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The Expansionist
Wednesday, April 11, 2007
 
Comparability. My colleague in Northern England raised some interesting questions for which I don't have really good answers. If you have, let me know (XPUS@aol.com) and I'll share them with other readers. This is the email I got today, titled "Looking at globalization from another angle - disparity in the cost of living".

Isn't the uncompetitiveness of manufacturing industry in the developed world essentially an exchange rate problem?

The reason why the likes of China and India can afford to pay such low money wages is in part because workers there have a lower quality of life, but mainly because the cost of essential goods (food, housing etc) is so much cheaper in those countries. Can the West do anything to equalize the cost of living with the Third World, so that money wages only differ to the extent that they reflect actual differences in the standard of living?

Have Western countries brought this on themselves by allowing inflation to get out of control? Cheap imported consumer goods may have made the problem worse by disguising the true extent of inflation as it really matters (ie increases in the prices of the bare necessities)?

And here's my reply.
Valid points, but I can't see anyone in the world financial order demanding that currencies reflect the realities within societies rather than perceived inequalities between societies. That is, if it takes 25,000 currency units to live an ordinary life in a First World country but only 2,000 of the same unit to live a comparable life in China or India, I do not think the powers that be are going to require equalization, multiplying the exchange rate of China/India by 12.5 so workers there get the same relative amount of pay as a worker doing comparable labor in a First World country. That would indeed eliminate the cost advantage of offshoring production, but nobody in international finance is going to go for it, least of all China/India.
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But raising wages and standard of living is indeed a goal of, for instance, U.S. labor unions active abroad, not just for the benefit to foreign workers but precisely to cut the arbitrary exchange-rate-based disparity in wages that is destroying jobs for people in the First World who work with their hands. I think, by the way, that "work with their hands" is a good way to think of most of the jobs that are most affected by offshore competition. That includes some types of back-office operations such as data entry done (with their hands) by keyboard operators who don't have to think much about what they do, but just type.
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Equalizing wage rates would also give people the chance to work in their own culture without having to either emigrate or 'internally emigrate', as to work in, for instance, a call center or software-development office that works in a different language on things largely alien to one's own culture.
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In Expansionism, there would be a total elimination of artificial exchange rate differences, because all parts of the Union would use the U.S. dollar. But the local currency would have to be traded in at an initial exchange/trade-in rate that would almost never be 1:1, except for, say, Canada (whose dollar is now worth $0.88). We would presumably convert currencies in bank accounts and swap coins and bills at something like the existing international exchange rate on the date of accession to the Union, with perhaps some modest bonus in consideration of people's trading in their separate sovereignty for joint sovereignty. In the case of Britain, for instance, if the exchange rate is $1.9749 per pound, we could round up to $2 per pound or even $2.25, or some mutually agreed point. But what do you do about a currency like the Chinese yuan, now exchanging at 7.7310 / $? How do you even calculate what it "should" be? The CIA World Factbook has a feature called "purchasing power parity" or PPP. For China, it shows a per capita income, PPP, of $7,600. I have no idea how that is computed. On a PPP basis, China's economy is shown at $10T; the U.S., at $12.98T. Chinese labor force, 798M; U.S., 151M. For India, the figures are economy, $4T; per cap, $3,700; labor force, 509M.
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How do we compute comparability of living standards? Do we count washing machines? How about dryers? Do Indians in the deserts of Rajasthan need clothes dryers if all they have to do is put the clothes out on a line or toss them over a bush or wicker chair and they're dry in 16 minutes? -- indeed, some litewate fabrics might be dry almost before being put up with clothespins! (Are these still called "pegs" in Britain?)
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Do people need TV if there's nothing they want to watch? Or do they have to have access to foreign programs and thus either satellite dishes or cable to be regarded as living equally well as Westerners? We in the U.S. don't watch much foreign TV, just a Britcom now and again or a wildlife documentary from here or there. What if life doesn't revolve around TV, (cell)phone or home computer in another culture? Does the absence of a TV in every common room or a computer in every house get counted as a mark of poverty or a difference in culture? Who needs a car if you live in a village, walk to the fields and back home, and pick up everything you need from a local market each day, as you need it? Who needs a big, multistory house if you don't entertain at home but most entertainments take place on the porch or in public facilities or on benches round the village square? Who needs a well-insulated house, furnace, and oil heat in the tropics? Speaking of walking to and from work, that was also the pattern in much of the First World for a very long time, especially for factory workers in company towns. When people lived and worked in the same town, walking or taking a short hop on a local bus sufficed. Now we face commutes hours in duration round-trip, and inadequate public transportation may force people to own a car, with all its attendant expenses. That need, however, is an artifact of a cultural shift in living/working patterns. Having a car we have to have is not a luxury or, necessarily, an improvement in standard of living. You see the problem. Do you have solutions?
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I don't understand inflation. Why should something that cost $1 in 1950 cost $7 now? And why do some things cost wildly more (healthcare, college education) while others increase in price at only modest rates or actually drop in cost in constant dollars? Makes no sense to me. But even less sensible is the distortion in costs. A family of four could live reasonably comfortably on the income of one wage-earner in 1950. Not today. Were we fooling ourselves in 1950, and people really had to scrimp to get by on one income? Were our needs simpler, such that we did not feel we "needed" so many consumer goods to live well? Many people, even in the lower middle class, could afford, indeed, to have a cleaning woman in once or twice a week to help with the housework. Now, even with two incomes, families feel they can't afford 'help', so have to do everything themselves. How did this happen? Where did all the money go? Did wages drop as more women entered the workforce, increasing labor supply more than demand?
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Some things, like long-distance telephone calls and, some say, gasoline, got cheaper in real dollars.
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But there seem so many more demands on our finances nowadays that most people feel hard-pressed. Why is that? And, more importantly, what can we do about it? Usurious interest rates plainly play a role. I'm pretty sure we pay much higher rates now than in the Fifties, perhaps by a multiple, not an increment.
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Some people call for reining in the commuting culture to relocalize life, and not just as a fuel-saving measure, tho that matters. Most people in 'advanced' countries -- in colder climates, at least -- are isolated within their household rather than fully involved in "the community". Most of us don't know more than a tiny proportion of our neighbors, even on sight, much less by first name, even less by full name. New communities that require all houses to have a front porch and separate pedestrian traffic from vehicular traffic are being built in some places.
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Which costs more? Each member of a family/household sitting in a room to oneself, watching TV, listening to music, or chatting/working at the computer -- all of which require lites and their own electric power -- or living a more communal life in one room or out on the porch chatting, singing, dancing, telling jokes and sharing stories, or just watching the world go by, whittling, carving, or knitting while it does? In economic terms, the 'family' scattered across most of the rooms of the house, lites ablaze and electronic devices in use, is 'enjoying' a higher standard of living, and paying for it. That does not equate, however, with a better quality of life. So what exactly does "standard of living" mean?
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Between 'worlds' (First and Third), is going by oxcart or horsedrawn wagon from point A to point B worse than using a car? Might people feel more connection to their ox or horse than to a hulking piece of metal? Imagine the outcry, however, if you were to suggest that an oxcart is the economic equivalent of an SUV, and valued them at par!
(The current U.S. military death toll in Iraq, according to the website "Iraq Coalition Casualties", is 3,294 — for Israel.)



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