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Beware of Friends Bearing Opinions

by r------ Sat Oct 4th, 2008 at 11:54:32 AM EST

Do FT journalists ever stop peddling their free trade, liberalisation and deregulation gospel?

To read Giles Merritt, a former FT journalist and current SecGen of a "Think Tank" based out of Brussels called "Friends of Europe," the very worst thing we can do, as Europeans facing the Anglo-American credit crisis, is meddle with our trade policy to the detriment of the gospel of trade liberalisation pushed by those very same Anglo-Americans over the past three decades.

Nobody really knows what caused the Great Depression of the 1930s, but its specter is haunting us now. Will the financial meltdown spreading around the world lead to a re-run of the events that followed the Wall Street crash of October 1929? The answer to this question lies ahead of course, but the clues we have are unsettling.


Nobody really knows what caused the Great Depression? Well, perhaps so; nobody really knows what caused the War of '14-'18, but knowledgable people know enough to make some very precise arguments, so much so that there are competing schools of thought. Ditto the Great Depression. "No one knows," but we have some very good ideas, and three main schools of thought. But this doesn't stop Mr Merritt from developing his thesis, a red herring of a thesis in the service of the animating and discredited ideology of the elite in his home country: neo-liberalism.

The crucial point is that even though historians argue over the complex causes of the Great Depression, they generally agree that it wasn't the Wall Street crash itself. Dramatic as that was, the panic in which corporate shares collapsed and financiers leapt from skyscraper windows was a fairly short-lived affair. By the early 1930s American capitalism was back in business and forging ahead once more. Wall Street had, after all, suffered similar shakeouts every 20 years or so since the 1840s.

Here, Merritt is taking sides in the debate on what caused the Depression, without letting on. There are generally three schools of thought on what caused the Great Depression. One, advanced by Milton Friedman (and subscribed to by Ben Bernanke, great student of the Depression), held that it wasn't the crash which caused the depression, but an inadequate response to that crash on the part of the US Central bank in the following period. The markets required greater liquidity, in order to offset the deflationary pressure put on assets and, eventually, goods and services, and to prop up banks in whom the public had lost trust, prefering to withdraw their funds (with good reason) and stash them in the mattress. A credit freeze ensued, and the economy collapsed. If all of this is sounding familiar, it's no wonder - this is the dominant interpretation of the Great Depression as seen through the eyes of Anglo-American financial elites.

But, it is not the only interpretation; in fact, there were two alternative explanations at the time on the continent, one from the conservative "Austrian School" led by Freidrich Hayek, which explicitly blamed easy credit and inflationary policies led in particular by the United States in the 1920's, as directly causing both the crash and the ensuing downturn. The credit boom was allowed to go on for far too long in the 1920's; the Depression (as well as the Crash) were inevitable. Another school, equally critical of the credit boom of the 1920's, came from the left and was typified by a German Socialist, Rosa Luxemburg, who argued that not only was credit used to build capital stock and accumulate ever more capital on the part of economic elites, but it was also used to give workers a false sense of well being, increase the burden of risk on their and their children's shoulders, and accentuate their poverty in the event their fortunes, ever more wedded to those of their Masters, took a turn for the worse. An additional criticism was the contribution of great income inequalities to the resolution of the crisis, via lack of confidence, on the part of those on the receiving end of inequality, in the institutions benefiting those on the upper rungs, starting with banks.

I think most of us see more than a few grains of truth in both what Hayek and what Luxemburg were saying in the last great global credit crisis. And even a little Friedman. But most of us will agree that we see precious little analysis, on the part of our press elites, which reflects either of these two schools. So, as usual, we will be treated to more Friedmanite prose to the exclusion of everything else.

(And it's not true that American capitalism was in the ealry 30's back to it's normal self. It took a few years for the deflationary spiral to take root, but people generally acknowledge 1932-1933, the heart of the "early thirties," to be the bottom, starting to grow only in 1934. Merritt is just plain wrong here.)


One of the major reasons that America's 1929 financial crisis turned into a global economic slowdown was shortsighted policymaking, first by the U.S. Congress and then by America's main trading partners. The Smoot-Hawley tariff introduced in 1930 by a Republican senator from Utah and a fellow-Republican congressman from Oregon to protect the United States from both farm and industrial imports triggered a global trade war. Britain retaliated with its system of imperial preferences. The protectionism that spread rapidly made scores of millions jobless, homeless and hungry across the planet.

Ah....that's right. The problems that "reforms" (deregulation and liberalisation) brought us via the credit crisis can only be solved by more "reforms". It had to come, eventually.

The law of unintended consequences quickly made itself felt, with the United States arguably hit hardest by its own misguided policy. American banks had lent generously to European industries after World War I, and when the latter were denied their U.S. export earnings they could no longer service their debts. By 1933 almost 9,000 U.S. banks had failed.

