The Wealth of Nations and the Failure of Globalization
While it remains depressingly futile to bang the drum of warning against the dangers posed to the American economy by the new “global economy” there is a piece up at HuffPo this week by Thom Harmann which everyone should read. Globalization Is Killing The Globe: Return to Local Economies
The reason I find the subject depressing (which, not coincidentally, is also the reason I get beaten up by my hard core conservative cronies on this) is that there are aspects of it which are glaringly obvious, but have become so politically poisonous among doctrinaire conservatives and party gadfly types that we’re just not supposed to talk about them. Hartmann’s piece is far from perfect, but it does provide a much needed refresher course on some economic fundamentals taken straight from one of the nation’s earliest authorities on economics.
A stick on the ground has no commercial value, but if you add labor to it by carving it into an axe handle — a thing of commercial value — you have “created wealth.” Similarly, metals in the ground have no commercial value, but when you add labor to them by extracting, refining, and forming them into products, you “create wealth.” Even turning seeds and dirt and cows into hamburgers is a form of manufacturing and creates wealth.
This is the “Wealth of Nations” that titled Adam Smith’s famous 1776 book.
On the other hand, when a trader at Goldman Sachs makes a “profit” trading stocks, bonds, or currencies, no wealth whatsoever is created. In fact, to the extent that that trader takes millions in commissions, pay, and bonuses, he’s actually depleting the wealth of the nation (particularly to the extent that he moves his money offshore to save or invest, as many do).
This definition is at the heart of the argument over what actually constitutes the fabric and soul of a potentially thriving American economy, or a fading, failing one. It addresses the question of how much of a burden is placed on the economic engine by people who, as my friend Ron Beasley has often put it, create profits by “rubbing two pieces of paper together.”
Unfortunately, Hartmann goes a bridge too far when working out his definitions of “income” vs. “wealth” as such analysts are frequently wont to do, but his argument is worth including here as a starting point.
“Wealth” is different from “income.” Wealth is value, which endures at least for some time. Income is simply compensation for work. If you wash my car for $10 and I mow your lawn for $10, we have a GDP of $20 and it looks like we both have income and economic activity. But no wealth has been created, just income.
On the other hand, if I build your car, I’m creating something of value. And if you turn my lawn into a small farm that produces food we can all eat, you’re creating something of value. Not only do we have an “economy” with a “GDP,” we also have created wealth.
Hartmann’s unfortunate example takes a good starting point and shoves it off a cliff. In reality, all “work” performed as honest labor toward a productive end contributes to the overall “wealth.” If you pay me to wash your car, I’m contributing to its maintenance, extending the useful life of the product and bolstering its potential resale price, thereby increasing the actual “value” of the car over its lifetime, albeit in a small way. Similarly, if you mow my lawn, you contribute to holding up the property value over time, increasing the value of the home. Going back to his example of sticks and ax handles, this is similar to saying that only the person running the wood lathe to carve the handles is creating “wealth.” But what of the guy who mops the floors or the woman who changes the light bulbs in the factory and keeps power flowing to the lathe? They also contribute to the creation of wealth – in the form of ax handles – albeit indirectly.
The author would have done better to stick with examples of people who extract profit from the system by purchasing currency and waiting for its worth to fluctuate, sellers of junk bonds or, in one of the most common and extreme examples, cases where the government extracts tax money from the citizens and fritters it away without providing much real value to the taxpayer in return.
But that part is something of a distraction from the larger point, which Hartmann addresses here:
The main effect of the globalism fad of the past 30 yearrs — lowering the protective barriers to trade that countries for centuries have used to make sure their own local economies are self-sufficient — has been to ship manufacturing (the creation of wealth) from developed nations to developing nations. Transnational corporations love this, because in countries with lower labor costs and few environmental and safety regulations, it’s more profitable to manufacture products. They then sell those products in the “mature” countries — the places that used to manufacture — and people burn through the wealth they’d accumulated in the earlier manufacturing days (home equity, principally, along with savings and lines of credit) to buy these foreign-manufactured goods.
At first, it looks like a good deal to consumers in developed nations. Goods are cheaper! But over a decade or two or three, as the creation of real wealth is reduced and the residue of the old wealth is spent, the developed nations become progressively poorer and poorer. At the same time, the “developing” nations become wealthier — because those are the places that are producing real wealth.
