Inflation

Don't Blame China (Or Corporations), Politicians Pushed Jobs Out of the U.S.

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Clarks desert boots

While listening to the major-party presidential candidates come within an inch of declaring war on China during last night's debate, my first thought was that Beijing displayed admirable restraint by not sinking a U.S. aircraft carrier about two-thirds of the way through the posture-fest. My second thought, though, was of the inflation-fueled sticker shock my father displayed a year ago over the price of desert boots. Yeah, that sounds weird. But those two political candidates, and power-grubbers just like them, have helped create conditions in which it's very attractive for manufacturers to do everything they can to keep costs down, including moving factories to such terrible destinations as China.

First, to be clear, I'm not arguing that all of the incentive to move manufacturing overseas comes from inflation. There are good reasons to move manufacturing that have nothing to do with the eroding purchasing power of the dollar (although many of those reasons can also be blamed on politicians). But my father is a guy who spent much of my youth stomping around in Clark's desert boots. He's also an economically savvy guy who writes financial newsletters. And he balked at the price I'd paid for my own pair of desert boots even though that price was comparable to what he paid back in the day, adjusted for inflation.

My father, like many people, was blind-sided by inflation. The purchasing power of the dollar erodes, and even if manufacturers do nothing more than adjust for inflation, people complain about price-creep and insist they're being gouged. Clark's desert boots cost $12.95 in 1959. By standard measures, according to the American Institute for Economic Research's handy cost of living calculator, they should cost $100.87 today. They list for just about exactly that now, though you can usually find them on sale. But labor costs in in Britain have dramatically risen in that time, so the shoes are no longer made there — they're made in Vietnam.

Likewise, Levis 501 blue jeans have been a staple clothing item over the decades. They listed in the 1986 Sears catalog for $30.99 each. Sears currently lists them for $64.00 (which would exactly compensate for inflation), but has them on semipermanent sale for $47.99 — J.C. Penney just lists them at $45.00. That means 501s are actually cheaper than they were in 1986, once you adjust for inflation. U.S. labor costs have also risen in that time, so it's no surprise that Levis has moved production to Asia.

Incidentally, the AIER warns, "Most Americans in 2011 experienced a day-to-day inflation rate of 7.2 percent—more than two times the official estimate released by the Bureau of Labor Statistics … If the inflation rate of big-ticket items such as cars matched that of everyday items, consumers would be appalled." The organization explicitly links price rises to "monetary expansion policies" — policies implemented by our fearless leaders in Washington, D.C.

Historically, such a large expansion of the money supply has always resulted in higher inflation. For now, most of the additional money created by the Fed is accumulating in the excess reserves held by banks. But recently banks have started lending again. Reserves have started flowing out of the banks and into the wider economy through a somewhat increased volume of consumer loans and a more dramatic increase in the volume of commercial and industrial loans. There are also some early signs of life in the housing market and therefore in mortgage-loan origination.

All forms of lending convert bank reserves into money, available to be spent by consumers on goods and services. If the money enters the economy without a corresponding increase in output, higher inflation will follow. With money supply increases in the 14 percent range and output increases forecast in the 2 to 2.5 percent range, it seems likely that the money supply will outpace output.

So, when Mitt Romney and Barack Obama rail against China's nefarious practice of offering Americans good they want at prices they like, and attack corporations for shipping "American jobs" overseas, they're mugging shock and horror over a situation they and their buddies created. They screwed with the value of the dollar, consumers were horrified by resulting price rises, and manufacturers raced to lower production costs to avoid alienating customers. And it's everybody's fault but the that of the government officials who started it all.