The Paradox of Unthrift Waiting for another – doubtless very different – Keynes

The cornerstone of John Maynard Keynes’ General Theory of Employment, Interest and Money is the rejection of one of the pillars of classical economics, and indeed of virtue itself classically understood. That pillar is saving. In that classical world, saving is a fundamentally important action, crucial to economic survival and growth. From it flows the wherewithal to outlast economic downturns – “saving for a rainy day” – and from it flows capital which is then available for investment, either by the saver or by someone else, to whom the saver either lends or extends, in the form of venture capital. This was orthodoxy, not only for economists, but for everyone living during the age of scarcity, prior to the Industrial Revolution.

Keynes turned this economic orthodoxy on its head, when he popularized the notion of the paradox of thrift. In this understanding, saving actually is harmful to the economy because it withdraws money from circulation that otherwise would go toward consumption. In other words, saving breaks the link between production and consumption which is basic to the circular flow of the economy. Speaking of the individual saver, Keynes wrote, “For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself” (General Theory, p. 84).

Keynes wrote during the time of the Great Depression, when economists (and everyone else) were knocking their heads trying to explain the utter collapse of economies around the world. The conviction of many was that classical economics had not predicted the collapse and could not explain it. They came to these conclusions: At bottom, the problem was a collapse in demand; this was caused by, among other things, saving; demand needed to be restored in order for supply, and thus labor, to be restored. So everyone followed Keynes’ advice and turned to government to make up the shortfall through deficit spending.

What was missing in Keynes’ analysis and indeed in the solutions put forward to deal with the Great Depression was an understanding of the drastic change that had taken place in the economy as a whole which had been wrought by the Industrial Revolution. It was a change pointed out, on a different level, by José Ortega y Gasset in his book, The Revolt of the Masses, published in 1930.[1]

Hitherto the economy had run in terms of the circular flow of production and consumption at the level of the household. These two had to be in basic alignment, with the balance tipping in favor of production, or the household would not survive. Mr. Micawber put it succinctly in Charles Dickens’ novel David Copperfield: “Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

But the Industrial Revolution brought in its train the fabulous capacity to produce, far beyond anything previously imaginable. This production in turn generated wealth for the masses beyond anything that had gone before, which Mr. Ortega y Gasset brings into clear relief. But it also upset the balance of production and consumption, of the circular flow, by enabling the divorce of production from consumption: rather than being producers first, people became consumers first, and all generations since then have been characterized, not by what role they play in production, but by the fact that they are all consumers.

This consumption without regard to production has been advancing ever since the late 19th century, and it has done so through the political process and universal suffrage. Whatever else it did, the Great Depression, and indeed the Second World War, generated an exponential increase in the number and volume of programs and entitlements enabling precisely consumption without regard to production.

The Industrial Revolution did not create this divorce, but it did facilitate it, by virtue of the exponential increase in productivity it engendered.

Keynes took advantage of this possibility by 1) blaming saving, thus classical economics, for the divorce, 2) rather than restoring this balance, working on the basis of it, and 3) proposing an alternative: demand-side economics, which is deficit spending so as to facilitate consumption and in this manner generate production.

So the Keynesian Revolution hijacked the Industrial Revolution, in doing so solidifying the divorce. But the idea that demand can create supply is only an illusion made possible by the great productivity enabled by the Industrial Revolution. For that capacity to produce, seemingly as if by magic, does not nullify the fact that individual and household production still precedes consumption and enables it. All the factory systems and automation and whatever else is involved in the modern production process does not change a simple reality: it is still aggregates of networked households that do the production, and consume the results of the production. Supply still creates its own demand.[2]

Which is why we are waiting for a new – doubtless very different – Keynes. The divorce between production and consumption has to be resolved; the two need to be brought in balance again, because the alternative is nothing other than ever-increasing debt. For where does the vaunted Keynesian multiplier-inducing pump priming come from, other than deficit spending, i.e., government indebtedness? Mountains of it. And by the same token, the global-supply-chain-structured world economy[3] has broken the circular flow of national economies and turned the world into regions of production and consumption, whereby the link between the two is consciously severed, for the gain of those occupying the nexuses of the transnational framework, in the process generating massive trade deficits, all of which are “financed” by – that’s right – more indebtedness.

All Keynes did was acknowledge the reality of what was already transpiring but had yet to receive any theoretical justification from economists. Our – doubtless very different – St. Benedict will need to provide an economics that recognizes this reality and instead shows how to redress the imbalance wrought by politics and indeed by changed social mores. That will not be easy, for it will require the complete overhaul of our system of values. But who was St. Benedict, other than someone who enabled the conservation and transmission of civilization itself? Nothing less is needed.

(for more, see also The Problem of Saving)


[1] For this and the following, see the previous article.

[2] This will continue to hold true even in the new age of automation ahead of us, in which robotics will play the leading role – Blade Runner notwithstanding.

[3] Paraphrasing Rousseau, I would say that “Man was born free but everywhere is in global supply chains.”

Border-Adjustment Sleight of Hand? Sense and Nonsense on the Border Adjustment Tax

The trickle of articles discussing the proposed Border Adjustment Tax (BAT) has turned into a veritable flood. Not surprisingly, the lion’s share of these articles oppose the idea of border adjustment. It would be tedious to run through them all; suffice it to say that the primary argument is that such a tax would raise the price of consumer goods.

That of course is true. But that would not be such a bad thing. For, what is the point of cheap consumer goods if the purchasing power required to buy those goods has been shipped overseas, in the form of productive labor, otherwise known as jobs?

Is this not the Achilles’ Heel of the current structure of the division of labor? We have divided up the world into rich consumption-oriented regions and poor production-oriented regions, and have allocated production capacity accordingly. The problem with this arrangement is, it has divorced production from consumption: production does not finance consumption, as it should in a healthy economy.

What should happen in such an arrangement is that the low-wage, producer countries should be seeing a steady accretion in purchasing power, reflected both in higher wages and appreciating exchange rates, which would serve to bring trade relations into balance by allowing them to consume more and so import more. The rich consuming countries would constitute the flip side of this: they would produce more and so export more.

That would be a healthy arrangement for international trade. But the current system does not allow for that. It keeps low-wage producer countries at the low-wage end, and obstructs their consumption; conversely it keeps rich consumer countries consuming at the same levels, whether through asset-bubble-financed consumption (which led to the housing crisis of 2007-2008) or simply by lavish wealth redistribution schemes, which in effect redistribute wealth from the future to the present, because they are financed in increasing degree by deficit spending, otherwise known as debt.

So the gap between production and consumption is being bridged by indebtedness. Which is one of the reasons why the world has generated such a massive debt overhang. And no matter how much one hears politicians crow about “the crisis being over” and “the future looks bright,” the debt overhang only gets more overhangy: In 2016 global debt continued its unsustainably onward and upward course.

We owe it to ourselves? Let’s not kid ourselves. Borrowing is not a shuffling of money from one drawer to another, or, as the Dutch say, “broekzak-vestzak” (pants pocket-shirt pocket). No, borrowing is receiving money in exchange for a promise to pay at some future date. In other words, it is not that we owe it to ourselves; rather, we owe it to the future – to future generations, who are on the hook for what we, collectively, borrow in the present.

The idea behind all sound borrowing is that it goes toward investment, not consumption. (Borrowing for consumption can only be permitted if sufficient reliable future income stands over against it – hence, a form of cash flow management.) Borrowing should be done in order to finance future, reliable, income – a return on investment.

Our present global trading system fosters irresponsible borrowing – borrowing for consumption without heed to the capacity to repay. In fact, it is built upon such borrowing. Which explains its unsustainability. Global indebtedness continues to burgeon, as we just pointed out. And fueling this indebtedness is the production/consumption divorce, which is reflected in trade imbalances. These imbalances are simply measures of indebtedness, for all trade deficits are “financed.” Which is another way of saying, paid for by debt rather than by a reciprocal performance.

We have gone over this many times in previous posts. The funny thing is, you won’t hear a word about it in the discussions regarding the BAT. At least, not on the part of its opponents. For them, all that matters is that it raises prices on consumer goods.

As far as popular treatments go, one of the most adept criticisms of BAT was published on April 16 in the Wall Street Journal: “The Border-Adjustment Sleight of Hand,” by Veronique de Rugy and Daniel J. Mitchell.

For starters, de Rugy and Mitchell go after one of the main arguments pushed by the pro-BAT forces, that the tax will cause the dollar’s exchange rate to rise, and so neutralize the effect on imports. Hence, any rise in prices of consumer goods will be wiped out by the rise in the dollar’s exchange rate, which has the effect of lowering prices of imported goods. De Rugy and Mitchell throw cold water on this notion. The data, they say, argue against any such compensating effect taking place, especially in the short term.

I thank the authors for making this argument. Because if the BAT has no effect on trade relations, then – to paraphrase Flannery O’Connor – “to h/*& with it.” What is needed is precisely an arrangement that will do something about trade imbalances, and if the BAT won’t, then let’s get something that will.

But de Rugy and Mitchell go on to argue that the BAT will not do anything to affect trade relations anyway. They do so by pointing to the effect Value-Added Tax (VAT), another kind of border-adjusted tax, has had on trade. In their view, VAT has done nothing to skew trade relations one way or the other.

Here’s the nub of their argument:

The claim is that VATs give foreign companies an advantage. Say a German company exports a product to the U.S. It doesn’t pay the American corporate income tax, and it receives a rebate on its German VAT payments. But an American company exporting to Germany has to pay both—it’s subject to the U.S. corporate income tax and then pays the German VAT on the product when it is sold.

Sounds horribly unfair, right? Don’t be fooled. Like magicians, those making this argument are distracting the unwary, hoping that nobody will notice the trick.

Here’s the real story: What matters from a competitive perspective is whether the playing field is level—and it is. When the German company sells to customers in the U.S., it is subject to the German corporate income tax. The competing American firm selling domestically pays the U.S. corporate income tax. Neither is hit with a VAT. In other words, a level playing field.

What if an American company sells to a customer in Germany? The U.S. government imposes the corporate income tax and the German government imposes a VAT. But guess what? The German competitor selling domestically is hit by the German corporate income tax and the German VAT. That’s another level playing field. This explains why economists, on the right and left, repeatedly have debunked the idea that countries use VATs to boost their exports.

While this argument sounds convincing, it overlooks some essential information. In fact, it focuses on one effect only and totally overlooks another. So it’s not sleight of hand that’s the problem, it’s short-sightedness. Granted, in this example there is a level playing field in America, and an equally level playing field in Germany. But that’s the problem – there are two playing fields. On the American playing field, you have no VAT, but on the German one, you do. The question is not so much whether individual German products are advantaged or disadvantaged vis-à-vis their American counterparts, but whether Germany is shifting its entire playing field to the advantage of producers – both German and American – and disadvantage of consumers – both German and American. And that is what’s happening. Germany, and other countries that employ VAT, have made it more difficult to consume in their countries. Therefore, they end up overproducing, and shipping their excess production to foreign countries, mainly the United States. It is this that leads to the trade imbalances we have been harping on and will continue to harp on.

Here is an overview of US trade imbalances with key trading partners in 2014, taken from the Wikipedia article, “List of the largest trading partners of the United States.” Firstly, notice that the overall US trade balance is in deficit by a $734 billion. That’s an additional $734 billion in debt, rung up in just one year. Add that to the federal deficit and you really do have a twin-deficits problem.

But notice also that all the major bilateral trade deficits are with countries that have a VAT.

Rank Country/District Exports Imports Total Trade Trade Balance
World 1,454,624 2,188,940 3,643,564 -734,316
1  China 115,775 462,813 578,588 -347,038
 European Union[3] 270,325 416,666 686,991 -146,340
4  Japan 63,264 132,202 195,466 -68,938
5  Germany 49,362 114,227 163,589 -64,865
3  Mexico 230,959 294,151 525,110 -63,192
15  Ireland 9,556 45,504 55,060 -35,948
16  Vietnam 10,151 42,109 52,260 -31,958
11  Italy 16,754 45,210 61,964 -28,456
6  South Korea 42,266 69,932 112,198 -27,666
18  Malaysia 11,867 36,687 48,554 -24,820
9  India 21,689 45,998 67,687 -24,309
21  Thailand 10,573 29,493 40,066 -18,920
8  France 30,941 46,765 77,706 -15,824
12   Switzerland 22,701 36,374 59,075 -13,673
10  Taiwan 26,045 39,313 65,358 -13,268
27  Indonesia 6,037 19,203 25,240 -13,166
2  Canada 266,827 278,067 544,894 -11,240

Is that coincidence? We think not. Of course, VAT is not the only factor involved in trade deficits. There is also the infamous currency manipulation, as well as factors such as forced savings. I have gone over these in previous posts, and the reader would do well to apprise him- or herself of them.

The fact of the matter is, the BAT – or something like it – is direly needed to offset these ongoing trade deficits. Of course, there will be a price to pay, in the form of higher prices for consumer goods. That is why representatives of industries ranging from retail sales to the Koch Brothers to “big oil” oppose it. But higher prices for consumer goods will of  necessity reduce consumption vis-à-vis production and help bring that relationship more in line with trading partners, thus helping rebalance trade. Granted, it would be better if those other countries would eliminate their border-adjusted tax regimes, but that is not in the offing. Something has to be done, and this is better than nothing.

