(What’s Left of) Our Economy: So You Think Trade is an Engine of Productivity Growth?

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economics, economists, European Central Bank, exports, free trade, GDP, gross domestic product, imports, International Monetary Fund, labor productivity, productivity, productivity growth, total factor productivity, Trade, trade openness, World Bank, {What's Left of) Our Economy

The idea that the more international trade a country engages in, the more strongly its productivity will grow, is widely accepted among economists. Indeed, no less than the World Bank, the International Monetary Fund, and the European Central Bank (the eurozone’s version of America’s Federal Reserve) say so.

How then, can these august institutions and other believers explain the following: On the one hand according to the United Kingdom’s Royal Statistical Society, the country’s feeble annual average labor productivity growth of 0.3 percent over the last ten years was its “statistic of the decade”? Worse, it was the poorest decade for British productivity growth since the early 19^th century.

Yet on the other hand, during this period, the United Kingdom’s openness to foreign trade – a data point created by adding a country’s imports and exports and then expressing this sum as a percentage of its entire economy, or gross domestic product (GDP) – has for the most part been hovering near post-1960s highs. In other words, the more foreign trade the UK has been engaging in, the lower its productivity growth seems to have become.

Nor is this phenomenon restricted to the UK. The same pattern can be seen in the United States, although the country’s openness to trade is much lower than the United Kingdom’s in absolute terms (not surprising, since we’re comparing an island with a continental sized economy). RealityChek regulars shouldn’t have to be reminded about America’s discouraging collapse in labor productivity growth.

What about trade? In fairness, America’s openness to trade has been falling recently. But no, that’s not President Trump’s “fault.” The decline began in 2011, when trade’s share of GDP hit a post-1960 high of 30.79 percent. As of 2017 (the latest data year available according to this source), it still stood at 27.09 percent – much higher than the period average of 19.29 percent.   

Also in fairness: Simply because openness to trade for these two big national economies has coincided with lousy productivity growth doesn’t mean that openness to trade causes the problem (or vice versa). It doesn’t even mean that openness to trade is the main productivity culprit, for many different characteristics of an economy influence any single characteristic.

But certainly in light of the American and British experiences, even if the conventional wisdom is right and trade openness does encourage productivity growth, it’s clearly a policy choice that’s often overwhelmed by other features of that same economy. P.S. – it ain’t just the Anglo-Americans. The World Bank’s databases also portray global trade at only slightly off its all-time high as a share of the global economy. And guess what? It turns out that global productivity growth has been crappy lately, too, whether we’re talking labor productivity or total factor productivity (a broader gauge that measures output from the use of many different inputs, not just labor).

As a matter of fact, it’s not difficult to think of ways in which more trade can undermine productivity growth – e.g., if import floods decimate the sectors of the economy that have historically been its manufacturing leaders, or if trade policy fosters their offshoring. (Strong cases can be made for both propositions when it comes to American domestic manufacturing.) 

So the case that trade fosters productivity growth is hardly a slam dunk.  And that’s one more reason to believe that the broader case for free trade isn’t, either.

(What’s Left of) Our Economy: Can Free Trade Nowadays Really Maximize Global Well-Being?

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China, East Asia, economics, free markets, free trade, globalization, Trade, {What's Left of) Our Economy

As nearly every economist worth their salt can tell you, as far as their profession is concerned, the prime end goal of liberalizing global trade as completely as possible is maximizing the entire world’s economic well-being. And theoretical, purely economic criticisms of the freest possible global trade have been dominated by questioning whether efforts to achieve this goal have truly have kept this promise, or are capable of doing so.

I don’t mean to minimize the importance of this debate, or others focusing on related but distinctive issues bringing into play non-economic considerations – like whether trade and broader economic policies need to broaden their definition of well-being to include goals like increasing feelings of happiness and security, or like fighting climate change and other threats to the environment, or like preserving America’s national security, or like ensuring that the economic well-being being created is more equitably shared.

But these days, it seems that American policymakers in particular need to ask themselves a more fundamental question: Assuming the goal can be reached, is the greatest possible worldwide economic (that is, material) well-being actually a goal that the global trading system should be trying to reach? And all peoples and governments of good will, not simply the United States, have a vital stake in figuring out the right answer – especially if they place noteworthy value on free markets.

The presence of the word “governments” in the previous sentence points to a central complication that the welfare-maximizing enthusiasts seem to be missing.

Specifically, no one of good will could reasonably oppose maximizing the economic welfare of all the world’s individuals (assuming, of course, that whatever non-economic challenges caused by high growth – e.g., environmental threats – aren’t ignored).

But even leaving aside strategic and national security considerations, the organization of the world’s individuals into governments creates a big problem with this objective. Specifically, many of these governments have organized their national economies in turn around principles and practices that have nothing to do not only with free trade, but with free markets or any aspect of economic liberalism themselves – the idea that individuals and other economic actors (like businesses) have the right to make the (legal) economic choices they regard as serving their own best economic and/or non-economic interests.

China is the obvious example. Its system holds that, even though at a very local or micro level, individual and other actors (because of the point I’m about to make, I’ve always hesitated to use the word “businesses” or “companies” to describe any Chinese goods- or service-producing entities) can be permitted to act on their own impulses, any such economic decisions with broader effects should be made or be subject to the control of the state. And all resources related to the economy are ultimately accountable to the state as well.

There’s no legitimate doubt that freer trade has helped lift hundreds of millions of Chinese out of poverty, and of course contributed to the economic well-being of myriad non-Chinese individuals and businesses and other entities that sell to this huge, burgeoning market, the growing prosperity of Chinese individuals. But there can also be no legitimate doubt that this free trade has also greatly strengthened a Chinese government whose practices clearly amount to a broad rejection of free trade and the rest of free market thinking.

