Washington policy debates are chock full of rich people telling poor and middle-class people that they will have to tighten their belts. In fact, in the crazy upside down world of Washington this passes for “courage.”
Cutting back Medicare is one of the favorite forms of belt-tightening being pushed by the elites. Many of the advocates of deficit reduction argue for raising the age of eligibility for Medicare from 65 to 67. Another favorite among this group is to require larger premium payments for Medicare from middle-class beneficiaries. Of course many Republicans would simply privatize Medicare and replace it with a voucher, which almost certainly would not be sufficient to cover the cost of health care.
It is striking in this discussion that no one advocating Medicare cuts ever proposes taking advantage of the lower cost health care systems in other countries. As every policy analyst knows, the problem of Medicare costs stems almost entirely from the fact that our health care system is incredibly inefficient. We pay more than twice as much per person for our health care as people in other wealthy countries even though we have almost nothing to show for it in the way of better health outcomes.
This enormous gap in costs suggests an easy opportunity for massive gains from trade. If people in the United States can get their health care from other countries there would be huge savings. While it may impractical for most of the population to go to another country for most of their health care needs, this is not true for Medicare beneficiaries, the vast majority of whom are retired. Many retirees have friends and/or family in other countries. If they opted to move to another country to get their health care, there could be enormous savings that they could share with the government.
To take a simple example, the Medicare trustees project that the cost to the program for an average beneficiary in 2020 will be close to $16,000. Suppose the cost of providing care in the United Kingdom is half as much or $8,000 a year.
If Medicare paid for a beneficiary to get care in the U.K. instead of the United States, the savings would be $8,000 a year. It could pay half of this money, or $4,000 a year, to the beneficiary and still save $4,000 for each beneficiary that opted to go to the U.K. to get care. If 1 million beneficiaries (at 2 percent of beneficiaries) opted to take advantage of this sort of deal, the savings would be $4 billion a year. If 5 million beneficiaries took advantage of this opportunity the savings would be $20 billion a year.
Over a longer horizon the gains would be projected to get much larger as U.S. health care costs are projected to hugely outstrip the increase in costs in other countries. As a result, the savings from going to the U.K. or elsewhere could easily exceed $16,000 a year by 2030. This would mean both that the government’s savings would be increasing for each person that took advantage of this deal and also that many more beneficiaries would likely opt to get their care from other countries.
Once we go out 20 years, for many beneficiaries their share of the projected savings would more than double their income. The projected gap in health care costs are so enormous than the U.S. government could even pay a premium of 10-20 percent above the cost of health care in other countries and still have enough money left over to allow large payments to beneficiaries and huge savings to the government.
The point is simple. The story of those incredibly scary long-term deficit projections is a story of exploding health care costs. If these projections of exploding health care costs prove accurate, then the country would enjoy enormous savings by having Medicare beneficiaries get their health care from the more efficient health care systems in other countries.
If we were having an honest policy debate this sort of proposal for free trade in health care services would be front and center on the national agenda. After all, which is a better way to save money on Medicare, making people wait until age 67 to qualify for benefits or giving beneficiaries the option to get health care in another country and to put some money in their pockets?
However you won’t hear about free trade in health care in the Washington policy debates. The Washington policy elites love trade when it can be used to beat down the wages of auto workers or truck drivers. However when trade might jeopardize the income of the pharmaceutical and the insurance industries, and highly paid medical specialists, they don’t even want it to be part of the discussion. And since the elites control the Washington policy debate, folks can expect to wait until age 67 for their Medicare and/or pay higher premiums.
In the great days of the USA, Henry Ford stated that he wanted to pay high wages to his employees so that they could become his customers and buy his cars. Today we are proud of the fact that we pay low wages. We have forgotten that the economy is a tool to serve the needs of society, and not the reverse. The ultimate purpose of the economy is to create prosperity with stability.
—Billionaire speculator Sir James Goldsmith, 1993 1
Equal trade, fair trade, honest, decent trade requires reasonable balance between trading partners and strong domestic economies. When that happens, Adam Smith’s model works pretty well: prices for labor, materials, and finished goods all settle near the area where they “naturally” should be.
But as we’ve seen from the immensely imbalanced statistics on distribution of wealth, something is not working the way Smith envisioned. Wages appear to be dwindling, and the number of strong, healthy competitors appears to be shrinking.
Watch: Free Trade - POOF goes the Money & the Stimulus
Teddy Roosevelt Weighs In
President Theodore Roosevelt brilliantly defined the American Dream in the context of the dynamic difference between a business that is a builder of community and one that hollows out community. “We are a business people,” Roosevelt said at the Ohio Constitutional Convention in Columbus in 1912.
The tillers of the soil, the wage workers, the business men—these are the three big and vitally important divisions of our population. The welfare of each division is vitally necessary to the welfare of the people as a whole.
The great mass of business is of course done by men whose business is either small or of moderate size.
The middle-sized business men form an element of strength which is of literally incalculable value to the nation. Taken as a class, they are among our best citizens. They have not been seekers after enormous fortunes; they have been moderately and justly prosperous, by reason of dealing fairly with their customers, competitors, and employees. They are satisfied with a legitimate profit that will pay their expenses of living and lay by something for those who come after, and the additional amount necessary for the betterment and improvement of their plant.
The average business man of this type is, as a rule, a leading citizen of his community, foremost in everything that tells for its betterment, a man whom his neighbors look up to and respect; he is in no sense dangerous to his community, just because he is an integral part of his community, bone of its bone and flesh of its flesh. His life fibers are intertwined with the life fibers of his fellow citizens...
So much for the small business man and the middle-sized business man. Now for big business.
It is imperative to exercise over big business a control and supervision which is unnecessary as regards small business. All business must be conducted under the law, and all business men, big or little, must act justly....“Big business” in the past has been responsible for much of the special privilege which must be unsparingly cut out of our national life.
I do not believe in making mere size of and by itself criminal.
The mere fact of size, however, does unquestionably carry the potentiality of such grave wrongdoing that there should be by law provision made for the strict supervision and regulation of these great industrial concerns doing an interstate business, much as we now regulate the transportation agencies which are engaged in interstate business. The antitrust law does good in so far as it can be invoked against combinations which really are monopolies or which restrict production or which artificially raise prices....
