal constituents want (and also with what lobbyists want, especially if the lobbyist is a big contributor to to politician's election campaign). Thus fixing blame on individuals (or corporations) is not very productive in solving the problems. It's also misleading since such allegations fail to mention all the others that are also to blame, oversimplifies the problem and distracts us from searching for multifaceted real solutions.
It's repeated time and again that most of our GDP (70% is often claimed) consists of consumption and thus to increase GDP we should spend more on consumption rather than save. Both assertions are wrong.
First, for a manufactured good, much of the GDP is created in the manufacturing, mining, and/or agricultural processes needed to produce the good and not in the selling or consumption of the good. The GDP in the selling of the good is the GDP of retail trade which is the depreciation and maintenance of retail store buildings plus the wages of the store employees, etc. This is a lot less than the receipts from the goods sold (the alleged 70%).
GDP is what one produces, not what one consumes. For example if one buys and consumes a foreign made product what they pay is divided up between the costs of the retail trade, transportation costs, and foreign manufacturing costs. Both the later and part of the transportation costs increase foreign GDP but not U.S. GDP.
Saving money instead of spending it on consumption provides investment funds that other people and companies spend. This also creates more GDP. It's a source of capital investment to generate GDP for the future. Thus it's better to save than to spend. Rich countries (and some rich people) got that way because they were thrifty and saved for the future. If the savings is invested in American business and industry it should provide jobs here which is more than the jobs it would provide if the money was spent on consumption of a foreign made good (or one made with foreign components). Right now, with low interest rates (in large part due to the Federal Reserve) and the decline of manufacturing, there is a lack of inducement to save and this needs to be corrected.
Paul Krugman, NY Times columnist is advocating this. Something like this method worked to get us out of the Great Depression of the 1930's (although some claim that the 30's depression would have ended OK without such stimulus) but it doesn't work today. The massive borrowing and spending on World War II, which began in the early 1940's, was largely spent on employing Americans for war production, enabling such workers to buy consumer goods made in the U.S.A. (although due to the war production, many consumer goods were in short supply). This was then something like a huge stimulus package and it ended the Great Depression. Note that it's sometimes claimed that if it hadn't been for World War II, the Great Depression would have ended anyway in the early 1940's. Perhaps so, but the War did it fast. After the war ended and most of the industrial capacity of Europe and Asia had been destroyed by the war, prosperity boomed in America and it became (temporarily) the major source of consumer goods for the world.
But today with most U.S. consumer goods being imported, a significant portion of U.S. government stimulus money went to import more goods and thus supported foreign workers and not American workers. It didn't build factories here to produce the consumer goods that we now must import and it leaves our economy in the unsustainable condition of dependency on foreign imports.
The stimulus did provide us with more imported goods and also did give us more jobs here such as more service-sector jobs like sales associates selling foreign-made goods. But when the stimulus money is spent, we return to the same problem, only it's worse because the stimulus money has been borrowed by the government which winds up much deeper in debt and thus closer to bankruptcy (or the like).
Aren't bubbles supposed to burst? Housing costs in the 2000's were becoming unaffordable for many. If the US is to compete with foreign countries in manufacturing, we need low cost housing for factory workers. Thus one may claim that the crash in housing prices did more good than harm. Housing prices, even after the crash, may still be too high.
People who bought houses they couldn't afford were often behaving quite rationally since they often couldn't afford the high cost of renting either. But a major cause of the depression was the high cost of housing (mostly due to high land prices) which is still too high in many locations. So the problem was mainly the increase in housing prices rather than the collapse of such prices although the collapse caused panic and loss among the owners of mortgages and imposed future obligations on government which in effect guaranteed many of the mortgages and later actually bought many such mortgages via the Federal Reserve's purchase of "Mortgage backed securities" in 2012+.
No one can know the exact course the depression (which is marked by various collapses) will take nor the time-frame, but one can speculate on it's rough outline.
The housing bubble collapse which got worse in 2007 heralded the start of a much larger collapse that has yet to happen. I stated then that it may take a few more years beyond 2007 until the full impact of the housing bubble popping manifests itself. But I was an optimist: the impact happened a year later in 2008 and was pretty severe.