 

A Monetary Solution to Trade Imbalances? Gilder and the Gold Standard

The wait continues regarding the tax reform proposal to come out of the White House and be taken up by Congress. Despite the headlines dominated by more peripheral matters, tax reform is shaping up to be one of the cruxes to the success of the new administration. It is not simply a matter of reducing tax rates, or eliminating loopholes, or otherwise rendering the tax code more transparent and equitable, as important as those things might be. It turns out that tax reform is also crucial to combat the out-of-kilter trade arrangements that not only are strangling the US economy but also are perpetuating inequitable and exploitative terms of trade, at both ends of the trade relation, for both developed and developing countries.

How is tax reform relevant to this question? By virtue of one of the key proposals now being discussed: the border adjustment tax. We discussed this, and its importance in terms of trade relations, in a previous post.  As of this writing, the prospect of its being incorporated into the tax reform proposal taken up by Congress is up in the air. One report even speaks of it being on “life support.” If it, or something like it, does not come along, something else, most likely more draconian, will probably take its place. Something more like traditional protectionism.

But there are other proposals being floated likewise intended to counteract the cockeyed trade regime with which the world is now saddled. Conservative icon George Gilder has one for us that merits consideration. Gilder’s focus of late has been money, as evidenced by his 2016 book The Scandal of Money: Why Wall Street Recovers but the Economy Never Does. The burden of the argument is that floating exchange rates are the bane of the modern economy; our economic issues can only be rectified by a return to the gold standard. Floating exchange rates, in this version, are the product of government-controlled money, and as the Friedrich Hayek-authored epigraph has it, “The source and root of all monetary evil [is] the government monopoly on the issue and control of money.”

In his book, one of the claims Gilder makes is that the accusation against China as being a currency manipulator, is specious. Quoting John Mauldin, Gilder asserts that “Trump and all those who prattle on about Chinese currency manipulation have the economic comprehension of a parakeet” (p. 40). But Gilder, at least on this score, has had a change of heart. Writing in The Federalist, Gilder confesses “I was wrong.” Trump’s economic comprehension, apparently, does exceed that of a parakeet. In fact, he is on to something – though he does not quite know what. “World trade is no longer expanding for a reason, and Trump has put his finger on it. That reason is a combination of crazy quilt trade pacts, disguising wild and wooly monetary manipulation.”

So Gilder puts his finger on what Trump already put his finger, refining what he implies is a wooly argument. It is not the “crazy quilt trade pacts” that are the problem, so much as the “wild and wooly monetary manipulation” that they ostensibly conceal. Gilder’s vision is of a world in which speculators in the currency trade generate deranged exchange rates, wild swings that make a mockery of economic fundamentals. “Currency trading is a speculative orgy that fails to correspond at all with relative productivities of workers, or comparative advantages between countries, or purchasing power parities between different markets.”

For example, US workers have lost their jobs – because the Japanese yen went from 80 to the dollar to 300 to the dollar and back, and because the euro has fluctuated 20% vis-a-vis the dollar: “A worker who lost a job because of the global economy might as well have been hit by lightning. No rhyme or reason explained it. What we call a crisis of trade is really a scandal of money.” NAFTA was a big mistake, not because of the specifics of the deal, but because it led to Mexican peso devaluation: “No entrepreneurial creativity or worker efficiency or technological virtuosity could dent the overwhelming impact of the drastic relentless change in the unit of account. It emitted—as Ross Perot put it—a ‘giant sucking sound’ symbolizing a major reorganization of North American manufacturing. Yet the entire costly and tempestuous change was mostly an effect of monetary speculation.”

Hence, the global trade imbalances which have precipitated the mass transfer of production and capacity and thus jobs have been caused by floating exchange rates. The solution, as one might surmise from such a diagnosis, is to eliminate them. “So long as central banks possess the power to change currency values virtually at will, free trade cannot be either fair or efficient.”

Let us take note at this point, that we have added a person of interest to the list of currency malefactors. To the currency traders, the “10 international banks that do 77 percent of the exchanges,” Gilder has added central bankers. But this does not yet exhaust Gilder’s list. Where are the politicians? Here they are: “With money controlled by politicians in the guise of central bankers, it cannot serve as an objective measuring stick of commerce.” So central bankers are really politicians – essentially giving us three categories of malefactors. Which is why Gilder endorses Hayek’s assertion that it is government-run money that we are dealing with.

Gilder’s solution: “We Need A New Bretton Woods Agreement. ” Let’s take a look at that. Bretton Woods was the post-World War II monetary arrangement whereby the dollar, tethered to gold, served as the reserve currency for the countries of the world’s various domestic currencies. We will be exploring the concept of a reserve currency more fully in a future blog post (for now, these posts will suffice). The idea of a reserve currency is to function as “real” money in the banking system, so that monetary issue is limited to some multiple of reserve currency holdings. In other words, in the Bretton Woods framework, domestic currency issues were restricted by the amount of dollars held by the banking system, mainly the central bank. The amount of dollars, in turn, was restricted by the requirement of gold redeemability, with the price of gold fixed at $35 per ounce.

This would eliminate both inflation and deflation: “The best way to obviate both inflation and deflation is a global agreement to tie currencies to gold in the spirit of Bretton Woods.”

For all the respect I have for Mr. Gilder’s work – and it is a lot: his Wealth and Poverty made a permanent impression on my thinking, back when I was a wet-behind-the-ears Peace Corps volunteer – I think he claims too much here. The problem is that he posits precisely what he needs to demonstrate: that a commodity money standard, such as the gold standard, brings with it price stability. Certainly, tying domestic currencies to gold would eliminate their fluctuations vis-à-vis one another, but that is not the same thing as saying that prices would cease fluctuating. Quite the contrary.

During its heyday in the 19th century, the gold standard operated in terms of the so-called “automatic mechanism,” with gold flows settling imbalances between trading regions. Not between countries per se, but regions – because in the framework of the gold standard, borders vanish and the participating countries become locked into a single economic unit. At least, theoretically; practice was different, as we shall see.

So then, where countries tied their currencies to gold, and gold flows were allowed to occur without hindrance, and where corresponding trade flows of goods, services, labor, likewise were allowed to occur without hindrance, there you had the properly functioning automatic mechanism. And within this mechanism, gold flows are triggered by interest rates. Where interest rates are high, there gold flows. What leads to shifts in interest rates? Economic performance. Interest rates are raised where economic performance is lagging, and reduced were economic performance is buoyant.

What was the result of such actions? It has everything to do with the reserve function of gold in this system. The money supply is tied to gold; the more gold held by banks, the more money could be issued (a healthy multiple was considered to be two to three times the amount of gold reserves). Gold inflows allowed for monetary expansion, hence increased lending and thus increased investment and expenditure, while gold outflows reduced the money supply, tightened lending conditions, and throttled economic growth. In this way, economic regions were kept in balance: where growth was occurring it would automatically be restrained, and where contraction was occurring, the economy would automatically be stimulated.

Trade imbalances could not arise under such a system, but there was a price to pay: inflation and deflation. Where the money supply was allowed to expand, there you had inflation; and where the money supply was forced to contract, there you had deflation. Inflation and deflation was built into the gold standard with its automatic mechanism. Mr. Gilder’s assertion that a gold standard eliminates price fluctuations is totally mistaken. A gold standard functions precisely by triggering inflation and deflation.

There is more. The broader economy, in this system, is tied to the amount of gold held in reserve. In other words, economic growth, population growth, and attendant phenomena depended upon the vagaries of gold mining production as to whether they could even occur or not.

But of course, the 19th century was also the age of the social question, the silver question, the labor question, the suffrage question. All of these questions were tied to the gold standard with the restriction it inherently placed upon economic growth. The labor movement arose in response to that restriction, as did expansion of suffrage: for politicians realized that much hay was to be made by appealing to that ever-expanding voting bloc of disgruntled workers subjected to the whims of gold flows and gold reserves.

In response to incessant social and political agitation, there came the institution of central banking, the goal of which was to mediate between these social forces, on the one hand, and the dictates of the automatic mechanism, on the other. Increasingly, the pound sterling was considered to function as a substitute for gold, enabling money supplies to expand accordingly. But like the post-WW2 dollar standard, this made the world dependent upon sterling, and countries like Germany chafed under that dependency. The sterling standard gave the UK an “exorbitant privilege,” as they say, and provoked rivalry with Germany that ultimately led to the First World War.

Things got even worse in the aftermath, as war reparations along with the devastations of war led to the ascendancy of the US, which, in accordance with the dictates of the day, received in payment mountains of gold. But despite copious amounts of lip service, the automatic mechanism was not allowed to reassert itself. Instead, it was during the 1920s that the entire ideology of “price stability” and “full employment” began to be developed and implemented by central bankers, and the key to this was to keep all that gold from entering the financial system, provoking an unsustainable boom, or, even worse, allowing it to flow back to the countries from whence it came, as those countries tried to export their way to prosperity. The US, of course, had always practiced protectionism and now continued to do so, essentially consigning countries like Germany to relative penury and sowing the seeds for the Second World War.

What needs to be realized is that any system of currency which short-circuits the feedback mechanism (Jane Jacobs’ term) of currencies vis-à-vis one another, like the gold standard did, only substitutes another feedback mechanism. If one does not wish for fluctuating exchange rates, one should welcome the inflation-deflation whipsaw, because that is the alternative means for rectifying imbalances. And where such a whipsaw mechanism is politically unfeasible, as in any developed democracy it will be unfeasible, then the alternative is stagnation, as imbalances are allowed to build up on bank balance sheets in the form of unredeemed debt.

These are our alternatives. There are no others. The dream of a return to the gold standard should be laid to rest. Besides, the likelihood that such apparitions from the grave will be given new life is probably zero. Let’s spend our time talking about feasible alternatives.


More on the gold standard can be found in these posts and in these excerpts from my book Follow the Money: The Money Trail Through History. More on floating exchange rates can be found in these posts.

The Shape of Things to Come?

The fledgling Trump administration has been greeted by an explosion of resistance on the part of the Left. The Democratic Party has shown its antipathy in various ways. For one thing, many Democratic members of Congress declined to attend the inauguration. For another, Senate Democrats have delayed the appointments of President Trump’s cabinet appointees, even though they cannot block them. On his first day of office, President Obama had seven cabinet appointments approved by the Senate; President Trump had two.

These are pinpricks. Something much more substantial, if not in terms of government processes, then at least in terms of imagery, was the Women’s March on Washington, conducted on the day after the inauguration. I must say, I had a hard time discerning what exactly this protest was about. At first glance, given the various forms of costume worn by many of the participants along with the rather graphic and potty-mouthed language flaunted by various speakers, the event was difficult to take seriously. It would seem that there was a message there for President Trump, in response to the notorious recording of his words expressive of sexual harassment. But that particular message already loses its force when one recalls that President Bill Clinton was credibly accused of multiple instances of, not words, but actual acts of sexual harassment, and that these very same forces of feminism not only did not protest his presidency, but defended it.

Indeed, there was something more substantial at stake in this protest. It will form a battleground throughout the time of the Trump administration. I speak of abortion rights. This march was a down payment on the pressure that will be brought to bear when Supreme Court nominations take front and center, as they will before long. For all intents and purposes, feminism is abortion rights; the rest is window dressing.

Be that as it may, in all of the splash coverage provided by the news media, not only of this event but also of such irrelevancies as crowd size at, and viewership of, the inauguration, some monumental events have been taking place that have not received nearly the same coverage. Perhaps this is a good thing, for if they received the attention they deserve, events like the Women’s March on Washington would fade into the background, in favor of a strategy geared more closely to actually regaining the influence that has been lost in hitherto key constituencies.

Allow me to elucidate. On Monday President Trump met with various union representatives. Now we all know that for ages, unions have supported the Democratic Party. But after this meeting, the union leadership expressed sentiments that completely confound this traditional arrangement. It seems that Donald Trump is serious about conducting business in an entirely new way, outside the traditional constraints and folkways that have governed Washington for lo these many years.

Consider the statement made by Sean McGarvey, president of North America’s Building Trades Unions and, among other things, a contributor to the Huffington Post:

We just had probably the most incredible meeting of our careers with the president and the vice president and senior staff, when the president laid out his plans about how he’s gonna handle trade, how he’s gonna invest in our infrastructure and how he’s gonna level the playing field for construction workers and all Americans across this country. And then took the time to take everyone into the Oval Office and show ’em the seat of power in the world… The respect that the president of the United States just showed us — and when he shows it to us, he shows it to three million of our members in the United States — was nothing short of incredible, and we will work with him and his administration to help him implement his plans on infrastructure, trade, and energy policy so that we really do put America back to work in the middle-class jobs that our members and all Americans are demanding.

Other union leaders’ comments echoed this sentiment. When the president announced to them that he was terminating the United States’ participation in the Trans-Pacific Partnership (TPP), they applauded. One leader even spoke favorably of President Trump’s controversial inaugural address, saying that it was “a great middle-class address… It hit home both for the people that have been hurting… it was a great moment for working men and women.”

This is stupefying. What it portends, if President Trump and the Republicans in Congress follow through on their promises and implement job-friendly policies, is a massive shift in the political landscape, as the mainly white working class abandons the Democratic Party and lines up with the Republicans. But such has been in the offing for some time; it only took someone with the, shall we say, chutzpah of Donald Trump to actual make this happen.

The focus of progressivism generally, and the Democratic Party in particular, is no longer with the class struggle, which was their original raison d’etre. The focus has shifted to identity politics with its potpourri of multiculturalism and various aggrieved groups, minority or otherwise, the attention of which is directed not so much to economic class than to the criteria of diversity and an understanding of human rights wherein government-funded consumption takes the place of the right to work.