Contrary to standard liberal dogma, the failing of our fiscally conservative, free market friends is not some sinister plot to prop up industries and the wealthy at the expense of the middle class. The problem is that our model is still based on a Happy Days mentality, treating corporate entities as if they still behaved the same way they did in earlier, happier times. We – and I include myself here – call for cuts in the corporate tax rate as the true path to economic recovery and job growth. And in theory this is the one true path. The federal government lacks the ability to actually “create” jobs in any long term, meaningful way which actually helps build and sustain the economy. The best they can do is create an environment where it is easier for private industry to grow and create those real jobs. Easing the tax burden on employers is a big part of that power.
Unfortunately, when constructing a strategy to put such proposals into place, the government must be aware that the corporate environment has changed radically over the last five decades and our policies need to reflect this if government action is to be effective. (My conservative friends should brace themselves now, because you’re not going to like this next part at all.)
In the Happy Days, business models incorporating concepts such as international telecommuting were impossible. And nobody gave much thought to building factories or doing work in other countries which would help “foreigners” rather than our own citizens. It simply wasn’t part of the American Dream. When the government took actions such as cuts in the corporate tax rate it hit the economy like a hot steroid injection. When new employees were hired, they were Americans. When a new factory went up, it was built in Boise, not Bangladesh. Further, competition was still vigorous. Companies worked to make a good profit, but they had to keep reinvesting in the business, resulting in further expansion, employment and general prosperity. The federal government could act boldly when it chose to do so and see direct results.
Globalization has not eliminated these effects entirely, but it has diluted them to dangerous levels. Competition has decreased and maximizing the bottom line on shareholder reports, dividends and executive bonuses is the order of the day. Workers are an expensive inconvenience to be reduced where possible and the cheap labor and raw materials which Hartmann references are too great of a temptation for virtually every business. Every extra dollar funneled into the economic engine by the government produces a drastically reduced return here at home in terms of jobs and prosperity.
So what is there to be done? Lest conservatives think I’ve taken leave of my senses, let me reassure you that direct government intervention and regulation is not the solution. That’s simply not in keeping with the founding principles of the nation and leads us off on a different path to destruction. But the government can and should rethink their system of merit based rewards and incentives in their dealings with corporate America.
First, the government remains a huge consumer of privately produced goods and services. And they have every right to determine who they will or will not do business with. America First and Buy American should be the order of the day, with full preference given to companies who produce and hire here at home wherever possible. Also, the aforementioned tax relief will have far more of the desired impact if it is properly targeted. We should offer a more lenient tax rate to stimulate job growth, but offer it only to those companies who can demonstrate that they are repatriating offshore jobs and using domestically produced goods. For those companies who choose to continue the new age globalization practices, let them. The free market will still prevail. But offer them no cut in tax rates nor any other benefits. If they want to make their money overseas, let them see if they can find their customer base there as well.
Before we even get started on the response to this, let me anticipate it for you. “Protectionist!” my conservative cronies will cry. The “Smoot Hawley!” accusations will fly freely as if the speaker’s hair were on fire. Protectionism? You are correct. That’s become something of a dirty word in conservative circles, in case you didn’t know, but we have something here which is badly in need of protection. Smoot Hawley? Please… spare me the Happy Days bleating. The failed policies of that era were badly implemented, but they were also fighting a very different enemy. Back then we were trying to stop other countries from flooding us with cheap products, materials and labor. The enemy today is of our own making and is found within our own borders. We are fighting to keep jobs here and to promote the use of our own resources, not defeat some perceived bogeyman from across the sea.
Some of these same critics will also declare that such policies will simply drive up prices for consumers. And yes, they are correct. You would have to pay more than one dollar for your roll of tube socks at Wall-mart. Hartmann provides the correct answer to this complaint as well.
“But won’t that make Wal-Mart’s stuff more expensive?” whine the flat-earthers.
Yes, it will. But most Americans (and Greeks and Spaniards) would gladly pay 10 percent more for the goods in their stores if their paychecks were 20 percent higher. And manufacturing paychecks have always been higher, because manufacturing is where “true wealth” is generated (thus the basis for most union movements, which further guarantee healthy worker income and benefits).
The transnational corporations benefiting from globalization are also, in most cases, the transnational corporations that own our media, so even the word globalization is rarely heard in reports on economic crises around the world.
But globalization is the villain here, and one that needs to be taken in hand and brought under control quickly if we don’t want to see virtually the nations of the world end up subservient to corporate control, a new form of an ancient economic system known as feudalism.