The next, and more damaging collapse may be the bankruptcy of the U.S. government (and some state governments). As of mid 2011 the U.S. had a AAA (the best) credit rating for its sovereign debt (treasury bonds/bills) but the U.S. was downgraded in August 2011 to AA+, with a negative outlook by Standard and Poors.
The following is what was expected to happen, but hasn't thus far: Many institutions such as pension funds that hold U.S. government debt, would be forced to sell such debt since they are only permitted by their rules to hold the highest rated debt. The selling of such debt would reduce the price of such bonds, which is tantamount to increasing the rate of interest on them. Thus interest rates that the government must pay to borrow money would go up, thus making it more costly for it to borrow money. This might then result in further degrading its credit rating when would cause more selling. The final result of such a vicious circle would likely be similar to the situation in Greece in 2011-13, where the interest rates it would have to pay to borrow more money are prohibitive and thus Greece is asking other countries (mainly European organizations) to bail it out at lower interest rates. But what country is big enough to bail out the United States? China? Possibly, but China isn't likely to do so.
What has actually happened so far due to the credit rating downgrade is the opposite of what was expected above. Due to the stock market drop and the possibility of economically weak countries in Europe defaulting on their debt, people sought safety, and since traditionally, U.S. government bonds have been considered to be a safe haven, investors sold stock and bought U.S. bonds, thereby increasing the price of existing bonds which in effect lowers the effective interest rate on such bonds. So as U.S. bonds became officially more risky, their interest rates went down instead of up. In late 2011 and 2011, a 10-year U.S. bond interest rates dropped below 2%. When will investors wake up to the increased risk?
However, some claim that technically the U.S. is already broke. See U.S. Is Bankrupt and We Don't Even Know It by Laurence Kotlikoff - Bloomberg Business. One gloomy scenario is 5 Things That Will Happen To You When America Goes Bankrupt by John Hawkins.
url="http://rightwingnews.com/john-hawkins/5-things-that-will-happen-to-you-when-america-goes-bankrupt/"> name="5 Things That Will Happen To You When America Goes Bankrupt | Right Wing News">.
One symptom of impending collapse has been the decline in the US dollar in value vs. the Euro over the past several years. Before the European debt crisis, starting with Greece, it was thought that the Euro could become the world's currency instead of the dollar. As the Euro increased in value, Foreigners who invested in the U.S. would find they have lost money and would be more inclined to pull out of US investments, driving the dollar still lower with respect to the Euro.
But by 2010 it became clear that the Euro also had severe problems due to the economic situation in some European countries being about as bad (if not worse) than the United States. Five of these countries are Portugal, Ireland, Italy, Greece, and Spain (known as PIIGS). Would the Euro be devalued (by printing more Euros) in order to bail out these countries? Allegedly this has already happened on a small scale, since the European Central Bank (ECB) has issued funds to national central banks based on deposits of collateral which is of questionable value such as the bonds of countries that seems to be hopelessly in debt. Although the ECB may derate such collateral below its face value this may not be enough.
Still, a Euro in trouble doesn't mean that the dollar can't get into even more trouble and hyper-inflate.
At the same time, the higher prices of foreign goods due to a weakened dollar would result in less imports (good) but the U.S. government could both raise taxes and interest rates in order to entice investors to loan it money and keep the government going. The result would be less consumption and stagflation. Higher interest rates mean less or negative business expansion.
Higher prices (without a corresponding increase in wages) mean less retail sales and less service sector employment leading to higher unemployment. There would likely be a contraction of consumer credit and more bankruptcies and foreclosures. Depression in the US means the US imports less, causing a temporary worldwide depression. But it would be much more severe in the US than most other places (except for possibly for the PIIGS countries) due to the U.S.'s huge debts and trade imbalance. Gold would soar in price (although due to inflation it might not increase much in real worth). There would be more bank failures. The government would have to pay higher interest rates on its debt.
So we would have a full fledged inflation-depression (sometimes called "stagflation") to contend with. To get out of it, we would need to greatly increase manufacturing and the export of manufactured goods. See Revival of Manufacturing? But that would be very difficult due to the loss of our manufacturing plants and engineering know-how. Even patents held by foreigners could pose problems. So such a depression might become nearly permanent.
