Economics Archives - More Letters to the Corinthians

Inflation II

The first article on this topic discusses one type of inflation—prices rise when more money chases the same number of goods. That’s the general theory, but it fails when we run the t-shirt machine a few extra hours to make all the fashion you want. Yes, more money causes inflation when it comes to something that’s limited in supply, but it doesn’t when you can flip a switch to generate more. So if everyone needs the only lawyer in town and wads of cash is available, the price of legal services will rise. That doesn’t need to happen when goods are easily made. For example, more money doesn’t make the price of sweaters go up. More money makes people buy more sweaters. So instead of having three, we buy five. But they’ll all be at the same price.

The second cause of inflation comes with rising costs within nature. We already know the price of oranges gets affected by an early frost. If nature ruins the growing season, the yield will be less. As a result, the price of oranges rises and only those who really want them, buy them. Same goes when farmers have a bumper crop. Lots of asparagus means cheap asparagus. That’s why you always buy fruits and vegetables in season.

The biggest source of cost-caused inflation is wages. For instance, when we raise the minimum wage or export jobs to China, it’s easy to see a direct causation. But what about when staff come calling due to the cost of living? Sometimes employers can negate this increase by way of productivity, sometimes they can’t. When not, here’s another reason for inflation.

So there are four primary causes:

Too much money chasing the same number of goods and we can’t flip a switch to make more (e.g., legal services in a town with only one lawyer)
Cost increases due to nature (e.g., early frost on oranges, forest fires on lumber)
General cost of living affecting wage demands (with no accompanying productivity gain)
Increases or decreases in productivity (e.g., new machinery, government regulations, corporate tax)

Prices have a number of methods to go up (or down). So just to be safe, maybe buy everything today.

Inflation

Understanding economics is different from learning other trades. For example, take machining or dentistry. The knowledge in these areas gets acquired and then passed along through generations. But with economics it’s often figured out on the fly. That’s because conditions in this field change. Take inflation.

For the past 50 years central bankers have focused on this issue. Previously, their mandate was to control inflation and encourage employment—both at the same time. But during the reality of the 1970s, bankers were forced into making a choice. Faced with the conundrum of high inflation and not enough jobs, Milton Friedman claimed the two could never be satisfied at once. He said the concern for inflation must always come first and that’s what central bankers did. They shifted focus.

Two levers

Big banks started managing inflation by using two levers: control interest and print money. When things look good keep rates low, but once inflation rears its ugly head, rates go back up. Then when the economy is suffering, push rates down to provide stimulus. That’s how they saw rates. The second lever involved putting money in and out of the system (by printing and destroying).

Together these levers worked well up until the crash of ‘08, which was a big one. Central banks reacted by lowering interest rates and increasing their part in world money supply from $46 to $69 trillion. Yes, they created 23 trillion dollars in just ten years. Traditionalists expected bigtime inflation to follow since more money was now chasing the same number of goods but that didn’t happen. We experienced only regular inflation (because it’s easy to make more goods).

More importantly, over the past few months of 2019 central banks stopped using the interest lever. They figured inflation could now be controlled by simply putting money in and out of the system. This way rates could remain low and government debt would be manageable for the foreseeable future. (What some call, kicking the can down the road.)

Modern Monetary Theory

Then we caught Covid and a whole whack of new debt has been issued. What to do? Well bankers are pondering a new idea. This time, instead of using either of the old levers, they’ll be using taxation. You see the only concern with lots of money in the system is inflation. But what if we could control inflation another way? Here’s the plan.

Imagine if GST floated between 1% and 29. When it’s 29, will you be buying a new car? Probably not. But when it’s at 1%, everything goes on sale. Under this new program government can jack up or down the economy without constraining the money supply. This way we can continue to sustain enormous amounts of debt. It’s like redefining money’s purpose. Sure, money will still facilitate the exchange of services and goods, but in the macro sense it will no longer be part of controlling inflation. And that’s a major change (until the next new theory).

Capitalism

Canada’s McGill University hosts an annual hockey game played between the professors of its humanities department and those from the business school. They call it “capitalist pigs vs. communist bastards.” For years it’s been a big hit and no matter who wins, the pigs buy lunch.

Afterwards, they host a Symposium-style discussion on the merits of the two systems. Modeled after Plato’s great play, guests come together to discuss a serious topic—but it’s a party. Everyone eats, drinks, and gets merry, then afterwards, rather than putting on disco, they offer up arguments on a given issue. (In Plato’s version the subject is love, and Socrates wipes the floor as the last speaker.)

