This is the "NAFTA and WTO Recession" and it's not gonna end until trade policy changes

If we had the NAFTA debate to do all over again, I think the soundbite that could have won it for us would have been this:

NAFTA would make it illegal to do any manufacturing in this country. 

It's exactly the sort of cut-to-the-marrow soundbite that the right loves to use to polarize debate -- to say 'you're either with us or you are America-hating scum.'  And unlike conservative talking points this soundbite has the added benefit of being true.

Here's why it's true:

For-profit corporations in this country are required by law to maximize profits for shareholders.  That's what it means to be a for-profit company.  So if a U.S. company can have its product manufactured here for $17 dollars an hour or manufactured in another country for $1 an hour -- the U.S. company is required, through its legal obligation to shareholders, to offshore the production to the lowest cost manufacturing center. 

But here's the thing.  We very well may get to have the NAFTA and WTO debates all over again -- because the recession we are going through right now is the direct result of NAFTA & WTO.  And the recession is not going to end (in any meaningful lasting way) until trade policy changes. 

Both of these trade agreements were based on absolute intellectual horseshit.  The idea was that yes, the U.S. would end up sending a lot of manufacturing jobs to lower cost production countries. BUT! the argument went, everything would be okay because U.S. workers would still be the ones designing and managing and marketing those products -- and those management jobs would grow and would be far better jobs than the lousy manufacturing jobs they replaced. 

Here's why that's complete nonsense: 

Under currently international trade agreements, Hewlett Packard could offshore every single job in the company -- manufacturing, design, marketing, legal, etc. to India -- leaving one single job left in the U.S. for the CEO (if he chose to live in Malibu or something).  And we can't all be the CEO of HP.  The U.S. economy needs at least 150 million jobs in order for our people to survive. We need a natural diversity of different types of job to match the natural diversity in our population -- namely we need an economy such that anyone with a strong back and a good attitude can make a middle class standard of living in this country -- and that's what we had before NAFTA & the WTO. 

So the prosperity that we saw over the last 20 years was an illusion.  Suddenly, TVs and electronics and clothes got really really cheap.  And we felt wealthy because we could buy more of them.  But all the while, the core of our economy was being hollowed out as manufacturing jobs were being sent overseas.  Specifically, that cheap big screen TV at Best Buy was only cheap because it came at the expense of a unionized manufacturing job in the U.S.  The $500 you saved on the TV came out of the salary of an American worker.  And now 20 years later, SURPRISE! all the manufacturing jobs are gone and they aren't coming back.  An entire generation of American men with only a high school education has been sacrificed to the beautiful equations of Milton Friedman that turn out, in the real world, to only benefit his corporatist friends.  And then endless cheap credit kept the illusion of prosperity going, even as we had run out of jobs and the salaries that went with them.  But now that bubble has popped and all of the gauges are showing empty, empty, empty. 

As the Obama administration strives to jump start the economy -- there is quite literally nowhere to pump the stimulus money.  You can't pump it into traditional manufacturing -- because those jobs are gone.  So they try to pump it into green manufacturing and energy efficiency -- which is great.  Until you realize that U.S. corporations are still required by law to maximize profits for their shareholders and Chinese manufacturers can make anything we can make here -- and only pay their workers $1 an hour (sometimes less).  So then you realize that the hundreds of billions of dollars we are pumping into green manufacturing -- is really just the U.S. government funding the R&D that is going to make Chinese manufacturers rich. 

So Obama and his boys Tim Geithner & Larry Summers then try to reinflate the housing bubble through tax credits and guarantees for big banks to take big risks again -- because really, other than financial ponzi schemes, we don't really make anything in this country anymore.  But how long is that papering over of the problem gonna last?  Until the mid-terms in November?  Until the 2012 presidential election at the latest.  But then the clock runs out again. 

So when the double dip recession comes and the economy completely flatlines because we don't have any manufacturing jobs in this country (and the white collar research and design jobs are not nearly enough to make up for the jobs that are lost) -- I propose that we start the debate about rebuilding our economy by canceling NAFTA and dismantling the WTO.

Quite literally the kids in black were correct and the white (University of Chicago) guys with Ph.D's were terribly, catastrophically wrong. 

The Ascent of Money, part 3, a closer look at the relationship between violence and wealth

This is the last post in my three part series on The Ascent of Money (you can read parts 1 and 2 here).

In this post, I want to return to the question, 'What is the relationship between violence and wealth?' One of the reasons I'm so intrigued by this question is that the relationship between the two seems obvious and yet it is never talked about openly in popular culture, and certainly never talked about in an economics classroom. Indeed it seems to me that the only time we every acknowledge the relationship between violence and wealth is in TV shows like The Sopranos or perhaps a movie featuring the character Jason Bourne. I think it is vital to study this dynamic because as we come to understand the relationship between violence and wealth we can presumably take steps to have less violence in our economy and in our society, correct?