During the depression of the 1930's, the US had vast natural resources on reserve such as oil to help get us out of the depression. We also had a lot of closed factories which could be restarted. Today we have little such reserves to fall back on. The US would become a large impoverished has-been nation something like Russia is today --or worse since Russia has oil and gas reserves to fall back on. To boot, the government debt is so high that it could result in a collapse of the credit of the United States government (default). In other words the government goes broke and the credit rating of U.S. debts plummets.
Once the U.S. is bankrupt and there is no one to bail us out, there is likely to be much higher unemployment along with less welfare and unemployment benefits. The result would be more hunger (and malnutrition), higher death rates and lower population growth. Less population (and a poorer population) would mean less food consumption, leaving more food available for exports. If foreigners will no longer loan us money to pay for imported manufactured goods, we can export more food (and eat less) to help pay for it. Of course rich people will still have plenty to eat. If it gets too bad, this could lead to riots, more political charlatans, and elections of leftist candidates. Revolution is unlikely since the U.S. has an electoral process to produce major changes.
After we are well into the existing depression and are really suffering, we can look back on it and think of how we enjoyed our spending sprees on imported good as well as the housing and stock market bubbles while they lasted. We were able to get foreigners to do the work that we should have been doing, and still got their goods without working for the goods. We did this by borrowing from them to buy their low cost products made by their low-wage workers. So we benefited double:1. the price was low and due to forthcoming default by the U.S. (or the equivalent by devaluing the dollar). 2. We didn't even have to even pay for much of it since we got it on credit.
Furthermore, our policies of lower taxes on the rich (and other benefits for them) enabled them to become much richer while the rest of us got poorer and eventually suffered. But we will still be left with a wonderful country from sea to shining sea and majestic national parks, etc. (for those that can afford to visit them). Also, population may get reduced by lowered life expectancy and by people choosing to have fewer children due to very hard times. This is certainly an inhumane and stupid method of needed population reduction but it does help a little in solving our problems.
The more distant future is more murky. Will we learn much from this ordeal? Will we become more financially responsible, do more productive work, and stop most of the waste in our society, and fix most of the causes? If we can do all this and more, we may enter a new golden age but if not, we may be doomed to future austerity, turmoil, and struggle. And as a consolation, we would still be much better off than many of the poorest countries in the world and there would also be other developed countries which would share our misery.
In early 2008, claims that we were in a recession hit the front pages of the mainstream media. Then in Dec. 2008 a recession was officially declared that started in Dec 2007 (and supposedly ended in June 2009) so these previous claims of recession, which many rejected at the time, turned out to be valid. This article in early 2008 predicted that this could be the start of financial collapse. And writings about this, plus oodles of related material, is finding its way to the Internet. The rate of publication of books on the topic rapidly expanded after 2007. The author (me) has not adequately kept up with the more recent books on the subject and no longer lists books he considers to be of lower quality.
Ryerson, William N.: Population. Ch. 12 in The Post Carbon Reader, Healdsburg, California, Watershed Media 2010.
Whipple, Tom: Peak Oil and the Great Recession. Ch. 19 in The Post Carbon Reader, Healdsburg, California, Watershed Media 2010.
Arnold, Daniel A.: The Great Bust Ahead: The Greatest Depression in American and UK History is Just Several Short Years Away. This is your Concise Reference Guide to Understanding Why and How Best to Survive It. 2002. It's only 64 p. w/large print. Bases its entire argument on demographics extrapolated from past trends. Likely not worth reading.
Beckman, Robert C.: The Downwave: Surviving the Second Great Depression. New York: E.P. Dutton, c1983. Portsmouth : Milestone Publications., [ca. 1992]
Brussee, Warren: The Second Great Depression. Bangor, ME: Booklocker.com, 2005. Seems to base the cause on debt, using government statistics. Doesn't seem to cover the big picture.
Bonner, William: Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. 2003.
Bonner, William: Empire of Debt: The Rise of an Epic Financial Crisis, 2005.
Braby, Don: The Approaching Winter: The Next Great Depression. (Paperback, 100 pages Published by author) 2005.
Cadieux, Danielle; David W. Conklin: The Great Recession, 2007-2010: Causes and Consequences 2010. Based on the publisher's review, this seems to only cover the financial causes and thus is not comprehensive.
Chossudovsky, Michel: The Global Economic Crisis The Great Depression of the XXI Century(Paperback) 2010. This book seems to put the blame on the rich and the government that lets them get away with it. But that's not the whole story. See Who's to blame. Reviewers claim he's repetitious and uses hyperbole.