Every year the battle begins the same. “Capitalism sucks, too much goes to the top.” “Oh ya, if it wasn’t for us you’d all be starving.” Then as the night goes on (and booze starts to flow) they get down to the truth.

Communism

Communism was developed by Laura Engels and Groucho Marx, back in the 1860s. Conceived during a time when insufficient production kept many people poor, it sounded like a great idea to some. Not knowing that technology—namely electricity and the motor—would eventually come along to fix things, it claimed society would be better served if we all shared. Kind of like living on a kibbutz. But in political practice, it was used by cutthroats to obtain power.

Certain leaders conned the public into believing they’d raid the rich to feed the poor, only to get rich themselves. As a result, sympathizers don’t look to the past for vindication. They believe this theory was never properly put into practice and now deserves a second chance. Let’s take a look.

Communism calls for full-on socialism while eliminating all private property. Every business is owned and operated by the government through central control and you’re not allowed to buy a home—you can only rent. Then when it comes to working and taking, the philosophy is “from each according to his ability, to each according to his needs.” The social history of communism is easy to dismiss. Its dictators killed millions (mostly those who refused to comply). But the economic history is quite clear. This ideology didn’t get people up in the morning. Why? Because it conflicted with human nature. Sure most of us are designed to be nice, but not that nice. At least, not to the degree that communism requires.

Any successful system involves having your best people do the hardest jobs. And if that means buying them a new Ferrari every couple of years, so be it. Providing the gifted with some sort of incentive isn’t harmful to society. It belongs within the common good. For when the gifted put forth their best efforts, it grows the pie for everyone. We really don’t want talented software engineers sitting at home writing a novel.

“Okay, okay.” Socialists say, “We’ll give you back your private property.” Sorry, not enough. Hard workers aren’t going to dance for just a house. And every economy needs all horses to run. Workers aren’t going to accept overtime or dangerous / uncomfortable conditions for the sake of some newfound church. We want compensation. That’s why every version of this utopian dream dies on the streets. It’s not natural. People like money and everything that it buys. So much so they’re willing to work for it.

And just when it looks like capitalism is gaining the edge, some commie pulls out a joint.

Ethics

“Ya, but a lot of you capitalists are dicks.” And that’s the problem with truth. It cuts deep.

The stereotypes of Mister Burns and Ebenezer Scrooge are long out-of-date. Rich people don’t act like that anymore. Most of them are nice. Andrew Carnegie said, “A man should spend the first half of his life making money and the second half giving it away.” Bill Gates isn’t the first. But even with modern day heroes, far too many of the powerful are knobs. And that’s the problem with business.

Capitalism requires ethics and they don’t teach you that in business school. Even worse, you can’t regulate it. There is no lever to prevent corporate raiders from ripping apart towns or gaming the system (e.g., say in finance). And, other than competition, there’s nothing to stop companies from overcharging customers or underpaying staff. Same goes for paying your bills on time. Our system relies upon ethics. The kind your mother taught you. And not all participants comply.

It’s not about building hospitals or funding a shelter, it’s about running a respectable shop. State regulators can’t be everywhere and it’s impossible to plug all the holes. So the economy requires morals. And not just from the top, it’s everyone’s business. People are what keep this system going and when you take riches without responsibility, you’re not up to the job.

Summary

It’s no secret that not everyone is born the same. Some have the “do good in school” gene, while others just don’t. Some have loads of energy to climb a mountain, others don’t. And a bunch of us were dealt a crappy hand. That being said, it’s not the job of industry to solve any of these problems. But when you get into the billions and hundreds of millions, you’ve been more than compensated.

Everyday people don’t like to see opulence when they’re being left out. They too like toys. So this trend against capitalism isn’t coming by way of another system. It’s coming from within. Many who thrive under this current order aren’t worthy of its rewards, and it’s getting noticed.

As for McGill, their tournament has been going on for years and series-to-date, capitalists are winning. But the last couple games have gone to the commies, which might tell you something. Professionals continue to argue and implement change, but a lot of people still seem to be miffed. It sure would be a shame to go against human nature. Then again, isn’t it natural to complain?

Money

If you read the business pages with any sort of regularity, you’ve undoubtedly heard the term debt. Apparently, we have lots of it. So maybe it’s time to look into the causes of this problem and start a discussion about money. First off, it has three sources.

Wages

The first is called wages. It’s the paycheque-to-paycheque funding that sustains life. That’s why a strong economy is so important—people need jobs. And it’s not just for psychological purposes, employment provides a means to get by.