We have documented the symbiotic relationship between neoliberal capitalism and this multiculturalist identity politics in previous posts, particularly this one. What needs to be realized is that this new coalition is incompatible with the old one, the one in which the working class formed the core constituency. In fact, this new coalition is demonizing the old working class, while the president the workers helped to elect is routinely referred to as a “fascist dictator,” perhaps because of the old-school working-class-oriented policies he is enacting. After all, they are so very industrial. You know, sooty.

The question for the new progressive coalition is, having kicked the working class to the side, what is the game plan now? Is it going to be these showy, frothy marches? If so, it reminds me of the following scene from the movie Rango:

Trumponomics and the Great Rebalancing

Donald Trump’s election victory on November 8th is now a fact. Reactions to it have not been lacking, of course. On the economic front, they have ranged from the cautiously optimistic to predictions of utter doom. For their part, the financial markets went from downturn to upturn in short order (as chronicled here by Jerry Bowyer). But the financial markets, disconnected as they are from the real economy, are not very good arbiters of broader economic trends. What is important is the concrete policy decisions the Trump administration is going to make with regard to trade.

This is not to diminish the importance of other measures, such as tax policy. These will play an important albeit subordinate role in the kind of economic performance the country and the world will experience in the coming years. But the key issue – and significantly, one of the key issues addressed in Trump’s campaign – is trade. In terms of economic importance, nothing else comes close. To paraphrase Alfred North Whitehead, contemporary economic policy consists of a series of footnotes to trade policy.

For those who have been following this blog, such a statement should come as no surprise. Allow me to reiterate the main points:

  1. The global economy is so structured as to be systemically imbalanced. Certain countries run persistent, sizeable trade deficits; certain others run the mirror image of persistent, sizeable surpluses.
  2. Far from being innocuous, these imbalances are unsustainable, and leave a trail of carnage in their wake. They are unsustainable because they are financed, not by Palley’s “virtuous circle of growth” characterized by the circular flow of production and consumption, but by indebtedness. The trail of carnage is the hollowed-out production capacity in rich countries combined with sweatshop production in low-wage countries.
  3. The benefits of this system accrue to transnational elites: first, transnational corporations which profit from “buying low and selling high” within this made-to-order framework, then the politicians, media entities, and academics who serve to justify the framework, mainly by deflecting attention from its true nature and toward the ersatz quest for “justice” as embodied in identity politics, which locks subjugated populations permanently into this exploitative framework.

Great profits are being made within this arrangement, the flip side of the great losses (the ever-burgeoning global debt burden) the tab for which will be picked up by future generations (hello Millenials!). It stands to reason that anyone threatening to upset this particular apple cart will incur the ire of the entire range of vested interests, popularly known as “The Establishment” and more scientifically as the Transnational Capitalist Class.

The gravy train must keep flowing, and the uneasiness bordering on panic bordering on hysteria evidencing itself in much of the post-election news reporting has its roots precisely in the realization that (to use yet another of these analogies) the punch bowl is about to be taken away.

Now then, if these trade deficits are as important as I am claiming they are, what can be done about them? Obviously, this will be easier said than done: not only will there be the implacable resistance of special interests, there will be the entire set of problems that is involved in what has come to be known as “The Great Rebalancing.” For what is required is that entire national economies be reordered to restore the “virtuous circle of growth” and break some seriously settled habits.

On the export side, there are two major forms of imbalance that need to be addressed: the Asian Tiger model and the German model. Let’s take these one at a time.

The Asian Tiger model was pioneered by Japan and took flight during the 1970s upon the breakup of the Bretton Woods arrangement. Ultimately it is based on the artificial suppression of the currency’s exchange rate in order to ensure export sales. The export industry in combination with government controls the economy. They structure the economy in order to benefit the export industry at the expense of domestic industry and trade. In particular, the banking system is subjugated and forced to perform certain functions, such as paying below-market interest rates on both savings (thus penalizing households) and loans (thus benefiting business).

One result of this model is that it keeps money earned from exports (which earnings are denominated in dollars) from re-entering the ordinary market (a process called sterilization), as this would cause the currency to appreciate. Rather than being repatriated to the producers, much of those dollar earnings are kept in dollars, held by the country’s central bank, and invested in US government debt (Treasury bills and bonds). In this manner, earnings are taken out of the ordinary market and kept on the financial markets, leading to asset bubbles. This money can return to the ordinary market and so fund consumption, but not by the original earners spending it (which would reinstate the virtuous circle); rather, it is borrowers, who are given access to this liquidity, and in this manner are allowed to fund consumption in an unsustainable manner. This was one of the factors behind the boom-bust of the first decade of the 21st century.

The German model differs from the Asian Tiger model because it does not depend on obtaining competitive advantage via manipulation of exchange rates or by sterilizing foreign earnings. Rather, it achieves this through fiscal policy, mainly through measures to suppress consumption. Wages are held down in the interest of competitiveness, and consumption is discouraged by means of a consumption tax (VAT). The result is the same: the producers, whether they produce for domestic or foreign consumption, are kept from spending their own earnings. These earnings are simply foregone. This benefits the export sector by improving terms of trade, but it does not benefit the country, because those foregone earnings could have gone to generate and sustain the domestic economy, thus reducing the country’s dependence upon the vicissitudes of export markets.

What these methods have in common is the suppression of consumption. It is perhaps no coincidence that the countries engaging in these practices have long traditions of frugality and asceticism. This is not the place to enter into a discussion regarding the relation of religion and morality to economic growth, although I do reserve the right to do so at some point in the future. I only raise the point to indicate something that cannot be mere coincidence. And indeed, the countries on the other end of the trade relation – the net consumers – have gotten a name for being spendthrift and lazy, incapable of competing. The reality, as we hope to explore another time, is more complicated.

So, in order to achieve this “great rebalancing,” essentially two things have to happen – countries need to reorient their fiscal and monetary policies to, in the case of the producing countries, promote domestic consumption, and in the case of consuming countries, promote domestic production. In the latter case, a reworking of venerable “import replacement” policies is in order. A focus on the domestic economy is required which will restore the virtuous circle of growth and break the cycle of unsustainable debt financing.

What kind of policies would the Trump administration need to pursue in order to further this proposed state of affairs?

First of all, one thing needs to be made clear. All the saber rattling on the part of countries in Europe and Asia with regard to a trade war, such as China’s threat to buy Airbus aircraft rather than Boeing aircraft, are nothing more than that. As with the dire warnings surrounding Brexit earlier, the countries doing the threatening are, in point of fact, in no position at all to threaten. They are running trade surpluses with the US or the UK, as the case may be, which means that they selling more to those countries than they are buying from them. This means that they need those countries’ markets, and if they cannot sell to them, they will be left with surplus production and nowhere to offload it. Hence, these countries know as well as anyone that saber rattling is useless at best and counterproductive at worst.

What about US threats of (to cut to the chase) a 45% tariff on imported goods from China? This would be the least desirable method of achieving some sort of rebalancing. Leaving aside the corruption involved in business lobbying for protected status (as noted in 1931 – another period of protectionist agitation – by James Harvey Rogers), such a tariff would dislocate whole industries and so undermine economic growth in the short to medium term. In the longer term, a tariff might lead to a functioning economy in the US, as domestic industry restored itself to some level of its former glory, but it would damage China severely, without providing any mitigating mechanism to enable it to begin producing for the domestic economy on a sustainable basis.

There are far better and more mutually agreeable ways to engage the great rebalancing than punitive tariffs. Firstly, and Mr. Trump is absolutely right on this, currency manipulation has to be stopped. While China may not be engaging in this at the moment, it most certainly was for a long period in the late 1990s and up until the crash of 2008, leading to its mountain of dollar reserves. In this regard, Trump is closing the gate after the horse has bolted, at least respecting China, but the entire system of sterilization and amassing of dollar reserves has to be put an end to.

Then there are the domestic policies that structurally suppress consumption. These have to be reversed. In the case of China, household consumption in 2010 declined to an “astonishing” (Michael Pettis’s word) 34% of GDP, astonishing in view of the fact that for most countries this figure is at 60-70%. Behind this low level of domestic consumption are policies promoting forced savings and what Michael Pettis refers to as “financial repression,” wherein banks operate to transfer savings from households to business and government at below-market rates. The German method utilizing wage restraint and consumption tax must also be reversed.

The Trump administration must insist on these common-sense changes in domestic policies on the part of its trade partners, because they are not mere matters of domestic concern: they affect trading partners as well. Pettis shows this in ch. 6 of his book The Great Rebalancing. Using the case of Germany vis-à-vis Spain, he outlines how domestic policies in Germany affect Spain’s economic prospects, and how both countries need to make coordinated adjustments to ensure a transition to a balanced economy. The same has to be done on a global scale.

On the domestic front, changes to the tax regime regarding business, bringing it more in line with other countries’ corporate tax rates, will be of some help, as will various initiatives to reconstruct and bring jobs back to the inner cities, and the various infrastructure projects. But these will be of little use if the main issue, international trade and its discontents, is not addressed comprehensively and thoroughly. Otherwise, the opportunity presented when the US electorate dodged the bullet of a Clinton presidency, which would have sealed the deal for the transnational corporate class, will have proved to be only a bump in the road to Elysium.

On the Road to Elysium When fiction approaches fact

The 2013 movie Elysium depicts a dystopian future of unremitting, jarring poverty juxtaposed with serene, detached wealth. Literally detached: wealth resides in a lavishly equipped, lebensraum-furnished space station, high above an impoverished, exhausted Earth. The planet is only useful as a source of provision and maintenance for the space station; its fruits have been extracted and depleted, while the population is mainly left to its own devices, an excess labor force without the capacity to sustain a decent standard of living, the only purpose of which is to serve the elite floating high above.

It is a haunting image, as it should be. And, admittedly, an extreme one. But it resonates – because in this day and age, the gap between rich and poor has been steadily widening, bringing the Elysium scenario within the realm of the plausible. The purpose of this article is to explore how this has come about.

For starters, the problem with the world system as currently configured is that it divorces consumption from production – a recipe for disaster. For consumption needs to be funded, and there are only two ways to do that. Either produce, or borrow. The modern world has chosen – or, our betters have chosen – for the latter.

In the ideal economy, production and consumption are in a circular flow; supply creates its own demand. Production is in equilibrium with consumption, and pays for consumption. There are neither gluts nor shortfalls.

Of course, this is unrealistic. No economy is a closed loop like this. First, as discussed in the accompanying course as well as in this article, the so-called “problem of saving” makes its appearance, and complicates matters. This leads to two markets, not one – the ordinary market of production and consumption, and the financial market of credit and debt. This two-market framework is a natural outgrowth of the money economy. There is no ultimate disconnect between production and consumption here: the monies that flow into the financial market eventually flow back to the ordinary market in one way or another, closing the production-consumption loop.

But in the modern world system the circular flow of production and consumption is purposely disrupted. This is the heart of what is wrong with the world economy today. It is the issue that urgently needs to be addressed, because it is producing a time bomb that eventually must go off, with unforeseen and unfathomable results.

The disruption of production and consumption is primarily visible in the balance of trade. Nowadays, trade relations are characterized by sustained, sizeable imbalances. The inevitable byproduct of these imbalances, and what makes these imbalances so lethal, is debt. In a previous article, I wrote: “Trade imbalances have to be ‘financed’: in other words, they are paid for by debt. When trade imbalances are incurred, the countries running trade surpluses are also exporting capital: this is called a capital deficit. What they are doing is exporting demand, by exporting excess savings. To put it bluntly: they are extending the credit to the consuming countries that these countries require to buy their production.”

These countries are exporting demand. What does this mean? It means they are seeking to sell production, not to their own, domestic consumers, but to foreign ones. They are disrupting the circular flow. In a normal situation, they would not be exporting demand; domestic demand would match supply; they would be buying what they sell. Of course there are always surpluses and deficits, because no economy is entirely closed. But the sustained effort, the policy decision, to “export demand,” which means to shift consumption abroad, would not exist.

How do they do this? By suppressing domestic consumption. In other words, domestic producers are not being allowed to enjoy the fruits of their labor. The demand they otherwise would generate is being taken from them. Normally this would result in overproduction, a glut of goods and services, and prices would adjust accordingly, falling, bringing the unbalanced situation into equilibrium. But through various manipulations outlined here (under the rubric of currency manipulation), domestic production is put out of joint with domestic consumption, the producers are robbed of a portion of their earnings, and the shortfall is made up for by foreign consumption, which picks up the slack.

Why do they do this? Why engage in a conspiracy against the domestic economy in order to promote exports? Back in the late 1800s, the British economist John Hobson already had an answer. For him, British imperialism was a net loss, costing the country far more than it provided in terms of income or revenue. Not only was it prohibitively expensive, but it disadvantaged a broad swathe of domestic producers. Why engage in it then? His conclusion was that it provided an advantage to various vested interests – particular interests, as opposed to the common good – which in turn were able to influence policy in their favor. In other words, imperialism and colonialism subordinated the national interest to particular interests.

The same thing is happening today. Certain countries are pushing exports, generating massive trade surpluses year after year; while certain other countries are living beyond their means, running the mirror image of trade deficits, year after year. The usual mantra we then hear is that the exporting countries are virtuous, disciplined, hard-working, while the importing countries are lazy, decadent, improvident – but it would be more accurate to characterize each as victims of a regime, which exploits both ends of the trade equation.