DeMint, Jim: Now or Never: Saving America from Economic Collapse. 2012. By a very conservative U.S. Senator. He's mainly concerned about the U.S. going bankrupt, and rightly so. But he's opposed to significantly increasing taxes on the rich and wants to go full speed ahead on pumping out more oil in spite of global warming. He ignores the trade imbalance and the book has no index.
Diamond, Jared: Collapse: How Societies Choose to Fail or Succeed" About collapse of ancient and modern societies due to depletion of resources, etc. Not about financial collapse but the reader can make inferences.
Duncan, Richard: The New Depression: the breakdown of the paper money economy, 2011. Duncan seems to think that we can increase deficits and expand credit to extreme amounts, thus getting us out of the Depression. He also thinks that by spending huge amounts of money we can develop solar energy to replace oil. The solar energy part is wishful thinking but expanded stimulus leads to much more debt which we would need to get out of by default on or by hyper-inflation, either one of which would scare away future benefactors that would loan us still more. He correctly points out how going off the gold standard facilitated excessive expansion of credit. Probably not worthwhile reading.
Huffington, Arianna: Third World America, 201l.
King, John L.: How to Profit from the Next Great Depression by New York : New American Library, , c1988
Kotlikoff, Laurence J.: The Coming Generational Storm: What You Need to Know about America's Economic Future, 2005.
Krugman, Paul: End This Depression Now!, 2012. He proposes to end the depression by stimulus: borrowing and printing money. Also, there would be more mortgage relief. But unfortunately, this cure would only be temporary until the credit of the U.S. runs out (which this proposal exacerbates) and then the situation would likely become even worse.
Leeb, Stephen: The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel, 2006.
Mandeville, Michael Wells: The Coming Economic Collapse of 2006: Trends, Predictions, & Prognostications for 2004-2006 and Beyond .
Martenson, Chris: The Crash Course: The Unsustainable Future Of Our Economy, Energy, And Environment, 2011. This book appears to be more comprehensive than the other books since it covers the problem of running out of natural resources. It's criticized for being somewhat repetitious. In contrast to Kunstler's book, "The Long Emergency" it delves more into economics.
Panzner, Michael J.: Financial Armageddon : protecting your future from four impending catastrophes. 2007. One of the better books on the subject but focuses on the financial sector and not on the overall problem. The scenario of initial deflation followed by inflation he presents needs contention, since the initial deflation may mainly happen for real estate while other goods and services inflate.
Peck, Don: Pinched: How the Great Recession Has Narrowed Our Futures and What we can do About it. 2011. If you want to know how this depression has affected people in the U.S. this is about the best book to read. He uses both statistics and personal examples. But Peck is going along with globalization, ignores the trade imbalance but, does mention in passing the public's support/rejection of free trade without explaining what is actually happening. On p. 183 re free trade, etc. he claims that "the winners gain more than the losers lose" but he fails to explain that the winners are mostly foreigners and the losers Americans. If Americans do more to benefit the rest of the world than the foreigners do, then global welfare is decreased.
Peterson, Peter G.: Running On Empty: How The Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It, 2004.
Phillips, Kevin: American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century, 2006. (Perhaps one of the best books, but about half of the book is devoted to blaming the religious right for our predicament which is not the crux of the problem).
Phillips, Kevin: Bad Money, Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism; New York: Viking 2008. This rather short book is also one of the best books but it seems to have been hastily written. It mentions a lot of historical parallels but unless the reader has a strong background in history, the understanding of these parallels is impaired. This book has been criticized for not proposing what we should do about the dire situation.
Schiff, Peter and John Downes: Crash Proof: How to Profit From the Coming Economic Collapse. John Wiley & Sons, 2007.
Stathis, Mike: America's Financial Apocalypse: How to Profit from the Next Great Depression. AVA Publishing, 2006.
Thurow, Lester: The Zero Sum Solution, 1983, 1985. Publishers weekly reads: MIT economist Thurow warns that spiraling U.S. national and foreign-trade deficits combined with declining productivity will lead to lower living standards and the kind of economic eclipse suffered historically by Greece, Rome, Portugal and 20th century Britain. So we were warned decades ago about some of the problems we currently face but failed to heed such warnings. Thurow has authored a number of other book on these and related topics.