The important thing is this: that, under such government recognition as we may give to that which is beneficent and wholesome in large business organizations, we shall be most vigilant never to allow them to crystallize into a condition which shall make private initiative difficult.
It is of the utmost importance that in the future we shall keep the broad path of opportunity just as open and easy for our children as it was for our fathers during the period which has been the glory of America’s industrial history— that it shall be not only possible but easy for an ambitious man, whose character has so impressed itself upon his neighbors that they are willing to give him capital and credit, to start in business for himself, and, if his superior efficiency deserves it, to triumph over the biggest organization that may happen to exist in his particular field.
Whatever practices upon the part of large combinations may threaten to discourage such a man, or deny to him that which in the judgment of the community is a square deal, should be specifically defined by the statutes as crimes. And in every case the individual corporation officer responsible for such unfair dealing should be punished.
We grudge no man a fortune which represents his own power and sagacity exercised with entire regard to the welfare of his fellows. We have only praise for the business man whose business success comes as an incident to doing good work for his fellows. But we should so shape conditions that a fortune shall be obtained only in honorable fashion, in such fashion that its gaining represents benefit to the community....
We stand for the rights of property, but we stand even more for the rights of man.
We will protect the rights of the wealthy man, but we maintain that he holds his wealth subject to the general right of the community to regulate its business use as the public welfare requires.2
In this speech Roosevelt identified the key distinction and pointed directly to the situation the world finds itself in now.
Corporations have become so large and powerful that We the People— citizens and their governments around the world—no longer have the ability to control or restrain corporate misbehavior when it endangers the common good. And so we have epidemics of cancer, acid rain, ozone holes, and massive species die-offs as multinational corporations roam the world, strip-mining it for human labor, minerals, fossil fuels, and the fragile remaining bounty of its forests and oceans.
The ultimate in unequal trade has ensued from increasing corporate influence. Very large corporations—Roosevelt’s “big businesses”—have now become able to sue an entire nation, in a court that they, the companies, lob- bied to create, and can overturn the laws of independent nations with virtually no appeal. And unlike any court in the civilized world, this court is as secret, private, and difficult to appeal to as any military tribunal.
Free Trade Ravages National Economies
Free trade is a phrase behind which multinational corporations have essentially strip-mined both the developed and the developing world. That’s strong language, but the metaphor holds up under examination. In strip-mining, a company comes in, strips off anything necessary to get at what it wants, and leaves. Similarly, the developing world is being mined for its resources, including human labor. At the same time, the already-developed world is being mined for its wealth, as its middle class and working poor sink farther into debt while multinational corporations become richer than any historic kingdom the planet has ever seen.
To understand what we can do about this, we first need to understand the mechanism. And there most definitely is a mechanism. When properly executed, it works quite reliably.3
Every product from shoes to nails to computers requires some human labor to manufacture. This can be done under working conditions that are safe and comfortable (or unsafe and uncomfortable) and using chemicals, techniques, and energy from toxic or safe/renewable sources.
For the cost of one American or European or Australian laborer, a company can hire between fifteen and fifty laborers in a developing country; and as an added bonus, the company can go back to using toxic chemicals banned in the United States over the past fifty years and buying cheap electricity from coal-fired power plants that would be illegal in this country. And when workers are injured or die, there’s virtually no cost to the company.
Thus as transnational corporate lobbying succeeded in bringing about a “flat” world opened for free trade, about 4 billion people suddenly came into the same labor market that was once a protected space occupied by about a half-billion, and the other costs of manufacturing fell through the floor.
The first result of this was that companies that moved manufacturing from the developed world to the developing world were able to decrease labor and externality costs and increase earnings (profits). As companies used this principle to their advantage and built empires in industries from shoes to retailing by selling products made in low-labor-cost nations into the retail channels of the high-labor-cost nations, it seemed like it was a good thing (it was certainly promoted as a good thing!). Cheaper products were available in the wealthy nations, jobs were created in the poorer nations, and the people who made it all happen got rich.
But there were complications.
If an American company wanted to compete with the one that had gone offshore for labor or to avoid environmental regulations, it faced only two choices: shut its domestic factories and move manufacturing offshore, or go out of business. The result—on a vast scale—has been that the larger companies have moved offshore and the smaller companies that lacked the resources to do that have gone out of business. The number of competitors has dwindled, and markets have become concentrated in fewer and fewer hands.
As a consequence well-paying manufacturing jobs in the developed world have evaporated at a startling pace. This echoes all the way up from the local level, through state and national economies, finally showing up as a general lowering of the standard of living in the developed world. Wages drop, benefits vanish, jobs become scarce, and people become insecure.
Along with the economic changes come social changes. The worst of it shows up at the bottom first—the number of people in prison explodes, as do other negative social indicators. Antidepressant drug use goes up, suicide goes up (particularly among teenagers, who are developmentally most fragile and are watching their future earnings prospects evaporate), and spouses and even children go to work to help support the household. Debt goes up as the society becomes progressively poorer.
Wealthy nations respond to the offshore challenge by trying to be competitive, which means further lowering wages and benefits. Companies may even cut promised benefits to their longtime employees who have already retired. But even if the local company cuts wages in half (doing enormous damage to the local economy), a transnational corporation is still able to hire a dozen or more workers for the same job in a poor nation. Consequently, the race to the bottom gathers momentum—the bottom is where more than 6 billion people compete for the same work that was, until recently, performed in a tariff-protected economy of 1 billion people (the developed world). Resources won’t stretch that far. The bottom is worldwide poverty supervised by a wealthy few, also known as feudalism.
In the developing nations where these “new jobs are created,” people who have been doing traditional farming leave the land for the sweat-shops, and the land is turned over to intensive corporate agriculture. People who in previous generations were independent, self-sufficient farmers become urban slum-dwellers, the working poor, dependent on agribusiness and supermarkets for their food.