The transnational capitalist class (TCC – of which more here), composed of various manifestations of “Davos Man,” is the ultimate beneficiary. By engaging in this debt-funded, imbalance-riddled economic system, it is able to funnel the surplus value generated by forced savings into its own pockets, while allowing various debt mechanisms to provide for the indispensable consumption that enables this gravy train to keep going.

In other words, a significant portion of the ever-burgeoning global debt burden is simply the flip side of an equally significant sum of profits disappearing straight into the pockets of our modern-day benefactors, the global corporate elite, along with their cronies, facilitators, and enablers in their various support roles in government, politics, academia, the entertainment industry, and the news media. The tab will be paid by future generations, when those various debt instruments come due. Après nous, le déluge.

This is the source of the widening gap between rich and poor worldwide. This is the road to Elysium.

How is this debt-funded consumption sustained? Let the reader understand: this is the key to the modern political scene. This arrangement, this racket, runs through a political system revolving around identity politics. This is what makes the gimcrack mechanism go. Identity politics, as I outline here, serves to defuse and divert opposition to the global capitalist regime. It deflects leftist agitation away from its home base, the class struggle, toward the safe – for hegemonic capitalism – alternative of identity politics. In fact, it serves as a key brick in the edifice of this hegemonic capitalism, for identity politics dovetails precisely with the culture-ideology of consumerism that locks peoples and nations into their economic roles within the system.

It turns out that identity politics provides the justification, under the guise of “human rights,” for never-ending deficit spending on entitlements. In other words, not only does it foster the ideology of consumerism, it also provides the legitimation for debt-financed consumption, which is the key to maintaining the gravy train of profits into the pockets of Davos Man.

In this age, respect for human rights is considered the sine qua non of civilized society. But what are human rights really? An understanding of their origin sheds light on their conflicted character. They came along during the “Age of Enlightenment” of the 18th century, to take the place of religion as the source of law. As I wrote back in 1995:

Religion was relegated to the privacy of one’s own conscience. It was therefore also removed from any influence on public life. What replaced it, in early liberalism, was a focus on property rights; when that produced alienation, the focus shifted to collective property redistribution. These are modernism’s first principles, and they are Epicurean, materialist, consumerist. Both foci, property and redistribution, have at their core the consumerist individual. It is consumption – appetite – which this society worships. Human rights mean that each individual has the inalienable right to satisfy those appetites. To deny one such a right is to violate one’s integrity as a human being. When a conflict of appetites arises, or when appetite conflicts with a real right (such as with abortion), the strongest (i.e., the one with the best legal representation or the most effective propaganda machine) wins.

Hence, consumerism is not simply a function of households spending beyond their means. It is also a function of entitlements, as currently defined and implemented by welfare states. In his scathing indictment of rights-as-entitlements, P.J. O’Rourke was not far from the mark: “Freedom is not … entitlement. An entitlement is what people on welfare get, and how free are they? It’s not an endlessly expanding list of rights — the ‘right’ to education, the ‘right’ to health care, the ‘right’ to food and housing. That’s not freedom, that’s dependency. Those aren’t rights, those are the rations of slavery — hay and a barn for human cattle.” If this sounds harsh and unfair, think about it. These are the rations of a peculiar form of slavery – to an unseen hegemonic power holding the nations in its sway. We are satisfied to eat the crumbs falling from the table of the TCC.

Government-financed “discretionary spending” keeps the boat floating, even when jobs are scarce and salaries are stagnant, and households have maxed out their credit cards. The economies of the consumer countries have for years had their production capacity hollowed out as with numbing regularity jobs have been shipped overseas. This has had the inevitable effect of producing a structural shortfall in purchasing power. This shortfall was first made up for with the real estate bubble of the early 2000s, but since the crash, it has been maintained by massive deficit spending on the part of the Obama administration.

How the pie is divided up, and who gets a seat at the table, now turns out to be a crucial factor behind the identity politics agenda. The government now plays the role of benefactor to various disadvantaged groups, which are encouraged to develop and maintain an identity precisely as disadvantaged groups, in order to form a consumption-based coalition to 1) maintain the power of the ruling elite (in other words, deflect and coopt the class struggle), and 2) maintain demand for below-market global production, thus keeping the gravy train going.

In the current US political constellation, African-Americans are perhaps the key members to be mollified in terms of this “coalition management.” African-Americans have been whipped up into a frenzy of anti-authoritarianism (mainly against the police, but also against the white majority generally) which seemed a bit odd to those of us who thought that the worst aspects of racism were behind us, but who now have almost been led to believe that racism has never been worse. The plot thickens when one realizes that groups like the Ford Foundation and George Soros’s Open Society Foundation have contributed tens, if not hundreds, of millions to the major front group for this movement, Black Lives Matter. Knowing what we now know, it would appear that this is yet another effort to shunt a disgruntled voting bloc away from dangerous activity (such as voting for a presidential candidate who wishes to confront the system as presently constructed, rather than maintain it) and back into the safe confines of identity politics, in which factions vie with each other for favors, rather than with the central power for justice.

The timing of the emergence of the Black Lives Matter movement lends credence to the notion that this agitation has been part of a strategy of coalition management. The death of Trayvon Martin in 2012 can be seen as a watershed in this emergence, for it was soon after that the #BlackLivesMatter hashtag first made its appearance. But it wasn’t until the death of Michael Brown in Ferguson, Missouri, in August 2014 that things became heated. This was followed by the incidents involving Freddie Gray in Baltimore and Eric Garner in New York. By now this has generated an all-out attack on policing specifically and the allegedly racist character of white society generally, with incidents of attacks on both becoming a drearily repeating spectacle.

What is curious about this, again, is the timing. For the so-called “new wave” of immigration began at roughly the same time. Reports of this “new wave” began trickling in in 2013. This new wave of immigrants, bolstered by a massive influx of children (itself spurred by Deferred Action for Childhood Arrivals, President Obama’s 2012 initiative to provide illegal immigrant minors), produced a surge in numbers of new immigrants, both legal and illegal, in 2014 and 2015.

In terms of coalition management, this influx creates problems. The two groups, illegal or unauthorized immigrants and African-Americans, compete for the same jobs and the same benefits from government. That the administration and the Democratic Party is promoting and indeed sponsoring the wave of immigration has the potential to not sit well with existing coalition members like African-Americans, or the working class generally. Therefore, it would seem entirely plausible that, to deflect attention from this conflict, the African-American community has been stoked with allegations of rampant racism, making use of every plausible such incident to reinforce a general narrative that the enemy is not a competing coalition member, viz., immigrants, but the Other, those outside the Democrat coalition, or in other words, whites, conservatives, the police, Christians. This is a matter of speculation; perhaps Wikileaks emails will shed more light on the decision-making process.

Regardless, this is what coalition management  in the age of identity politics looks like.

There is one more aspect that deserves highlighting, and it is connected with the need to maintain consumption levels in Western countries. The phenomenon of mass migration, encompassing both immigration and the influx of Middle Eastern refugees, runs contrary to the national interest of the target countries, and the widespread opposition to the scale with which it is being conducted has fed massive unrest against the ruling class. What is being missed in all of this is that these newly imported populations constitute fresh sources of consumption, regardless of whether employment and thus purchasing power is available for them or not. For in the age of human rights and the welfare state, consumption will be maintained, whether by production or, as we have learned, simply by mortgaging the future through deficit spending to maintain entitlements. All of these migrants can consume much more of that below-market production if they are ensconced in the rich Western countries than if they remained in their countries of origin. In this manner the gravy train keeps chugging along.

This is how we have embarked on the road to Elysium. Debt-funded consumption is combined with structurally low-wage, low-regulation, environmentally-unfriendly production. It is a massive engagement in transactions of decline which unchecked will lead to a situation in which the Elysium of science fiction will increasingly approach reality.

Carrying the Water The Role of the Left in the Neoliberal Order

I am struck with disbelief with the apparently unlimited extent of their smug arrogance. It is these very men (and yes, they are mostly men!) who are singularly responsible for the mess we are in. Blair and Clinton in particular presided over the massive accumulation of debt, reckless deregulation and disproportionate and unbalanced boom in our economy which brought us to the precipice. That they and their ilk imagine that they should now be ‘sorting things out’ is cause for worry. In another time they might have been thrown in the dungeon.[1]

All power tends to coopt and absolute power coopts absolutely.[2]

All in all you’re just another brick in the wall.[3]

“Neoliberalism” is the term used to refer to the most recent form capitalism has taken in the modern world. It is shorthand for the new order gestating since the 1970s, characterized by “extensive economic liberalization policies such as privatization, fiscal austerity, deregulation, free trade, and reductions in government spending in order to enhance the role of the private sector in the economy,” as the Wikipedia entry has it. Such characteristics are explanation enough as to why neoliberalism has become a veritable swearword among left-leaning thinkers.

An article by George Monbiot published in The Guardian succinctly summarizes the left’s case against this Novus Ordo Seclorum. The title says it all: “Neoliberalism – the ideology at the root of all our problems.” Neoliberalism is responsible for everything from the 2008 credit crisis to the epidemic of loneliness to the collapse of ecosystems. At its heart is the unfettered individual in competition with other such individuals, wherein “neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency… Attempts to limit competition are treated as inimical to liberty.”

Although it rose to ascendancy in the 1970s, as an agenda neoliberalism was first put on the map back in 1938 by the throwback Austrian economists Ludwig von Mises and Friedrich Hayek, in the face of a Keynesian onslaught that carried all before it. They and like-minded thinkers, holding fast to the old-school ideal of limited government and free markets, kept to their belief even when it seemed a lost cause. But their perseverance was repaid. With the collapse of the Keynesian consensus in the 1970s, their ideas gained a new lease on life, and with the ascent to power of Ronald Reagan in the US and Margaret Thatcher in the UK, they became the new political-economic orthodoxy.

Then came the harvest. As Monbiot relates: “massive tax cuts for the rich, the crushing of trade unions, deregulation, privatisation, outsourcing and competition in public services.” And not only in these countries but across the globe: “Through the IMF, the World Bank, the Maastricht treaty and the World Trade Organisation, neoliberal policies were imposed – often without democratic consent – on much of the world.”

The “freedom” neoliberalism promises resembles the “equality” pilloried by Anatole France in The Red Lily (“In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets and steal loaves of bread”). For what does it entail? In Mobiot’s words, “freedom from trade unions and collective bargaining means the freedom to suppress wages. Freedom from regulation means the freedom to poison rivers, endanger workers, charge iniquitous rates of interest and design exotic financial instruments. Freedom from tax means freedom from the distribution of wealth that lifts people out of poverty.”

And where such freedom is restricted in rich countries, it is transferred to poor ones, “through trade treaties incorporating ‘investor-state dispute settlement’: offshore tribunals in which corporations can press for the removal of social and environmental protections.”

Essentially, neoliberalism has gutted the state, privatized its services to the detriment of all but the owners, reduced through austerity the transfer payments that “lifts people out of poverty,” and legitimized the destruction of the environment.

Martinez and Garcia provide an additional summary of the neoliberal agenda: 1) the rule of the market, 2) cutting public expenditure for social services, 3) deregulation, 4) privatization, and 5) eliminating the concept of the “public good” or “community.” Here deregulation is added to the list of failures, while the eradication of the pursuit of the public good and community parallel Monbiot’s mention of the epidemic of loneliness.

The roster of witnesses could be multiplied, but without adding much. It is a rather bleak and somber picture that the critics of neoliberalism paint. But things are perhaps even worse than they think they are. For in their critique, they advance hardly any new notions beyond the traditional critiques of capitalism that have been leveled since the emergence of the “social question” in the 19th century. It is rather too easy simply to put the blame for the failures and dysfunctionalities of the modern world system at the feet of traditional free-market capitalism. This enemy has been long defeated; things have progressed far beyond such simplicities. Might there be a reason that precisely this obsolete bogeyman is so energetically pressed as the root of all evil? Might it be that such a critique obscures what is really going on, and hides from us the true problem?

For there are realities to the new “neoliberal” order that this critique does not take into account. This is a form of intellectual blindness. And it is being exploited precisely in favor of neoliberalism.

Is neoliberalism simply old-fashioned classical liberalism (i.e., modern conservatism)? To argue as much is to lose sight of some extremely important factoids. One such, as was documented here, is that budget deficits and spending on social programs are not down, but up. Especially in the wake of the credit crisis of 2008, governments in both the United States and Europe have increased deficit spending, not decreased it. Another is that the developed countries still exhibit high, some would consider crippling, levels of regulation. Spending is therefore not going down, and the regulatory state so decried by conservatives shows no sign of being dismantled.

The critique of neoliberalism proffered by Monbiot et al. is quite simply outmoded. It is based on an exclusive focus on the nation-state as the locus of economic and political activity, supplemented by a likewise outdated center-periphery construct of the relations between nations, whereby e.g. the rich Northern nations exploit the poor Southern nations. But that explanatory framework only obscures the true dynamics of the globalist economic system.[4]

We have explored this system in some detail in previous posts (go here for a catalogue of articles). The important thing to glean from those treatments is that the center-periphery framework of exploitation has been superseded by a transnational corporate arrangement that stands over and outside of specific national constrictions and allegiances.