Ah, 9,000 banks failed because of protectionism? Imagine that. Talk about magical thinking.

Well, it's a good thing we have free trade today, because otherwise another 9,000 banks would fail. What's that? They're failing anyway? Trade has little to do with it? Well, don't let that spoil an Englishman's argument for free trade.They've been at it since the Opium Wars...

Now even more than then, thanks to globalization, international trade is the key to economic health everywhere... if the world's great trading nations begin to erect barriers to one anothers' goods and services, then they'll be doing far more damage to the global economy than any financial crisis ever could, however enormous the banks' and investment houses' recent losses.

Maybe we should just leave trade rules as they are, to demonstrate once and for all that liberalisation impacts little in a global crisis of confidence, one that was predicted long ago by many of us here, much like Luxemburg, Hayek and their contemporaries almost a century ago. What matter import when workers can afford to buy what is imported? What matter export when workers abroad can't afford to buy what is exported?  The Depression is often used as a bugbear by advocates of Trade liberalisation. It's time to put that fear-mongering to bed.

If there is to be a resumption of tit-for-tat protectionism, then the signs are that it will start in the United States. The perception among many American voters is that "unfair" competition from low wage countries in Asia is robbing the U.S. of jobs. Similar resentments in Europe have of late seen the European Union resorting to anti-dumping actions against allegedly underhand practices in China...

Allegedly?

Melamine anyone?

The seeds of a fresh round of protectionism may already be sown, yet no economies benefit more from booming international trade than those of the rich countries. American labor unions complain about the 7 million jobs lost every year to foreign competition, but in fact the last 12 years have seen a net jobs gain in the United States with an extra 23 million people employed.

Hmmmm...any thoughts on income growth over those magical twelve years there? Oh yeah, that's right...median income for those Americans has barely budged since 1994, year after Nafta passed. All the benefits of liberlisation go to the elites, all the risks to workers, and yet another limey neo-liberal wonders why there is political pressure for fairer trade.

The reason isn't hard to find. America and Europe have the know-how and the retail markets that are the main drivers of new industrial bonanzas like that of China. On average, only 15 cents in every dollar of Chinese exports' added-value stays in China, and for goods like laptop computers and other electronic gizmos that share can drop as low as 3 to 4 percent. Experts talk of the "smiley curve," in which the upward parts of the smile are a product's design cost, brand value and retail profit and the lowest portion of the curve the actual manufacturing process.

Look no further than the long ongoing current account deficit in the United States to see the bankruptcy of this position. The world's largest economy borrowed cash, goods and services from everybod else for three decades to fuel domestic consumption bankrolled by easy credit, and the painful unwinding has begun and is scaring everyone. Yet Merritt still wants to talk about Smiley curves.

Talk about being out of touch...

As a counter point, continental Europe, which maintained far more of its industrial base, relatively speaking, than the US, has no current account deficit to speak of. And the impaired assets its banks have their respective books which are now unwinding? Mostly Anglo-american.

With luck, the weeks and months ahead will see containment of the panic that is making global financial markets so dangerous and unpredictable. Still more luck as well as good judgement will be needed to stop the crisis spreading to world trade. Let's hope the policymakers have learned the lessons of the "hungry thirties."

Luck...your side is going to need a lot of it in the future if you hope to stay relevant.

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Bernanke's position is similar to Friedman's, but their prescriptions are different.  Bernanke's was more a direct assault on the gold standard, but still generally in favor of the traditional Keynesian activism, while Friedman pushed his "robotic Fed" idea about a steady increase in the money supply leading to steady growth.  I think history has shown Bernanke to be more-right, and Friedman admitted as much later in life.

Blaming protectionism is silly quite honestly.  Trade isn't nearly a large enough piece of the economic pie to cause a collapse of that magnitude.  GDP contracted by one-third, but trade was only about -- what, 15% of GDP?  And, really, tariffs simply aren't going to produce that kind of crash.

The causes can't be narrowed down to only one thing or another.  Was it the nature of incomes during the Gilded Age?  Was it contraction in the money supply?  Was it the logical result of an enormous credit bubble?

All of the above.

I don't think I'm opening any new doors to suggest that skyrocketing inequality and an increasingly crunched middle class should have a destabilizing effect on aggregate demand.  I think Friedman and Bernanke were both right to talk a lot about monetary policy accelerating the crash in output and employment because of further destabilization of demand through a combo of sticky prices and contraction.