When the new sweatshop nation’s urban working poor begin demanding higher wages and benefits, clean air and water, and a safe workplace, the corporations move to another country where labor is cheaper and regulations are looser. It happened in the 1990s when a mass exodus of multinational corporations left Korea, Taiwan, and Thailand for the ultracheap labor of Vietnam, Myanmar (Burma), and China, shattering the economies of those former “Asian tigers.”* Poverty explodes as slums overflow with crime, drugs, and prostitution—the symptoms of desperate people seeking some sort of income when the real jobs are gone. It is just like strip-mining, and it’s a sign of the worst sort of corporate citizen—one without the slightest concern for the impact it has.
In the process the multinational corporations become richer, moving their “mining” activities from one nation to another as profits dictate. As multinational corporate wealth increases, stock prices go up and the top few percent of the socioeconomic pyramid become wealthier. Nations learn to watch the stock market, thinking—in complete error— that it is an accurate indicator of the nation’s wealth and economic health. In fact, from the Dutch tulip market collapse in 1637 to the U.S. stock market rises and crashes of 1929 and 2008, rapidly increasing markets have historically been indicators of an economy on the edge of implosion or undergoing radical social transformation.
As Sir James Goldsmith suggested in the epigraph of this chapter, we have forgotten that the purpose of economies—the whole reason why humans began trading with each other from the earliest days—was to provide for social stability. Your country makes good cheese, we make good clothing, another country makes good wine: let’s all trade these products with one another so all three of us can enjoy good cheese, clothing, and wine.
But in a “flat” free-trade world dominated by corporate values instead of human values, social stability is not a consideration unless or until it affects profits. This is the lesson of unequal values. And when a country becomes socially unstable, rather than working to restore the stability of the nation, multinationals simply leave town and go somewhere else, as Asian nations learned in the 1990s and Argentina learned in 2002.
This is not a new model, by the way. It’s how the East India Company treated India, the early American colonies, and numerous smaller countries that it considered its property. It reflects the mentality not of communities but of pirates, a mentality that gives birth to phrases like robber baron, corporate raider, and private equity.
Herman Daly and Robert Goodland used to work at the World Bank. They didn’t like what they saw. Consider this prophetic 1992 comment, two years before GATT was approved:
If by wise policy or blind luck, a country has managed to control its population growth, provide social insurance, high wages, reasonable working hours and other benefits to its working class (i.e., most of its citizens), should it allow these benefits to be competed down to the world average by unregulated trade?...
This leveling of wages will be overwhelmingly downward due to the vast number and rapid growth rate of under-employed populations in the third world. Northern laborers will get poorer, while Southern laborers will stay much the same.4
And this is exactly what we have seen happening.
The Corrective, Balancing Power of Tariffs
Historically, nations used tariffs—taxes on imported goods—to equalize differences between nations. Expensive-labor nations would charge tariffs on imported goods that were labor-intensive in their manufacture, to protect their domestic industries. Nations that wanted to protect unique natural resources or strategic products would use import/export policy to ensure their long-term survival and wise use. Trade was possible—it’s always happened among nations—but it was fair trade, fair to the humans in the trading nations and in the interest of the nations themselves.
Now multinational corporations have finally succeeded in freeing themselves from the constraints of social commitment to any nation whatsoever.
In the absence of tariffs and self-interested national trade policies, they are free to roam anywhere on a moment’s notice, looking for minerals, rain forests, and cheap labor. And because increasingly all money flows through them, they have essentially infinite power in all negotiations.
Finally, in a replay of events on American shores, they have in some cases taken roles in governments around the world. More than 150 countries have joined the WTO, and the giant transnational corporations are now dangling the carrot of cash to the leaders of the poorer nations. We’ve seen this movie before; it’s easy to tell what happens next. These governments readily comply, join the WTO, and subscribe to free trade. But what they get may not be quite what they bargained for. That’s what happened to no less a power than America.
How US Legislators React
The world’s largest transnational corporations are among the biggest contributors to politicians in America, and most members of Congress have supported the WTO even if they get a bit testy when the Dispute Resolution Panels rule against their favorite legislation. One good example comes from a speech to Congress by Representative John D. Dingell of Michigan on June 21, 2000:
Our major trading partners, including Japan, Korea, and the EU [European Union nations], have turned the WTO dispute settlement process into a de facto appeals court that reviews U.S. trade agency determinations and strikes down our trade laws. Japan and Korea have gone so far as to say they will launch WTO appeals of every U.S. trade determination that is adverse to their interests. Already, WTO decisions are gutting the effectiveness of U.S. trade remedies in ways that the Administration and Congress expressly rejected during the negotiations on the agreement establishing the WTO.
Increasingly, both governments and citizens of nations all over the world are expressing concern about the WTO’s process of leveling the corporate playing field across 153 member nations. Corporations manufacturing and exporting from countries that have lax or minimal environmental and labor laws are aggressively challenging and striking down the stronger laws passed in more-developed nations.
Countries with laws that banned the import or marketing of products they consider dangerous to their citizens are finding those laws struck down because other countries with weaker laws can now, to some extent, define the standard to which every WTO-member nation must be held accountable. They do this through WTO’s primary trade-law model, which says that a country cannot ban the import of a product because of how or with what type of labor it was produced.
Overturning Our Laws
Thus it’s now largely illegal to ban the import of products made by slaves or under inhumane conditions or made with chemicals that poisoned the local environment. This has sparked an explosion of industrial activity in labor-cheap and environmentally lax nations. At the same time, the industrial core of more-developed nations with higher labor and environmental standards has been hollowed out in just the past few decades, leaving vast landscapes of abandoned factories and a populace increasingly on edge about employment security.
In a developing nation where there is little or no cost or penalty to dump-ing toxins into the air or water, manufacturing is vastly more profitable than in a developed nation where toxins must be captured, stored, tracked, and cleanly disposed of in environmentally responsible ways. In the developed world, we have minimum-wage laws, laws regarding the maximum hours that may be worked per week, and safety and environmental laws. In the past, if an offshore product wasn’t made in ways we approved, we either banned its import or added taxes or tariffs to give our cleaner domestic companies a competitively level playing field.
For example, say there’s an hour’s work in the manufacture of a pair of American-made shoes. In the United States, that hour costs $12.77, including benefits and overhead.5 That same labor may be 10 cents an hour in Malaysia. So for the past century or so, the United States would have added a tariff, or tax, of $12.67 on any shoe imported from Malaysia that had an hour’s labor in it. That way U.S. shoe manufacturers could stay in business. It would level the playing field between the two cultures and nations, thus providing for fair trade.