Until now, it’s been easy to argue that whatever Beijing’s interventionist record, freeing up trade between China and the rest of the globe has improved the world’s wealth on net, even though China may have been the greatest beneficiary, and even though workers in high-income countries (to cite one prominent example) may have paid an economic price on net. 

But all this wealth creation unquestionably has strengthened this command-and-control Chinese system, its global footprint, and its influence over the world economy. If you believe in the virtues of free markets, how can this kind of development possibly keep increasing overall world economic well-being over any significant period of time (as opposed to spurring the kinds of brief boom periods that tend to become busts)? And if it can (and statist China has been a big global economic player for many years now), then maybe it’s time to rethink faith in free markets to begin with?

Of course, it’s important to keep in mind a long-time standard explanation of how China’s economic rise can be squared with support for continual global trade liberalization. It’s the confidence that more and freer trade with China will promote a liberalization of China’s domestic economy that will inevitably loosen the state’s grip trade and other foreign economic policies. But as known to anyone who’s been following China issues in recent years, Beijing has been reasserting control over much of the paltry amount of economic activity that it had previously ceded. Moreover, this trend didn’t begin with current leader Xi Jinping. So at the very least, the optimists are now under a heavy burden of proof to show that continuing to free up trade with China, or even fighting Trump-ian American backsliding, will maximize global welfare indirectly, by fostering Chinese internal economic liberalization.

Given China’s immense size, a China exception to the trade-spurring-welfare-maximization claim would be crucial enough. But it’s not just China. Economic intervention even dwarfing that practiced by the United States (including but hardly limited to the massive response to the financial crisis by the Bush and Obama administrations, and especially the still considerable stimulus supplied by the Federal Reserve) is common the world over. Gradations vary considerably, but fascinatingly, and perhaps revealingly, its strongest in East Asia, the region that, even leaving China out, almost everyone agrees has been the biggest net winner from trade liberalization going back to the early post-World War II period.

Unlike China, some of the leading East Asian beneficiaries of freer global trade, like Japan and South Korea, are U.S. security allies. But they conform with no reasonable definitions of free market systems, either. Should American policy, and the policies of other more market-oriented economies, support making these countries and their highly interventionist systems stronger, richer, and more influential as well?

China’s rise and increasingly anti-American actions on many fronts have prompted speculation that current bilateral tensions might eventually split today’s highly integrated global economy into separate, Cold War-like U.S.- and Chinese-dominated spheres. In fact, this may be a Trump administration goal. So far, this talk has emphasized the intertwined technology and national security reasons for pursuing this goal. But if free markets are all they’re cracked up to be, it may also be warranted for solely economic reasons.

(What’s Left of) Our Economy: The Big Messages Being Sent by a Jetsons-Like Invention

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Aeolus Robotics, automation, capital spending, Consumer Electronics Show, Democrats, domestic workers, economics, Fight for 15, Immigration, innovation, Jobs, minimum wage, offshoring, Open Borders, robots, Roomba, Rosey, technology, The Jetsons, Trade, Washington Post, {What's Left of) Our Economy

Along with the rest of the world, I just got another reminder that the future is arriving a lot faster than most of us expect. And that’s got especially big implications for related points I’ve long been making about U.S. immigration policy and efforts to boost the country’s minimum wage.

For many years, when I’ve spoken about immigration policy, I’ve used the following argument to explain the relationship between the mass immigration America has fostered for so long (including winking at illegal immigration) and the productivity gains and technological progress needed to ensure that living standards can improve in a sustainable (not bubbly) way:

“Does anyone remember Rosey, the robot maid on the 1960s TV cartoon show, ‘The Jetsons’? Did you ever wonder why, decades later, there’s still no Rosey – or anything better than a Roomba? A major reason has to be that, with so many legally and illegally present housekeepers and housekeeper candidates available, and willing to work so cheaply, there’s been little incentive to automate domestic work.”

It was my way of using pop culture to illustrate why a big spur to technological progress (and the higher productivity it tends to bring) for the United States in particular has been the scarce labor situation that’s existed for most of American history. With workers in chronically short supply, and therefore increasingly expensive to hire, U.S. businesses were constantly looking for labor saving devices that could cut their costs. And American inventors were terrific at seizing the opportunity and providing them.

In other words, the U.S. economy was behaving exactly the way the textbooks said it should. When labor became too costly, business stepped up its search for ways to substitute capital (which often meant) technology, for those overly dear workers. More recently, as labor has become more abundant (and therefore, all else equal, cheaper), this dynamic has often shifted into reverse.

Incidentally, mass immigration policies aren’t solely to blame. Offshoring-friendly international trade deals like the North American Free Trade Agreement (NAFTA), and similar trade policies (like coddling China’s trade predation) have also greatly expanded the amount of workers realistically available to American employers, especially in sectors like manufacturing. And it’s surely no coincidence that business spending on equipment and machines and the like (called capital spending) has been a notable weakness lately in the U.S. economy. (In fact, although many factories in China are automating rapidly – because of wage increases – this report makes clear that labor surpluses are still slowing its pace in some important Chinese manufacturing industries.)

What has this to do with Rosey? Simple. As this Washington Post piece from last week shows, she’s here – or just about here. For at the latest annual Consumer Electronics Show (one of the tech industry’s major events), a company called Aeolus Robotics unveiled a device that looks awfully similar. According to the Post reporter, this “child-sized” machine

“performed domestic duties such as mopping, picking up stuffed animals off the floor and moving furniture, and, perhaps most impressively, retrieving drinks from the fridge using an intricate-looking grabbing arm — all without human assistance.”