The author’s conclusion is a bit too dramatic for my tastes and festooned with hyperbole, but the underlying premise rings true. Circling back to the first paragraph, though, I am forced to finish this screed on a mostly dismal note. The path is there for us to take, but we’re highly unlikely to pursue it. And the obstacles are not found in just one party or the other in Washington. Both have been complicit in this downward slide and the well financed interests who hold the leashes of the collection of lap dogs in Congress will not hear of any such reform. If you don’t believe that, ask yourselves why there is no tort reform in the current health care bill or why Washington isn’t even trying to eliminate the anti-trust exemptions for the industry which prevent competition across state lines? It doesn’t take a genius to divine the answer. The people who fuel the system with cash don’t want it to happen, so it doesn’t. And they don’t want us to reform the interface between government and business to promote real job growth and economic strength at home through America First policies, either.
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I see no logic in saying that a currency trader creates not much wealth while someone making axe handles or mopping floor does. If they weren't creating something of value they wouldn't be in business long, what they are creating could be risk management, capital flow, etc. If there wasn't value in what they did, why would the currency exchanges run? They simply wouldn't work without the free flow of money and these folks help provide that. Sure they aren't popular right now do to the financial crisis, but these folks are very necessary and create trillions of dollars of wealth indirectly, more than the guy cleaning up behind that woodworker, and much more than the woodworker himself.
Although my reaction to Hartmann's piece was pretty negative overall (the amount of mischaracterization and general ideological slant put me right off), I hear what you're saying Jazz.
One of the biggest problems here, though, is totally unaddressed. The issue is not just that we've shipped manufacturing (“wealth creation”) overseas. We are also, as a nation, far and away the world's number one consumer of these goods. Entire national economies depend upon us buying those products now.
Globalization has had massive, permanent effects on international commerce, and the geopolitical ramifications are past any point of return (imho).
jazz
“In the Happy Days, business models incorporating concepts such as international telecommuting were impossible. And nobody gave much thought to building factories or doing work in other countries which would help “foreigners” rather than our own citizens. It simply wasn’t part of the American Dream. When the government took actions such as cuts in the corporate tax rate it hit the economy like a hot steroid injection. When new employees were hired, they were Americans. When a new factory went up, it was built in Boise, not Bangladesh. Further, competition was still vigorous. Companies worked to make a good profit, but they had to keep reinvesting in the business, resulting in further expansion, employment and general prosperity. The federal government could act boldly when it chose to do so and see direct results.”
I hope you realize that this paragraph explains exactly how the conservative, free global market system is nothing more that the redistribution of wealth on a global scale! Move wealth to other countries and skim off the top the difference between sweat shop wages and the wage structure in the US that allowed our country to dominate the world. About time you free traders realized that profit at any cost actually destroys your own country's economy.
The blindness is obvious. A few years ago when illegal immigration was on the front burner, a roofer was quoted as complaining that he could only find illegals willing to roof for 10 bucks an hour. (California roofers make 20 an hour.) The question that was never asked then was simple, did this guy reduce the cost to customers proportional to his savings? Of course not, that wouldn't be good business. As lone as the only criteria for business is profit, short term gains inevitably leads to the loss of wealth.
You that squawk about liberal efforts to redistribute the wealth, but why the blind eye to corporations doing the same?
Why do most economists shake their heads at anti-trade sentiment?
Trade normally enriches both parties. There is no zero-sum game…
“Why do most economists shake their heads at anti-trade sentiment?“
Probably because so many people falsely set up a straw-man of calling it “anti-trade” sentiment when it's actually Fair Trade sentiment. Fair Trade beats so called “free trade” any day.
While I am no lawyer, it is my understanding that a “Buy American” policy would be a violation of the WTO, a Treaty signed by a republican Senate in 94 with the full support of the best Republican President since Eisenhower…
Cheap Labor Conservatism rules…
Financial intermediaries are pivotal to wealth creation for many reasons. The key point is that they shouldn't extract more from the system than they help to create. A Marxist interpretation of capitalist economic cycles (which I think is dead on) is that there is an unmet need — due to lack of development, technological innovation, whatever — that exploiting will create a lot of wealth, and the financiers help companies get capital to explore that. As the market matures it starts creating a lot of wealth for the financial system, the capitalists and the workers. However there is an inevitable concentration of power amongst a few market winners and eventually growth rate decreases, at which point the monopolists can start cutting wages/workers/globalization/etc in order to try to keep profits up. This seemingly works for a while, but eventually erodes the middle class to the point that overall real (wealth oriented) growth slows immensely. At that point the financial system — also desperate to keep up profits — starts acting as a leech on the system because they are extracting more than is created. The lack of foresight by the monopolists, who try to protect their market share at the expense of moving forward exacerbates the situation. The heavy real cost of capital due to the financier demanding more than can be expected based on the underlying fundamentals means that they pull back from financing much new competition and instead focus on asset oriented stuff, i.e. shifting paper around, further depressing growth rates as it raises operational costs. Eventually everything falls apart because there isn't enough growth to pay the interest, so on and so forth, blah blah revolution, whatever.