Nations have often used tariffs to discourage manufacturing operations from moving their factories and jobs to less regulated nations.
But according to WTO, those tariffs are considered “restraint of free trade.” It’s illegal under WTO rules to consider how or who makes a product or at what level of pay it is manufactured. The loss of jobs to offshore began decades ago, but the elimination of tariffs during the Reagan and Clinton administrations accelerated it markedly. In the past few decades, more than 20 million Americans in labor-intensive industries have lost their jobs.
The other upshot of this is a dramatic increase in people around the world who are working either as overt slaves or at a wage rate that makes them virtual slaves in dangerous and toxic workplaces and living in an environment of company stores and company housing.
The developed world, and particularly the United States, at first appeared to have benefited from this. It allows our consumer-based economy to continue to hum, with low inflation and rising profits, just as the American South benefited so much from cheap slave labor before the Civil War. But at best this was a short-term benefit.
The “New World Order”
In most nations of the world today, there are basically two types of political parties. Those two parties stand on either side of a nearly invisible line—one party huge and imposing and the other thin and sickly, a political sumo wrestler pitted against an aging and infirm Woody Allen. The parties, regardless of local labels, are “We Who Represent the Interests of Multinational Corporations” and “We Who Represent the Interests of Human Beings.” The first group has gotten laws passed that allow the easy movement of capital from nation to nation under rules far different and more relaxed than those for humans.
In the United States and most other developed nations, most of the distinctions between politicians are becoming increasingly blurred, and in many nations all the local politicians have joined the parties of the corporations. Those parties and politicians that exist to represent the interests of human beings have been marginalized or overwhelmed by the parties and politicians that exist to represent the interests of the corporations. The reason for this is simple: most of the world has followed our lead regarding “free speech” campaign contributions.
After the end of apartheid in South Africa, American corporations donated the services of corporate lawyers to help draft the new South African constitution. Pointing to the 1886 Santa Clara case, they essentially said that in America corporations have the same constitutional status as humans, so you should write this into your constitution, too.
South Africa did that, as have many other countries that have emerged or developed or separated from the former Soviet Union. It’s a challenge to find the details and the statistics, and I’m hopeful that this book may spur somebody to do that hard, nation-by-nation, language-by-language research, but it appears that many of the countries of the world have written corporations-as-persons into their constitutions or laws, thinking that they were following the original intent of the Framers of the U.S. Constitution, which, of course, is not the case.
The result is that corporations have functionally taken control of governments the world over, particularly through their participation in the funding of the electoral process. Thus, corporations have become the honey pot from which many politicians and political parties draw their nourishment.
In a Democracy...
In the 1996 election cycle in the United States, 96 percent of Americans didn’t make any direct contribution whatsoever to a politician or political party, and fewer than one-quarter of 1 percent of Americans gave more than $200. By contrast, each of America’s top five hundred corporations gave more than $0.5 million to the Democrats and the Republicans during the decade preceding the 1996 elections.
In the 1998 election cycle, which was not even a presidential election year, those corporations contributed $660 million to candidates, while the last remaining organized groups that represent workers—unions, which are not considered persons in the United States and most other countries but are instead regulated as artificial persons—were able to pony up only $60 million in campaign contributions raised from their members.
Unions have to operate under the same types of rules and laws that corporations did before 1886, and, in fact, additional restrictions have been placed on them since then. So-called “paycheck protection” legislation is being pro- moted by corporate lobbyists that would essentially criminalize union contributions to candidates. And, increasingly, in corporate-controlled nations around the world, unions are being deemed illegal, political, or even labeled as terrorist organizations and ferociously stamped out.
Can it change? I believe so. But only if the word gets out.
Notes:
The collapse of “the Asian tigers” also had much to do with IMF structural adjustment programs, according to many commentators.
1. Sir James Goldsmith in an interview with Yves Messarovitch, published as The Trap (New York: Carroll & Graf, 1994).
3. A more detailed explanation of the concepts in these points is found in Goldsmith’s The Trap (see note 1 above).
4. Herman Daly and Robert Goodland, “An Ecological-economic Assessment of Dereg- ulation of International Commerce under GATT” (Washington, DC: World Bank, 1992), quoted in The Trap (see note 1 above).
Markets need to be free. When the government interferes to dictate what market participants can or cannot do, resources cannot flow to their most efficient use. If people cannot do the things that they find most profitable, they lose the incentive to invest and innovate. Thus, if the government puts a cap on house rents, landlords lose the incentive to maintain their properties or build new ones. Or, if the government restricts the kinds of financial products that can be sold, two contracting parties that may both have benefited from innovative transactions that fulfil their idiosyncratic needs cannot reap the potential gains of free contract. People must be left ‘free to choose’, as the title of free-market visionary Milton Friedman’s famous book goes.
What They Don’t Tell You
The free market doesn’t exist. Every market has some rules and boundaries that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How ‘free’ a market is cannot be objectively defined. It is a political definition. The usual claim by free-market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined ‘free market’ is the first step towards understanding capitalism.
Labour Ought to Be Free
In 1819 new legislation to regulate child labour, the Cotton Factories Regulation Act, was tabled in the British Parliament. The proposed regulation was incredibly ‘light touch’ by modern standards. It would ban the employment of young children – that is, those under the age of nine. Older children (aged between ten and sixteen) would still be allowed to work, but with their work- ing hours restricted to twelve per day (yes, they were really going soft on those kids). The new rules applied only to cotton factories, which were recognized to be exceptionally hazardous to workers’ health.
The proposal caused huge controversy. Opponents saw it as undermining the sanctity of freedom of contract and thus destroying the very foundation of the free market. In debating this legislation, some members of the House of Lords objected to it on the grounds that ‘labour ought to be free’. Their argument said: the children want (and need) to work, and the factory owners want to employ them; what is the problem?
Today, even the most ardent free-market proponents in Britain or other rich countries would not think of bringing child labour back as part of the market liberalization package that they so want. However, until the late nineteenth or the early twentieth century, when the first serious child labour regulations were introduced in Europe and North America, many respectable people judged child labour regulation to be against the principles of the free market.