The robot – billed as “the first multi-functional robot that can act like a human being” – still doesn’t crack wise in a New York accent, like the cartoon Rosey. But how far off can that be?

Technology and labor costs hardly move in lockstep, and of course innovation results from many causes. But economic theory, anyway, is saying that my view on the cost and supply of domestic workers is becoming outdated. Common sense also suggests that if something like Rosey is just about here, then domestic workers aren’t as cheap and/or as abundant as I believed. So their wages may well have been rising strongly enough lately to create demand for an automated counterpart.

At the same time, the advent of “Rosey” (and how many other devices like “her” just over the horizon?) amounts to a frantically waving red flag about the wisdom of any immigration policy moves likely to increase the supply of poorly-skilled workers in the American economy – which is to say, any proposals supported by the national Democratic Party and the rest of the country’s Open Borders enthusiasts. Just what kind of work can they be expected to find? Indeed, the automation progress represented by “Rosey” signals that much of the existing workforce in the nation is going to be increasingly hard-pressed to secure or hang onto decent-paying jobs.

Similarly, although I believe there’s still a strong economic (and moral) case for a national minimum wage that tracks inflation, the seemingly impending dawn of the Age of Rosey raises big questions about the wisdom of the kinds of minimum wage jumps sought by the “Fight for 15” campaign and other activists.

“Rosey’s” appearance at the Consumer Electronics Show doesn’t mean that I’ve come down one way or the other in the vital debate taking place today over whether all this recent technological progress ultimately will be a net job killer or creator. But it seems clear as a bell that this tech wave is being completely ignored by the Open Borders and the Fight for 15 backers, and that Americans closest to the low end of the wage and income scale are likely to be among the biggest victims.

(What’s Left of) Our Economy: A Big New Hit to Free Trade Theory

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Adam Smith, Bruce R. Scott, comparative advantage, David Ricardo, economics, economists, factors of production, free trade, Great Britain, machinery, manufacturing, Portugal, protectionism, Ralph E. Gomory, Steve Keen, technology, textiles, The Wealth of Nations, Trade, William J. Baumol, wine, {What's Left of) Our Economy

OK, time for some good news – at least if you’d like the economics community to come up with more realistic views of trade policy and its impact on the national and global economy. As made clearest by a (sadly overlooked) journal article by Steve Keen of Kingston University in London, some noted academic economists have identified fatal-looking flaws in comparative advantage theory – the 18^th century concept that ever since has anchored mainstream scholarly thinking about the entire discipline, along with justifying the virtues of the freest possible trade flows.

As Keen writes, comparative advantage identified benefits flowing from economic specialization, and was first advanced by British economist Adam Smith in his seminal The Wealth of Nations to explain the superiority of laissez-faire, free market practices within industries. His compatriot David Ricardo extended the concept to relationships between industries and countries. The core idea in its trade theory version is that all countries and their peoples will reap maximum gains if they limit themselves to those tasks that represent their own best efforts – even if they’re laggards by international standards in that particular sector.

I first encountered a compelling objection to comparative advantage in the early 1990s, in the form of a sharp observation by Harvard Business School professor Bruce R. Scott. As he noted, Portugal, one of two countries in Ricardo’s classic description of comparative advantage’s virtues, basically hewed to the Ricardian prescription, specialized in turning out relatively simple products (in this case, wine) – and remained a poor country for centuries. The second country was Great Britain. It specialized in higher value goods (epitomized, in that era, by textiles), and became the world’s greatest and richest empire.

More fundamentally, Portugal specialized in activity that could generate good levels of growth in the short-term, but whose long-term wealth creation potential was limited by low levels of productivity growth, capital and technology intensiveness, by limited potential for innovation, and by deficiencies in other closely related indicators of dynamism. Great Britain specialized in activity whose positive spinoffs were bound to be far greater.

Other major Ricardo blind spots have been pointed out since then – for example, his skepticism that capital would ever easily move across borders. But his central insights have continued commanding pervasive respect among professional economists. Just as important, they’re still revered by political leaders and opinion molders who find these theories convenient for portraying their often self-interested trade policy preferences as indisputable truths, or who learned in a freshman economics class that they’re gospel.

Keen’s big addition to comparative advantage critiques has to do with unfettered free trade’s likely effect on an economy’s diversity and growth potential. As he notes, Ricardo’s case for liberalizing trade flows hinges on a completely unrealistic assumption about its impact on a national productive base, and hence on national output and incomes. The assumption: that countries will wind up better on net if they abandon those activities that don’t meet the comparative advantage test, and refocus their efforts on activities that can pass it, and that such a transition is feasible in the first place.

In other words, Portugal would scrap all of its textile factories (and presumably all its other industries as well), and become for all intents and purposes a mono-economy devoted to wine. Great Britain would abandon whatever wine-making and other non-textile work it was engaged in, and turn into a big cloth-making facility. What of the other necessities of national and individual life, at least those that are in theory trade-able? They would be imported – and paid for by the earnings from exports of the national champions.

Simply articulating this scenario reveals how completely fanciful it is. For example, what about supplying needs before the envisioned transitions are completed? How long will they last? And even over decades under a free trade regime, could the global economy possibly be expected to turn into the kind of exquisitely complex but perfectly functioning mechanism that could enable a large number of mono-economies from securing the full range of traded goods and services that are either needed or simply wanted?

Keen, however, identifies what he reasonably seems to view as a more fundamental problem: The sectors of the economy in which Ricardians want countries to specialize are relatively strong because they efficiently use various factors of production (chiefly, according to Keen, machinery). The Ricardian transition entails other parts of the economy switching to that strong sector (again, wine-making and textile-making in Portugal and Great Britain, respectively), and essentially becoming just as good as wine-making – largely because all the kinds of machinery used in that economy can easily, and indeed seamlessly be redeployed in the strong sector.

