By Sell on News of Macrobusiness, a macro equities analyst. Cross posted from MacroBusiness.
We cannot say we were not warned. Many commentators about globalisation said that it would create an imbalance between labour and capital, for the simple reason that capital is free to move wherever it wants, and labour, except at the very top end, is not. And so it is turning out, with the middle classes of much of the developed world under extreme pressure, and shrinking.
There has been some rise of a middle class in the emerging economies, but it is nowhere near enough to compensate for the loss of demand in developed markets. In many respects, the US housing and debt crisis was the last gasp for a significant slice of the middle class in America after decades of declining real wages. They borrowed to keep themselves at that level, and of course it could not last. Europe’s middle class is under extreme pressure and so is Japan’s.
That much is well known. What I think is less examined is the way that economic measurements influences the formulating of government policies to deal with the economic and social implications. One of the effects of globalisation is that labour is the government’s responsibility. Capital has no responsibility except to itself, and can for the most part push governments around. Put another way, labour remains a problem of the nation state whilst capital has transcended the nation state. Maintaining employment, looking after labour, is not just a key to political survival of any democratic government, it is key to attracting the blessing of the capital markets. Strong employment (and tax collection) is key to keeping government deficits under control, without which the punishment of the capital markets is usually brutal.
So governments in developed economies are caught in a vice. To keep the work force in employment, the workers have to be able to compete with much cheaper labour forces in the emerging world. If they try to compete on price, it leads to a Catch 22 — to keep the nation’s standard of living up you have to cut workers’ standard of living. Doesn’t quite work, really.
There is always the possibility of investing heavily in areas like infrastructure or education — but this, if done aggressively, will blow out government expenditure and create unsustainable deficits that lead to the punishment of the capital markets. Another Catch 22.
There are some exceptions. The US gets a free pass on deficits because the US dollar is the reserve currency of the world; no other country with open capital markets could get away with racking up so much debt. Although it cannot be indefinite, of course. And Japan is hermetically sealed, it has blocked out the international capital markets for the most part. That, too, will eventually have a big economic cost, indeed it already has.
But for most countries, including Australia, that is the conundrum they are presented with. The most attractive durable solution is to become like Germany, whose industrial habits and structures give it an exceptional ability to maintain competitiveness. Trouble is, it is very German — not easily replicated by anyone else. Or they can pursue a mercantile route like Korea, but this is deemed to be against the economic orthodoxy; sullying the purity of price signals.
This leads me to my complaint about how economic analyses work. One problem is that economics only records a score, it is not suitable for developing strategy. And the scoring tends to be always pretty much the same — labour is too expensive and must be driven down; any form of government assistance is harmful to consumers. Policy makers must, essentially, have no policy other than to let the markets work. That is, let capital find its most profitable destination. Which for the most part inexorably leads to lower wages for much of the middle class.
Another problem with economic analyses is the persistent use of circular arguments. The key badge of honour of economists, to use Paul Krugman’s phrase, is David Ricardo’s doctrine of comparative advantage. This argument for specialisation — high wage countries specialise in high wage tasks and low wage countries do the low wage tasks and both sides benefit — is a circular argument. It says that if countries transact more, then there will be more transactions per head. Hard to argue with, as most tautologies are. But it assumes that there is a neat transfer and it is far from automatic.
Labour in high wage countries will obviously come under pressure from labour in low wage countries if there is only a finite amount of employment. In an environment of global over supply (over supply that is a function of the lack of a big enough middle class in emerging economies and also of huge technological advances), there is obviously going to be pressure on the number of jobs. The result is obvious to see in the auto industry, where car makers shop around the world to get the best subsidies from governments confident that there is an excess of labour.
Economics, in other words, is heavily biased towards the interests of capital, hardly surprising given that it is basically a record of transactions and capital flows. If capital is looked after then consumers will be fine and labour is, well, somewhere in the rear. The problem with the bias is that economic systems are whole systems. As Philip Coggan points out in this excellent talk, there is a long history of the inter-relationship between debtors and creditors, a swinging balance.