In this context globalization is just a way of shifting labor around. And the way to stop the break down would be for the financial system to always have a spread below “real” returns and capitalists to have at most a profit equivalent to “real” returns.
This is such a “no duh” logical explanation that it's astonishing it isn't widely accepted…the most common critique (other than smearing it because they don't agree with Marx's ideas about how to get around it) is to declare that the labor oriented view to be dead. Which is all fine and mighty to proclaim in the middle of the multi-generational cycle but harder to argue now.
Here is a formal explanation of how the financial system is involved in this way, as believed by Steve Keen. He isn't a Marxist economist, and these assumptions lead to the only model I've ever seen that can accurately model the full cycle as it relates to debt and output. (And importantly, why all our interventions are leading to very little increase in output thus far.)
The WTO is the problem. It is an organization that mandates that large multinational corporation set economic policy for nations – by definition the “F” word, fascism. And you are right, it is in part Clinton's fault and I'm not even sure I wouldn't take Nixon over Clinton. He did a lot less economic damage.
“[I]t's actually Fair Trade sentiment. Fair Trade beats so called 'free trade' any day.”
I have mixed feelings about this. Part of it lies in the reality that there's often not free trade elsewhere, but all kinds of “cheating.” It's similar to the cheap accusation often made of capitalism (and of libertarianism) that it is anarchic, and that all kinds of misconduct (which some critics will admit are well removed from capitalism or libertarianism) must be associated with it, as it amounts to some kind of irresistable temptation. (I even describe libertarianism cynically, not so much wisely, sometimes as “the honor system,” with all that that term implies.)
In addition to the constraints that accompany typical “fair trade” objectives, often in the name of fairness we get trade restrictions that are not fair, are often arbitrary, capricious, or even cruel or vengeful. (The same applies to taxation.)
I'd like to note something that I gleaned from an economics book yesterday: Even critics of free trade often (and we see this now, in the case not only of Iraq but of Iran as well as Cuba and North Korea) speak and act as though they know that constraints on trade are economically harmful and harmful in other ways. Hence even lefties have been on record before in favor of trade sanctions against nations that misbehave (and want the embargo against Cuba ended). “Fair traders” who also view sanctions as bad (the normal view) need to examine their inconsistency and irony.
“Trade normally enriches both parties.”
I disagree, I think it depends over the long run. Looking at it from a systems theory point of view, the questions should be: a) how dependent is a party on the transaction for overall economic health and b) what is the balance of trade?
Partners that are relatively balanced and diversified definitely have benefits from trade, however dependencies (either on the input or output side) increase the positive feedback in the system, and the balance of trade is the “connection strength” between them. There is definitely nothing run with globalization per se, but any system theorist that looks at how we manage trade instantly says that it is fundamentally unstable and destined to collapse. I need to find the book that talks about this, but the author said that if he were given the task of making the most unstable system possible, it'd look almost exactly like our international financial system.
Right now we have incredibly complex and dependent production chains that naturally cause cascades when one part is disrupted, and it is very violent due to how strong the connections are (in large part due to centralization). This is why any part of the system can cause a complete collapse at any time.
“Free trade” is simply allowing businesses with the wherewithal to make use of another country's labor force to do so. Its a big deal now because it is dirt cheap to ship large quantities of goods just about anywhere in the world. Say you forbid a company to do this, keep in mind what you are doing, you are using your authority to stop someone from doing something in their best interests. One of two things is going to happen.
First and definitely you put that company at a competitive disadvantage and create resentment. Its tantamount to saying to a deli that they can't buy meats from a cheaper vendor because, well, you say so. Second, in the case of manufacturers, you make it look attractive to simply shut down all operations and move to where you'd have simply purchased the goods. GM becomes a Malaysian company for example. Now, this is not likely to happen, but you get the idea. If the situation warrants it though for whatever reason, need to stay competitive, profit, whatever, thats what would happen. You can't stop the movement of manufacturing to where it is most cost effective without basically putting a stranglehold on the businesses. Even if you did they will eventually be replaced by companies not in that stranglehold and your still facing the same problem. The point of “Free Tarde” isn't to allow companies to move their labor around, that's going to happen one way or another. Its to regulate it and someone control it in a sensible fashion.