If this assumption was valid, as Keen observes, then it would be reasonable to suppose that each rejiggered national economy could produce even more output, and generate higher incomes for its population, than before. But as the author also observes, this outcome makes no sense because “machinery is specific to each industry, and the crucial machines in one industry cannot simply ‘move’ to another without loss of productivity.” And if you believe, as is the case with mainstream economics, that rising productivity is a key – and over the long run, the biggest key – to rising incomes, then you should recognize this Ricardian transition also as a recipe for worsening national impoverishment.

That is, in the kind of mono-economy Ricardo hoped would eventually comprise the global economy, most of the populace would be struggling with inappropriate capital stock and other assets to earn a living engaged in activity with which it boasted little, if any, experience.

Why did Ricardo overlook something so obvious? In Keen’s words, it’s an example of “a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry….”

However, Keen continues, “The archetypal machines for cloth and wine manufacturing in Ricardo’s time included the spinning jenny and the wine press. It is stating the obvious that one cannot be turned into the other, but stating the obvious is necessary, because the easy conversion of one into the other was assumed by Ricardo, and has been assumed ever since by mainstream economic theory.”

Here’s another example of the same delusionality that will be familiar to everyone who’s followed the U.S. trade policy debate for the last few decades: the claim by supporters of current trade policies that trade-related production and job losses are no big deal because America’s real edge in the global economy going forward is, say, services. So the best response is to train all those displaced auto workers to become nurses (and, pace Keen, to use all that surplus auto production machinery to write software).

Just as interesting, Keen points to a small but growing body of research touting the advantages of industrial and other economic diversity – the opposite of Ricardo’s aim. A broad-based manufacturing and technology base has of course long been supported by critics of current trade policies for national security reasons (to ensure the ability to produce an adequate range of defense assets), and to avoid potentially dangerous dependence on foreign supplies of civilian goods as well.

Similarly, it’s been contended that too many linkages exist among manufacturing industries, and between manufacturing and many kinds of services, to assume that entire sectors can be lost without major collateral damage.

Keen’s piece, however, also spotlights evidence that the world’s least successful national economies tend to possess narrow – at best – productive bases and to generate a comparably narrow range of exports, and that the most successful turn out a wide variety of goods for both domestic and foreign markets.

Keen’s theoretical critique of Ricardo is by no means the only one that’s come from the ranks of economists themselves. In 2001, William J. Baumol (a former President of the American Economic Association no less) and Ralph E. Gomory, one of the nation’s leading technology authorities, produced this study purporting to show that explicitly promoting national industries and technologies via various forms of government intervention (including tariffs) can produce better results for individual countries that toeing the free trade line.

But the Baumol-Gomory case has (so far) failed to dent confidence in Ricardian trade theory notably. And certainly the Mainstream Media never displayed much interest. In that vein, of possible import is the appearance this week on Bloomberg.com of this follow-up of sorts to Keen-like analysis. More steps on a  journey of a thousand miles?

Following Up: Why Economists & Establishment Media Should be a Little More Humble on Trade

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Adam Davidson, Donald Trump, economics, economists, Federal Reserve, Financial Crisis, Following Up, Global Imbalances, Great Recession, Janet Yellen, Korea, Peter Navarro, The New Yorker, TPP, Trade, Trans-Pacific Partnership

A fascinating and revealing coda has just been provided to my brief brush with fame last week, when The New Yorker deemed my views on trade issues not worthy of consideration.  And the source was, of all people, Fed Chair Janet Yellen.

As I wrote on October 13, in a profile of Donald Trump economic adviser Peter Navarro, New Yorker writer Adam Davidson made clear that he considered one glaring weakness of the Republican candidate’s views on trade and other economic policies to be their lack of support among professional economists. As a result, Davidson was completely unimpressed when Navarro noted that I have endorsed them in general – since I lack an economics degree. Nor was his interest piqued when I reminded him by email that my predictions about the outcomes of major trade policy initiatives, like admitting China into the World Trade Organization, were much more accurate than those of most Ph.Ds .

Enter Chair Yellen. In a speech in Boston the very next day, she focused on “some ways in which the events of the past few years [since the outbreak of the financial crisis and Great Recession] have revealed limits in economists’ understanding of the economy….” And despite her understatement, these limits look awfully important. The subjects to which they apply include how demand influences supply, the makeup of the groups of actors economists study (which these scholars’ models assume are completely homogeneous), how finance affects the real economy, and “what determines inflation.”

Indeed, Yellen’s list raises the question of where economists’ knowledge really is solid – at least in terms of ideas that affect economies’ performance in the real world. And so does the economy’s abysmal performance on net since the outbreak of a near-financial cataclysm that virtually none of its members foresaw.

Yellen did add an international question that she believes deserves much more research: how changes in American monetary policy affect the rest of the world and then feed back to the United States. But even though other aspects of the nation’s relationship with the global economy strictly speaking don’t fall under the Fed’s purview, she still might have noted that major gaps still exist in her profession’s understanding of international trade.

Even more disturbing: Although the trade-fueled global imbalances that built up during the bubble decade have been identified as bearing great responsibility for the crisis’ outbreak, as Davidson’s attitude suggests, international commerce is the one area of economics where no significant thinking has been called for at all since the disaster. Indeed, judging from the reactions to Trump’s trade proposals, the conventional wisdom is more entrenched than ever.

Of course, none of this is to say that economists know nothing useful, whether on trade or elsewhere. But with evidence that those global imbalances are once again nearing pre-crisis peaks (albeit with a somewhat different composition), and with President Obama seemingly more determined than ever to win passage of a trade agreement (the Trans-Pacific Partnership) modeled on a Korea deal that has supercharged the U.S. merchandise deficit, you’d think that both economists and journalists would react to proposals for fundamentally new approaches with at least minimal humility.

