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The editor of the London-based Economist is leaving, something I normally wouldn’t write about except the magazine is one of the world’s most influential, and it has been a leading voice for trade liberalization since its founding (in 1843!). Most of all, if its departing chief is any indication, the publication hasn’t learned a blessed thing about how the distinctive form of freeing trade spearheaded by the United States since the early 1990s was instrumental in triggering the worst global recession since the Great Depression, and how it continues threatening an even worse replay.

John Micklethwaite, who has edited The Economist since 2006, allows in a farewell essay that “Globalisation has indeed brought problems in its wake.” But he insists that those difficulties have been more than offset by freer trade’s record doing “an incredible job of reducing want” and, in particular, of lifting nearly 1 billion people out of extreme poverty since 1990.

Yet Micklethwaite makes no mention of the role played by policy-induced trade flows over the last two and a half decades in inflating the credit and housing bubbles in the United States and other high income countries, and thus ensuring that, without remedial action, they would at some point burst with disastrous consequences for the entire world.

As I’ve mentioned before, the argument that what are called “global imbalances” helped set the stage for the crisis and its painful aftermath is well established in the ranks of the world’s leading economists. Micklethwaite knows it backwards and forwards; his magazine has even covered it. But it’s never informed The Economist’s widely cited and enthusiastic editorial paeans to trade agreements and related policy decisions that unmistakably helped light and added fuel to the fire. And this narrative is nearly unheard of at the level of America’s chattering class, its Mainstream Media, and its elected politicians – many of whom either rely on The Economist for this type of deep analysis, or pretend to.

That’s pretty scary given that President Obama and the powerful offshoring lobby are pushing for some of the most ambitious trade liberalization deals in world history. At the same time, it’s at least partly understandable, since it’s a difficult argument to make. So let me try to express it as simply as I can.

Since the pursuit of the North American Free Trade Agreement (NAFTA), starting in the very late-1980s, American trade policy in particular has followed a strongly offshoring bent. Its main purpose has been not to promote more sales of American-made products and services overseas. If that were the case, its main targets would not have been very low-income countries like Mexico and China and Central America and the Andean countries of South America and sub-Saharan Africa and Jordan and Vietnam. Their populations have simply been too poor for their economies ever to have become significant buyers of what U.S. workers turn out – at least on a net basis.

Instead, the purpose was to enable U.S. businesses, primarily big multinational manufacturers, to take advantage of the super-low wages and other costs and light regulations, in these countries, and turn them into bases for supplying the American market – with factories and workforces once located in the United States.

Why was this so unwise? And how did it help bring on the financial crisis? Because all the offshoring enabled by these trade deals took income and income-earning opportunities from populations that the world economy relied on to consume (Americans and to a lesser extent West Europeans), and transferred them to those very low-income countries. That is, enough productive power was sent to the third world to undermine American and European consumption power significantly. But third world incomes started from such a low base that the new wealth could not possibly turn these populations into major net consumers.  Indeed, as with the role of global imbalances, this income shift is now no longer controversial among economists who actually know the subject.

As a result, the world’s main consumers no longer earned enough to enable their consumption to sustain adequate global growth, and the world’s new producers were still far from being able to fill the gap. Governments in the high-income countries, especially in Washington, tried to paper over the problem with unprecedented flows of cheap credit – which inflated the bubbles. But the underlying source of instability remained wholly unaddressed, as made clear not only by the bursting of those bubbles, but by the inability of the United States and most of Europe to grow satisfactorily without them.

Micklethwaite evidently decided to ignore this issue when preaching the (unalloyed) virtues of freer trade. Let’s hope his successor at The Economist displays more intellectual honesty.

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