There is also a long history of the relationship between capital and labour. When capital markets were largely national, there was an obvious interrelationship between wages and the consumer demand on which decent returns for capital investment depended. Pay the workers well and they would buy the stuff you made. But now, capital is global and the investment is global. That relationship has been destroyed, leaving governments to pick up the peieces.
It is not just the case that the finance sector has privatised the profits and socialised the losses. The finance sector has profoundly altered the interdependency of the system on which they, and everyone in developed economies, ultimately depend.
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Am I seeing double? I thought this piece is in the Links.
No, your eyes are fine. I skipped right over that one to drugging Albert Einstein. So, my bad. On the other hand, as Yves says, it’s got some important observations, and maybe everybody didn’t click through. So, unless it violates NC custom — readers? — I’ll leave it up.
No, you’re not seeing double, and despite others taking issue with the “red herring” of the war on the middle class, you’ll find that destruction of the middle class goes hand-in-hand with efforts to block the rise of the middle class.
“Labour in high wage countries will obviously come under pressure from labour in low wage countries if there is only a finite amount of employment. In an environment of global over supply (over supply that is a function of the lack of a big enough middle class in emerging economies and also of huge technological advances), there is obviously going to be pressure on the number of jobs. ”
This,
“It is not just the case that the finance sector has privatised the profits and socialised the losses. The finance sector has profoundly altered the interdependency of the system on which they, and everyone in developed economies, ultimately depend. “,
is not just coincidental, not to those making efforts to block the rise.
People appear unaware of how much the “financial sector”=Wall $treet have impacted economics-2001, said sector controlled-contributed 19% of U.S. economy…by 2007, that number was 41%. This 22% differential was derived from middle-class earnings…
Check out the historical narrative of world power economies whose banking systems were able to gain control of said economies-Britain, Holland, Spain, as
per Kevin Phillips’ book, “American Dynasty”.
Britain recovered.
Though only due to the election of Clement Atlee.
Critical Mass: The Mispricing of Derivatives Risk And How the Financial World Ends
Finance capital has moved well beyond the stage where it bothers itself with notions of production, demand, and cost of labor. But even absolute ownership of the political system will not be sufficient to sustain an infinite expansion of interconnected risk.
“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Warren Buffet, Berkshire Hathaway annual report, 2002
http://jessescrossroadscafe.blogspot.com/2012/02/critical-mass-mispricing-of-derivatives.html
So you anticipate a derivatives-fuelled melt-down of the overly interconnected financial overlords and their institutions.
Unfortunately I believe that means a depression that would make 1931 look a walk in the park.
Captial takes the bit it in its teeth and runs all of us into a wall: not a pretty scenario to contemplate.
Aggravatingly, I often hear people paraphrase Henry Ford’s shtick (Ford would have, of course, put off by my suggesting he had a “shtick”) about paying your workers well enough that they can afford to buy your product…
Ugh. As if capital were still tied tightly to “home”.
Globalization is not a stand-alone. It depends on infrastructure, local resources, and social organization, none of which is paid for. It depends on subsidies, overt and hidden. Locust capitalism.
And it’s all about cheap foreign labor?
http://usa.chinadaily.com.cn/business/2012-02/21/content_14656402.htm
So true.
China has already begun to export cars manufactured by Chinese automakers.
Mexican “negotiators” never demanded technology transfer from Ford or GM as they built plants in their country, as did the Chinese.
Partly as a result, Mexico has grown at 0.5%, GDP/Capita, during the last 30 years.
China has grown at a 9% GDP/Capita clip for the last twenty years.