Thus seen, the ‘freedom’ of a market is, like beauty, in the eyes of the beholder. If you believe that the right of children not to have to work is more important than the right of factory owners to be able to hire whoever they find most profitable, you will not see a ban on child labour as an infringement on the freedom of the labour market. If you believe the opposite, you will see an ‘unfree’ market, shackled by a misguided government regulation.
We don’t have to go back two centuries to see regulations we take for granted (and accept as the ‘ambient noise’ within the free market) that were seriously challenged as undermining the free market, when first introduced. When environmental regulations (e.g., regulations on car and factory emissions) appeared a few decades ago, they were opposed by many as seri- ous infringements on our freedom to choose. Their opponents asked: if people want to drive in more polluting cars or if factories find more polluting production methods more profitable, why should the government prevent them from making such choices? Today, most people accept these regulations as ‘natural’. They believe that actions that harm others, however unintentionally (such as pollution), need to be restricted. They also understand that it is sensible to make careful use of our energy resources, when many of them are non-renewable. They may believe that reducing human impact on climate change makes sense too.
If the same market can be perceived to have varying degrees of freedom by different people, there is really no objective way to define how free that market is. In other words, the free market is an illusion. If some markets look free, it is only because we so totally accept the regulations that are propping them up that they become invisible.
Piano Wires and Kungfu Masters
Like many people, as a child I was fascinated by all those gravity-defying kungfu masters in Hong Kong movies.
Like many kids, Conditions of trade are specified too. One of the things that surprised me when I first moved to Britain in the mid 1980s was that one could demand a full refund for a product one didn’t like, even if it wasn’t faulty. At the time, you just couldn’t do that in Korea, except in the most exclusive department stores. In Britain, the consumer’s right to change her mind was considered more important than the right of the seller to avoid the cost involved in returning unwanted (yet functional) products to the manufacturer. There are many other rules regulating various aspects of the exchange process: product liability, failure in delivery, loan default, and so on. In many countries, there are also necessary permissions for the location of sales outlets – such as restrictions on street-vending or zoning laws that ban commercial activities in residential areas.
Then there are price regulations. I am not talking here just about those highly visible phenomena such as rent controls or minimum wages that free-market economists love to hate.
Wages in rich countries are determined more by immigration control than anything else, including any minimum wage legislation. How is the immigration maximum determined? Not by the ‘free’ labour market, which, if left alone, will end up replacing 80–90 per cent of native workers with cheaper, and often more productive, immigrants. Immigration is largely settled by politics. So, if you have any residual doubt about the massive role that the government plays in the economy’s free market, then pause to reflect that all our wages are, at root, politically deter- mined (see Thing 3).
Following the 2008 financial crisis, the prices of loans (if you can get one or if you already have a variable rate loan) have become a lot lower in many countries thanks to the continuous slashing of interest rates. Was that because suddenly people didn’t want loans and the banks needed to lower their prices to shift them? No, it was the result of political decisions to boost demand by cutting interest rates. Even in normal times, interest rates are set in most countries by the central bank, which means that political considerations creep in. In other words, interest rates are also determined by politics.
If wages and interest rates are (to a significant extent) politically determined, then all the other prices are politically determined, as they affect all other prices.
Is Free Trade Fair?
We see a regulation when we don’t endorse the moral values behind it. The nineteenth-century high-tariff restriction on free trade by the US federal government outraged slave-owners, who at the same time saw nothing wrong with trading people in a free market. To those who believed that people can be owned, banning trade in slaves was objectionable in the same way as restricting trade in manufactured goods. Korean shopkeepers of the 1980s would probably have thought the requirement for ‘unconditional return’ to be an unfairly burdensome government regulation restricting market freedom.
This clash of values also lies behind the contemporary debate on free trade vs. fair trade. Many Americans believe that China is engaged in international trade that may be free but is not fair. In their view, by paying workers unacceptably low wages and making them work in inhumane conditions, China competes unfairly. The Chinese, in turn, can riposte that it is unacceptable that rich countries, while advocating free trade, try to impose artificial barriers to China’s exports by attempting to restrict the import of ‘sweatshop’ products. They find it unjust to be prevented from exploiting the only resource they have in greatest abundance – cheap labour.
Of course, the difficulty here is that there is no objective way to define ‘unacceptably low wages’ or ‘inhumane working conditions’. With the huge international gaps that exist in the level of economic development and living standards, it is natural that what is a starvation wage in the US is a handsome wage in China (the average being 10 per cent that of the US) and a fortune in India (the average being 2 per cent that of the US). Indeed, most fair-trade-minded Americans would not have bought things made by their own grandfathers, who worked extremely long hours under inhumane conditions. Until the beginning of the twenti- eth century, the average work week in the US was around sixty hours. At the time (in 1905, to be more precise), it was a country in which the Supreme Court declared unconstitutional a New York state law limiting the working days of bakers to ten hours, on the grounds that it ‘deprived the baker of the liberty of work- ing as long as he wished’.
Thus seen, the debate about fair trade is essentially about moral values and political decisions, and not economics in the usual sense. Even though it is about an economic issue, it is not some- thing economists with their technical tool kits are particularly well equipped to rule on.
All this does not mean that we need to take a relativist posi- tion and fail to criticize anyone because anything goes. We can (and I do) have a view on the acceptability of prevailing labour standards in China (or any other country, for that matter) and try to do something about it, without believing that those who have a different view are wrong in some absolute sense. Even though China cannot afford American wages or Swedish working conditions, it certainly can improve the wages and the working conditions of its workers. Indeed, many Chinese don’t accept the prevailing conditions and demand tougher regulations. But economic theory (at least free-market economics) cannot tell us what the ‘right’ wages and working conditions should be in China.
I Don't Think We Are in France Anymore
In July 2008, with the country’s financial system in meltdown, the US government poured $200 billion into Fannie Mae and Freddie Mac, the mortgage lenders, and nationalized them. On witnessing this, the Republican Senator Jim Bunning of Kentucky famously denounced the action as something that could only happen in a ‘socialist’ country like France.