Wage-money comes from multiple sources, all in a cycle. Consumers buy goods, companies make and sell those goods, and employees get paid. Those employees then become the consumers who restart the cycle. Make sense? Money supply resulting from wages then shrinks or grows based on the vibrancy of the economy. When robust, money supply grows. If the cycle slows down, it shrinks.

Loans

A second source of money comes by way of lending. This article describes the marginal reserve banking system and how institutions evaluate risk. Suffice it to say when interest rates are low, business and people borrow more—thereby expanding the supply of money. Same can be said about other forms of debt, like credit cards.

Central banks worry about this phenomenon. If they feel more money could help the system, they’ll lower rates to give borrowing a boost. But if they feel the economy is running hot, they’ll raise them in order to combat inflation. Inflation usually comes from a strong economy running too long and can be controlled by making borrowing tight. Shrink the money supply, shrink the inflationary effect. At least, that was the old rule.

Central banks

Central banks like the Bank of Canada do two things. They control interest and print money. In the past, their primary focus was on inflation. When things looked good, they’d keep rates low; but once inflation reared its ugly head, rates would go back up. The opposite can also be said. When the economy is suffering (meaning prices are also low), central banks lower rates to provide stimulus. But something has changed over the past few years. Something investors should know.

Central bankers are no longer using interest to control the money supply. They’re creating and destroying on their own—and this could be a game changer. Because so much currency has been printed since the crisis of ‘08 (23 trillion worldwide), central bankers have obtained an influence that doesn’t involve touching rates. Specifically, they used to use interest to encourage / discourage personal and commercial lending, now they just put more money in and out of the system. Yes, they’ve always put money in and out of the system but not like this. Current dollar values are through the roof and that’s why this could be a game changer

The point

Ask any Australian bartender and they’ll tell you economics is always changing. Commerce has become increasingly international and ceases to stay still. Senior investors are (by definition) open to new dynamics and if places like the Fed are controlling inflation more by putting money in and out of the system, then interest rates may continue to stay low. And if rates stay low, there’s less of a chance the market will crash (i.e., long tail risk).

The old theory professed that during a downturn, central banks would lower rates to stimulate the economy. Then once everyone is back up and working, raise them. They did this for two reasons: one to combat inflation and another so they could do it again. Old time believers felt this method was best but now that central banks have created so much money there may be a better way. One that allows for rates to stay low.

If the international objective is to move to a new paradigm, you can feel comfortable about investments like real estate and stocks. At least from an interest perspective they won’t get killed by rising rates. Business and government still have to worry about debt but this explains why news agencies have stopped talking about long tail. And why my returns average around 6% when everyone else is getting 30.

Krog

In the beginning there was a caveman named Krog who lived in a hut down by the river. Often Krog would evaluate his life and conclude he had everything he could need—for his essentials were only air, water, food, and shelter. Air was easy because it was all around. Water was good since he had the river. Food was a pain because it took an average of 10 hours per week to hunt and grow. And because his hut was already built, it only took a few hours per week to maintain. He was happy.

But living in this self-made paradise made Krog lonely. One day he went into town and found himself a mate. They instantly fell in love and were married. Then Mrs. Krog moved in.

After the first year, Krog asked what she thought of their slice of heaven and sweetie replied, “Well everything is nice and all, but ever since the wedding we’ve gained bushels of weight so maybe we should start wearing clothes.” Krog took one look at his burgeoning belly and went off to plant cotton and build a weave—thereby added clothing to his basic needs. After the second year, Krog asked again. And sweetie started with, “Well everything is nice and all, but it sure would be great to have a soft comfortable bed to sleep on along with a few tables and maybe a really funky couch.” So off Krog went to invent the furniture industry. After the third year Krog thought, do I really want to know? But asked anyway, which could have been a mistake because on this very day sweetie was in a bad mood. She said, “Well I’m kinda sorta happy, but I’m tired of going down to the river to get water so why don’t you build me a direct pipe. And while you’re at it, it would be nice to have some light around here because every time I get up in the night, I’m always tripping over s#!$. And hey, what about some heat—I’m frigging freezing!”

Now Krog had a problem, a big problem. He’d already added loads of hours to his work week by inventing clothing and furniture—how could he possibly provide more. And then to him an idea did occur.