Wiedemer, John David and Robert A Wiedemer, Cindy S Spitzer. America's Bubble Economy: Profit When It Pops. John Wiley & Sons, 2006.
Bryce,Robert: Gusher of Lies: the dangerous delusions of "energy independence". New York : Public Affairs, 2008. Claims (likely correctly) that the alternatives to petroleum are not feasible but fails to do enough analysis to prove this. It's alleged that he neglects conservation and thinks the US attacked Iraq because of oil. He claims that alternative energy will only make a small contribution to our fuel "needs" except that atomic energy has significant potential. Points out that we import a lot of other things besides oil and thus it can't be too wrong to import a lot of oil. But fails ?? to empathize how this is abetting future financial collapse.
Dobbs, Lou: Exporting America: Why Corporate Greed Is Shipping American Jobs Overseas, 2004.
Fletcher, Ian: Free Trade Doesn't Work: What Should Replace it and Why, 2010. A reasonable thesis but a lot of mistakes in the book. For example, he doesn't think (p.50) that our low savings rate is one of the causes of the trade deficit.
Hacker, Jacob S. +: Winner-Take-All Politics; How Washington Made the rich Richer--And Turned Its Back on the Middle Class, 2010. One of the best books on the problem of inequality. But a reader might get the wrong impression that this is the major cause of the depression while it is actually just one significant cause out of several. It fails to point out that some regulation of business was not efficient and explain how some labor unions took advantage of businesses contrary to the public interest. The rich are quite a diverse group and some try hard to give back to the public. Also, being rich gives one a lot of free time to understand the problems of society and the means to help remedy them. They are also the ones that can easily afford to save a lot and invest.
Kunstler, James: The Long Emergency. He presents doomsday scenarios of disaster due to future scarcity of oil in this book and on his website: Clusterfuck Nation: Comment on Current Events This name should give you a clue that he engages in shock and hyperbole, but that may be what's needed to wake people up to the looming crisis. His website covers some of the other causes of this depression.
Liveris, Andrew: Make it in America : the case for re-inventing the economy, 2011. Suggests government financial incentives for encouraging manufacturing in the U.S. Fails to fully explain how manufacturing jobs create service sector jobs. Doesn't propose protective tariffs. An overly simplistic book but better than nothing.
Perelman, Michael: The Confiscation of American Prosperity: from right-wing extremism and economic ideology to the next great depression. New York: Palgrave Macmillan, 2007. This is a well documented but biased academic book covering mainly the topics of income inequality and the failure of academic economists to propose solutions to real problems. It presents a lot of history too. But it doesn't go into the important topics like excessive debt, the housing bubble, etc. nor does it discuss land rents which is a major cause of income inequality. It implies that economic growth is good while not addressing the problems of overpopulation and non-renewable resource depletion. But its emphasis on income inequality as a cause of economic collapse is something that others have usually fully neglected and partially compensates for the other shortcomings.
Swanson, Gerald J.: America the Broke: How the Reckless Spending of The White House and Congress are Bankrupting Our Country and Destroying Our Children's Future, 2004.
Sykes, Charles J.: A Nation of Moochers, 2011. Has many examples of misuse of "entitlements" by Americans.
Talbott, John R.: The Coming Crash in the Housing Market: 10 Things You Can Do Now to Protect Your Most Valuable Investment. 2003.
Economy in Crisis: http://www.economyincrisis.org was one of the best websites on this topic but by 2017 it was dead and redirected to advertising. However : Economy in Crisis on Twitter still exists (in 2017) but doesn't seem to be well organized or maintained. Ditto for a similar page on Facebook. Twitter has a link to the old dead site and it was likely set up as a tweet discussion site, with the articles expounding on the crisis thesis and what to do about it remaining on the now dead main site. Unfortunately, they couldn't be moved to the twitter site due to twitter rules but if they were on another site, links to them from twitter would be allowed. Historians (or people who want to revive the site) can still view the original on the "Wayback Machine". I was told that the reason they quit was the death of the person who provided financial support. I'm looking into it. If you are willing to take over the project, contact me (the author).
The old site put emphasis on evils of free trade. and selling U.S. companies to foreigners. Some data on the old site was not up-to-date. Someone should revive it: obtain the domain name, update the site, and make sure it gets relinked to twitter and Facebook.