France was bad enough, but on 19 September 2008, Senator Bunning’s beloved country was turned into the Evil Empire itself by his own party leader. According to the plan announced that day by President George W. Bush and subsequently named TARP (Troubled Asset Relief Program), the US government was to use at least $700 billion of taxpayers’ money to buy up the ‘toxic assets’ choking up the financial system.
President Bush, however, did not see things quite that way. He argued that, rather than being ‘socialist’, the plan was simply a continuation of the American system of free enterprise, which ‘rests on the conviction that the federal government should interfere in the market place only when necessary’. Only that, in his view, nationalizing a huge chunk of the financial sector was just one of those necessary things.
Mr Bush’s statement is, of course, an ultimate example of political double-speak – one of the biggest state interventions in human history is dressed up as another workaday market process. However, through these words Mr Bush exposed the flimsy foundation on which the myth of the free market stands. As the statement so clearly reveals, what is a necessary state intervention consistent with free-market capitalism is really a matter of opinion. There is no scientifically defined boundary for free market.
If there is nothing sacred about any particular market boundaries that happen to exist, an attempt to change them is as legitimate as the attempt to defend them. Indeed, the history of capitalism has been a constant struggle over the boundaries of the market.
A lot of the things that are outside the market today have been removed by political decision, rather than the market process itself – human beings, government jobs, electoral votes, legal decisions, university places or uncertified medicines. There are still attempts to buy at least some of these things illegally (bribing government officials, judges or voters) or legally (using expensive lawyers to win a lawsuit, donations to political parties, etc.), but, even though there have been movements in both directions, the trend has been towards less marketization.
For goods that are still traded, more regulations have been introduced over time. Compared even to a few decades ago, now we have much more stringent regulations on who can produce what (e.g., certificates for organic or fair-trade producers), how they can be produced (e.g., restrictions on pollution or carbon emissions), and how they can be sold (e.g., rules on product label- ling and on refunds).
Furthermore, reflecting its political nature, the process of re-drawing the boundaries of the market has sometimes been marked by violent conflicts. The Americans fought a civil war over free trade in slaves (although free trade in goods – or the tariffs issue – was also an important issue). The British govern- ment fought the Opium War against China to realize a free trade in opium. Regulations on free market in child labour were implemented only because of the struggles by social reformers, as I discussed earlier. Making free markets in government jobs or votes illegal has been met with stiff resistance by political parties who bought votes and dished out government jobs to reward loyalists. These practices came to an end only through a combi- nation of political activism, electoral reforms and changes in the rules regarding government hiring.
Recognizing that the boundaries of the market are ambiguous and cannot be determined in an objective way lets us realize that economics is not a science like physics or chemistry, but a polit- ical exercise. Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect. If the boundaries of what you are studying cannot be scientifically determined, what you are doing is not a science.
Thus seen, opposing a new regulation is saying that the status quo, however unjust from some people’s point of view, should not be changed. Saying that an existing regulation should be abol- ished is saying that the domain of the market should be expanded, which means that those who have money should be given more power in that area, as the market is run on one-dollar-one-vote principle.
So, when free-market economists say that a certain regulation should not be introduced because it would restrict the ‘freedom’ of a certain market, they are merely expressing a political opinion that they reject the rights that are to be defended by the proposed law. Their ideological cloak is to pretend that their politics is not really political, but rather is an objective economic truth, while other people’s politics is political. However, they are as politically motivated as their opponents.
Breaking away from the illusion of market objectivity is the first step towards understanding capitalism.
Barack Obama's trade policy, as embodied by the pending U.S.-Colombia free trade agreement, sadly resembles George W. Bush's blueprint. It promotes export growth and investment at the expense of local economies and resilient food systems. This is unfortunate, not only because it fails to deliver the "21st-century" trade agenda President Obama promised on the campaign trail, but also because it ignores some of the key lessons from NAFTA and the 2008 global food price crisis.
For decades, the primary problem for agriculture has been low prices, which compel farmers to continue to produce more and more to make up in volume what they lose in falling prices, and to seek ever expanding markets at home and abroad. Cheap imports have flooded developing countries, devastating poor, small-scale farmers, while failing to stabilize incomes for American growers.
Trade policy isn't neutral. It's a specific set of rules that tend to favor specific actors. Rather than learning the lessons of the 2008 food price crisis — that governments need the ability to shield key markets from extreme volatility — this agreement simply replicates the 20th-century model.
Like NAFTA did for Mexicans, the U.S.-Colombia agreement would subject Colombian farmers to immediate competition from U.S. exports. Duties on 70 percent of U.S. farm exports of wheat, barley, soy, and most processed foods would be eliminated immediately. The deal would also abolish Colombia's "price bands," which kick in to protect local farm goods when prices fall.
While prices are high for now, many Colombian farmers will find it difficult to compete with goods whose prices can vary so dramatically. As in Mexico under NAFTA, tariffs on corn and a few other sensitive products will be phased out over a longer period. In Mexico, NAFTA pushed more than two million farmers out of agriculture. That shows how even a long transition may be inadequate when no real alternatives for rural employment exist. Many of those farmers were compelled to migrate to urban areas or the United States to find work.
The Obama administration says that this trade deal will help the South American nation, citing the Colombian government's proposals to restore lands to people displaced by civil conflicts. Yet there's no assurance that farmers facing competition from U.S. exports or new investments facilitated by expanded trade would be able to stay on their land.
In the wake of the free trade pact among the United States, Central America, and the Dominican Republic known as DR-CAFTA, the non-profit group ActionAid documented numerous cases of Guatemalan farmers who were pressured by palm oil and sugar producers to sell their land to make way for industrial-scale production of a single crop. Many of these farmers had been granted titles in the wake of that country's civil war, only to lose them again when inadequate access to credit and other inputs made it impossible for them to earn a living.
This new trade deal also calls for deregulating foreign investment rules, which could put new pressure on land as mining companies expand operations. Apparently, our trade negotiators aren't heeding the lessons learned from the NAFTA and DR-CAFTA deals.
This export-led model has a downside for U.S. farmers too. Despite rising agricultural exports, the number of small, commercially viable American farms has dropped by 40 percent in the last 25 years. Very small farms serving local markets (and relying on off-farm income) and very large farms have increased substantially.