Specialization of labour

Krog went to town to present a new plan to the townsfolk. “I say rather than all farming and building and maintaining our own homes, how about we specialize and just do one thing or the other? This way we’ll attain greater outputs, which will afford us a higher standard of living.” Then after selling everyone on the idea, Krog suggested that instead of using this excess to build bigger homes and grow more food, they use it to produce more necessary goods like clothing and furniture (which he showed and the women went wild). “Furthermore, if we invent a little technology we’ll have even more labour capacity, which will allow us to run a water company, an electric company, and to explore for natural gas to yield heat.”

His presentation went so well they went on to invent things like money and punch clocks, and every townsperson signed up for a forty-hour work week. Triumphantly, Krog walked home. But there was an inherent problem with his brainchild—specialization of labour. Sure it increased outputs, thereby affording everyone a better standard of living, but it took away people’s ability to simply provide for themselves. Plus it committed everyone to public work.

Why we work

(Here we’re talking about public work, not making your bed in the morning.) We work for two reasons: to make money to provide for ourselves and to play our part within society by providing for others. The first is obvious but the second is theoretical. I work for you and you work for me, and together we both get more. It’s actually quite beautiful (and really was a good idea). You spend eight hours a day working for others in return for the benefits of others working for you.

Whether it’s eating, watching TV, or sitting on the sofa, almost everything that sustains you is the product of other human’s labour. The entire economy is built around people providing goods and services for each other, which means every piece of raw material and every labour hour spent is eventually for the benefit of some one.

Command economy

Getting back to Krog, things started out smooth but as time went by there were two problems:

Deciding what everyone should do
Ensuring everyone had a job so they could derive income

The first problem became evident when people discovered they had too many carpenters and not enough plumbers. Sure everyone’s trim looked nice but the toilets were backing up. So they added administration to ensure we’d have enough of everything. This was called a command economy and its purpose was to ensure everyone was performing a job and drawing a wage.

Market economy

As time went by this administration became impossible to maintain and there were labour surpluses and shortages. Plus many were getting upset that everyone was being paid the same. Some argued their jobs were harder so they deserved more.

At the next town hall there was so much shouting and complaining that the convener, Sir Adam, yelled, “scr#@ it!” and declared we’d be better off managing our own affairs. He suggested a market based system where people work wherever they like and wages act as an attraction to occupations where they are needed and a deterrent from those already full. This idea was quite revolutionary so everyone said, “Okay, let’s try it.”

New problems

Shortly after adopting this new strategy, labour surpluses and shortages subsided along with the complaining about how we were paid. But two new problems arose:

The division of strong and weak
Private enterprise

Krog’s original idea was for everyone to be better off. But what happened was people started being paid for what they produced, not just their time. So if within an eight hour shift one maid cleaned more rooms than another, she got paid more. And this was going on everywhere. As a result, the strong were paid more than the weak and we arrived at a division in living standards.

We also found issues that came with private enterprise. Like companies were put in charge of things like safety standards, some people were making wads of cash, and nobody was sure of what government should do.

Summary

We’ll talk more about these problems later. For now, remember this:

The economy was invented by a guy named Krog (mostly because of his wife).
Specialization of labour increases outputs (which affords everyone a higher standard of living) but eliminates the freedom and ability to survive on your own.
A command economy doesn’t work.
A market economy solves the problems of a command economy but creates its own. These problems are the division of strong and weak, and the inherent issues of private enterprise (which we’ll discuss next).
Money is simply the exchange of labour (and it’s all about labour).
Technology greatly affects outputs.
Economists mostly strive towards greater outputs (i.e., standard of living). They don’t concern themselves with other parts of society, like what is fair.

The Corporate State

There’s a movement going on for companies to go beyond their regular duties. That in addition to providing goods and services they must also spend on social responsibility. Free marketers like Milton Friedman call this hogwash. Charitable contributions and furthering the public good aren’t suitable territories for business. Plus it’s your money, so John Q Public is being overcharged for undemocratic causes. A good question that’s only now coming to light.

Competition

Let’s start with the way it’s supposed to be, according to theory. Without a doubt, the coolest term in economics is creative destruction. It describes the role of competition. It says if company A makes a better widget, it will attract more customers and profits, then Company B must either adapt to this new condition or perish. Net result: better value for the consumer and greater efficiency for the system.

The competition model works well because business, in its quest for survival and profits, will always try to outmaneuver the other guy. Take for example what Costco has done to traditional retail. Their model, along with that of Amazon, reworked the way we receive goods. By providing similar products at lower prices, thousands of classic retailers have been destroyed because of diminishing market share. But this theory no longer works in some places. Take for example our big six banks. They’re technologically so adept that as soon as one gains any sort of advantage, the others quickly catch up. It’s like competition is only one step behind. So in reality, no big bank in Canada is going to fail. (And if so, just one.)