Might the trade issue have damaged things?  I guess so, but, again, I think it's silly to suggest that tariffs caused it.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Oct 4th, 2008 at 12:25:27 PM EST
Bernanke's was also a much more nuanced take than Friedman's, which isn't terribly surprising given that Bernanke's never really spoken out much about his political views (although some have read hints at support for the Dems in some of his statements as Fed chairman).  Friedman, in contrast, was obviously much more into the political fights, and he had more of an agenda to push by attacking the central bank.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Oct 4th, 2008 at 12:34:43 PM EST
[ Parent ]
... government from a fiscal stimulus to a fiscal drag at the end of the 1920's.

A lot of people do neglect it, because a lot of the fiscal stimulus was by states and local communities engaged in road paving projects. However, with the dominant share of Government Spending during the 1920's was state and local government budgets, looking at just Federal budgets is a serious mistake.

Hell, its a serious mistake today, with state and local governments still representing a very hefty share of government expenditures on newly produced goods and service, which is the income injection.

Add the collapse of the 1920's housing boom, and the collapse of business investment in productive capacity, and there is ample General Theory income-multiplier explanation for a prolonged downturn.

So there's the fourth explanation of the Great Depression, a collapse of aggregate demand with such damage done to the finance sector that it was only the Government sector that had the capability of financing fresh injections into the expenditure-income loop.

The Great Crash of 1929 accelerated the collapse of many banks across the country, but given a collapse in demand for the product of industry leading to an accelerator-multiplier collapse of demand for productive equipment, a collapse in demand for home construction, a collapse in demand for agricultural products leading to collapsing incomes in the substantial minority of the population still working on the farm, and the conservative view of the Fed as an lender of last resort against sound assets, there would have been a banking panic in any event.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Oct 4th, 2008 at 03:07:28 PM EST
Some time ago I stopped listening to the wealthy/powerful because I realized that they would say/print practically ANYTHING in order to defend themselves.  Imagine what you might do if you were seriously concerned that all of the CHICKENS were getting organized and were going to rise up against their human captors/killers?  That's the current position of the ultra-wealthy.  They are very outnumbered by the poor/middle class and the internet is making mind-control VERY difficult.  ET isn't helping their cause.

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sat Oct 4th, 2008 at 07:26:36 PM EST


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Oct 4th, 2008 at 08:11:54 PM EST
[ Parent ]
Thank You.  Wish it was shorter.

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sun Oct 5th, 2008 at 09:59:21 AM EST
[ Parent ]
That's the story ... AFAIU, he told it all over the province. Of course, people didn't have the internets back then, and were willing to stand and listen to political speeches much longer than a lot of us are used to.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun Oct 5th, 2008 at 01:09:00 PM EST
[ Parent ]
RS, I think you're attacking the wrong enemy. I fail to see that free trade is the problem, with the problem rather being bad distributionary policies.


Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Oct 4th, 2008 at 08:12:12 PM EST
There are arguably multiple distinct problems with what has come to be known as "free trade." While it's true that some trade is mutually beneficial, declaring that all trade is mutually beneficial strikes me as an exercise in applying textbook theorems without taking into account real constraints in the real world.

The first problem is that "free trade," as peddled by wingnut commentators, include both unrestricted (and even untaxed cross-border movement of capital, and unrestricted trade in goods. These are two quite distinct policies, but are usually conflated by neolibs, because unrestricted trade in goods is usually - usually, but I think not universally - mutually beneficial. Whereas unrestricted and untaxed movement of capital is much more often a zero- or negative-sum game (but very good for the back pockets of people who pay the salaries of wingnut commentators).

But even unrestricted trade in goods can be problematic. One obvious example being strategic goods: Food, antibiotics, electricity and probably a couple of other things you could mention need to be in really stable supply. If a country is cut off from any of these goods for even a short period of time, it will suffer some very nasty Bad Things.

In those cases, a case can easily be made that security of supply trumps low price, and domestic industries in this sector must be protected - because to put one's faith in foreign suppliers is to hand those foreign suppliers (and the countries in which they are located) a firm grip on your balls.

Another obvious exception to the notion that Ricardian free trade is universally beneficial would be infant industries. Suppose you have a country - La Republica De Los Bananas - that has never produced ball bearings. Sure, it is possible that it might be able to get ball bearings cheaper by buying them abroad than by attempting to start up production at home. But this would be true for virtually any industrial good.

So, if La Republica De Los Bananas wants to industrialise (which quite a lot of non-industrialised countries do), they have to build up a comparative advantage in some industry. And doing that is certainly impossible when you have to slavishly open your markets to competition from established industries abroad.

Which domestic industries to favour, to which extent they are to be favoured and indeed whether to use trade policy to spur industrial development at all are obviously political decisions that have to be made in the context of La Republica De Los Bananas' social and industrial policies, so it's far from obvious that signing away the right to make them is A Good Idea.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 4th, 2008 at 09:48:20 PM EST
[ Parent ]
Right.

Even their sources and authorities, thinking of Ricardo and Locke, preface their remarks on trade with the phrase, "If a country hath a surplus ..."