Clusterfuck Nation: Comment on Current Events Often hyperbole, with strong language. But "tell it like it is" (or worse than it is) is sometimes insightful.
The US Government Is Bankrupt (by Doug Casey) Extreme libertarian but less extreme cutbacks are essential.
The American Workplace - The Shift To A Service EconomyLast statistics are for 2005.
The forerunner of this article, originally written in 1994, was limited in scope and entitled "Free Trade" of which it was critical, especially concerning capital flight from the U.S. Years later, in the mid 2000's it was expanded and became "Financial Collapse". Then in 2011 it became "Depression 2007- and its causes" since the recession (depression) that started in 2007 is more than just "financial collapse". The forthcoming financial collapse that I (and many others) predicted in the early 2000's almost happened in the late 2000's. My claim that there is no adequate book on the topic still holds as of 2014. This article still needs improving with additional concepts, examples, references, etc. It also need better organization, including eliminating (where feasible) repeating the same concept which is often feasible to reference by internal links (links from one section of the article to another section of the same article).
Over the 21 year period I've worked on it, my understanding of the problem improved. In 2011-12 I proofread it, correcting typos and awkward wording, adding references, etc.
My insights in 2011 were that many manufacturing jobs are not feasible to export to foreign countries and that we may become a major agricultural exporter at the expense of degrading the nutrition of poorer people. I've also been checking over the list of multiple causes.
In late 2015 I started to update it and realize that it's too much gloom and doom and needs to be more balanced and explain why disaster has been delayed.
To do is a proposal for cures which is likely to be rejected by future readers as being too drastic, but drastic measures are needed to solve the problem.
The U.S. government has many statistics of interest. They are mostly kept by the Bureau of the Census and the Bureau of Economic Analysis (BEA). Much of it has been placed on the Internet. While they may not be as easy to read as other sources that utilize them, you know that you are getting information directly from the source.
A stock is sometimes thought of as a part ownership in a corporation, but on average, all one usually gets from the ownership of a stock is its dividends. You may object and claim that by buying stock that goes up in value, one also gets "capital gains" due to the increase in stock price. But what is the sum of all capital gains for a share of stock over its lifetime? In the long run, all corporations will fail and become worthless. So it's trivial to show that the sum of all capital gains on a share of stock one just bought is just equal to the negative of the price paid for it. For example, you pay $1000 for a share of stock, and eventually that stock becomes worthless. $1000 has been lost, probably not by you but by others who bought your share of stock somewhere in the future. Thus the long run the sum of capital gains is negative (a loss).
It's not actually quite this simple. If you buy a stock, there will be in the future a series of capital gains and losses by the people in the future who get your stock (including you when you sell the stock). To determine the present value of future capital gains and losses one should discount them to the present time using an appropriate interest rate. There is also the transaction costs (commissions) to be deducted from the capital gains. Of course at the present time one doesn't know the future but one can give an example of a hypothetical future. So using such discounting it might turn out that the present value of future capital gains is positive instead of negative. But it's also possible to be the other way around so that the present value of the expected capital gains is even more negative than the purchase price.
Thus an estimate for the present value of a stock is the present value of the expected future dividends paid by the stock, discounted to the present time since one usually assumes that a dollar in the future has lesser utility than does a dollar right now (today) even if there is no inflation.
In this article "services" means services in the broad sense and includes doctors, lawyers, educators, government employees, as well as sales clerks, fast food workers, truck drivers, cleaning people and gardeners.
The U.S. has a significant surplus in services. Much of it is due to foreign tourists for which the U.S. provides lodging (hotel), food, and transportation services. Foreign tourists spend their foreign money in the U.S. and provide the U.S. with some foreign currency when they exchange their money for dollars. This foreign currency helps the U.S. buy foreign goods. If you visit tourist attractions in the U.S. such as the National Parks, you will see a lot of these foreign tourists spending their money on U.S. services.
Another service where the U.S. has a surplus is computer software, mainly Microsoft's monopoly. But in some foreign countries there is much interest in switching to the use of free Linux software, especially in countries which are more critical of U.S. policies. But due to secrecy of the codes needed to operate some computer hardware (such as printers), Linux software is not fully functional with some hardware and this problem with Linux helps maintain Microsoft's monopoly.