The business world has matured and its landscape has changed. In many sectors, this paradigm has secured a number of players success and guaranteed gain. For example, Tesla can enter the car market but the other 6-7 organizations are there for good. One may drop off, but based on Tesla’s results the others will simply adapt. So many of the enterprises you know today in industries like, oil and gas, power generation, materials, automotive, banking, transportation, and insurance are here for good. Bottom line: creative destruction doesn’t always get to do its thing.

History

Before continuing with our new system, let’s take a look at the past. Back in the day, corporations had to compete for their dough. There wasn’t room for excessive profits because everyone had to sell for as low as they could. People didn’t have the money to overpay for anything and emotional quality hadn’t yet been invented. It was a different time.

But as things progressed, people stopped caring about absolute price and wild-style competition. Together this all but guaranteed certain industries gains. Customers started to pay crazy amounts for designer t-shirts and the number of actors in certain spaces started to shrink (i.e., mergers and acquisitions). So in certain markets, a limited number of players now charge higher than required “market prices.” Prices that people are now willing to pay.

Without full competition and money sensitive consumers, no one is pressuring down price. So if you don’t care, they don’t care — and some establishments are really raking it in. All of which has led us to social business warriors calling for a cut.

Co-opolies

In certain industries, dominant players now act as cooperative monopolies. Formerly known as oligopolies, these huge corporations perform in mature industries protected from destruction (thereby guaranteed above appropriate returns). This is the current state of capitalism. So here’s the issue: should banks be able to bill you an extra nickel every time you incur a charge and then donate it away; or should they offer the lowest possible price and let you decide what to do with the savings?

Milton says lowest possible price. It’s not the bank’s money nor is it their position to choose. New economic thinking says that extra nickel isn’t there for the sake of some cause. It’s the consequence of operating without full competition so they were going to overcharge you anyway. As a result, why not take a piece of the profits.

Social responsibility

New economic thinking has won and certain organizations had to agree. New rulers then laid down the law. We’ll continue with the current system as long as you agree to the following:

Pay your people well, to ensure a middle class (see Unions)
Create a charitable foundation, to direct money where governments can’t go
Align your corporate message with the established social direction

Pretty serious stuff. As a result, Amazon has raised its minimum wage to $15/hour, Costco is at $14, and Walmart’s on its way past $11. All without public intervention. And don’t forget white collar wages. Second and third, every big company now has a foundation and the universal message in advertising is consistent. (Everywhere!)

Summary

Free market theory should always be respected, even when it doesn’t apply. But the business scene has changed and ol’ Milton is dead. He’s right that charity is not the natural disposition of commerce. Business is designed to make money (and destroy). We don’t like to think about the other guy. But in an economically advanced system, certain organizations are no longer justifiably self-serving units. They need to play a larger role in the world.

Corporations have been given social responsibility and are now in charge — just as much as governments. And they’re superseding government in many ways. Business controls wads of cash and is loaded with talent. What a great idea to merge efficiency and practicality with the emotions of do-gooders? Better approach against problems and it’ll teach companies to love. (Not a bad plan, when they have all the money.)

There’s a saying “the quickest way to profits is to overcharge customers or underpay staff.” It’s a tradition well known. Woke corporations are now undertaking their post. Gracefully run a co-opoly with all the responsibilities that entails. The new forward. And don’t worry, they’ll never build an army, administer legalities, or take control of currency. Governments will always play their part. One that’s dutifully defined. (As long as we keep an eye on them.)

Corporate Tax

Lots of talk these days about corporate tax rates. Since everyone is chatting, let’s take a moment to blow your mind. Corporate taxes aren’t what you think and the philosophy behind them is changing. Let’s start with an income statement.

A standard statement looks like this: after sales are recorded and expenses are paid, you’re left with two values: “profit before tax” and “profit after tax.”

Income	100 million
Expenses	50 million
Profit Before Tax	50 million
Tax (at 26%)	13 million
Profit After Tax	37 million

Which number do you think corporations manage to? It’s profit after tax. So when the Royal Bank does its forecasting they see financials like this: in essence managing tax like any other expense.

Income	100 million
Expenses	63 million
Profit	37 million

This means tax is factored into price just like any other cost. So if taxes go up, prices go up. And if taxes come down, so does price. It seems strange at first but you’ll see that corporate taxation is just like adding GST. Companies don’t actually pay it, people do.