(What’s Left of) Our Economy: The Times’ History of Free Trade is Bunk

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Adam Smith, Binyamin Appelbaum, Donald Trump, Douglas A. Irwin, economics, economists, free trade, I.M. Destler, Jagdish Bhagwati, John Maynard Keynes, John Stuart Mill, mercantilism, protectionism, Republicans, Richard Nixon, Robert Torrens, Ronald Reagan, Smoot-Hawley Tariff, strategic trade theory, tariffs, The New York Times, Trade, {What's Left of) Our Economy

It’s easy to imagine the thought processes responsible for The New York Times running last week’s article describing Donald Trump’s views on trade policy as “Breaking with 200 Years of Economic Orthodoxy”:

“We are the newspaper of record.”

“The public needs vital context to make intelligent decisions.”

“We can flaunt our matchless knowledge of history.”

What a shame, then, that economic correspondent Binyamin Appelbaum’s piece failed so badly on so many counts.

Let’s be charitable and start off by accentuating the positive. Appelbaum deserves credit for characterizing trade concerns as “among his oldest and steadiest public positions.” That’s a healthy corrective to media-wide reporting portraying the Republican presidential front-runner as motivated solely or mainly by – nativist and even racist – hostility to immigration.

It was also encouraging that Appelbaum acknowledged (though in an excessively narrow way, as will be demonstrated below) that “economists have oversold their case.” And he helpfully quoting a leading voice in the profession as noting not only that foreign protectionist practices are all too common, but that “It might be that the threat of tariffs or other trade sanctions could cause American trading partners to open up their markets or drop their barriers to trade.”

Unfortunately, nothing else Appelbaum wrote met standards of current or historic accuracy. First, although he correctly described mercantilism’s focus on amassing trade surpluses, he never pointed to a Trump statement endorsing such a goal. Conversely, the author errs when he contends that the orthodoxy calls for maximizing international trade flows. Instead, it calls for permitting global trade to reflect patterns of comparative advantage to the greatest extent possible.

As for Appelbaum’s brief history of American trade politics, it omits crucial facts. Specifically, he quotes as gospel the view of the University of Maryland’s I.M. Destler that “For most of the last century…skepticism about trade had been relegated to the fringes of the Republican Party.” But no significant Republican shift toward trade liberalization took place until after World War II. Indeed, legislators Reed Smoot and Willis Hawley, sponsors of the 1930 tariff, were both Republicans.

And even after most of the party warmed toward freer trade positions, major tariffs were imposed in 1971 by President Richard M. Nixon and throughout the 1980s by President Ronald Reagan – hardly fringe figures.

Finally, Appelbaum also seriously distorts the economics profession’s position on trade liberalization. Why, for example, didn’t he point out that, like one of the contemporary he cited, Adam Smith himself endorsed the threat and use of tariffs to open foreign markets. He also left out all the major loopholes in standard free trade theory pointed out by some of the biggest names in economic history. This history of the idea of free trade by Dartmouth’s Douglas A. Irwin makes clear how significant they have been. Here’s a summary drawn from my (New York Times) review of Irwin’s 1996 study – which unfortunately has not been digitized:

“Robert Torrens and John Stuart Mill explained how countries could use tariffs to enhance national wealth by stimulating the production of more profitable exports. Mill showed that tariffs protecting ‘infant’ industries could help them survive competition with more established rivals and eventually become self-supporting — without exacting larger costs from that country’s consumers or other economic sectors.

“During the 1920’s, Frank Graham of Princeton theorized that tariffs could provide permanent help for national economies by encouraging a shift from agriculture into manufacturing, thereby increasing a country’s total wealth. In the wake of the Great Depression, John Maynard Keynes insisted that free trade policies could impoverish individual countries during periods of already high unemployment, deflation and fixed exchange rates, particularly when the deflation was caused by a central bank’s determination to keep interest rates up. And in the 1980’s, a school of ”strategic trade” theorists contended that the special characteristics of certain industries (particularly those dominated by a few producers) could allow governments in some instances to use export subsidies to create national advantage.”

Irwin was correct in noting that “these arguments simply represent exceptions to a still-enthroned free trade rule — not new rules themselves (my paraphrase).” But it’s also true that these exceptions are so substantial that they call the theory’s validity into question.

In fact, Columbia University economist Jagdish Bhagwati, a leading free trade champion for decades, put it best when he observed, ”One cannot assert that free trade is ‘the policy that economic theory tells us is always right’ . . . certain developments make the case for free trade more robust whereas others make it less so . . . the latter are subject to many difficulties as one passes from the classroom to the corridors of policy making.”

I suppose that Appelbaum and The Times should be praised to trying to convey the idea that a high profile current campaign issue has deep roots in the past. But is it so unreasonable to hope that they could do the story anything close to justice?

Our So-Called Foreign Policy: Send in the Clowns

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2016 election, alliances, Bernie Sanders, China, Cold War, Donald Trump, economics, foreign policy establishment, free-riding, George W. Bush, Hillary Clinton, Iraq war, ISIS, Middle East, NATO, neoconservatives, Our So-Called Foreign Policy, Republicans, Russia, special interests, think tanks, Trade

You don’t need to have any regard for Donald Trump to appreciate the black humor of Washington’s Republican foreign policy establishment (or at least lots of it) launching a campaign to brand him an incompetent and a menace in international affairs.

Last Wednesday, about 100 “GOP national security leaders” released a letter they signed stating their “core objections” to the possibility that the Republican front-runner will win the White House. The first reaction that any reasonable person should have is “If these are the leaders, who are the followers?” I worked professionally in the foreign policy field for decades and still keep up with it actively. And many of the signatories are completely unknown even to me. Apparently even a glorified briefcase carrier for a fourth-level political appointee in George W. Bush’s administration qualifies.

