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.