Sklair provides a succinct summary of this arrangement. “[It] is based on the concept of transnational practices, practices that cross state boundaries but do not necessarily originate with state agencies or actors. Analytically, they operate in three spheres: the economic, the political and the cultural-ideological. The whole is what I mean by ‘the global system’…. The building blocks of the theory are the transnational corporation [TNC], [which is] the characteristic institutional form of economic transnational practices, a still-evolving transnational capitalist class (TCC) in the political sphere, and the culture-ideology of consumerism in the culture-ideology sphere.”[5]

At the heart of this system is, then, the TCC, the transnational capitalist class. This group is the major extractor of surplus value in the modern world. In previous posts we have explored the skewed relationships of nations in the current economic framework, characterized by trade deficits run by some countries and trade surpluses by others. We have noted that this arrangement has to be financed by continuous indebtedness, for every trade imbalance has to be financed, and we have asked the question, why allow these imbalances to continue? Who benefits from this deficit consumerism whereby debt piles up with no end in sight? As I put it here:

Qui bono? Not the workers, neither in the exporting nor in the consuming countries. Rather, it is our familiar friend, [Fernand] Braudel’s “shadowy zone” of behind-the-scenes capitalist power brokers, which benefits from its “commanding position at the pinnacle of the trading community” to steer the profits in its direction and the losses to both ends of the trading network. In this arrangement, there is no core and no periphery – there are only regions of exploitation. The difference is in the form the exploitation takes.

Already in 1977 Goldfrank noted the incipient formation of this new group that would become the TCC:

There is growing evidence that the owners and managers of multinational enterprises are coming to constitute themselves as a powerful social class beyond their role behavior: forming interest groups, engaging in common educational and recreational activity, attempting to include top economic managers in the socialist countries (with which trade and joint investments are increasing rapidly), and working out an ideology in which the world is truly their oyster.[6]

Since then, the literature exploring the TCC has burgeoned. One of the leading proponents of this explanatory framework is Leslie Sklair, now professor emeritus of sociology at the London School of Economics. In the article cited (note 5 above), one of the many he has dedicated to the subject, he provides a succinct outline of the characteristics of the TCC (pp. 521ff.):

  1. Outward-oriented, global perspective. “The growing TNC and World Bank emphasis on ‘free trade’ and the shift from import-substitution to export-promotion strategies of most developing countries over the last decade or two have been driven by members of the TCC.” This is accompanied by a globalist orientation in the training of business managers: “There is now a huge literature in the popular and academic business press on the ‘making of the global manager’ and the ‘globalization of business and management’ … confirming that this is a real phenomenon and not simply the creation of a few ‘globaloney’ myth makers.”
  2. Cosmopolitan “citizens of the world.”
  3. Shared lifestyle, including education and consumption patterns (“luxury goods and services”). Members of the TCC enjoy “exclusive clubs and restaurants, ultra-expensive resorts in all continents, ‘the right places to see and be seen’, private as opposed to mass forms of travel and entertainment and, ominously, increasing residential segregation of the very rich secured by armed guards and electronic surveillance, from Los Angeles to Moscow and from Manila to Beijing.”

As a class the TCC is held together by these elements, oriented about a common goal: the exploitation of the possibilities provided by global consumption. “The culture-ideology of global capitalist consumerism is the fundamental value system that keeps the system intact” (p. 523). And so it behooves this global elite to maintain and foster this state of affairs. Sklair refers to this as the siege mentality of capitalism: “The siege mentality entails the view that social systems are always potentially vulnerable to attack, no less from inside than from outside. Approval, and reward for behaviour which sustains it, must be maintained to ensure the persistence of the system” (p. 517).

This is the imperative: the TCC needs to foster the ideology of global capitalist consumption in order to maintain its hegemony. Thus far, it has been quite successful doing so. “The practical ‘politics’ of this hegemony is the everyday life of consumer society and the promise that it is a global reality for most of the world’s peoples. This is certainly the most persistent image projected by television and the mass media in general. In one sense, therefore, shopping is the most successful social movement, product advertising in its many forms the most successful message, consumerism the most successful ideology of all time” (p. 531).

The success of the TCC in propagating this universal ideology meets us at every turn. The question then is, how in blazes have they done it? It is at this point that our argument takes a curious turn. For we have to proceed beyond the usual consumption critiques revolving around the deleterious effects of advertising (manipulation, subliminal messaging), wastefulness (the throwaway society), and the like. There is an added dimension to this newfangled globalist consumerism, the understanding of which unravels many a mystery.

This added dimension was first referenced (to the author’s knowledge) by David Rieff in a celebrated article published in the August 1993 issue of Harper’s Magazine. Entitled “Multiculturalism’s Silent Partner,” it laid bare a hitherto (and still) unrecognized, because improbable, correlation: the “newly globalized consumer economy” has its flip side in multiculturalism.

Rieff begins his analysis with a tantalizing assertion. In the face of universal agreement that Marxism had died with the Soviet Union, he argues that precisely a Marxist hermeneutic explains the current climate of opinion and practice, which by that time was being dominated by the notion of multiculturalism. “For an application if not of the methods of ‘vulgar’ Marxism then at least of those (related) modes of understanding that are to be found on the business pages of the better newspapers might produce a rather more grounded sense of what we are talking about when we talk and talk about multiculturalism. Despite the denials and mystifications of the intelligentsia, multiculturalism is a phenomenon with a silent partner: the broad and radical change now taking place within world capitalism” (p. 62).

The debate about multiculturalism had given the sense that ideas mattered, that what the intelligentsia of either the right or the left, for or against, had to say on the matter would prove decisive to the social order. Rieff pours cold water on the notion. It is not ideas that are driving this debate, he says; rather, it is the new reality of an emergent global capitalist order.

“Reality is elsewhere,” says Rieff.

Can conservatives really believe that a few curriculum changes will undermine a system that could not be weakened by the Comintern or the Soviet Black Sea fleet? As for our campus revolutionaries: How can they insist on the emancipatory power of multiculturalism when during the 1980s – the very decade in which multiculturalism became the dominant intellectual current in elite sectors of academia – the conditions of the poor, of working-class women, and of America’s non-white citizens deteriorated dramatically? If multiculturalism is what its proponents claim it is, why has its moment seen the richest 1 percent of Americans grow richer and the deunionization of the American workplace? There is something wrong with this picture (p. 63).

There is a new game in town, he writes, and multiculturalism is simply an epiphenomenon thereof. “The curiousness of the situation is that both sides have misconstrued the power of multiculturalism in precisely the same way: as a threat to the capitalist system. In reality, it is nothing of the sort, as becomes clear the moment one stops looking at multiculturalism in ideologized, millenarian terms – as if it were some kind of pure, homegrown manifestation of the Zeitgeist – and instead sees it as perhaps the most salient cultural epiphenomenon of an increasingly globalized capitalist system” (p. 63).

To perceive this is to hold in one’s hand the key to understanding some otherwise puzzling phenomena. For instance, the increasingly incongruous nature of university curricula. “Behind the embrace of multiculturalism among college administrators is the belief that there is no incongruity in simultaneously subsidizing an English department made up of feminists and poststructuralists, a physics department that is up to its eye balls in research grants from the federal government, and an enormous (and enormously profitable) quasi-professional sports establishment, complete with athletes who are students only in the technical sense.” The point is, the mentality has changed: “Once administrators have decided that the university will be a kind of department store, then each new course offering becomes little more than another product line, and department chairpersons begin to act like the store’s buyers” (p. 63).

Far from undermining the detested capitalist system, the presuppositions of multiculturalism turn out to dovetail nicely with those of the new corporate mentality. “The multiculturalist mode is what any smart businessman would prefer. For if all art is deemed as good as all other art, and, for that matter, if the point of art is not greatness but the production of works of art that reflect the culture and aspirations of various ethnic, sexual, or racial subgroups within a society, then one is in a position to increase supply almost at will in order to meet increases in demand” (p. 64). Indeed, culture becomes something of a bazaar; and is that not what makes for good business as well?

Instead of being a rare and costly thing, culture becomes simultaneously a product, like a car – something that can be made new every few years – and an abundant resource, like, well, people. The result is that the consumption of culture can increasingly come to resemble the consumption of goods. After all, just as one cannot say that a preference for Pepsi is superior to a preference for Dr Pepper, what is euphemistically known as “cultural pluralism” permits a similar abdication of judgment in matters of artistic taste. The rules of the market are soon in full control. If students want to read Alice Walker in a literature class instead of the Iliad, fine. The publishing industry certainly has no qualms. It knows it can market Walker more savvily than it can market the Greeks. At any rate, it is not a case, as conservatives allege, of the student as barbarian. Rather, it is a case of the student as customer. And in our society – and, increasingly, most societies – the customer is always right (pp. 64-66).

It is not only students and department heads that are affected by this; professors are as well. The radicals turn out to have found a comfort zone in the new material order, even if that clashes with their professed beliefs.

For all their writings on power, hegemony, and oppression, the campus multiculturalists seem indifferent to the question of where they fit into the material scheme of things. Perhaps it’s tenure, with its way of shielding the senior staff from the rigors of someone else’s bottom-line thinking. Working for an institution in which neither pay nor promotion is connected to performance, job security is guaranteed (after tenure is attained), and pension arrangements are probably the finest in any industry in the country – no wonder a poststructuralist can easily believe that words are deeds. She or he can afford to (p. 66).

Indeed, words offer another telltale sign of confluence. Rieff cites an article by “new historicist” professor Janet Nedelsky in which she writes of the need to do away with boundaries because boundaries indicate, in her words, “a separation and opposition that does not capture the complex, fertile, and tension-laden interconnection between self and others.” But isn’t it curious that this viewpoint regarding boundaries coincides with e.g. Larry Hirschhorn and Thomas Gilmore writing in the Harvard Business Review about the new ideal: the “corporation without boundaries.” Why is the one radical and the other not? In fact, they are equally so.

The more one reads in academic multiculturalist journals and in business publications, and the more one contrasts the speeches of CEOs and the speeches of noted multiculturalist academics, the more one is struck by the similarities in the way they view the world. Far from standing in implacable intellectual opposition to each other, both groups see the same racial and gender transformations in the demographic makeup of the United States and of the American work force…. [B]oth CEOs and Ph.D.’s insist more and more that it is no longer possible to speak in terms of the United States as some fixed, sovereign entity. The world has moved on; capital and labor are mobile; and with each passing year national borders, not to speak of national identities, become less relevant either to consciousness or to commerce (pp. 67-68).

Rieff goes so far as to say that it is business, not the radicals, that is having the more practical effect implementing a multicultural agenda. “The multiculturalists may pride themselves on posing a fundamental threat to what Professor Henry Giroux has called ‘the hegemonic notion that Eurocentric culture is superior to other cultures and traditions by virtue of its canonical status as a universal measure of Western civilization.’ But the reality is that no serious player in the business world has anything but the most vestigial or sentimental interest in Western civilization, as it is roughly understood by campus radicals and conservatives alike.” When everything is submitted to the market for valuation, then all values become relative. The business community has embraced this relativity. “The market economy, now global in scale, is by its nature corrosive of all established hierarchies and certainties…. If any group has embraced the rallying cry ‘Hey, hey, ho, ho, Western culture’s got to go,’ it is the world business elite” (p. 69).

The result may not be what the idealists had in mind. The brave new world of global consumerism is a far cry from visions of egalitarian, environmentally friendly utopia. “The collapse of borders, far from being the liberating event that the academic multiculturalists have envisaged, has brought about the multiculturalism of the market, not the multiculturalism of justice. And if there is a mystery about all this, it is that so many people could have expected a different, more ‘enlightened’ outcome” (p. 70). Nevertheless, it is the reality of the borderless world in which we have landed.

What is revealing is how academics, the proponents of a supposed anti-capitalist alternative, have fallen so easily into line with this “multiculturalism of the market,” ruled as it is by the corporate business world.

Campus radicalism is awfully selective anyway. Its talk is long on race and gender, short on class. And that is probably just as well, since the market economy, ready though it may be to admit blacks and women, is hardly likely to sign its own death warrant by accepting a radical revision of class relations. Were such proposals to be seriously advanced, on campus or elsewhere, the multiculturalists would soon discover just how tough capitalism can be when its real, as opposed to its sentimental, interests are threatened (p. 71).

Indeed, it is in their economic interest to do so. “That is the beauty of the academic multiculturalists’ approach: they can appear to be radical and can feel themselves to be radical, but they can advance a program that, stripped of its adorning rhetoric, is little more than a demand for inclusion, for a piece of the capitalist pie” (p. 71).

This is more than just coincidence. There is more than just a correlation between multiculturalism and globalist corporate capitalism, between the corporate elite and the academic elite. There is in fact the “Marxist” connection to which Rieff refers in his article: the illusion clung to by the left and its intelligentsia that it calls the shots in this culture war, when in reality it is only carrying the water for the global corporate regime.

Rieff makes this clear with a pertinent comparison.

The rise of multicultural capitalism is comparable to abolitionism: the slaves were freed when the abolitionists could count on the support of economic interests in the North, for which an economy based on slavery was an impediment to the future economic well-being of the United States. It was industrial civilization, not justice, that the hardheaded plutocrats of New York and New England were interested in furthering. And until they were convinced that their own interests were at stake, all the oratory of Frederick Douglass, Henry Ward Beecher, and their colleagues was for naught. After they were convinced, this same oratory seemed to sweep all before it (pp. 70-71).

“Seemed to.” It is all so quintessentially Marxian. The economic is the “base,” the intellectual is the “superstructure,” a framework that, “for all their professed respect for the Marxist tradition,” is “out of favor” with the multicultural intellectuals. As well one might expect, given the underlying reality.

This economic base is more than just an abstraction, a Marxian construct. It is the source of funding for the entire academic enterprise, and not only that, for the myriad of activities that impinge upon and determine the direction of the broader culture.