The second reaction is much more obvious: Many come from the Republican party’s neoconservative wing. Based on its record, their credibility has fallen how deeply into the toilet? Nor is this question based solely on the second Iraq war. After all, I personally favored the effort to overthrow Saddam Hussein, and still believe that the invasion was justified – though of course the occupation was a (largely foreseeable disaster). But these ostensible experts and intellectuals have failed on numerous other major grounds as well.

As made clear by their indictment of Trump, their ranks include champions of the laudable but transparently looney idea that the United States can and should spend considerable amounts of time and effort spreading democracy to and engaging in nation-building in regions and countries (like Iraq) that have no tradition of accountable government and no experience with un-coerced cohesion. More recently, they’ve propounded the equally nutty notion that Middle Eastern countries can be turned into an effective anti-ISIS force that will handle most of the ground fighting to boot.

They’ve long supported U.S. trade and international economic policies whose effects have included enriching increasingly belligerent China and showering it with advanced, defense-related technologies. For nearly as long they’ve favored the expansion of the NATO alliance right up to Russia proper’s borders – which can’t have helped improve relations between Washington and Moscow over the last decade. In fact, even decades after the Cold War ended, they have remained tightly wed to U.S. defense commitments to flagrantly free-riding allies – which also often rip off Americans shamelessly on trade and other fronts. In fact, they have never displayed the slightest genuine inkling that domestic economic strength is the key to any successful American foreign policy strategy, however interventionist or restrained.

But there are two more fundamental problems with these figures, along with the non-neocons among them, that have translated directly into weaknesses and blunders that have plagued American diplomacy since the early post-World War II years. And please keep in mind: Many of these conclusions come straight from my first-hand experience working closely with these folks during my four-year stint as Associate Editor of FOREIGN POLICY magazine.

First, unlike the original Cold War U.S. foreign policymakers – who were certainly not beyond legitimate criticism – most of the current crowd lacks any meaningful experience in the private sector. Its members have never built or even run viable businesses, or invented anything worthwhile. As a result, they have never been judged by standards like successes that create tangible, enduring rewards and widespread benefits, or failures that exact painful, lasting costs.

Instead, most have brought themselves to the attention of decision-makers by rising through the ranks of academe or, worse, its ersatz Washington version – the think tank world. And the skills needed to stand out in these realms – turning a neat phrase or fashioning a catchy soundbite, identifying and courting prospective patrons, manipulating an all-too-gullible national media, and perhaps most important, creatively regurgitating stale dogma that promotes special interests – have nothing to do with keeping the nation as a whole secure and prosperous. They’re entirely about personal advancement in what I’ve called a Washington culture that coddles failure.

In other words, these figures are overwhelmingly foreign policy careerists. And since their working experiences as a rule have been so tightly confined to the bubble worlds of the Beltway or college campuses, they have almost never needed to encounter the obstacles continually erected by stubborn reality to the best laid plans of mice and men. Which is why they typically lack the wisdom and judgment best guaranteed to navigate them.

Not surprisingly, then, these 20^th and 21^st century version of renaissance courtiers deserve credit for no meaningful achievements whatever. Indeed, the degree of safety and prosperity that the nation has enjoyed during their tenures has been due almost entirely to the wealth and power it has amassed over the centuries, along with the inherent security created by favorable geography. If today’s foreign policy establishment can be said to have accomplished anything, it’s taking practically any opportunity available to squander the nation’s built-in advantages.

Not that I want to leave readers with the impression that out-of-control careerism is confined to the Republican wing of the foreign policy establishment. Its Democratic wing has been at least as unimpressive. And you can be sure you’ll be hearing from it if Vermont Senator Bernie Sanders starts posing a greater threat to Hillary Clinton’s presidential hopes.

(What’s Left of) Our Economy: State of the Union Fakeonomics on Immigration

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demand, economics, free trade agreements, Gillian B. White, Goldman Sachs, illegal immigration, Immigration, Jan Hatzius, Jobs, Obama, offshoring, State of the Union, supply, The Atlantic, TPP, Trade, Trans-Pacific Partnership, wages, workers, {What's Left of) Our Economy

The more I go over the economic thinking behind President Obama’s final State of the Union address, and some of the commentary it’s generated, the weirder both get. Here are two especially noteworthy examples, and they both flow from the president’s claim that: “Immigrants aren’t the principal reason wages haven’t gone up; those decisions are made in the boardrooms that all too often put quarterly earnings over long-term returns.”

Actually, Mr. Obama’s starting point is a straw man. I don’t know of anyone whose views have attracted significant attention who solely blames immigrants for wage stagnation. I don’t even know anyone who blames illegal immigrants. I do know lots of folks who believe that the levels (too high) and mix (too many uneducated and unskilled) of legal and illegal immigration have contributed meaningfully to this problem. But I guess States of the Union are no place for nuance.

Even stranger about the president’s contention, though, was his defense of mass immigration’s role in the American employment picture was its contrast with his treatment of trade deals like his Trans-Pacific Partnership and their own destructive impact on jobs and pay. This issue went unmentioned.

No one blames these agreements and related policies for the entire wage problem, either. But does the president genuinely suppose that trade deals, and the job and production offshoring to very low-wage countries they’ve encouraged, have been totally unrelated to the pursuit of those “quarterly earnings over long-term returns,” and by extension to wage woes? In fact, can he or anyone else reasonably doubt that these same shortsighted boardroom denizens have lobbied so hard to push these deals through Congress precisely because they help maximize short-term earnings so effectively at American workers’ expense?

