Globalization 101

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This is a first course in globalization. Globalization has been going on for decades, but its effects have only become apparent to most people recently. Ours was a large, diverse economy that concealed the effects of globalization because with millions of companies, each acting in their own best interests, the net effects were not apparent until too late. The Great Recession laid bare the hidden truth.

To illustrate the process of how we reached the present state of affairs, I am going to posit an economy of two large companies, each starting with 100,000 employees. Company A makes cars and company B produces food products. Each companies pays its employees enough in wages/salaries that everything that A and B make is sold to those 200,000 consumers and their families.

Then one day out of a clear blue sky, the CEO of A decides to save money and increase profits by outsourcing the manufacture of some auto parts to right-to-work states in the US and soon thereafter to manufacturers abroad. This was the beginning of globalization. It led company A to reduce employment in the US by 25,000 employees.

Now company B has a problem. The 200,000 consumers it has been selling to have been reduced by 25,000 to 175,000. It no longer can sell as much as it has been selling and then decides to layoff 12.5% of its employees to match reduced sales. This leads to a further reduction in B’s sales by 6+% and further layoffs as sales decline. Since A has reduced employment by an initial 25,000 employees and B has reduced employment by nearly 20,000, the sales of cars made by A decline from 200,000 units to roughly 150,000. This leads to further reductions at both A and B as they respond to decreased demand as the supply of customers for both declines.

This is the beggar your neighbor policy that US companies have been following for decades. The size of the economy concealed what has happening for years. As companies downsized and outsourced, they increased short-term profits that were rewarded with higher stock prices by Wall Street. No one thought that US manufacturers would ever run out of customers. WELL, WE HAVE. It is now time to re-industrialize so that US companies again have customers for what they make. Protective tariffs and quotas are how developing nations industrialize and it is how we should manage our necessary re-industrialization.

Please see One World, Ready or Not | A parable | Where have all the good jobs gone? | Quality

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