Also, I think the authors making too big of a link to manufacturing and creating wealth. That is not the sole method of making wealth, services and expertise, and the ability to actually make money move is what creates wealth. Money is like electricity, its only performing work when its moving. Stationary it is merely potential. Those fund managers that just take a profit, those guys are playing a big role in the movement of money, making actually do stuff, and therein lies the creation of wealth. You can actually have a fully viable and growing economy, with ZERO manufacturing, as long as you have access to goods and generate wealth via monetary movement. Check out Switzerland. And please don't take the term “Zero Manufacturing” too literally, but you know what I mean.
“a) how dependent is a party on the transaction for overall economic health and b) what is the balance of trade?”
Ow. This is an argument for autarky, in a large sense.
I'll admit, “comparative advantage” leads to dependencies.
[While it remains depressingly futile to bang the drum of warning against the dangers posed to the American economy by the new “global economy”]–
…dangers posed to the American economy by the NEW global economy…..
Had to stop there and ponder the meaning of this. Dose this mean we are now afraid of capitalism?
If so…what and why?
If not…what?
I see know alternative BUT capitalism, therefore I shall NOT ponder it nor bang any warning drums.
“This is an argument for autarky, in a large sense.”
It is my strong belief that the best way to balance security with prosperity is to have local self sufficiency when it comes to the basic necessities (including the production chain to create them), and use trade to develop luxuries. Then you have policies that try their damnedest to make sure that the business cycle affects the discretionary part of the economy only…which would really primarily just be an anti-tax/bailout sentiment. I'm big into localization of energy/food/building material production because I feel it allows more personal freedom and security against recessions. IMO it would also help create a more dynamic economy through experimentation.
“I'm big into localization of energy/food/building material production because I feel it allows more personal freedom and security against recessions. IMO it would also help create a more dynamic economy through experimentation.”
This is similar to the arguments in favor of federalism and decentralization, whereas the Left typically wants centralization (and a de facto unitary state and national government in Washington). (It's against Big Food because it's against Big Business and against other large objects of political disfavor.)
Globalization is not going way actually we are on are way to one global government. Globalization. The USA did not realize that the world went forward while it was fighting wars.
The USA is broken in many ways..health care http://ezinearticles.com/?Borderline-Diabetes?-… The economy and also a very split congress. Europe is the future. (This was also predicted in the Bible)
Free trade, free trade, free trade. Actually if you check the true import taxes, the United States was an almost totally protectionist society. Andrew Carnegie, of steel making fame, did not get rich by producing a better product for less money.
The British were well ahead on production of quality steel and iron. Americans could not compete overseas so they changed the law that so it favored American production. If you want to you can check where steel was sold to all other countries by the British, Germans and French. They were all beating Americans in the worldwide railway boom. I'm not saying this was a bad thing. It actually produced enough cash to modernize American production and import cheap foreign labor to mine the coal and iron.
The economic miracles of Taiwan, Japan, and Korea were founded on protectionist policies. Plus all three got huge infusions of cash from the Korean and Vietnam wars. If you read the programs devised by the economists on MacArthur's staff, they forced almost total protectionism on Japanese trade and pulled the money out for modernization by grinding the peasants to the point that unofficial starvation was becoming a problem. Fortunately the Korean War started before too many peasants died.
I am aware of most incorrect items that are constantly repeated by people with an position to defend. I really don't care.
FIrst three thumbs up on the article Jazz. Surprised me to see you linking to Thom Hartmann.
Another useful and informative tidbit Hartmann has highlighted on his radio show is how productivity (which equals supply) and wages (which drive demand) rose in concert in America for most of our history. Only recently have we seen productivity soar while wages stagnate, largely because of globalization. The only way to sustain a consumer economy without wage growth is through borrowing, which we have embraced fully and much to our detriment.
We need to increase employment and wages in order to fuel demand, which even profit-driven multinationals should recognize. Killing the world's biggest consumer market doesn't make sense — yet. Once China, India and Brazil can buy the output of, say, Nike, they can just kick the USA to the curb and go right on selling $2 shoes for $102.
Those who think we don't need manufacturing jobs used to say we're a “service economy” now. But gee, those jobs have gone overseas too. Now we're supposed to believe that we rub pieces of paper together more wisely than anyone else. Hogwash. There is literally nothing we Americans do that can't be done by others.
Anyone who even WANTS American workers to compete “on a level playing field” with $2 a DAY workers is nuts. (BTW, 40% of world population lives on < $2 a day. I hope no one, no matter how ideological, wants that).