Just askin’.

The second example of State of the Union-related economic weirdness comes from an Atlantic post making the case for the president’s views on immigration and wages. It was perfectly conventional – to the point of predictability – for Atlantic staffer Gillian B. White to trot out the usual studies showing that most economists strongly deny any immigration responsibility for U.S. wage stagnation.

What was a lot less conventional was her neglect of the obvious immigration- (and trade-) related implications of this point from another leading economist that she quoted and then paraphrased:

“‘The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment’” Jan Hatzius, the chief U.S. economist at Goldman Sachs wrote in a 2014 research note. That’s because many companies have learned to be leaner, they hire fewer employees, and still benefit from continually growing productivity. And because the country is still not at full employment, they can keep paying workers less. All of this serves to boost the company’s bottom line, while workers are unable to participate in those benefits.”

It’s clear to any thinking person that Corporate America has gotten much leaner (although this greater efficiency isn’t showing up in the productivity data any more). And it should be equally clear, as Hatzius notes, that this development has increased the supply of labor more than the demand for workers (the ultimate reason full employment hasn’t been reached), and therefore reduced the price of labor (as over-supply will do for anything in a reasonably free market, human or otherwise, that’s in surplus).

Hatzius wasn’t quoted on the link between this labor market mismatch and American immigration flows, but White is confident that “Obama is right” (about immigration – not trade, which she also ignores) and that “the level of wage dampening that immigration is actually responsible for in the broader scope of the problem pales in comparison to the wage suppression that has occurred since multi-billion dollar companies decided to prioritize rewarding shareholders first and workers last.”

Indeed, she states, the immigration effects are so slight compared with the supposedly entirely separate corporate governance and strategy changes that discussing the former is “a bit beside the point.”

But by definition, if she’s right, here’s what’s a bit beside the point, too: At a time of subpar employment levels that themselves are undermining workers’ bargaining power, the United States keeps admitting roughly one million legal immigrants each year. Moreover, it has enforced its borders so poorly that the illegal population stands at more than 11 million.

In turn, White’s reasoning implies, significantly reducing either the illegal population, or the legal flow (or both), and accordingly improving the labor supply-demand balance, would leave the bargaining power and wages of current, legal workers virtually the same.

It sounds like White doesn’t really believe that the laws of supply and demand apply to labor markets at all, or at least not to those with significant immigrant participation rates. Same for that majority of economists she cites. Who’s to say “No”? After all, economics isn’t a real science. But if this is the case, couldn’t these analysts declare their heresy openly, or at least tell the rest of us where supply and demand still matters, where it doesn’t, and why? While they’re at it, of course, they could let the rest of us in on what other venerable maxims of economics they’ve now decided we can do without – and when.

Our So-Called Foreign Policy: The Wisdom and Blind Spots of Henry Kissinger

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China, economics, Henry Kissinger, idealism, international order, interventionism, Iran deal, Jacob Heilbrunn, Obama, Our So-Called Foreign Policy, power, Putin, realism, Russia, strategy, The National Interest, Ukraine, World War II

When I was helping to edit FOREIGN POLICY magazine, I used to say that the only authors whose articles I would ever accept sight unseen were those by U.S. and other present and former heads of major national governments, and Henry Kissinger. I never had the pleasure and honor of working with this former Secretary of State and presidential national security advisor, and disagreed with him strongly on major issues then and now. But I still haven’t seen any reason to doubt that Kissinger boasts a combination of hands-on policy experience (in what a well known Chinese curse understatedly calls “interesting times”) and deep historical knowledge that’s been unique.

So I would strongly urge everyone interested in U.S. foreign policy or world affairs to read the interview with Kissinger just published in The National Interest. I was, to be sure, disappointed that Editor Jacob Heilbrunn didn’t ask his subject about the Iran deal – especially since Kissinger and one of his successors, George Shultz, wrote an op-ed in April highly critical of President Obama’s efforts to deny Tehran nuclear weapons, but not flatly dismissing the possibility that the president could conclude an acceptable agreement. Now we have a final deal. What does Kissinger think? Maybe he’s still holding his cards close to his vest, and ruled the topic out of bounds in advance?

In fact, the only headline issue on which Kissinger comments is Russia’s grab for more power in Ukraine and elsewhere along its European borders. If you think Vladimir Putin is the devil incarnate, or the second coming of Stalin, you need to learn about Kissinger’s notably evenhanded interpretation of how this crisis emerged – with which I broadly agree. His ideas for easing East-West tensions deserve much more attention, too.

Ultimately, however, what I found most interesting about the interview has to do with what I have always found most disappointing about Kissinger – his failure to help develop a distinctly American version of “realist” diplomatic thinking.

At the start of the interview, Kissinger does a good job of defining the debate between realists (supposedly like himself) and “idealists” that has shaped much of American foreign policy since the end of World War II: “The way the debate is conventionally presented pits a group that believes in power as the determining element of international politics against idealists who believe that the values of society are decisive.” As this statement suggests, he (correctly) views the dichotomy as “simplistic” and “artificial,” but does (also correctly) acknowledge that these terms can influence how leaders order their priorities and strike balances among competing objectives.

Yet however important these concepts to American strategists, as I’ve pointed out, even avowed realists like Kissinger have consistently overlooked the single most important ingredient for successfully pursuing this approach – understanding geography and its implications. In fact, wherever they’ve stood on the realist-idealist spectrum, U.S. leaders have for decades followed a strategy that’s almost willfully defined geography out of existence. Both Democrats and Republicans alike, during and after the Cold War, have carried out policies of military intervention, alliance building, and economic integration, that are much more appropriate for a small, highly vulnerable country than for a continent-spanning power protected by two wide oceans.