National leaders matter. And nationalistic/jingoistic leaders – leaders who believe that their country is destined for greatness and refuse to accept a “managed decline” – are far better for growth than leaders who fancy themselves otherwise.
are you a nationalist or a global citizen?
once you answer that question everything becomes much simpler especially for the politicians assuming they work for labor (voters) not capital!
without an industrial policy with specific objectives there will be 160,000,000 that are not necessary over the next thirty years and as Bill Murray called “compost”:
http://www.reuters.com/article/2012/02/10/idUS82523190520120210
there is deliberate objective to take the US consumption – feed it from offshore “as long as it lasts” once it is gone and the people have no more discretionary purchasing power they – the banks & major brands – will move on – without US jobs the federal debt will blow up sooner or later – the only thing that saves it is the reserve currency status for a while – austerity doesnt work
1994 Sir Jimmy Goldsmith (a corporate raider, investor and european statesman) warned then – “only” solution is to trade with those countries with “comparable” – wages / regulations / work rules – everything today was predicted and Greenspan/ Rubin / Summers knew it!
http://www.youtube.com/watch?v=4PQrz8F0dBI
(see entire 7 interview series)
the white collar doesnt understand that as the blue collar gets decimated their while collar jobs are largely support – whether directly working for manufacturing company or in the support system around those direct jobs or the service industry that will spiral down as well without discretionary income to support it – lawyers are transaction based even the litigators – velocity effects the number of transactions – doctors the same way – other than research – will be effected as the medical systems are not supported by business and government as they are eliminated or cannibalized – medical transactions will go down and on and on for all other services
reverse WTO membership and GATT – they knew what would happen with no restrictions on “comparable” wages for country trading entrance – there is NO way to compete at $22 dollars a day for 6 day work week and 10 hours a day with a bonus of slave working conditions. NO way to overcome that with government subsidies or education
strip out from the export stats #’s last year from USA – low labor content commodities / boeing / military goods (coercive not free trade) and there is little left to export with high labor content (hours)!
the WTO participation could have been done in many other ways when WTO was put into effect – but the financial interests especially LBO artists and major brands that could retain USA consumption markets for free without any tariffs and move labor offshore could pay for the acquisition no matter what the price – so the government aided and abetted this present condition as a willing participant
change the personal tax rates to 75% above $1 million and offer offsets for US – manufacturing only jobs created – change the tariff structure or a VAT to change the intermediate sale / cost location dynamic
the idea the infrastructure to support manufacturing isnt in the USA anymore is a joke it will come back in thirty six months if hard rules were put in place – slavery may not be able to be introduced a la foxconn – but some inflation is necessary as offset to jobs availability
either put the 160,000,000 to work or as Bill Murray says tell them they are compost !
It’s “vise”, not “vice”.
Jest sayin’…
“Viuce,” actually; Australian spelling.
wishful Luddite…. how found you are of the days when capital was more ‘trapped’ in each state!! But what you really pine for is the the return of USA’s (or more broadly USA + its Anglo-Saxon partners) dominance of the global economy.
Yes freer movement of capital makes relative unit labor productivity all the more important to determine relative prosperity. On that issue a rather large slide in the US was masked by the debt bubble. But one thing is for sure restricting capital flows will not fix America’s middle class prosperity.
Its time we all woke up and smelt the coffee. The advantages we had post WWII vis-a-vis the rest of the world has almost vanished. Decades of under/ineffective investment in education and infrastructure has diminished the relative attractiveness of US labor. We fix that and that free flowing capital will redeploy in the US.
Such Trollspeak.
What crankyinnyc says about US investment in public schools is true. There are far too many teachers who would earn 50% of their pay if they were thrown into the private sector. Than there are also many who would make 200% of their base pay at a multinational.
The problem is that the teachers union won’t allow the exceptional ones to rise to the top.
That being said, I’m not convinced that exceptional teachers would make a huge difference.
Instead, I would rely more on fiscal policy to better distribute the rents of globalization.
Great teachers don’t magically make great students. Sometimes it seems that the discussion of public education takes place in movie fantasy land. You know the one. Where the beautiful and charismatic movie star wins over the class of inner city underachievers. Runs off the drug dealers. Confronts the abusive parents. Pays for the poor kids’ school trip out of their own pocket. Fights the stifling local school board. And all without another penny of the tax dollar going to education.
