The dogma of globalism

"Skeptical Economist" emails:

I think a useful question is how 'free trade' became such a cult in the U.S. Clearly, it wasn't the dominant ideology until quite recently. Notably the Reagan administration did all sorts of things (trade barriers, domestic content, devaluation) that the current crop of Republicans (and Democrats) regard as 'Unthinkable'. A few conjectures.

1. The current elite cohort took enough economics in school to understand comparative advantage and production possibility frontiers. As a consequence they think they know enough about trade to have a settled opinion. Of course, they don't have a clue what the current account is or the definition of purchasing power parity. But a little bit of knowledge that supports one's prejudices is a powerful thing.

2. The 'Smoot Hawley' caused the Great Depression meme somehow became the accepted wisdom of American society. Stated differently, 'protectionism' became the ultimate no-no with SH and the Great Depression as the justification. The funny thing is that very few people (even the opponents of SH) saw it that way back in 1929/1930. Nor did Frederick Lewis Allen (Only Yesterday) writing in the 1930s. Nor did Galbraith a generation later. Nor did later economists such as Friedman or Bernanke all of whom devoted a large fraction of their careers to studying the Great Depression. Yet by the early 1990s, Al Gore felt he could refute Ross Perot by holding up a picture of Smoot and Hawley.

Clearly, Jude Wanniski's 'discovery' that the stock market crash was caused by Smoot-Hawley was enormously influential. The subsequent refutations got lost in the noise. Since the substance of Wanniski's argument wasn't great, his vast influence must be derived from something else. I would argue that elite society was looking a rationale for its policy preferences.

3. The ideology of globalization has become dominant in much of U.S. society. Arguably, it is THE ideology / religion of the elite. The vast and favorable response to Thomas Friedman's book The World is Flat tells us far more about prevailing ideas than the content of the book. One economist noted that in a book of 672 pages, the phrase 'trade deficit' never appears. The phrase 'free trade' shows up 30 times. The word 'trade' doesn't even appear in the index, 'free trade' does though.

4. The cosmopolitan idea/ideal has made considerable inroads in recent years. Clearly this is not unrelated to the ideology of globalization. What is different is that influential figures now boast about being 'cosmopolitans'. For example, see "Cosmopolitanism" by Matthew Yglesias. In the past, cosmopolitan was an avoided label and definitely used as an insult. Robert Shiller (Irrational Exuberance) wrote a good essay on "The New Cosmopolitans". He understands that he is one, but his interpretation is somewhat critical. It can be argued that Obama is our first truly cosmopolitan president. Famously, he showed his disdain for ordinary Americans with his line about bitter people in small towns.

"and they cling to guns, or religion, or antipathy toward people who aren't like them, or anti-immigrant sentiment, or anti-trade sentiment as a way to explain their frustrations."

Obama offered these candid words in private with no expectation that they would ever be disclosed. ...  What isn't so well know is where these notorious words were spoken. That part of the scandal never gained any notice. It turns out that it was on Billionaires Row in San Francisco. 

Conversely, his speech in Berlin on July 24th, 2008 was overtly public. It was also deeply cosmopolitan at many levels. My favorite lines are

"That is why the greatest danger of all is to allow new walls to divide us from one another.

The walls between old allies on either side of the Atlantic cannot stand. The walls between the countries with the most and those with the least cannot stand. The walls between races and tribes; natives and immigrants; Christian and Muslim and Jew cannot stand. These now are the walls we must tear down."

5. Samuel Huntington wrote about the denationalization of U.S. elites in "Who Are We." A major theme of his book was declining elite loyalty in the United States. Of course, this enables elites to espouse ideas that are bad for the U.S, but good for them.