From a geopolitical perspective, even Kissinger’s well known preoccupation with creating and preserving “international order” is a sign of diplomatic hubris rather than a hallmark of prudence and pragmatism. Why, after all, would such a serious and knowledgeable student of the past believe that disorder, including widespread chaos, is a natural – much less achievable – goal for a world lacking consensus on fundamental values and norms of behavior? And as a result, why has Kissinger been so thoroughly convinced – along with so many other political friends and foes – that for a country with the advantages enjoyed by the United States, surviving and prospering amid this tumult is a much more feasible aim than bringing it to an end, or even significantly moderating it?

Finally, the National Interest interview also confirms another big weakness of both Kissinger’s version of realism and post-World War II foreign policy – a refusal to think seriously about economics. The word isn’t even mentioned. In principle, anyway, neglecting wealth and its creation was understandable for America for most of the Cold War. The United States was predominant, it had no challengers on this front, and the chief threats Americans faced seemed overwhelmingly military. Since the early 1970s, however – not so so coincidentally, when Kissinger was most prominent – keeping this spot blind has been inexcusable. For in this material world, from where does Kissinger think power in all of its tangible forms ultimately springs?

Still, with the exception of China policy (where his consulting business has compromised his analysis, in my view), I’m glad Kissinger remains active on policy issues and continues advising politicians. He may be 92, but he’s orders of magnitude wiser, deeper, and sharper than virtually anyone else in America’s foreign policy establishment.

Our So-Called Foreign Policy: The Real Lesson of Vietnam

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Baby Boomers, economics, energy, foreign policy establishment, geopolitics, internationalism, interventionism, isolationism, Middle East, Our So-Called Foreign Policy, Persian Gulf, public opinion, realism, terrorism, Vietnam War

No one who lived through it in 40 years ago, and was following the news even sporadically (far from everyone in the dazed and confused mid-1970s!), will ever forget the TV footage of U.S. military helicopters evacuating the last Americans and at least some of their local allies from Saigon in a humiliating denouement to the Vietnam War.

Even for many Americans who had lost much of their faith in the country’s virtues (all too easy in that stagflationary aftermath of the turbulent 1960s and the Watergate scandals), and who had watched disaster in Southeast Asia unfold slowly for years, this final act was surely harrowing emotionally. After all, however ugly Americans might have become to however many foreign populations, anything smacking of lasting military defeat had never been experienced in U.S. history.

The simple uncertainty of life without Vietnam-related news at least in the backdrop must have been unnerving as well, even if not consciously. Those who had actively or passively defined themselves as opponents, supporters, or bewildered spectators of the war faced even greater questions. Four decades later, it’s anything but clear if many of them have been answered among Baby Boomers and their surviving elders.

Failure in Vietnam shook up the nation’s leadership classes and foreign policy establishment, too. But what’s most striking four decades later is how few fundamental challenges to the policy status quo have emerged in these circles. The public is clearly more skeptical of foreign intervention and international engagement, although televised Middle East horrors in particular have interrupted that trend for the time being.

In addition, throughout the post-Vietnam decades, a handful of analysts has cogently explained how the Indochina debacle stemmed directly from the foreign policy strategies pursued by the United States since Pearl Harbor, and how this approach would undermine prosperity as well as needlessly court risk. (I’ve made my own small contributions, on this blog and elsewhere.  If you’re interested in others, I wholeheartedly recommend Googling – and reading! – the following “realists” in particular: Earl C. Ravenal, Robert W. Tucker, David C. Calleo, and Christopher Layne. For powerful indictments of U.S. interventionism on an issue-by-issue basis, see the many writings of Ted Galen Carpenter.)

But as I’ve argued, the left, right, and centrist wings of the foreign policy mainstream clung determinedly to an ideology called internationalism.  It’s characterized by the bizarre conviction that a geopolitically secure continental power with an immense potential for economic self-sufficiency can not be acceptably safe or prosperous unless literally every corner of the world becomes safe and prosperous, too. As a result, liberals, moderates, and conservatives alike defined American vital interests in breathtakingly sweeping terms, differing only on which combination or ratio of tactics (mainly the “hard power” versus “soft power” debate) were likeliest to pacify, stabilize, and enrich the entire planet.

In the process, all these leaders and analysts have neglected opportunities to reduce the country’s vulnerabilities to disrupted supplies of foreign goods, like energy, and to terrorist attack. Indeed, in defiance of the defining feature of economics itself, all have assumed that all the material resources to pursue this limitless agenda would somehow always be available, or could be created as needed.

That’s why, in the forty years since the fall of Saigon, American leaders from all over the political spectrum have:

>obsessed over fighting leftist forces in miniscule El Salvador and Nicaragua;

>fought two wars in Iraq, largely to protect the flow of Persian Gulf oil;

>permitted the worst attack on American territory in 70 years to take place;

>allowed the nation’s armed forces to become dangerously dependent on imports from a prospective Chinese adversary;

>kept the nation locked into defending allies against nuclear-armed adversaries increasingly able to retaliate powerfully against the United States;  

>remained committed to a futile policy of safeguarding U.S. energy and anti-terror interests by fostering stability and reform in a Middle East so thoroughly dysfunctional that it’s very state structure is falling apart;

>become addicted to preserving the semblance of growth and well-being by falling ever deeper into debt even though this blueprint triggered one financial calamity less than a decade ago;  and

>devoted oceans of rhetoric, and real and digital ink, to sliming any genuine dissenters as ostrich-headed isolationists, xenophobes, appeasers, or all of the above.  

As a result, all the commentary I’ve read that’s been occasioned by 40^th anniversary of Saigon’s fall has missed the main point. The most important lesson Vietnam is that American leaders have learned no important lessons at all.