+1
We do not have an education policy in this country. Except to teach to the test so that the students learn by rote a lot of useless stuff which they never put into practice because there are no jobs. Solution? Decide which industries need which skills and teach to the practical application of education – that of getting a job.
‘students learn by rote a lot of useless stuff which they never put into practice because there are no jobs’
Even if there were lots of it would go unused. My daughter is 15 and though no fool has trouble with basic addition and subtraction, spelling is a disaster, history wouild be funny really if not so depressing. A bit more ‘by rote’ wouldn’t go astray at least for her. Sure the social media is a factor (she never reads a book), sure her parents (both FT workers) don’t have as much input as their own parents (with stay at home mums) did, sure her hormones and personal lack of drive is part of it too.
But Jesus, she gets projects on gender issues, body image, megacities, advertising and marketing, you name it, but no maths, no reading, no anything genuinely useful.
‘Solution? Decide which industries need which skills and teach to the practical application of education – that of getting a job.’
I’m not sure that wholly employment-oriented approach is the optimum approach. Yes tailor some teaching to changing needs of the economy, but what I would prefer is a much more life-skills oriented method, allying basic science with practical stuff like vegetable gardening (incl permaculture, urban farming etc) and animal husbandry, carpentry and mechanical repair (using 3D printing etc), elec and computer engineering and software design and programming… with cultural elements like art, lit, music, etc compulsory too, to provide rounding. Of course you’ll get those skewed to one side or the other, but if we have a critical mass of people who can look after themselves and their loved ones, we will be negotiating the future more safely. Right now, we are heading into the future with people who have no real skills and no sense of what is possible.
Bill Murray’s aside could be just air-headed big star arrogance (as if people like him are productive, or irreplaceable!) but the plea for greater self-reliance chimes with me. And I am nearly 50 with exactly none of the skills I list above. Just sayin, my dad grew up in the 40s and could build a house, instal the plumbing and wiring himself, skin and cook a rabbit, scale fish, milk cows and shear sheep. Most of his mates could too, and the ladies complemented them with their own more home-oriented skills (and their own parents were even more self-reliant)- making clothes, growing and preserving the fruit and veg, etc. And when they relaxed with friends, several could play the piano while others sang. And they TALKED… on and on at times, outstaying their welcome just as I am now.
‘Progress’ isn’t always progress.
We all just need to stop whining and work for cheap is what he’s saying, methinks.
“education and infrastructure” perpetrate little bearing on
exploitive economy based upon free or cheap natural resources…
read Perkins’, “Confessions of An Economic Hit Man” for particulars…
German auto workers, e.g. those at Audi, expect 5-figure bonuses this year:
http://www.faz.net/aktuell/wirtschaft/unternehmen/automobilindustrie/rekordpraemien-in-automobilindustrie-jetzt-kassiert-die-arbeiterklasse-11662590.html
Public education + rigid qualification-based labor market (no, you can’t work as a carpenter above-the-table without qualification i.e. doing a 3-year apprenticeship) = pays off, and illustrates relationship between labor and captial markets.
Also of note in the same edition of FAZ is a report on the Austrian President’s program recognizing top students. The Austrian state gives top students rings comparable to super bowl or NBA champ rings. According to the Austrian sciencce minister, the rings are intended to bind top-performers to the state, which made the educational achievements possible.
I would never wear a ring.
One more piece of the puzzle — capital is simply one of the ways of mobilizing human effort.*
You may think it can be used to buy goods instead of services, but when you look at the goods you’re buying, they have been gathered, transformed, preserved, packaged and sold to you by people. Or, they’ve been cordoned off by people and you have to pay to access them. If you come up with an exception, I’d be thrilled to hear it.
So capital (the abstract sort that can flee the country in a millisecond) is nothing but a lever to control human effort. Seen that way, the MOTU look even more ominous than they did previously.
Noni
* others include threats and violence, pity, lies and stories, and societal structures like laws and customs.