History

The Canadian tax system, both personal and corporate, started in 1917. Before then, government got its funding from import duties and excise taxes (on items like fuel, booze, and cigarettes). In the early days (up to the 60s and 70s), combined provincial and federal rates on large corporations was in the neighbourhood of 48%. This rate has since dropped to around 27% (it varies by province) and we now have GST—so you could add another 5.

It’s not that governments are dumb, we’re still learning. And the field of economics is rather new so theories continue to evolve. Corporate taxes are inflationary because they get hidden within consumer price. That’s why they’re being reduced. If the government increases taxes, companies simply increase price. And if taxes go down, the market system says prices do too. In the end, it’s just a rate of money collected by business for government. Companies don’t actually pay it.

Government services get paid for by you, the public. That’s it. There is no magic bullet. And you can either contribute through income tax or pay at the pump.

GST

The practice of value-added taxation, which Canada borrowed from abroad, is also quite interesting. GST is a good idea. Why? Because it doesn’t matter if companies make a profit. Nor does it care if you use fancy loopholes on your individual return. There’s no way around it. The idea behind a value-added tax is brilliant and its worldwide adoption is growing.

Summary

Everything is a balancing act with taxation no exception. Canadian governments have a number of ways to collect revenue to ensure services get paid. Our multi-faceted approach works well and our system is tight. You can always argue about lowering rates but the structure is sound.

Our friends to the south are different. They recently reduced corporate tax rates, coming in line with modern economic thinking. The reasoning was to make America more competitive in a global world. The old system was blocking them from doing business internationally because foreign customers didn’t want to pay for American healthcare. So making this move was the right thing to do. Now what they need is some form of GST. Just wait for that fight.

Trade Wars

During 2018, America was renegotiating international trade agreements with the world. Some countries seemed fine but a number were in the crosshairs—namely Mexico and China. Add in a third group for postmodern nations like Canada and we have something to talk about. This article comes from August of that year. There’s a big difference between all three.

Europe and Canada

Let’s start with the small stuff. After WWII, European countries were handled with care. They were essentially treated as developing nations because their continent had been decimated. Today’s negotiations are simply bringing Europe up to par. It’s time they were fully incorporated into the First World with all its responsibilities and that’s exactly what’s happening. Portions of older agreements are being updated (including payments to NATO) and the whole thing is a coming of time—no big deal. It’s simply an adjustment, just like seeing a chiropractor.

Canada is different. Our liberal government is filled with left-leaning theorists not well-versed in the mechanics of business. Their passion is to promote a progressive agenda, which includes telling others how to live. And, believe it or not, it’s a valid position. The world needs those who push. But it’s probably best to separate us from our double-southern neighbours because Mexico may not be in a position to absorb all this progressiveness (i.e., more human rights only work when everyone is well fed, and there is an order in which you implement these sorts of changes).

Mexico

Though definitely moving upward, Mexico still has many problems. Too many poor people (which leads to illegal immigration), too small a welfare state (which is hard to compete against), and too big a drug industry. All problems which affect the United States. There’s no reason why Mexico can’t be like Poland. And it’s silly for the US to be exporting so many jobs overseas when they could have the very same arrangements next door.

The deal with Mexico has to be different than that with Canada. So much of Mexican life affects cultural America and they’re the gateway to stabilizing Central and South America. So if Mexico succeeds, so can 20 more.

China

China and the US have an interesting past. When Churchill and Roosevelt developed the UN, each selected one nation to join them on the five-member security council (along with Russia, with veto powers). For historic reasons, Winston chose France. FDR picked China. Four years later, Mao turned his country towards communism. A year after, they sent 260,000 troops to war against America in North Korea. (Nice!)

During the 1950s, China was an economic mess. Mao’s policies basically led people into starvation but once he died, reforms began to emerge and China introduced their own form of capitalism. One that employed a lot of help from the US. Remember, prosperity doesn’t come from dust. All that know-how and customer support came from somewhere. Needless to say, China became the poster child of globalization. But today, it no longer wishes to play by those rules.

The basic components to any economy is hands, minds, and money. And the rules of globalization say it demands capitalism and democracy in return for assistance. Well, China is feeling good about its system and are in no hurry to make change. They’ve come to a point where they have loads of dough and lots of confidence. All that’s missing is ol’ ingenuity but they’ve come up with a solution for that—just steal it. And herein lies the problem. China is saying no to full first-world conversion while continuing to enjoy the benefits of receiving globalization. And now they’re building a military.

In their defense, China still has way too many peasants to even consider democracy, regardless of what Hong Kong thinks. America says, “Fine, but conduct your business like a modern nation. No more special treatment with low currency and stuff.”