Here we hear echoes of Sklair’s contention that the TCC exerts great effort in gaining and maintaining its hegemony. In fact, we see looming before us one of the ways in which it concretely does so. Another article from the 1990s, in another leading journal of opinion, the New Republic,[7] sheds light on this.

In this article, David Samuels charts a peculiar shift in orientation on the part of the leading foundations. Now foundations are the number one vehicle by which the wealthy influence public policy and the direction of “civil society.” Beginning with the Rockefeller Foundation in 1913, they have had great influence on the development of law, politics, education, and culture. But Samuels notes a shift in foundations’ emphasis, away from broad cultural initiatives and towards narrow advocacy. “Where the Ford Foundation of the 1950s and ’60s spent its money on efforts to promote writing and scholarship at major universities and on symphony orchestras and ballet companies in dozens of American cities, Ford today spends its money on arts projects designed to ‘promote tolerance and social understanding’ and ensure ‘access and equity.’… In the past twenty-five years … a startling shift in foundation funding has occurred, away from research and toward the support of advocacy groups.” This narrow focus has been bolstered by an uncritical atmosphere in which foundation leadership, itself wedded to a multiculturalist agenda, no longer pursues a broad agenda of what once was known as the public interest. It has become a narrow world of its own, without critical openness. “Over the past twenty-five years, the men and women who staff America’s major foundations have become a tight-knit world unto themselves…. The preponderance of foundation grants to advocacy groups … suggests that foundations are less devoted to the reasoned pursuit of the public good than to the multiculturalist dogmas propounded by their staff.”

What could be behind such a shift? Is it that foundations, and the corporate interests behind them, have become wedded to this form of idealism? Are they selflessly pursuing the agenda of “inclusion” and “diversity”? Or is this an expression of Rieff’s base-superstructure relation?

Another critic of foundations and their influence, Joan Roelofs, sheds light on the motivation behind the corporate interest’s advocacy of this agenda. Her critique is rather to the point. “Almost all progressive organizations look to corporations and foundations for funding…. These liberal foundations are closely tied to political and economic elites. Their original founders were wealthy capitalists, and their current trustees and senior staff have close ties to the corporate world. Furthermore, their investments are in the usual high earning corporations…. We are not arguing that foundations are ‘all powerful,’ but rather that their power is enormous, and rarely revealed by scholars, journalists, or activists….”[8]

Foundations, as mentioned earlier, are a prime vehicle through which the corporate elite exercises hegemony. They are used to deflect, defuse, and coopt otherwise dangerously subversive or even revolutionary movements. “Foundations are not opposed to social change, but regard it as necessary and do not see it forthcoming from the political process…. The liberal foundations seek to direct change in a way that will not disturb the wealth and power of corporate elites and the hegemony of the United States” (p. 658). They do so in a myriad of ways. “They are gatekeepers for academics in all fields…. Foundations exert even more direct influence by co-opting activists and their organizations…. The radical activism of the 1960s and 1970s was often transformed, by grants and technical assistance from liberal foundations, into fragmented and local organizations subject to elite control” (p. 662).

As it turns out, multiculturalism, identity politics, and the emphasis on diversity and inclusion are rather convenient ways to attain this end. “Dissidence is fragmented through the creation of organizations for blacks, Hispanics, gays, lesbians, the disabled, Native Americans, and even poor people, who are considered just another minority in need of rights. Foundations have created and funded litigation organizations…. In the early 1970s, the Ford Foundation began to fund women’s studies research centers and academic programs; similar efforts resulted in institutions for other disadvantaged groups. Social movement activists are thereby transformed into researchers, managers, and litigators; and movements are fragmented into ‘identity politics.’”[9]

The strategy of splintering potentially disruptive populations into isolated identity-groups with accreditation in the political process serves to shunt these groups toward the relatively harmless activity of demands for “inclusion,” as Rieff put it, “a piece of the capitalist pie.” Because this does not bring the system itself into question – something which used to be the left’s raison-de-être.

Foundation ideology attributed the radical protests to defects in pluralism. The pluralist ideology holds that any interest is free to organize and to obtain benefits from the system, through peaceful processes of compromise. Disadvantaged groups… needed help in obtaining their rights. Grant money would enable them to participate in the interest group process on an equal basis with the more advantaged groups, and then they would no longer waste their energies in futile disruptive actions…. Poverty, militarism, racism, and environmental degradation are not by-products of the economic system or related to each other. They are merely defects to be corrected through the pluralist political process (p. 31).

What we have here is an ongoing, full-court press, which has been pushing the multicultural agenda during precisely the identical time-frame that the globalist corporate system was being established and expanded – which is, since the 1970s, and especially the 1980s. This is more than coincidence. As Brandt points out, “The Ford Foundation began supporting feminist groups and women’s studies programs in the early 1970s. Just ten years earlier they were busy training Indonesian elites (using Berkeley professors as instructors) to take over from Sukarno, which occurred soon after a CIA-sponsored coup in 1965 that led to the slaughter of hundreds of thousands. Did the folks at Ford Foundation have a bleeding change of heart, or are they continuing the same battle on another front? It would appear to be the latter.”[10]

No, it is not a change of heart, but a change of plan. The TCC means business, and it has for a long time. And its strategy is astoundingly effective. “The ruling elite are experts at manipulating their own interests; they know how to divide and conquer, which is why they continue to rule. As inequality becomes increasingly obvious, those who are less equal begin to see society in terms of ‘us’ and ‘them.’ The dominant culture shades this definition by using the mass media to emphasize our differences at every opportunity. Conventional wisdom becomes articulated within narrow parameters, which is another way of saying that the questions offered for public debate are rigged.”[11]

We are being played, not in the interests of “U.S. hegemony,” as Roelofs supposes, but transnational hegemony, TCC hegemony. We are being splintered into antagonistic identity groups, the better to control us. “The objective is to define ‘us’ and ‘them’ in ways that do not threaten the established order. Today everyone can see that there is more Balkanization on campus, and more racism in society, than there was when affirmative action began over twenty years ago. And for twenty years now one can hardly get through the day without being reminded that race is something that matters, from TV sitcoms all the way down to common application forms (it would have been unthinkable to ask about one’s race on an application form in the 1960s). We are not fighting the system anymore, we’re fighting each other.”[12]

But our problem is not so much discrimination, racism, and the like, but lack of opportunity generally, the byproduct of a system that wishes to hide that very fact. We are being pitted against each other in order to obscure this fundamental underlying reality. That lack is the result of a globalized economy structured in such a way as to squeeze genuine economic opportunity even as it proffers the consolation prize of limited redistribution of wealth and opportunity.

“Transnational accumulation” is what it’s all about; for the rest, let them eat cake. For “none of these dire trends are of any concern to the ruling elites who have the power to address them. They are citizens of the world, and no one – now not even the Soviet bloc – stands in their way. They have no need for borders; free trade is what they want and what they will eventually get. Many on Wall Street prefer unrestricted immigration, which would drive down wages and fold up our few remaining unions. For ruling elites, private security provides insulation and ‘social decay’ is just an irrelevant phrase.”[13]

Does that sound like it was written during the election cycle of 2016? It does – but it dates from 1993! This has been going on for quite a while – and we haven’t even been aware of it. And in this context, the notion of La Trahison des Clercs takes on a whole new meaning. “The campus left speaks of equality, and then forgets about justice by ignoring economic and class distinctions. This failure is so fundamental that multiculturalists should no longer be considered ‘leftists.’ As long as they claim this description, some of us – those who still feel that elites ought to be accountable – are beginning to feel more comfortable as ‘populists.’”[14]

Speaking of the election cycle, it did at last seem as if the left had regained some of its lost resolve, its sense of mission. The candidacy of Bernie Sanders provided a rallying point about which the critics of the system could gather. And there was no shortage of criticism of the leading candidate for the Democratic Party, Hillary Clinton, precisely in terms of a critique of neoliberalism. For Clinton was viewed as the candidate of the ruling class.

In their article entitled “Hillary Clinton’s Empowerment”[15] (subtitled “Hillary Clinton isn’t a champion of women’s rights. She’s the embodiment of corporate feminism”), Kevin Young & Diana C. Sierra Becerra explore the Clinton candidacy in the light of Clinton’s close ties to the corporate business world.

As first lady, Clinton had a significant impact on policy. “Clinton became perhaps the most active first lady in history. While it would be unfair to hold her responsible for all of her husband’s policies, she did play a significant role in shaping and justifying many of them. In Living History she boasts of her role in gutting US welfare: ‘By the time Bill and I left the White House, welfare rolls had dropped 60 percent’ — and not because poverty had dropped. Women and children, the main recipients of welfare, have been the primary victims.” President Clinton’s crime bill was similarly eye-popping from a progressive perspective. “Clinton also lobbied Congress to pass her husband’s deeply racist crime bill, which, Michelle Alexander observes in The New Jim Crow, ‘escalated the drug war beyond what conservatives had imagined possible,’ expanding mass incarceration and the death penalty.”

Of course now Mrs. Clinton is campaigning as if both welfare reform and a tough-on-crime policy were uniquely Republican (racist! sexist!) policy positions. What she does not point out is her own role in putting them in place.

But the real criticism focuses on her years as senator from New York (2001-2009) and secretary of state (2009-2013), during which “her promotion of US corporate profit-making and her aggressive assertion of the US government’s right to intervene in foreign countries” were the two defining features. Young and Becerra quote Bloomberg Businessweek’s assertion that “Clinton turned the State Department into a machine for promoting U.S. business,” seeking “to install herself as the government’s highest-ranking business lobbyist.” They cite her article in Foreign Policy in 2011 which “speaks at length about the objective of ‘opening new markets for American businesses,’ containing no fewer than ten uses of the phrases ‘open markets,’ ‘open trade,’ and permutations thereof.” In that article Clinton champions the Trans-Pacific Partnership (TPP): “Like Bill Clinton’s North American Free Trade Agreement, the deal is intended to further empower multinational corporations at the expense of workers, consumers, and the environment in all countries involved. Lower wages and increased rates of displacement, detention, and physical violence for female and LGBT populations are among the likely consequences, given the results of existing ‘free trade’ agreements.”

They further detail her penchant for militaristic intervention in foreign countries, and cite “neoconservative” Robert Kagan as to her likely policies should she be elected. “‘I feel comfortable with her on foreign policy,’ Kagan told the New York Times last June. Asked what to expect from a Hillary Clinton presidency, Kagan predicted that ‘if she pursues a policy which we think she will pursue, it’s something that might have been called neocon.’ But, he added, ‘clearly her supporters are not going to call it that; they are going to call it something else.’”

Actually, they call it “experience and exposure,” or as Michelle Obama recently put it, “No one in our lifetime has ever had as much experience and exposure to the presidency, not Barack, not Bill, nobody…. And yes, she happens to be a woman.” (Appeal to gender – check!)

Young and Becerra quote Middle East scholar Stephen Zunes, that while “‘Hillary Clinton has been more outspoken than any previous Secretary of State regarding the rights of women and sexual minorities,’ this position is ‘more rhetoric than reality.’”

Given Clinton’s backing of neo-liberal economic policies and war-making by the United States and its allies, her advocacy of women’s rights overseas . . . may have actually set back indigenous feminist movements in the same way that the Bush administration’s “democracy-promotion” agenda was a serious setback to popular struggles for freedom and democracy. . . .

Hillary Clinton’s call for greater respect for women’s rights in Muslim countries never had much credibility while US-manufactured ordinance is blowing up women in Lebanon, Gaza, Iraq, Afghanistan and Pakistan.

The bottom line is, Clinton is a representative of what we have now come to recognize as the TCC. The Clinton Foundation and its various branch activities has ensconced the Clintons firmly in the world of “philanthrocapitalism” with its hegemonic functionality within the global system. The influence peddling which seems to be at the heart of the Clinton email controversy should be seen in the context of this brokerage functionality, mediating relations between the TCC and government. Similarly, the $21 million earned by giving speeches to various corporate, banking, and Wall Street entities since leaving the State Department, and the $153 million total for speechmaking since 2001, are part and parcel of this linchpin functionality within the global system. As I noted in a previous article, Hillary Clinton is the “poster child” of that system.

And what of her opponent in the current election? Whatever one may say of Donald Trump, no one has said that he represents the corporate elite. Quite the opposite. Of course, reality may be otherwise. Were he to be elected, he might turn out to be cooptable as well.

Be that as it may, one thing has become clear. The culture war may have been won by the left, but it was won because the corporate world got behind it and indeed coopted it. This means that progressives should recognize their role within the global system. For given this understanding, the categories “right” and “left” have lost all meaning.

The tragedy in all of this: it is not a matter of right versus left, but top versus bottom. “The ruling elite that finds diversity useful is an elite operating at a level which transcends right and left…. Nothing shows this better than the fact that this ideological right has always been as concerned as the left over the real source of power, the elite globalists…. It’s not a right-left problem, but rather a top-bottom problem.”[16]

And yet the left is so easily egged on to do the dirty work: vituperate conservatives and champion the poster child of the TCC simply because she, as her husband before her, has mastered the art of shifting the blame for all ills to unpopular political opponents. This seems to be the role the left plays within this neoliberal order.

That is why I used the word “role” in the title of this article. To have a role to play is to be put into a particular position in order to perform a particular, scripted, function. It is allocated by whoever is in control of the situation. In other words, the left plays the role set for it by the powers that be, in this case the TCC. And as can be seen in this election cycle, it does so with alacrity, as if the surface phenomenon of a left-versus-right confrontation were the only reality. When the real reality is that this is only an epiphenomenon. The real reality determining the roles and the dance is that of a transnational capitalist hegemony that is busy turning the world into a surplus value yielding colony. The multiculturalist, diversity-oriented agenda in the end turns out to be just another brick in the wall.