BS.. Since when is direct labor cost the highest cost of manufacturing? It still is and always will be the costs associated with labor. Much of the issue today, is the mistake of believeing Labor, solely labor, the direct cost of labor in manufacturing is the driver of jobs leaving the US.
Cost of capital also impacts decisions. Capital gains and dividends are taxed at 0% in Mexico.
I would tax capital gains at 0% (to allow the use of common stock as money) and dividends at 100% since dividends are parasitical.
Capital gains are only realized when stock is sold. They should be taxed.
Dividends should be treated as ordinary income. In the case of a startup with high cost of entry, they represent the return on the investment of actual physical capital. Not that that happens much any more.
Rentier much?
In the case of a startup with high cost of entry, they [dividends] represent the return on the investment of actual physical capital. Nathanael
“Here you go new startup. Let’s drain some blood out of you so you can compete better!”
Capital gains are only realized when stock is sold. They should be taxed. Nathanael
No they shouldn’t be. Capital gains are measured in fiat. Thus a decline in the real value of fiat causes a phony capital “gain”. Yet, common stock is an ideal private money form from an ethical viewpoint. So why we would we wish to discourage its use?
As for dividends, they are stupid at best (for common stock holders since it is disinvestment in their own property!) and sinister at worse (for preferred stock owners since, in addition, the dividend is paid forever). If taxes are necessary then I can think of no better one than one on dividends.
In you they have taken bribes to shed blood; you have taken interest and profits, and you have injured your neighbors for gain by oppression, and you have forgotten Me,” declares the Lord GOD. Ezekiel 22:12
It appears to me that God does understand economics. The Bible is in favor of profits but not in favor of taking them or usury (from fellow countrymen). Common stock as money thus seems ideal from a Biblical viewpoint.
Dear Jim;
And look at how well that has benefitted the Mexican ‘Middle Class!’
ambrit:
If anything, Mexico is the future for the US Middle Class.
capital is free to move wherever it wants, and labour, except at the very top end, is not
I’m not sure about the second part of that statement. I have not seen being CEO outsourced to India despite the fact that obviously most of the CEOs of TBTF banks and Wall St firms are obviously dumber than shit. They drove their companies, and in fact, the whole world economy off a cliff. Instead these very same fucked up motherfuckers put a gun to the heads of the western world and threatened to take down the world unless they were bailed out. So upper, upper end labour is not relocating, instead, it’s put a gun to it’s head and is daring us to let it’s blow it’s own head off. Which will happen sooner or later I suppose.
” The most attractive durable solution is to become like Germany, whose industrial habits and structures give it an exceptional ability to maintain competitiveness. Trouble is, it is very German — not easily replicated by anyone else.”
There’s also the slight problem that, as Krugman has observed, everybody can’t run a massive trade surplus all at once, ze Germans or not…
You can import me and I will teach you how to be more German.
The day will start at 0630.
pffft. Sleeping in, are we?
If he’s German, he won’t get it (!)
To the Paradox of Thrift should be added the Paradox of Hard Work: if everybody is a busy bee, laboring all the day to produce nice things, there’s nobody to take a break and enjoy them.
Labour can move whereever it wants to *provided* its movement is not restricted by governments.
Immigration law, with police enforcement, is one of the ways in which governments act as strikebreakers for capital. Think about it.
Eventually it becomes completely non-viable; the only way to keep labour from moving to your country is to make your country suck so hard that labour doesn’t WANT to move there. The US is pursuing this policy.
You’ve got it backwards. Labor mobility is bad for labor, the same as busing blacklegs in to cross a picket line is bad. The same as “Right to Work” state laws are bad, because they prohibit organized labor from standing in the way of the employer and the cheapest possible worker contracting together to replace the union worker, in a race to the bottom.
Artificially limiting the rate of labor mobility is what the labor movement was always all about.