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Oct 4th, 2008 at 10:08:31 PM EST
[ Parent ]
... is in what sense not about distribution?

It certainly is not about classical Ricardian Free Trade.

Start with the distribution of power to large corporations, and the income distribution follows suit.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Oct 4th, 2008 at 11:06:55 PM EST
[ Parent ]
BruceMcF:
Start with the distribution of power to large corporations, and the income distribution follows suit.

we have deified 'efficiency', and big entities outperform small ones, in the short term, using prevalent, externality-ignoring metrics.

it's the same dynamic as if i joined a co-op of neighbours buying bulk food to save money paying retail.

power in group formation extends by linear logic to explain and partly justify the 'corporate mentality' we see playing out now, where only a few solitary titans gobble up all and sundry.

efficiency...

i order something from the states, it looks cheap, though the shipping comes to as much as the object, it's still worth the outlay, so i order it.

then italian customs block it and want taxes from me to import it. they send me a 3 page form to painstakingly fill out. i call the hotline for help and there's a typically confused bureaucratic reply that leaves me as clueless as before.

i fill out the form, send it, wait another week, and lo, the exact same form arrives again, needing the operation to start all over.

by this point i have found a reasonably priced, though inferior substitute locally, and decide to ditch the futile process of dealing with a comatose bureaucracy. i expect they have sent it back, as that's what they threatened to do while chivvying me to hurry up and fill the form.

this kind of crap is irritating enough at this level, but what if it had been a big order of something perishable, or upon which my business was made or broken, and i'd be yelling like the wingnuts for free trade and all...

this story helped me to understand the fury righties, business groups, (confindustria) have against 'gubmint work' mucking up the smooth swift flow of goods and services. they have a valid point, this is the weak link.

of course this is just the head, the long tail leads to sweatshops and slavery, so fair trade is definitely more sustainable and just, but bureaucracies can be really, really inefficient, with good intentions, but sometimes corrupt, hopelessly stupid implementation.

my shaggy dog story of the day!

sure, corporations need taxing as they hoover up resources, in their insatiable quest for the maximum shareholder dividends, but the taxing process has to be as frictionless as possible, or the baying about 'efficiency', 'lower prices for the consumer' begins, and big is better when it comes to tying up courts, buying political compliance and legislation favouring special (preciousss) interests.

the battles in boardrooms and staterooms are behind closed doors, the public needs more transparency. inefficiency breeds in secrecy, the more that is out in the open, more and better ideas can emerge.

self-organisation...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sun Oct 5th, 2008 at 06:27:46 AM EST
[ Parent ]
FTA are about getting countries to agree on surrendering their sovereignty over wealth flows across their border. Concessions on which widgets will be allowed to go from one country to another are just the bribe used to get the wealth agreement.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun Oct 5th, 2008 at 01:06:03 PM EST
[ Parent ]
I'd first say that we don't have "free trade" in any sense of the term other than the titles of the agreements.  We have corporatist bullshit.  Free-ish flow of capital, but not of labor, and not with equalized rules of the road from country to country.  And certainly not with an offsetting mechanism for people who lose that would maintain Pareto efficiency.

Others are right to note that trade is a form of redistribution.  All policy decisions inevitably involve redistribution, whether money or rights or simple degrees of leverage.  That's why they're in the political arena.

The real enemy is a lack of assault on the militant free-marketeer ideology backing the corporatist political regime over the last 30 years.  When ideas go on long enough without necessary criticism, they eventually become religions, and that's what has happened here.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 5th, 2008 at 10:57:15 AM EST
[ Parent ]
And, adding, Metatone made a good point -- several times, actually -- when he noted how economist (real ones) had been miserable failures at fighting the dominant view in DC.  With some important exceptions (Stiglitz, Krugman, DeLong, etc), that's absolutely true.  The enemy and the failure of the good lays at the feet of too many in my field, and it's time they stood up and shouted the nutjobs down just as academics in other areas have started to.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 5th, 2008 at 12:30:05 PM EST
[ Parent ]
I call Merritt's "analysis" stupid on its face simply because he does not even consider WWI. That war decimated proto-EU financial and real economic so-called growth in the decade proceeding in every fucking dimension of investment. Total annihilation. He's full of shit, too, by implying negotiation of gold trade PROTECTIONISM among proto-EU central banks and the US did not adversely  inform domestic policies to MONOPOLIZE and INFLATE  (Schelisnger re: Warburg et al, i.e. Morgan AND Hoover "progressives") domestic commodity prices that otherwise would collapse given dependence on international trade.(over-production in every nation outside westworld).

Diversity is the key to economic and political evolution.
by Cat on Sun Oct 5th, 2008 at 06:19:42 PM EST


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