 

  1. Rodney Schwartz, “Philanthrocapitalism and Davos make Me Sick!”, ClearlySo Social Business Blog, 5 February 2009.  
  2. Alasdair MacIntyre, After Virtue: A Study in Moral Theory (Notre Dame, IN: University of Notre Dame Press, 19842), p. 109.
  3. Roger Waters (Pink Floyd), “Another Brick in the Wall,” The Wall, 1979.
  4. For a concise criticism of this construct, see William I. Robinson, “The transnational state and the BRICS: a global capitalism perspective,” Third World Quarterly, Vol. 36 No. 1, 2015, pp. 1-21.
  5. Leslie Sklair, “Social movements for global capitalism: the transnational capitalist class in action,” Review of International Political Economy, Vol. 4 No. 3, 1997, p. 520.
  6. Goldfrank, W., “Who rules the world? Class formation at the international level,” Quarterly Journal of Ideology, Vol. 1 No. 2, 1977, p. 35.
  7. “Philanthropical Correctness: The Failure of American Foundations,” The New Republic (September 18 and 25, 1995), pp. 28-36.
  8. Joan Roelofs, “How Foundations Exercise Power,” American Journal of Economics and Sociology, Vol. 74, No. 4 (September, 2015), pp. 655, 657, 658.
  9. Roelofs, Foundations and Public Policy: The Mask of Pluralism (Albany, NY: State University of New York Press, 2003), p. 25.
  10. Daniel Brandt, “Multiculturalism and the Ruling Elite,” NameBase NewsLine, No. 3, October-December 1993.
  11. Brandt, “Multiculturalism and the Ruling Elite.”
  12. Brandt, “Multiculturalism and the Ruling Elite.”
  13. Brandt, “Multiculturalism and the Ruling Elite.”
  14. Brandt, “Multiculturalism and the Ruling Elite.”
  15. In Jacobin, March 9, 2015. Available here.
  16. Brandt, “Multiculturalism and the Ruling Elite.”

Prospects for the US Economy

THE WORLD ECONOMY IN RÉSUMÉ

In the previous post we outlined the structural condition of the world economy, and in particular the structural flaws it contains.

The main flaw is the divorce between production and consumption.

Prior to the establishment of this new macroeconomic structure, supply and demand were roughly in balance in the domestic economy.

We can see this by taking a look at the balance of trade of the United States between 1950 and 1980. In that period, the US economy was the major trading partner for the rest of the world – not to mention that the dollar was then, as it is now, the currency in which world trade is conducted – so that its trade data can serve as a useful proxy for the development of the broader world economy.

United States Balance of Trade

During most of this period, the US balance of trade was roughly in balance. Only towards the end of the period did it begin displaying the sharp divergences that would characterize the period since then, albeit here the magnitude of the imbalances is still very small. As we shall see, they have since taken on major proportions.

During this earlier period, some countries did indeed display trade imbalances. Where this was the case, it was the byproduct of colonialist relationships, such as with “banana republics” the role of which was to produce bananas; the same was true of sugar or rubber or oil. These commodities were produced for export, and the economies depending upon such exports were thus at the mercy of the whims of the world market.[1]

So this lack of balance between supply and demand was an exception to the rule. But since the establishment of the new macroeconomic order, that balance in domestic economies has been rudely disrupted by a new way of linking production and consumption.

In the new structure, the world has been parceled out into various supply and demand regions. Low-wage, developing countries have been designated as supply regions. They are used as sources of raw materials and production. The rich, developed countries have been designated as giant piggy banks. They have been allocated the role of consuming this production.

All of this is orchestrated from the top by the global corporate elite, which uses politicians, the media, the entertainment industry, and academia to further this “bread and circuses” New World Order of universal colonialism. The world is, indeed, their oyster.

This new order no longer balances production and consumption in a symbiotic circular flow within domestic economies. Instead, massive trade imbalances are created, each of which has to be financed. This means that it is debt, not production, that is paying for consumption. The system mortgages the future in favor of the present.

The magnitude of the new order’s collective trade imbalance, and thus dependence on debt, is indicated in the following graph:

The graph shows the current account balance for the world, the advanced economies, and developing economies over the period 1980-2016. The current account balance is a bit different from the balance of trade, as it includes income payments and transfer payments between countries. But these latter are relatively negligible as compared with trade in goods and services. So the two measures are roughly comparable.

What the graph shows is that the changes in the world economy in evidence since the late 1970s accelerated towards the end of the 1990s. Developing countries began generating an enormous collective current account surplus, in line with their role as the world’s producers; while advanced economies developed an enormous current account deficit. This persisted until 2010. With the credit crisis (actually the “debt-funding” crisis) the situation has since reversed somewhat: debt financing has since become hard to come by.

The upshot is that current account (and trade) imbalances became the norm for the world economy during this period, and since these imbalances had to be financed, they have left behind a mountain of debt that at some point will have to be paid off.

Within this framework, the United States has occupied the central role; it is the “consumer of last resort.”

The question now is, has anything changed with regard to the functioning of the US economy to indicate that it has broken with this structurally flawed global economic mechanism? Our conclusion in the previous post was very summary; we opined, with Palley, that stagnation was the direction the economy was headed, given the lack of any sign of a break with this failed model. Let’s look in more detail at the developments in the US economy since the crash.

WHAT THE STIMULUS DID TO PROMOTE ECONOMIC RECOVERY

Prior to the 2008 credit crisis, the US financed its consumption-oriented trade deficit via the housing bubble. This unsustainable method led to the crash. Since then, the US has turned to various schemes, in order to continue to finance this consumption.

The main such policy has been a return to good old-fashioned Keynesian deficit spending. Barack Obama justified this policy back in 2009:

Economists on both the left and the right agree that the last thing a government should do in the middle of a recession is to cut back on spending. You see, when this recession began, many families sat around the kitchen table and tried to figure out where they could cut back. And so have many businesses. And this is a completely reasonable and understandable reaction. But if everybody — if everybody — if every family in America, if every business in America cuts back all at once, then no one is spending any money, which means there are no customers, which means there are more layoffs, which means the economy gets even worse. That’s why the government has to step in and temporarily boost spending in order to stimulate demand.

That speech blames the banks for the crisis, while explaining also why the banks needed to be propped up and bailed out. Only a politician could argue both of these in the same speech and be applauded for it.

The problem with this kind of thinking, as we stressed in the previous post and shall further elaborate below, is that it does nothing to address the underlying structural economic framework that had the crash as its inevitable consequence.

The stimulus came in the form of the American Recovery and Reinvestment Act of 2009. Predictably, the ARRA did not lead to economic recovery. How could it, when it did not even begin to address the underlying problem of debt-financed consumption? The only change was that the government was taking on the debt, rather than consumers directly.

The ARRA set a precedent for deficit spending which has continued, albeit in more muted form, since then. The US has been running record budget deficits in every year since, as can be seen from the following graph:

As can be seen here, the Obama administration has been running deficits that dwarf those even of the George W. Bush administration, which used to take the prize for this dubious distinction.

This has led to a near-doubling of government debt as a percentage of GDP during the Obama administration’s term of office:

United States Government Debt to GDP

All of this deficit spending might be considered beneficial in the long term if it went to funding investment as opposed to consumption – in other words, if it went to addressing the structural flaw of the divorce between production and consumption. Was it being used to finance investment in productive capacity, so as to restore the “virtuous circle?” Borrowing to finance investment is borrowing to finance growth; borrowing to finance consumption, on the other hand, is simply selling the future out to the present.

This is the criterion. So then, what kind of spending has the federal government been engaging in? In the main, it is consumption as opposed to investment spending, as the following pie chart suggests:

Data is for the 2015 federal budget. Source: Politifact.com

Items such as Health (Medicare and Medicaid) and Social Security are not investment but consumption. Other items on the list can be viewed as partly one and partly the other. In particular, social welfare payments and salaries to civil servants/military personnel qualify as consumption.

Therefore, much of this spending is money distributed to citizens to fund consumption. Which means that much of the federal deficit and federal debt goes toward consumption spending. The same holds true for state and local levels of government.

In other words, most of the burgeoning deficit and debt have gone toward picking up the slack left by the bursting of the housing bubble.

This means that Keynesian deficit spending has not been addressing not economic recovery or restoration, but simply maintaining the status quo that gave us the housing bubble in the first place!

Structurally, nothing has changed.

This is evident from an examination of the US trade deficit during the course of the first 16 years of the 21st century, thus both prior to the crash and posterior to it.

The deficit peaked during the artificial boom years prior to the crash. But – and this is the point – since then, although the magnitude of the deficit has decreased, it is still running at nearly $500 billion per annum.

The thing to understand about the trade deficit is that it, too, has to be financed. In other words, the trade deficit has as its flip side, increased debt. How much of that debt ultimately is owed by the federal government, through its deficit spending agenda, is difficult to say. But what we can say it is this: the trade deficit continues unabated, while government deficit spending has grown enormously. The conclusion can be drawn, then, that government spending has picked up at least part of the slack left by the bursting of the housing bubble.

In other words, the structural flaws of the world economy as outlined in the previous post have not been addressed; only different means have been found to keep the system going as it is currently structured, precisely without addressing its structural flaws, because to do so would harm the interests that are profiting from the current arrangement.

WILL FUTURE ECONOMIC POLICY ADDRESS THE STRUCTURAL ISSUE?

The question remains, is there any prospect of this issue being addressed? As we saw in the previous post, Palley had no confidence that it would be with the Obama administration, and his prediction proved to be correct. But what now? With the 2016 elections we are facing a changing of the guard. Can the candidates’ positions shed any light on this?

One thing is for sure, the latest trade deal, known as the Trans-Pacific Partnership (TPP), is on both candidates’ bad list. This despite the fact that President Obama is continuing to push the deal, attempting to get the appropriate legislation passed by Congress before his term of office expires. Clinton’s opposition does appear to have been forced by both Sanders’ and Trump’s vociferous opposition, and many expect a Clinton administration to include among its priorities the passage of this bill, perhaps with minor modifications.

In a nutshell, the problem with this bill is that it sets up further machinery to arrange trade, not in the interests of the particular countries involved, nor to restore the virtuous circle of domestic economies, but to maintain and perpetuate the production/consumption divorce.

What more might we expect from a Clinton administration? Conveniently, we have a major address on economic policy to work with, given by Hillary Clinton on August 11th. Its key proposal is a renewed stimulus plan that ostensibly will provide the greatest investment in “good-paying jobs” since World War II: “We will put Americans to work, building and modernizing our roads, our bridges, our tunnels, our railways, our ports, our airports. We are way overdue for this, my friends. We are living off the investments that were made by our parents’ and grandparents’ generations.”

The problem here, of course, is that this is precisely what Obama promised. ARRA was supposed to provide a major boost to employment, while also renovating the country’s infrastructure. But as the Wall Street Journal put it in a post-mortem (Obama’s Stimulus, Five Years Later),

The federal government poured billions into the government and education sectors, where unemployment was low, but spent only about 10% on promised infrastructure, though the unemployment rate in construction was running in double digits. And some of the individual projects funded by the law were truly appalling. $783,000 was spent on a study of why young people consume malt liquor and marijuana. $92,000 went to the Army Corps of Engineers for costumes for mascots like Bobber the Water Safety Dog. $219,000 funded a study of college “hookups.”

In the main, the money went not to infrastructure, nor even to productive investment generally, but to the maintenance of existing favored activities in “the government and education sectors,” – thus, essentially, as favors to groups largely supportive of Democratic Party politics.

Will it be any different this time around? In terms of dollar amount, Obama’s stimulus dwarfed Hillary’s $275 billion. Donald Trump has also proposed spending on infrastructure. As The Atlantic points out, “Trump, a builder by blood, has pledged to double that figure, at least. He has called for spending up to $1 trillion on new roads, bridges, broadband, and more.”

If that were all that was to it, then we wouldn’t have much to look forward to as far as structural change is concerned. But Trump has made other proposals as well, which are well worth delving into. We defer that analysis to a later date.


 

  1. For an example of the vulnerability of such export-dependent economies, see Jane Jacobs, Cities and the Wealth of Nations (New York: Simon & Schuster, 1984), ch. 4, “Supply Regions,” which uses the example of Uruguay as a country that was totally dependent upon the cattle industry for exports (meat, leather), which got rich from this trade, but which went into steep decline after that trade collapsed in the 1950s.

Pettis on Brexit

Michael Pettis is one contemporary economist whose blog is worth reading. His books The Volatility Machine and The Great Rebalancing are required reading for those who would understand the workings of international trade relations, currency movements, and financial markets. His comments regarding the recent “Brexit” vote by the UK’s electorate are worth delving into.

“Last Friday’s Brexit turned out to be a far greater shock than most of us had expected,” he writes in his latest newsletter.[1]”I say this fully admitting that I was caught as flat-footed by the vote as anyone else, but not only was I wrong, my own work suggested that this was never as unlikely an outcome as I and most people thought.”

Indeed, anyone familiar with Pettis’s arguments regarding the serious problems facing the European Union should have been expecting such a result, and Pettis points out that followers of his work did just that.

I am glad to say that since the vote an American mutual fund and an Australian hedge fund have told me separately that although they did not expect the outcome, they did not think it was highly unlikely either, and had positioned themselves relatively well. They were both kind enough to tell me that they had done so largely because I had convinced them that the institutional rigidities in the euro zone would continue to undermine the economies of Europe and would cause nationalist and anti-immigrant parties to do extremely well. This would go on until either the European project broke down or the centrist parties radically changed their views.