China’s GDP is $14 trillion while India’s is only 4. But India is an English-speaking democracy, shouldn’t those figures be reversed? Truth be told, India’s democracy has hampered their progress. Private property rights have been an issue and their court system is a nightmare. So while India struggles doing things the right way, China puts its foot on the accelerator. Perhaps the tactic will be for American corporations to shift alliances to India or Pakistan. Hasbro has already announced it’s moving its manufacturing elsewhere. Lots of places have hands.

Summary

International trade is complicated because so many countries are at different levels. It’s easy when everyone’s the same and that’s the position Canada would like to take. But while you can discuss 18-week paid maternity leave with places like Europe, it’s naïve with somewhere like Mexico. And though the US is happy to listen, they’re busy right now.

Roosevelt knew something when he cuddled up to China in 1945, for it was the Chinese who built much of America’s railway. Back then, architects were amazed by how these people could work. Their hands moved like windmills as they outperformed anything America could muster by 30% (including every type of immigrant). It became well known that if these people ever got themselves organized, they’d be a real force. And now they have money.

Everyone knows the photo of Trump pointing his finger at Justin Trudeau. It’s become iconic. But there’s a better one where he’s shaking hands with President Xi. It says “game on.” So are we witnessing the economic dismantling of China? Or is this just a spat between number two and number one? I don’t know but it should be a good fight. Casual observers may think America has the advantage but they’re not taking into account culture. China is a get-to-work, obedient state. America is no longer anything like that. So at best, it’s 50/50.

Trump is definitely a controversial figure but believe me, he didn’t run to showboat his time with Daniels. This negotiation is the bailiwick of his candidacy and will certainly be the hallmark of his time as president. And like it or not, corporate America is right behind him. And though many of us find our entertainment in the political pages, you have to flip to the business section to follow this one.

Note: Watch the documentary, American Factory, produced by the Obamas.

Globalization

Back in the 14th century, poet Dante Alighieri made a remarkable statement. He said people need help in order to be good. “It’s too hard to live a moral life if we’re forced to live in evil conditions, surrounded by random violence and rank injustice.” 700 years later, world leaders have this figured out. That’s why we’re going through an important change. Globalization is part of it.

Nations have been exchanging goods for centuries and international tariffs have always been with us. In fact, tariffs were the original source of government income. But globalization isn’t just about free trade. It comes in three sections: political, social, and economic.

Political

Make no mistake, the world isn’t run by 35 people living inside a castle. It’s run by aristocrats, bureaucrats, and politicians. And they recognized early in the 1900s that mankind was in a race. A race between the good and civilized people we can become and the idiots we are born. Like it or not, humans come into this world pretty animal-like. We can then be civilized into wonderful citizens or left to live more like dogs. So the horrible truth is: if not for education and positive culture, we turn ignorant, selfish, horny, and crude. Not much different than an elk. Yes, most of our animal friends are fine creatures but many are miserable bullies that bite. And herein lies the problem. Nobody wants an unruly neighbour.

After surviving two world wars and the widespread threat of communism, it became apparent to the first world that democracy must be installed everywhere. Our planet is too unstable without it. So giving crazy-assed dictators the boot was priority number one, especially if they had money. Rogue nations were slated to be tamed and pushed towards democracy, which of course has three components: economic, educational, and infrastructure. You can’t just suggest it at a dinner party.

Economic

Once you remove natural resources from the equation, an economy is built on three things: hands, minds, and money. Hands represent simple (repetitive) manufacturing jobs, minds are those really cool brain jobs, and money is the investment necessary to get things going. Poorer nations have always had the hands—they just needed a push.

Students of Adam Smith will remember that capitalism requires everyone to act in their own best interest. That selfishness betters the welfare of all. Well, the business side of globalization works the same way. At least, the first parts:

The first world needs new customers
We can exploit cheap labour from developing nations to increase our standard of living

These are obviously selfish reasons. Coke gets to have more customers and Walmart buys easy-made products on the cheap. First world nations host additional head office jobs, while enjoying better profits and more competitive pricing. But these kinds of benefits didn’t require a concentrated effort—they would have happened anyway. Clearly, there’s more:

Provide startup capital and know-how to get things going
Become the large customer to ensure success

Things change dramatically when Reebok not only gives you the capital to start your business, they also guarantee the purchase of your product. That’s the concentrated effort that turned poorer countries into developing nations. As a result, economic globalization has lifted billions out of poverty and granted societies the ability to progress in many more ways.