The problem is trade has to be balanced. A trade deficit leads to loss of industry and job loss. See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html
I recommend import certificates, to force balanced trade. This is a certificate issued by an exporting country to the country receiving its exports, permitting that second country to export the same amount of goods back to the first country. See: http://anamecon.blogspot.com/2011/10/import-certificates-problem-and.html
If all countries did this, trade would be balanced, each country would import as much as it exported, and the wage advantage would be negated.
Since the European crisis is at heart a balance of payments problem, balanced trade is essential to its long range solution.
This won’t guarantee all jobs. Many are being lost to automation. Another problem.
The U.S. could invest heavily in infrastructure but it does not. Even when infrastructure needs reach crisis proportions, as in this example from New York State:
http://www.ritholtz.com/blog/2012/02/on-meredith-whitney-munis-and-leaks/
Will some Austerian please explain to me how this decision not to issue debt constitutes rational behavior?
“investing heavily in areas like infrastructure or education…will blow out government expenditure and create unsustainable deficits that lead to the punishment of the capital markets.”
Since the U.S. government issues the dollar, the U.S. (and other nations with their own currencies) can spend without worrying about capital markets.
And if the capital markets try to punish us, as a matter of national security we should be thinking of ways to get rid of capital markets. But I suppose that would be socialism or something.
“Strong employment (and tax collection) is key to keeping government deficits under control, without which the punishment of the capital markets is usually brutal.”
And during the crisis who came hat in hand to whom? Where does the real power lie? (I do not mean to underestimate oligarchy and plutocracy. But power is in no small part a matter of perception.)
“When capital markets were largely national, there was an obvious interrelationship between wages and the consumer demand on which decent returns for capital investment depended. Pay the workers well and they would buy the stuff you made. But now, capital is global and the investment is global. That relationship has been destroyed, leaving governments to pick up the pieces.”
The relationship has not been destroyed, it has been altered. Buying labor cheap in the developing world and selling products dear in the developed world will not work if the workers in the developed world cannot afford to buy.
This is not a new problem. It goes back at least to the British East India Company. Historically, a large part of the solution was the rise of an international labor movement. Now, labor has been under strong attack for over a generation, and still is. If yin follows yang, it should make a comeback, with less bloodshed than before. If, when, and how that will happen remains to be seen.
I am not even sure I believe in globalisation: http://andreasmoser.wordpress.com/2011/05/09/globalisation-is-a-myth/ – We educated people may be global(ised), but the large majority of people everywhere are not.
“Pay the workers well and they would buy the stuff you made”
So with capital being global now too, wouldn’t capital not only move itself from high labor costs to low, but also move it’s product to areas that could afford to buy? So why sell to Greeks? They are broke. Begin campaigns in new markets with marketing and advertising to convince that the ameircan consumerist materialist way of life is much better than what they had before. So now you have turned 2 billion Indian and Chinese people into rabid consumerists. Whereas in America when you have 10% growth in sales (maybe 3 million base customers or 1% of the total population, so 300k new customers a year), you now have 200 million customers and 20 million new customers a year. There is no reason at all for capital to concern itself with Greece. Let them eat cake. And it growth fell to 2%, capital is still wealthy. And as long as there is revenue growth, capital can be converted to financing and debt can perpetuate some revenue streams.
Glad to see some one taking on the comparative advantage doctrine. There are all sorts of problems with it that are rarely if ever discussed in the economics profession, and that would lead to much of mainstream economics having to be junked if they were every properly dealt with. Ghost economies (Detroit) and banana republics (reliance on export of unessential goods to distant markets) are just the two most obvious ones.
The theory itself, even if we accept it at face value, is far from palatable for most people. Ricardian analysis points to long-run declines in wages in currently high-wage countries, with offsetting increases in wages in low-wage countries. Factor-Price equalisation. The reality, of course, is that wages decline in developed countries much more dramatically than they increase in the developing countries, leading to a large net gain for the owners of capital. Exactly as we have seen.