Pettis goes on to point out that his economic analysis contradicted his own political analysis: “if I had had more confidence in the framework I use and less confidence in my ability to second guess public opinion, I would probably have expected that sooner or later there would be major ‘unexpected’ popular challenge to the European project.”

This happened to him once before, when he was intimately involved in financial constructions in Mexico, and is one reason he no longer seeks close relationships with government officials. In Mexico at the time, he got to know officials responsible for monetary policy intimately well. These officials assured him that Mexico would never devalue the peso, and Pettis, “deeply involved in trading and in arranging and structuring transactions in Latin American fixed income markets especially those of Mexico,” took their word for it. In the event, when Mexico did devalue, these officials were as shocked as he and everyone else. “My blunder was in not seeing the devaluation coming until October, when in retrospect it should have been obvious at least six months earlier.”

The same kind of considerations come into play now with regard to the European Union. In this sense, that economic analysis should not be clouded by official statements or even political wishful thinking. The European Union faces serious structural economic difficulties, and these should not be obscured by hopes regarding the desirability of the project.

To describe the situation Pettis uses the term “credibility Laffer curve.” In order to bolster credibility and assure markets that a country will maintain its exchange rate (e.g., Mexico in 1994) or, in the case of the euro today, that a country (e.g., one of the PIIGS) will stay in the euro, then that country will increase its debt as denominated in the pegged or fixed currency. This will show the world that it intends to stay in that arrangement, come what may. But Pettis argues for a “credibility Laffer curve,” as illustrated in the following graph:

From “Spain, Bankia and the Credibility Problem,” Financial Times, May 30, 2012. Available at http://goo.gl/sAEJqx.

Here, as “monetary severity” increases, credibility increases, but only to a point. After that, credibility begins decreasing again. The increased commitment evidenced in taking on more of this debt will encourage investors to put, or keep, their money in, e.g., Spanish debt; but at some point the amount of debt will reach a point where investors will lose confidence in the credibility of that commitment. And so money will begin ebbing away from that debt market, making the commitment ever less tenable (go here for more on this).

In the current situation, Pettis applies his insight as follows. “I think the ECB is itself now creating a kind of ‘credibility Laffer curve’ similar to that of Mexico, and I suspect I will find several occasions to discuss this concept in the future, but the key point in this particular case is that the great distortions imposed by the euro project, and the wider institutional distortions that have led to high levels of income inequality around the world, have not changed. That is why I should have assumed that any chance for a sharp gapping in public awareness, like the Brexit referendum, might surprise us.”

What is the choice for Europe, in the face of these seismic events in public opinion? “Europe must choose either a major reflation of demand in Germany that redresses the deep imbalances within Europe and reduces the growth of debt in peripheral Europe, although at the expense of more German debt and lower German ‘competitiveness’, or it will be forced to suffer high unemployment and an inexorably rising debt burden in peripheral Europe that will only end after many more years of suffering or with a break-up of the euro. So far it continues with the latter.”

The conclusion? “For this reason we should not be surprised by the continued migration of votes to the nationalist, anti-Europe, anti-immigrant camp. I have been writing about this process for five years and I should not have been shocked to see it happen in England.”

Indeed. Given the astounding reticence to put forward effective policy initiatives (quantitative easing? are you kidding?), these problems will continue to simmer, with responsibility for action continually put off by the current crop of politicians and policymakers, leaving it to the next set of politicians and policymakers to solve, and so on and so on. No amount of emotive appeals to European unity and the European “ideal” will make up for that fecklessness.


 

  1. “Monthly Report, June 29, 2016,” published by Global Source Partners. Pettis’s blog is accessible here.

The Economic Consequences of the Release (i.e., Brexit)

Much has been written on the recent decision by the UK to leave the European Union. Much of it is emotion-driven. But that is no way to assess such an important turn of events. The actual significance is, in significant degree, economic in nature. This calls for an economic analysis, to which we now turn.

The Organisation for Economic Co-operation and Development’s (OECD) Report published in April 2016, entitled The Economic Consequences of Brexit: A Taxing Decision[1], provides a competent summary of the disadvantages that might follow upon a British departure from the EU. We will use it as a reference for interaction.

Initial objections

The initial objections the Report registers are based on circumstantial evidence.

This holds for “Since EU membership in 1973, UK living standards have risen more than in peers” and “A multipolar world implies that the UK is economically stronger as an EU member, and in turn contributes to the EU strength.” (both on p. 9). Despite the graphs, such arguments, are, at best, suggestive rather than demonstrative. The same holds true for the objection that “Uncertainty has already begun to have a negative impact on the economy” (p. 10).

Exchange rates and the balance of trade

The Report then claims that “Uncertainty about Brexit has led to capital outflows and a weaker exchange rate” (p. 12). For a country running a perennial trade deficit, this is anything but objectionable. The graph below shows the development of the UK’s balance of trade since joining the EU (then the European Economic Community) in 1973.UK balance of trade

 

This shows a downward trend, and since the late 1990s, a persistent trade deficit. As such, a decline in the pound’s exchange rate will only help matters, by encouraging exports and discouraging imports.

This leads directly to the next objection, which is a weighty one. “Trade would be hit when the UK formally exits the EU.” If this is the case, it would be dire indeed. Let’s examine the substance.

“The EU remains the main trade partner of the UK and the financial sector benefits from direct access to the Single Market, which has strengthened the comparative advantage of the City” (p. 14). Absolutely true. And by way of elucidation: “Exports to EU countries account for about 12% of UK GDP and about 45% of total UK exports, and for imports the EU is even a more important partner.” This was already implied in the trade deficit data we looked at above.

The graphs below shows the breakdown. The first shows, by percentage, the UK’s export destinations, the second shows the UK’s imports by country of origin (source: The Observatory of Economic Complexity [http://atlas.media.mit.edu]).

UK exports

UK imports

The data is from 2014. As can be seen visually, Europe accounts for the lion’s share of both imports and exports.

The Report includes the following graph on page 15, showing the trade and current account situation between the UK and the EU:

UK current account2

Now then, all of this indicates mutual dependence. Even more than that, though, it indicates that the EU is more dependent upon the UK as a source of income than the other way around, given the fact that the UK runs a trade deficit with the EU. The EU has every reason to maintain existing trade relations with the UK. It would be to the EU’s disadvantage not to do so.

Renegotiating trade deals

The Report goes on to claim that “Negotiating a new trade agreement with the EU is likely to be complex” (p. 16). The various possibilities are laid out in a table, which we reproduce here:

brexit arrangementsThe claim is that negotiations will be complex and that the UK will be on the outside looking in, with the very real possibility of being relegated to “Most Favored Nation” status, in which trade with the EU will be “subject to the EU’s common external tariff.”

For one thing, negotiations need not be complex at all. The website Lawyers for Britain has put together comprehensive, detailed research papers on this issue, of which we gratefully make use. On Brexit and International Trade Treaties, it summarizes the issue both for the UK and for trading partners generally, with the following points (emphasis added to highlight key issues):

  • “Because of the EU customs union and ‘common commercial policy’, the UK is not able to negotiate its own trade agreements with non-member countries — we can only do so as part of the EU. The UK will be able to participate in new trade agreements with non-member countries from the day after exit.  The process of negotiating new trade deals can be started during the 2-year notice period leading up to Brexit, with a view to bringing them into force on or soon after the date of exit.
  • “The EU has existing free trade agreements which currently apply to the UK as an EU member.  Most of these EU agreements are with micro-States or developing countries and only a small number represent significant export markets for the UK.  Both the EU and the member states (including the UK) are parties to these agreements. The UK could simply continue to apply the substantive terms of these agreements on a reciprocal basis after exit unless the counterparty State were actively to object. We can see no rational reason why the counterparty States would object to this course since that would subject their existing export trade into the UK market, which is currently tariff free, to new tariffs. There will be no need for complicated renegotiation of these existing agreements as was misleadingly claimed by pro-Remain propaganda.
  • “The UK was a founder member of EFTA but withdrew when we joined the EEC in 1973.  We could apply to re-join with effect from the day after Brexit. There is no reason why the four current EFTA countries would not welcome us back, given that the UK is one of EFTA’s largest export markets.  EFTA membership would allow us to continue uninterrupted free trade relations with the four EFTA countries, and also to participate in EFTA’s promotion of free trade deals with non-member countries around the world.
  • “The EU is seriously encumbered in trying to negotiate trade agreements by the large number of vociferous protectionist special interests within its borders.  After Brexit, the UK would be able to negotiate new trade deals unencumbered by these special interests much faster than the EU, and with a higher priority for faciliting access to markets for our own export industries including services.
  • “It is completely untrue that you need to be a member of a large bloc like the EU in order to strike trade deals.  The actual record of the EU compared to that (for example) of the EFTA countries demonstrates the direct opposite.
  • “The baseline of our trade relationship with the remaining EU states would be governed by WTO rules which provide for non-discrimination in tariffs, and outlaw discriminatory non-tariff measures. From this baseline, and as the remaining EU’s largest single export market,  we would be in a strong position to negotiate a mutually beneficial deal providing for the continued free flow of goods and services in both directions.  We explain what such a deal would look like in a later post, Brexit – doing a deal with the EU.”

All of this indicates that it will require no herculean effort for the UK to reestablish itself as an independent trading partner, neither vis-à-vis the EU, nor the world at large. After all, the other countries of the world are not members of the EU, and they are surviving. And it bears repeating that for the EU to impose a tariff on UK imports would make no sense at all, because the same kind of tariff would be imposed reciprocally on exports to the UK: all $420 billion of them (from all of Europe, 2014).

All in all, it would be in the EU’s best interest to simply maintain existing trade relations, as they are eminently in its interest.

Other near-term effects

Further near-term effects discussed in the Report, such as a putative “reduction in UK trade openness,” “imposition of tighter controls on inward migration,” leading to “a large negative shock to the UK economy, which would spillover to other European countries” (all p. 21), are either mere surmises or could serve to argue the exact opposite.

The argument that a decline in the exchange rate would have deleterious effects on the UK economy is an example of an argument that could just as well be used to argue the opposite. As discussed above, a decline in the exchange rate would bolster UK exports and inhibit imports, which would benefit the UK and disadvantage the EU. In other words, the neo-mercantilist export policy of the EU countries like German and the Netherlands would be brought more in line with equity.

Long-term effect on trade

The Report goes on to discuss possible long-term effects.

The first one discussed is the trade situation. “The UK is the most attractive destination for FDI in the EU, partly owing to access to the EU internal market” (p. 24). Foreign direct investment would be restricted by withdrawal from this internal market. But again, as noted above, access to the single market is unlikely to be restricted, as the EU derives more advantage from it than the UK. Furthermore, the major inhibitor to direct investment is currency risk. But it’s not like the UK is withdrawing from the euro; it is only rearranging its relation with the EU, with the relation between the pound and the euro (a free float) not changing at all.

Effect of reduced immigration

Secondly, “Immigrants, particularly from EU countries, have boosted GDP growth significantly in the UK” (p. 26). Apparently, immigrants are more productive than native-born Britons. This is obviously a contentious statement; whether it proves anything is another question. Then there is this contention: “Immigrants from the EU make a positive contribution to the public finances, despite relying on the UK welfare system, which is also the case of UK migrants elsewhere in the EU” (p. 27). This is another statement difficult to rhyme with realities. Even if immigrants are all net contributors in terms of social welfare revenues and payouts, the jobs they take, leave other labor market participants without jobs and thus, at least in part, adds to the social welfare rolls (unemployment and other forms of social assistance). In addition, “immigrants from new EU countries have comparatively lower wages…” (p. 27), which means they depress wages, which may be beneficial to employers, but not to employees, and additionally reduce consumption.

The claim is made that reduced immigration would lead to reduced skills, and “A loss of skills would reduce technical progress.” That may be true in the short term, but where there is demand for skills, there will be training and education to enable workers to acquire those skills, and there is no inherent reason why native-born Britons could not be trained up. It is in fact a curious prejudice and form of reverse discrimination to believe otherwise.

The upshot

As a result of these putative disadvantages, the claim is made for a “central scenario” in which “UK GDP is more than 5% below the baseline by 2030.” Just the opposite is at least as likely.

Objections in favor of withdrawal can also be made, of course, but the Report neglects to mention those. One is the fact that the UK is the second-largest net contributor to the EU’s budget, after Germany. Another is that the UK bears a major part of the costs of the EU’s common defense. Yet another is the costs of an inherently cumbersome and inefficient, far-off, relatively unaccountable bureaucracy regulating so much of the economic life of the nation.

But the biggest problem with the EU is tangential to this particular debate. It has to do with the single currency, the euro, in which the UK, of course, is not a participant. The euro forms a massive net drag on the world economy, and the debt overhang to which it has contributed, by having encouraged irresponsible, indeed unconscionable, North-South lending, is an toxic inheritance that not only stifles current economic growth, but also forms a burden that future generations will be hard-pressed to alleviate.

That, however, is stuff for another discussion. For now, it is enough to re-emphasize that, in line with the position outlined here (with an assist here), it is nations, not empires, that create wealth. And that should be kept uppermost in everyone’s mind.


 

  1. Kierzenkowski,R., et al.  (2016), “The Economic Consequences of Brexit: A Taxing Decision”, OECD Economic Policy Papers, No. 16, OECD Publishing, Paris.