Social

The last dimension is social support. From UNESCO to the World Bank to Doctors Without Borders, international institutions have been seeded and continue to grow, all in an effort to better the Third World.

From the Gates Foundation to U2’s Bono, thousands of organizations have helped better the living standards of the poor. No one is forced to eat American hot dogs or listen to Madonna sing, the plan is simply to better the health and education of all so people can progress. And no, it doesn’t include telling them how to live religiously. They’ll get there on their own.

Summary

The ugly truth is we’re not born that impressive. Humans arrive in this world sorta dumb and it requires a process to bring out our potential. We’re also born a little mean but again, given the proper teaching and decent living conditions, we can become civilized. At least, well enough to live together.

The first world didn’t care if certain nations lived down by the river among nature. Live how you wish as long as you don’t bother anyone. The problem came when some places were attracted to communism. Taking money from the rich seemed like an easy fix. Things intensified with the advent of nuclear weapons. Now any leader could build a way to threaten the world. So like it or not, selfish or not, politically correct or not, for the sake of security it was deemed that all people must be civilized according to first world standards.

And sure, there was a social cost to countries like ours. Giving away all those easy jobs left a number of people stranded. But nothing is easy, especially when tackling world peace. So stop thinking of globalization as a coup put on by business—it’s not. Globalization is a world system for people to live together. Everyone needs food, shelter, and health to be good, so grant them this. And though it may seem selfish of certain countries at first, I think Dante would be proud. (He was Italian, you know.)

Foreign Trade

With all the news on trade negotiations and globalization, many of us are confused about how this whole thing works. Here’s a simple view that should help.

Big three

A nation’s economy can be broken into three parts: local, national, and international. Local economies include what goes on near your home (within your city or province), national means business activities within your country, and international involves selling to the world—which brings about currency concern and the balance of trade. Examples are as follows:

Local – dry cleaners, dentists, donut shops
National – telephone carriers and grocery stores
International – natural resources and automobiles

Of course, there is always a mix. Developed nations typically have numbers like this: 40% local, 30% national, and 30% international. And when it comes to international, there are usually two types: companies that export, and organizations like Walmart and McDonald’s who operate within another country’s economy sending profit and head office jobs back home.

Global

Doing business internationally has always had requirements. Political stability, property rights, and the rule of law are essential. That’s why the third world can’t compete. But once African countries finish their internal fighting and attain some fertile environment for capitalism, this planet will be running on all cylinders. (You think we got smog now!)

International competitiveness is about more than just ports, natural resources, and infrastructure. It involves business, politics, and culture intertwining together. For example, when it comes to women in the workforce, Canada operates on a different plane than most Asian nations.

Canada – 90% of mothers work full-time, 1 year paid maternity leave, subsidized daycare
Asia – 50% mothers work full-time, no maternity leave, no daycare (they use grandparents instead)

Because Canada is at a different place along the culture curve, it’s more expensive to operate here. That’s why globalization gives away all the cheap stuff. And there are differences between us and the States.

Canada – government hospital care, 1 year paid maternity leave
USA – private hospital care, no paid maternity leave

The US competes more closely with the developing world, especially in the South. But as the world continues to advance, everyone will eventually see things our way.

Manufacturing

You also hear lots about manufacturing and again there are two types: durable goods and inexpensive items that are easy to make. Durable goods are things like washing machines and other products made from metal. Stuff easily made includes all the crap you find at the dollar store. Initially, countries like China and Mexico only made cheap goods but as time went by, they turned their skills toward the better paying jobs that come with durable goods. That’s when we moved the cheap stuff to Bangladesh.

And every nation has protected industries. Ones excluded from facing international competition. Farming is popular since it aligns with national pride but some choices are much more practical. For example, auto factories can be converted into making tanks for times of war. Same goes for steel. You can’t be buying from the enemy.

Summary

Everything is always a balancing act. Because Canada has government healthcare, sometimes companies like Toyota prefer to operate here. It’s not just the hassle of managing American plans but what if you have to lay somebody off? Do you really want the stress of wondering whether they’re still covered?

Recent NAFTA renegotiations had lots to do with maintaining well-paying jobs here in Canada (like, making auto parts). Not everyone can work in tech and we’re serious about our middle class. On the other hand, super woke Liberal governments have put a stake in the ground with respect to oil production. They’ve pretty much capped us at 4 million barrels a day. As a result, international investors have moved elsewhere.

Hopefully, when it comes to trade, our progressive values haven’t put us too far ahead of the pack. In case they have, you can always work at the dry cleaner.