U.S. farmers, like their Colombian counterparts, need reliable public support and consistent market signals so that they can invest in local, regional, and national food production to feed their communities and their nations. Trade should supplement local food systems, not seek to replace them. The U.S.-Colombia pact would reinforce a system that leaves farmers and consumers at the mercy of volatile prices and markets. Instead, we need a new approach that ensures fair, healthy, and resilient food systems for all.
More than two years into the Obama administration, we're still waiting for a 21st-century trade policy.
Once again, the job numbers are dismal. In January, the U.S. economy created just 36,000 domestic jobs, far below the roughly 145,000 that economists had forecast. The unemployment rate fell, to 9 percent, but only because more and more discouraged workers are giving up and leaving the workforce.
The U.S. still has a jobs gap of about 14 million jobs, and that number is increasing as the labor force grows. Counting people who've given up, or who are working part time when they want full time jobs, the real unemployment number is around 17 percent. America now has about 25 million people either out of work or underemployed.
Meanwhile, corporate profits continue to set records. Profits in the third quarter of 2010 were 1.659 trillion, about 28 percent higher than a year before, and the highest year-to-year increase on record.
What's going on? Very simply, America's corporations no longer need America's workers.
As Harold Meyerson documents in a brilliant piece for The American Prospect, our most admired corporations -- GE, Apple, Hewlett Packard, Intel -- are creating ever more jobs overseas and relatively fewer at home. This has the double benefit of taking advantage of cheap labor abroad and disciplining workers to accept low wages at home. Along with the high unemployment rates have come declining earnings. Meyerson writes:
"In 2001, 32 percent of the income of the firms on Standard & Poor's index of the 500 largest publicly traded U.S. companies came from abroad. By 2008, that figure had grown to 48 percent."
This record contrasts dramatically with that of the right's favorite whipping boy -- Western Europe. Germany is gaining jobs at a rapid clip. Its industrialists are committed to producing at home, and just in case they get ideas of making outsourcing a way of life, they have strong unions who negotiate agreements on where production is located.
Germany's labor costs are the highest in the world, but Germany nonetheless runs the world's largest export surplus -- 7 percent of GDP -- while America runs chronic trade deficits.
Barring drastic policy changes, our jobless recovery is likely to continue. There are three parts to the problem.
First, while the economy is still in deep recession, both the administration and its Republican critics are already talking about steeper budget cuts. President Obama talks a good game about infrastructure spending, but it's hard to see where the funds will come from as deficit hawks in both parties prevail.
In Sunday's New York Times, Jacob Lew, the president's budget director, wrote a depressing (in both senses of the word) oped piece on the case for deeper budget cuts. In theory, massive infrastructure spending could create a lot of good jobs, but the Obama budget is likely to offer new spending at token levels to prove his good faith as a deficit-hawk, and the Republicans will likely deny him even that.
Then there is the problem that Meyerson nails. The Obama administration is not about to take issue with American companies that profit from locating ever more production abroad. The corporate elite is fiercely opposed to any limits on its freedom to relocate, and Obama is on a mission to make peace with big business. The administration continues to promote "free trade" deals on the premise that they will create jobs -- but more and more of those jobs get created offshore.
Both political parties are in denial about the plain fact that American industry is competing against an industrial system in China radically different from our own. If a company like GE wants to operate in China, the Beijing regime extracts conditions that violate the spirit if not the letter of the World Trade Organization.
Companies are made to take on Chinese partners, to transfer sensitive proprietary technology, and to shift their production and R&D to China. In exchange, they get government subsidies and docile workers. Eventually, much of their production is displaced by their Chinese partners, but in the meantime they make a lot of money.
In the past two decades, company after company concluded that the U.S. government didn't really care if we lost our manufacturing base. The Chinese government was making them an offer they couldn't refuse, so one by one they made a separate peace with Beijing.
At the latest U.S.-China summit, there was clucking about its overvalued currency, though last week the Treasury, out of solicitude for the feelings of Beijing's leaders, once again declined to name China as a currency manipulator.
But the overvalued Renminbi is a sideshow. The main game, which even relative hawks in the U.S. government just won't raise, is China's rigged industrial system. Why won't American officials go there? Because American corporations have adapted just fine.
Finally, there is the service economy. As many defenders of off-shoring have pointed out, even if Apple produces most of its products in China, a lot of the value-added stays in the U.S. Apple sales create jobs for workers in retail stores, warehouses, and shipping, as well as a relative handful of elite software and hardware designer jobs, not to mention corporate profits.
Swell, but in the absence of a labor movement, or higher minimum wages, or other pressure for decent retailing wages, the service economy is turning into a Wal-Mart economy, where domestic service jobs that are created mostly pay lousy wages.
These alarming job trends were not caused by the financial collapse that began in 2007. Rather, the prolonged recession revealed deep structural changes in the U.S. economy that reflect a gross imbalance between a corporate elite and ordinary working people.
So if you want to know why the Democratic Party did so badly in the 2010 midterms, it's because the administration lacked a plausible story about how to alter these basic dynamics. And it lacked that story because it was unwilling to challenge the corporate business model that disdains American workers. In light of that reality, the latest gestures by the president to show the business elite just what a good fellow he is are not just disappointing, but they are foolish politics.
The president's approval ratings may be up slightly in the wake of the Tucson shootings. The attack gave Obama an opening to shame the Republicans for their shrill partisanship and to model civility. But high-minded gestures will not cure the jobs crisis. The 2012 election will be won or lost in the industrial heartland, where states like Michigan, Ohio, Wisconsin, Missouri, and Pennsylvania are devastated from the recession, and whose jobs are not coming back as long as current policies continue.
There is a whole other strategy available for dealing with the jobs crisis -- a constructive economic nationalism. But neither the White House nor the Republican opposition is offering it.
In the United States, innovation has become almost synonymous with economic competitiveness. Even more remarkable, we often hear that our economic salvation can only be through innovation. We hear that because of low Asian wages we must innovate because we cannot really compete in anything else. Inventive Americans will do the R&D and let the rest of the world, usually China, do the dull work of actually making things. Or we'll do programming design but let the rest of the world, usually India, do low-level programming. This is a totally mistaken belief and one that, if accepted, will consign this nation to second- or third-class status.
