For me, this is exciting news! (Though many may conclude that I’m too easily excited.) In the above-linked editorial, Reuters writer Chrystia Freeland tells us of a just-released report that concludes that global capitalism hasn’t worked for middle-class America. That may not sound like an earth-shaking conclusion since it seems so obvious to so many of us. But what’s newsworthy is the source of the report. It’s not from some left or right-leaning think tank or someone whose interests are served by reporting such a conclusion. It comes from a Nobel prize-winning economist who would never have expected such a result. Ms. Freeland says it best in her opening paragraph:
Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations.
Ms. Freeland continues:
The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.
I have further news for Ms. Freeland. Not only is the middle class struggling in America, so is the lower class and so is much of the lower ranks of the upper class. Virtually everyone is finding things tougher, with the exception of the richest of the rich.
For someone from the field of economics, so heavily invested in promoting and praising the process of globalization, to come to this conclusion is truly significant. And, what’s even more satisfying to me can be found near the end of this article. It seems that Michael Spence, one of the authors of this report, is at a loss to explain the results. Most gratifying of all is the final paragraph:
Spence is honest enough to admit that he has no easy answers. But he has posed the right question. American politicians in both parties are focused on a budget debate that is superficial, premature and ultimately about something pretty easy to figure out. Instead, we should all be working on the much bigger problem of how to make capitalism work for the American middle class.
Just as important as the fact that a prominent economist has now published a study that debunks the promised benefits of globalization is the fact that a journalist like Ms. Freeland doesn’t challenge the conclusions of the report and rush to the defense of globalization. Instead, she acknowledges the truth and suggests that it’s time to do something to make capitalism our servant again instead of our master.
Is this not what I’ve been saying all along? On page 245 of Five Short Blasts, while envisioning a more enlightened future, I spoke of the establishment of new boundaries on capitalism to preclude the use of trade deficits and population growth to pump up sales volumes and stock valuations. (Thus, the 28th and 29th amendments I’ve proposed on this blog.)
And I’ve been steadfast in maintaining that all other issues pale in comparison to the need to deal with our trade and population (primarily immigration) issues. It was only earlier this month that I said exactly what Ms. Freeland said – that the budget and debt battles pale in comparison to the need to address this more fundamental issue.
While I see no evidence of any understanding about the role of population density in eroding per capita consumption and driving up unemployment and how it factors into trade, the world is indeed inching closer to the realization that, for whatever reasons that it can’t yet understand, the process of globalization, rooted in free trade theory, is fundamentally flawed. World leaders correctly recognized the role of global trade imbalances in collapsing the global economy. To the chagrin of export dependent nations, the G20 is now focused on ways to eliminate those imbalances. The World Trade Organization’s process of expanding its trade regime has ground to a complete halt. And now prominent economists are admitting that, contrary to their claims that freer trade would benefit all, it doesn’t. The tide is turning, ever so slowly, against the trade policies and their underlying economic theories that have brought America to near-ruin.
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Buried amongst the many comments on the piece, you’ll find one that I wrote. The following was my response:
Globalization is a fancy name for the process of implementing free trade that began in 1947 with the signing of the Global Agreement on Tariffs and Trade (GATT), forerunner of today’s World Trade Organization. At that time, free trade advocates got the upper hand of trade policy and convinced world leaders that we’d all be better off if each nation put aside trade policies based on their own self-interest and put to the test on a global scale the unproven “principle of comparative advantage,” a free trade theory developed by British economist David Ricardo in 1812.
Basically, Ricardo said that each nation benefitted if it concentrated on what it did best and traded that product for others made best by other nations. A key stipulation was that each nation had to maintain full employment, and that workers displaced from inefficient industries would find employment in others.
What Ricardo failed to incorporate into his theory was the effect that extreme population densities could have on eroding per capita consumption, driving up unemployment to such an extent that a nation could become completely dependent on exports to sustain its bloated labor force. Ricardo could be forgiven for that, since no one could envision such a situation in 1812. But today’s economists cannot.
Today’s economists choose to remain ignorant of the full ramifications of never-ending population growth because none dare to risk being labeled a “Malthusian,” a derogatory term arising from the theory of another British economist named Malthus who, in 1798, theorized that mankind’s population would forever be held in check by food shortages. The theory led to the field of economics being mocked as “the dismal science,” and to this day economists steadfastly refuse to ever again consider the possibility of overpopulation.
That’s a pity because if economists considered the full implications of population growth – not just the strain on resources and stress on environment, but other economic ramifications too – they might recognize the effect that population density has on per capita consumption.
What does that have to do with trade? Free trade between two nations – one less densely populated like the U.S. and another more densely populated like China, Germany or Japan (4X, 7X and 10X as densely populated as the U.S., respectively) – results in the spreading of manufacturing work evenly across the combined labor force. But consumption patterns between the two nations are badly skewed by the extreme population density and low per capita consumption in the more densely populated nation. The result is an automatic trade deficit and loss of manufacturing jobs for the less densely populated nation.
It is a fact that the U.S. consistently runs trade deficits in manufactured goods with more densely populated nations like China, Japan, South Korea, Germany and a whole host of other nations, many of them very wealthy nations with high incomes (thus debunking the myth that trade deficits are caused by low wages). At the same time, the U.S. consistently runs trade supluses in manufactured goods with less densely populated nations like Canada, Australia, every single South American nation, Russia, and so on.
In fact, if the nations of the world are divided evenly around the mean population density, in 2009 the U.S. had a trade surplus of $102 billion in manufactured goods with the less densely populated nations. With those more densely populated (same number of nations), the U.S. had a trade deficit in manufactured goods of $422 billion!
The data is there for all to see and the correlation between population density and balance of trade in manufactured products is absolutely undeniable. This is the reason that, since our last trade surplus in 1975, our cumulative trade deficit is approaching $11 trillion and is rapidly getting worse. Yet not a single economist has the courage to even consider the subject.
Global capitalism has failed America because of this missing ingredient – the role of population density in eroding per capita consumption and the role of disparities in population density driving global trade imbalances. Capitalism should be our servant, not our master. Boundaries need to be applied to make that happen. In the early 20th century we learned that a boundary was needed to protect against the abuse of labor. In the latter half of the 20th century we had to set boundaries regarding abuse of the environment. Two boundaries remain to be discovered and implemented. First, measures must be taken (regardless of whether they are tariffs or import quotas or whatever) to prevent trade imbalances that will surely persist otherwise. And, secondly, capitalism cannot be allowed to rely upon population growth as an engine for economic growth, as rising unemployment and poverty will be the inescapable result, which is precisely where we’re headed.