It's time we say enough is enough. The current policies, while they are encouraging the privileged to pull money out of the investment system and turn it into parked money - parked off shore in many cases - are not making progress on key areas. There is nothing going on that would not be going on with much better fiscal policies - with the exception of the slow motion demolition of Iraq.
One big issue is manufacturing: the fall of manufacturing in Europe and the US is a story that is often told, but which is reaching a crescendo. Companies cannot cut wages much more than they have, and so are looking to break the promises to the past, or shift these burdens to the taxpayer. Particularly in the cross hairs are the transportation industries: automobiles and airlines. For years these were the bastion of strong unions and strong wages, because transportation needed to be strong to fight wars. Now that the century of wars seems to be receding, the wealthy don't see why the need to keep these industries above the wage standards of Wal*merica.
Among the many signs of the transition is the move to make
oil companies pay for the shift away from carbon emissions. Carbon is a rock, we should leave most of it in the ground - but someone has to bear the burden of moving from energy that oozes from the sand to capital energy. For years it as the electrical generation and transportation sector, but they don't have the profits to bear it.
Without a strong manufacturing sector, the US and Europe will not have the flexibility to meet challenges. Wars are one kind of challenge that requires manufacturing flexibility. Another is changes to the economy - such as the emergence of new consumer powers. It also makes it harder to take advantage of positive economic effects or avoid one dimensional economic growth.
However, manufacturing of the old kind is not going to do the job. Detroit sells cars by the pound - the bigger the car, the more profit. Plush luxuriance comes from the weight of metal and all that it can hold. Detroit has gotten by selling "inflation wagons" - vehicles for the big family that are bigger and bigger. I used to joke about my grandfather's Packard and its weight, a relative's new minivan clocks in with both higher horsepower and more tonage.
The same is true with the legacy airlines - even the speed at which the name has stuck should tell you that they are headed out the door.
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These structures are the remnants of the series of wars and crisis points from 1914-1989. Dubbed "the short 20th century", it was an era where to protect the national industrial base, and later its access to materials, large military machines were needed. These military machines were logistical monsters. They required more supplies, of a more complex nature, delivered and managed in a more precise way. Gone were the days of building ships and tellling towns to raise regiments. Ships themselves required coal, parts, oil, later fuel oil, more kinds of ammunition, communications equipment, bases around the world stocked with all of the above, and trained people to run an increasingly complex machine.
The end of the cold war, and with it the end of mass mobilization conflicts between super-powers and regional powers means that the entire industrial system which was kept in place to fight these wars is also dying. And with it the sinecures that the industrial work force enyoyed. It is a paradox on the left: on one hand wanting peace, on the other hand, demanding labor rights that were granted to fight wars. Both can't be in place.
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The point of this post is to explain why free trade in goods is going to be with us. The destruction of the cold war economy is going to lead to calls for direct protectionism. Before military goods were self-evidently in need of protection, and provided indirect protection to their consumer equivalents. Both of these are untenable. The first because there is no Cold War to fight, the second because military hardware is prodigal of both supply and sink of energy - fighting a war means not having to care about global warming.
The wealthy have already snagged gains from "the peace dividend" - which has been, in no small part, taken out of the futures of people who hitched their wagons to the military economy. If you want to find a free market libertarian - call up the Raytheon missile defense systems and ask to speak to two enginners. One of them will probably be a socialist, the other will probably be a low tax libertarian. Don't ask me to explain it.
Thus people now being dumped out of the protected system are going to demand the path of least resistence, just as they did with Perot - "Protectionism Now!" Why shouldn't they get the same deal that hospitals, the stock market and home builders get.
The reason is this: it will cause a massive economic downturn with, in econogeek "no tendency towards equilibrium". That's technish for "things just keep getting worse".
How does this happen? Let's take it a step at a time. First let's close the borders to a few things - like energy. That will mean that manufacturers will find whatever the borders are closed to, make it someplace else, and then sell the result here. Why did the Japanese make plastic? Because at the time we had import quotas on oil. Make oil into plastic elsewhere, sell the plastic. Because it is virtually impossible to figure out how much oil is in plastic...
Now that means the borders have to get closed to just about everything. What happens? Prices go up, because if it were cheaper to make here, it would be made here. Businesses may push for lower environmental standards - and will get some of them - but this will only dull the edge. What do prices going up mean? Inflation. Which means that social security taxes go up, because Social Security is indexed to inflation. It also hits people on fixed incomes - retirees with defined benefit plans for example.
Now you might argue "but wages will go up" - but mostly for those people in protected industries. In fact, that is what is happening now with housing construction: housing contractors are working in the protected economy, and buying in the free trade economy. They come out ahead. But everyone else comes out behind, because they pay a lot more for what contractors make -namely houses and work on houses. In fact, even people in protected industries will start to come out behind, as more and more of what they buy will go up in price.
So what happens next? Well, the federal reserve raises interest rates, that is what happens. Every central banker who starts at Mt. Flushmore which has the legendary central bankers carved on it, will do so. General inflation is bad, because it turns a specific policy problem which can be addressed by incentives, into an endemic problem that cannot be. Interest rates go up, what does that mean? That's right lower economic activity. So while wages went up for some people, this is more than paid for by higher prices for most people, and other people losing their jobs to tighter money.
And we haven't even gotten to what happens with other countries: they of course aren't going to let us sell to them and not buy - even more than we already do - unless they are desperate. As soon as trade balances start turning negative, barriers go up. Nations leave the various treaty organizations. That means not just movement of goods, but tourism, travel, transperancy. More corruption, and yet more jobs lost, as people who sell things here suddenly find themselves out of jobs. They get lower wages as the shift to making protected things. This then lowers the wages that went up in the first place as there is more competition for the same protected jobs. Inflation becomes deflation. Recession becomes depression.
But wait, there's more! As the US can't sell abroad, and its dollar is less portable, the move away from the dollar becomes a flood. Prices of imports, like energy, shoot up. This produces another shock, as falling purchasing power meets rising prices. Desparate political leaders try stupid policies - massive tax cuts, or massive spending cuts, or directing the central bank to inflate to avoid depression. Gasoline hits 200 Bush Bucks a Barrel. The likely response will be to turn the US economy into China - low wages, high pollution, and massive controls on investment and spending. It isn't pretty.
This is why calls for straight protectionism and the end of free trade are not just beknighted, they are down right stupid, and almost any economist can follow out the story, because we've seen it over and over again. The only way out of our present problem is not less free trade, but more free trade.
That means things like Universal Single Payer Health Care - because only that controls the protected industry of hospitals, doctors and office visits. It means things like National Pension Reform because that will allow us to transition from the protected Cold War economy. It means things like a sustainable, scaleable and accessible energy system, so that we are not stuck by an umbilical cord to energy.
It means liberal and progressive government, because liberal and progressive government has grown with trade between nations and peoples.