The latest offender to advance this line of thought is Thomas Friedman, who has prominently displayed this familiar and entirely incorrect line of thought in the New York Times. Unfortunately, this idea is one that is widely accepted without careful thought about either its truthfulness or its consequences.
Truth and Consequences
Cheap labor abroad is cited as the incurable handicap that explains why the United States cannot compete. But cheap labor doesn't explain the fact that Japan and Germany, both high-wage countries, are successful in the automobile industry. Nor does it explain how semiconductors, a model of a high investment, low-labor content industry, are mainly made in Asia. The premise that the inescapable burden of competing against low wages means failure is simply not correct.
Perhaps even more disturbing than the lack of truthfulness is the fact that we are not addressing the consequences of not competing. There are some inescapable truths about any economic good, be it a manufactured good or a service: (1) you either produce it in your own country, (2) you trade something you do produce for it, (3) you do without it, or (4) you import it and promise to pay later.
We are moving steadily away from producing what we need in this country. We are also moving away from producing on a scale that enables us to trade for what we do need. Rather than do without, we are increasingly importing things with a promise to pay later. This cannot go on. When our trading partners, especially China, no longer want to loan us hundreds of billions of dollars a year to be paid later, we will have little productive capacity left and we will be a poor nation.
Friedman is only the latest to assume that we can avoid this fate by emphasizing designs, ideas, and R&D and trading them for the items we need. This is an attractive idea; we often hear about innovation parks and university research centers and often their work is both exciting and good.
But the chasm-sized flaw in this otherwise alluring proposition is scale. Balancing trade on ideas and R&D simply cannot be done. The most elementary analysis shows that the scale is entirely wrong. As one who spent many years as the head of research of a large corporation, I know how much R&D matters; I also know how small it is. Eight percent is a very large percent of revenue to spend on R&D. Even in manufacturing, which is relatively R&D intensive, 4 to 5 percent is typical. It is really wrong to think that you can scale up R&D to be big enough so we can trade it for the huge quantity of things we need but don't make in this country.
A Strange and Unworkable Strategy
Ignoring the issue of scale, Tom Friedman goes on to quote authoritative Chinese sources who say that by the end of the decade China will be dominating global production of the whole range of power equipment. To Friedman's approving eye this just means that China is going to make clean power technologies cheaper for itself and everyone else. Friedman says that Chinese experts believe it will all happen faster and more effectively if China and America work together with the United States specializing in energy research and innovation, at which, he asserts, China is still weak, while China will specialize in mass production.
It is probably true that all this will happen faster with the specialization Friedman describes, but where will we be at the end of that process? China will be making power equipment cheaply, but the chasm is still there, so what will we have to trade for it? Power equipment will be cheap in China, but if we adopt this approach it may well be unaffordable in the United States.
Meanwhile the Chinese wisely welcome our nascent innovations and turn them into products. They are building plants, making things manufacturable, and adding them to their growing GDP. Friedman's article contains an excellent example of this. He describes a U.S. developer with a new approach to solar-thermal power, whose proposal to the U.S. government asking for small scale support was easily outbid by a Chinese offer that was far larger and was aimed at much larger scale plants.
Specializing in R&D, but sending its fruits on to others is a strange and completely unworkable strategy for a nation.
Other Issues
Thinking of innovation as a standalone activity without production has other major flaws. First, our global corporations, understanding that innovation and production are in fact closely tied, are rapidly moving not only production but also R&D overseas. Intel's CEO made this very clear when he said that the goal of Intel's new plant in China is to support a transition from "manufactured in China" to "innovated in China".
In addition, the standalone innovation approach leaves most Americans entirely out. After all, only a very small portion of Americans are engaged in R&D. At a recent meeting I heard "The only thing that matters is innovative and passionate people." These people do matter, but they are very far from being the only ones. This attitude misses the point that it was all our people, working in many different work settings, that made this country prosper. And all of them will all be needed in any viable future for our country.
What We Must Do - The Role of Trade
We need successful industries and we need to innovate within them to keep them thriving. However, when your trading partner is thinking about GDP rather than profit, and has adopted mercantilist tactics, subsidizing industries, and mispricing its currency, while loaning you the money to buy the underpriced goods, this may simply not be possible.
The ability to compete in a world that is half-mercantilist, half-free is inescapably tied to effective trade policy. Our present policy is to beg. We ask countries like China to stop the subsidies and currency mispricings because they are creating a one-way flow of underpriced goods; goods that are destroying jobs on a large scale in many of the most productive sectors of our economy. But why should they stop? It's working for them.
We must move to balanced trade. With balanced trade every dollar of imports is matched by a dollar of exports of goods or services produced here in the U.S.A. We are fortunate that there are in fact ways to balance trade. One very attractive way is to adopt some version of Warren Buffet's Import Certificates plan, which Buffet has described in a remarkably insightful Fortune article.
We should act now to balance trade. We should not continue to beg while jobs disappear and our productive ability erodes.
What We Must Do - Motivating our Companies
Today our companies are motivated to take innovations abroad, produce there and import the goods into the United States. Increasingly we can expect services also to go overseas. We must produce here in the U.S.A., to employ the people of this country, and we must keep their activities effective by a steady stream of innovations in design and production. While other countries roll out a welcome mat of tax breaks and subsidies for our companies because their common sense tells them that their people being employed in productive work is the road to being a rich country, we provide no incentive for U.S. companies to produce here.
We cannot continue to have our corporations, faithful only to the interests of their shareholders, engage in a one-way flow of jobs, technology, and innovation out of the country. We need to realize that with globalization the interests of our country and of our global corporations have diverged. We can realign the interests of corporations with those of our country by rewarding companies that are productive here. And that can be done in ways that are consistent with our history and with the limited capabilities of our government.
Conclusion
Specializing in innovation is an attractive idea, but a misleading one; an idea that blinds us to what we really need to do.
We need to do more than produce exciting new ideas; we must also be able to compete in large productive industries. This requires us to both balance trade and to motivate our corporations not only to innovate, but also to produce in this country. While this is hard to do, it can be done. Specializing in innovation, though often recommended, is in fact a delusion, an alluring path that in reality will lead us straight downhill.