As labor wages have stagnated, labor’s level of debt has risen. So capital has figured out that its better to lend to workers than pay them. Not only that, the social contract these days is that one must take on debt to join the work force, generally speaking.
quote
In many respects, the US housing and debt crisis was the last gasp for a significant slice of the middle class in America after decades of declining real wages. They borrowed to keep themselves at that level, and of course it could not last…. that much is well known.
endquote
but it may also be WRONG. Blame high interest rates and low inflation moving money to the pockets of the creditors class.
see:http://rortybomb.wordpress.com/2012/02/23/guest-post-by-jw-mason-the-dynamics-of-household-debt/
note especially:
there is no reason to think that aggregate household borrowing behavior changed after 1980; indeed households rescued their borrowing in the face of higher interest rates just as one would expect rational agents to. The problem is that they didn’t, or couldn’t, reduce borrowing fast enough to make up for the fact that after the Volcker disinflation, leverage was no longer being eroded by rising prices.
Globalization is the unrestricted conversion of capital, unearned income, from the wrong paper into the right paper.
Ricardo assumed in his Political Economy and Taxation that capital was immobile, read the chapter “On Foregin Trade”. He said that it was possible that production could be shipped to other countries but his book assumed it didn’t. When he talked about “free trade” he was talking about commodities, products and the like. Once you allow capital, production, to go across borders it is a whole different ball game. Besides, countries like the US, Britain and Japan proved that you have to many times CREATE comparative advantage for your country. If Japan listened to the orthodox economists they would have never developed, they’d still be exporting silk. The government there supported its manufacturers for decades. Toyota tried to export to the US in the late 1950’s and it horribly failed. If they Japanese governments didn’t support and protect companies like Toyota there would never have been a Lexus. It wouldn’t have developed without the famous MITI either. If the US followed Adam Smith’s advice and didn’t develop behind the highest tariffs in the world (for over a century and a half) it would have never overtaken the British, who also developed behind a massive wall of protectionism. Same goes with China today in regards to the US.
I like the joke that Steve Keen mentioned in his book. An economist is shown how something works in practice and they then respond, “Ah, but does it work in theory?”. Obviously these pet ideas, and the assumptions that form the foundation for these theories, matter more than reality.
I’m not that big a fan of Jane Jacobs, but she does have a point that comparative advantage is something you can bring home, instead of forever having to trade the same old things with the outside. The usual unfair characterization of her concept of import replacement is that it’s “autarchy”, the misguided attempt to do it all at home and import nothing.
But she isn’t saying that at all, she’s saying when you are importing less of the old cool stuff because you’ve started making your own, you can use the export capability you’ve developed, and the import capacity you’ve freed up, to import new, even cooler stuff you couldn’t afford before. Making it at home lets you increase beneficial trade, it doesn’t decrease it.
Offshoring production, by contrast, decreases your ability to import cool new stuff, no matter how much you “saved” by moving formerly-domestic activity away from home.
“There is always the possibility of investing heavily in areas like infrastructure or education — but this, if done aggressively, will blow out government expenditure and create unsustainable deficits that lead to the punishment of the capital markets.”
This might be gospel, but that makes it faith, not truth.
If investment into infrastructure and education is actually connected to reality – e.g. in anticipation of rising energy costs, or rising temperatures, or rising sea levels – then it will reduce government deficits resulting from not investing into infrastructure. US workers might often not be able to compete with Chinese labor at a “living wage” for the duration, but if there are no roads or rails, the nation will be even less competitive. Retaining institutional knowledge and facilities, and advancing them, is a value all in itself, as rare earth minerals are demonstrating. Finally, punishment *of* the capital markets is very much desireable at this point. Punishment meted out by capital markets only matters to rentiers and those that live for short term profit.
Some things will have to be left to chance. But no nation aiming its resources at the obstacles and threats in the way of an educated, empowered population will do much wrong.
“The most attractive durable solution is to become like Germany, whose industrial habits and structures give it an exceptional ability to maintain competitiveness.”
Until it runs out of Greeks. This is not a durable solution.