Former World Bank Chief Blames Greenspan & Bush for Financial Crisis

April 28, 2008

I don’t disagree with Joseph Stiglitz’s analysis as far as it goes, but he altogether misses the main cause of the U.S. financial crisis: our “free” trade policy which has produced a $700+ billion per year trade deficit and a cumulative $9 trillion trade deficit since 1976. But what else would you expect from an economist? To lay the blame where it really lies would be to disavow their beloved “principle of comparative advantage,” the flawed, 200-year old theory upon which globalization is based.


“Global economy a world of hurt for U.S. workers” by Cynthia Tucker

April 26, 2008

This op-ed piece is by Cynthia Tucker, columnist for the Atlanta Journal-Constitution.  She has appeared on the PBS News Hour with Jim Lehrer many times over the years and is a highly respected journalist.

She absolutely hits the nail on the head with this piece in which she takes John McCain to task, but her criticism could apply equally to virtually any politician.  This editorial is a must read!  Following are a couple of key quotes:

“The campaign stop, part of McCain’s tour of “forgotten places,” highlighted the senator’s reputed penchant for straight talk, for refusing to pander no matter how unpopular his message. “Protectionism and isolationism have never worked in American history,” McCain said, according to The Associated Press.

He may be right, but McCain’s message would be more palatable if he were offering hard-pressed workers something other than the same dried-out message about education and job training. Retraining for what?”

Exactly!  I’ve wanted to scream the same question at the television every time I hear another politician suggest “job retraining” for displaced workers!  And I can’t let McCain’s lie that “Protectionism and isolationism have never worked…” pass.  The fact is that for the first 170 years of our nation’s history, we relied upon tariffs for all of our federal revenue and to afford domestic industry the protection it needed to grow.  As a result, we built ourselves into the most powerful, wealthy nation the world had ever seen – its preeminent industrial power and the envy of every nation.  By contrast, since turning toward “free” trade with the signing of the Global Agreement on Tariffs and Trade in 1947, our nation has been reduced to a skid row bum, literally begging the rest of the world for cash to keep us afloat.  McCain was right when he said he knew almost nothing about economics. 

“Here’s what the new economy has done for the average American: precious little. In 2000, median yearly household income, in 2006 dollars, was $49,447, according to The Wall Street Journal, which crunched data from the Census Bureau. By 2006, median household income had fallen to $48,223.”

In 1973 it was $40,000.  Take away the enormous increase enjoyed by the top one or two percent, and factor out the understatement of inflation by the Consumer Price Index, and you’d find that it has actually declined since then.  In other words, Americans are worse off today than they were 35 years ago. 

“… Princeton economist Alan Blinder, a longtime proponent of cross-border commerce, now says that it will create more severe social and economic upheaval than he once believed. He predicts that 30 million to 40 million American jobs are likely to be shipped overseas in the next 10 to 20 years, some of them in white-collar occupations such as financial analyst, microbiologist, graphic designer, radiologist and, oddly, economist.”

Alan Blinder is a former Fed governor and a long-time cheerleader for “free” trade and the supposed “benefits” it was going to bring to America.  Thanks for nothing, Alan!

“Those who still put great faith in free trade — Democrats and Republicans alike — need to look beyond their platitudes to see the displacement and anxiety it has created among middle-class workers. Their worries are not born of ideology but of a hard and bitter experience that has left them anxious about the future. When the factory where you’ve worked for years shuts down or your company stops offering health insurance, you’re not much interested in hearing about Adam Smith and theories of comparative advantage.”

It’s especially encouraging to hear someone call into question Ricardo’s (not Smith’s) principle of comparative advantage, the economic theory upon which the concept of “free” trade is based!

It’s great to see more and more prominent economists and journalists beginning to wake up to what’s being done to our country by “free” (blind!) trade. 


Are You Better Off Than The Previous Generation?

January 18, 2008

Yesterday, GM announced that it is offering buyouts to 46,000 older workers so that, under the terms of their new contract with the UAW, GM can replace them with workers that will be paid substantially less. 

On page 30 of Chapter 1, I asked the question, “Are you doing as well as someone in your position thirty years ago?”  This action by GM is a perfect example.  The people hired to replace these older workers will probably be very happy.  They’re probably people who have been working other jobs for $8 an hour, and now feel like they’re really moving up in the world.  But, compared to the preceding generation, they’re taking a very big step backward. 

This is the problem with our economy.  The downward spiral is slow enough that younger workers can’t see what’s happeing to them.  Only someone who’s been in the workforce for many years can put today’s events into proper perspective and see the damage that’s been over the years. 

This action by GM will do absolutely nothing in the long term to improve its competitive position. Foreign competition will simply respond by lowering their prices. GM’s problem is the same problem plaguing Ford and Chrysler – our trade policies. It has nothing to do with cost. If it did, wealthy countries with highly paid workers like Japan and Germany wouldn’t be killing us in the automotive market.Rather, the problem is that our trade policies are based on a flawed 200-year old economic theory of trade known as “comparative advantage.” It is flawed because it does not take into account (because the author could not foresee) what happens to per capita consumption when nations become very densely populated, or what happens when a reasonably-populated nation attempts to engage in free trade with such a nation.

As a result, we have an enormous trade deficit that has nothing to do with Americans being over-paid on under-productive. It has nothing to do with the quality of our cars. It is structural and irreversible without employing a tariff structure that is indexed to the population density of our trade “partners.”