With that in mind, as I read through Niall Ferguson's financial history of the world, I started to write the word "violence" into the margin anytime he mentioned the relationship between violence and wealth. I just want to draw your attention to some of those passages so that we can begin to move to the foreground, some of the underlying dynamics of our economy that deserve closer scrutiny:

"Behind every loan shark, there lurks an implicit threat." --The Ascent of Money, p. 40

It's obvious, but worth noting that the informal banker to most of the world's poor, relies on violence as a business model.

"Prior to the 1390s, it might legitimately be suggested, the Medici were more gangsters than bankers: a small-time clan, notable more for low violence than high finance. Between 1343 and 1360 no fewer than five Medici were sentenced to death for capital crimes." p. 42

Quite literally, modern banking began with mafia families in Italy. Interesting too that Ferguson sees capital crimes as "low violence."

"There were no debtors' prisons in the United State in the early 1800s, at a time when English debtors could end up languishing in jail for years." p. 60

I had forgotten about debtors prisons, but up until fairly recently (1869) the country that gave us the Magna Carta also loved putting poor people in jail.

But here's where things get really interesting:

"'War', declared the ancient Greek philosopher Heraclitus, 'is the father of all things.' It was certainly the father of the bond market. In Pieter van der Heyden's extraordinary engraving, The Battle about Money, piggy banks, money bags, barrels of coins, and treasure chests -- most of them heavily armed with swords, knives and lances -- attack each other in a chaotic free-for-all. The Dutch verses below the engraving say: 'It's all for money and goods, this fighting and quarreling.' But what the inscriptions could equally well have said is: 'This fighting is possible only if you can raise the money to pay for it.' The ability to finance war through a market for government debt was, like so much else in financial history, an invention of the Italian Renaissance." p. 69

"The Battle of Waterloo was the culmination of more than two decades of intermittent conflict between Britain and France. But it was more than a battle between two armies. It was also a contest between rival financial systems: one, the French, which under Napoleon had come to be based on plunder (the taxation of the conquered); the other, the British, based on debt." p. 80

"In many ways, it was true that the bond market was powerful. By the later nineteenth century, countries that defaulted on their debts risked economic sanctions, the imposition of foreign control over their finances and even, in at least five cases, military intervention. It is hard to believe that Gladstone would have ordered the invasion of Egypt in 1882 if the Egyptian government had not threatened to renege on its obligations to European bondholders, himself among them. Bringing an 'emerging market' under the aegis of the British Empire was the surest way to remove political risk from investors' concerns. Even those outside the Empire risked a visit from a gunboat if they defaulted, as Venezuela discovered in 1902, when a joint naval expedition by Britain, Germany and Italy temporarily blockaded the country's ports. The United States was especially energetic (and effective) in protecting bondholders' interests in Central America and the Caribbean." p. 98 [By the way, don't you just love how Ferguson describes international war crimes as "energetic (and effective!) ways of protecting bondholder's interests!"]

So the micro is the macro -- just as the loan shark will kneecap a debtor who is late on a payment, creditor nations will invade and overthrow governments, even democratically elected governments, in order to increase profits.

"As [Jan Pieterszoon] Coen [officer of Dutch East India Company (VOC) in the early seventeenth century] himself put it: 'We cannot make war without trade, nor trade without war. he was ruthless in his treatment of competitors, executing British East India Company officials at Amboyna and effectively wiping out the indigenous Bandanese." p. 134

Far from being an aberration, that theology of domination continues on to this day in U.S. foreign policy. It is also interesting to think about the ways in which creditor nations kneecap debtor nations to get their money back given that China is now the de facto banker to the U.S. -- holding nearly a trillion dollars of our debt.

"Besides cheaper calories, cheaper wood and cheaper wool and cotton, imperial expansion brought other unintended economic benefits, too. It encouraged the development of militarily useful technologies -- clocks, guns, lenses and navigational instruments -- that turned out to have big spin-offs for the development of industrial machinery." p. 285-286.

"The key problem with overseas investment, then as now, is that it is hard for investors in London or New York to see what a foreign government or an overseas manager is up to when they are an ocean or more away. Moreover, most non-Western countries had, until quite recently, highly unreliable legal systems and differing accounting rules. If a foreign trading partner decided to default on its debts, there was little that an investor situated on the other side of the world could do. In the first era of globalization, the solution to this problem was brutally simple but effective: to impose European rule." p. 289

You get the point. Even in a book written by a conservative Senior Fellow at the Hoover Institution (the Hoover institution -- intentionally named after the worst president in U.S. history), a guy who has a vested interest in obscuring the relationship between wealth and violence, the relationship shows up again and again. You can't talk about the history of money, or the history of finance, or economic history, without also talking about the history of violence and the ways in which violence has been used to enforce contracts and increase profits.

More on that topic in future posts.