6. A critical difference between this period and earlier eras of trade conflict (notably the 1980s with Japan) is the shift in corporate sentiment. In the 1980s, corporations and workers viewed the Japanese as essentially a threat. Rightfully so. Japan never made any material effort to co-opt the business elite and make U.S. economic decline privately profitable, even if publically disastrous. As a consequence, they were quite willing to support trade restrictions that protected both them and the U.S. from the foreign onslaught. Now we have a large segment of the corporate sector (Wal*Mart, Apple, etc.) dependent on policies that are highly detrimental to the U.S. I quote from Stephen Roach:

"In my view, this underscores a key element of tension in America’s current backlash against globalization that was not evident in the late 1980s.  Today, the pressures are being borne disproportionately by labor, whereas 20 years ago, capital and labor were in the struggle together.  In the late 1980s, many of the once proud icons of Corporate America were fighting for competitive survival at the same time that US workers were feeling the heat of global competition.  The pain was, in effect, balanced.  Today, US companies, as seen through the lens of corporate profitability, are thriving as never before while the American workforce is increasingly isolated in its competitive squeeze.  In essence, capital and labor are working very much at cross purposes in the current climate, whereas back in the late 1980s they were both in the same boat."

7. Somewhere from the 1990s onward, U.S. elites became convinced that they are so 'good' (superior, competitive,etc.) that they will come out on top in a globalized world, even if ordinary Americans and America as a whole suffers. For some of them, this is probably true. However, the class that worships Alice in Wonderland goes far beyond the infinitesimal number of hedge fund traders who can float back and forth from London to Greenwich, CT as tax rates and opportunities dictate.

Part of this is reasonable of course. Globalization (presumably) inflates the value of scarce skills while making unskilled or semi-skilled labor less valuable. However, the elite embrace of this mindset goes far beyond any rational calculation of interest. It is ultimately part of the bubble of American supremacy. 

A few years ago, Stephen Roach of Morgan Stanley asked one of Bush's Treasury Secretaries (not Henry Paulson) how America would earn its way in the world after our productive sector collapsed. The answer was that we (the U.S.) would act as 'capital allocator to the world.' Of course, this insane dialog attracted zero attention at the time or subsequently. The only good news is that U.S. credibility as a 'capital allocator' is within rounding error of zero.

In the same period the U.S. trade deficit reached its zenith (breaking every record for such things, by far), the standard explanation was that 'this was proof how of attractive the U.S. is to invest in'. Completely delusional but the received wisdom of the time. ...

A few years ago, a very good guy, Brad Setser wrote that U.S. policy towards China appeared to incorporate tradeoffs that reflected a subjugation of the general interest for narrow elite interests. At the time, the U.S. was pressing China quite hard to open its financial markets to U.S. investment bankers. The quid pro quo was continued, unconstrained Chinese access to U.S. consumer markets. This was a dismal tradeoff back in the Zeros. Of course, China won't give U.S. I-bankers the time of day at this point. Nor should they. 

"A cynic might interpret the huge windfall gains that China has provided Goldman (and others) as the danegeld that China pays Goldman (and others) to use their political clout to fend of the protectionist hoards in the industrial Midwest.   So far, that strategy has worked."

8. To a degree, elites have embraced 'free trade' as a way of weakening labor interests in the U.S. Some of this is very explicit and tangible. Factories moving abroad chasing cheaper labor. However, at a deeper level 'free trade' can be seen as both a way of making labor dispensable and a rationale for doing so.

9. The current generation of elites are largely divorced from the actual production of anything. They may have come from families that worked in the productive sector. However, they typically advanced via academic skills, not entrepreneurship or corporate careers. Many, if not most, have spent their entire careers in government, academia, think tanks, etc. Perhaps the only private sector activity they embrace / esteem is predatory finance. Predictably, finance is staffed by the 'best and brightest' from the same Ivy League skills and faces no serious competition from outside of the Anglosphere, at least so far. That finance is fantastically lucrative, urban, smokestack free and devoid of blue collar workers are just additional charms.

This looks like correlation of forces. A combination of economic interest, social preference, and ideology have made 'free trade' the mantra of our times. The good news is that this alignment is relatively new and deeply contrary to U.S. history. By contrast, 'free trade' has been the dominant ideology of the UK for 150+ years. The UK has deviated from 'free trade' occasionally (and successfully), but the ideology has remained dominant all the way to the present. For example, in the 19th century Dickens supported free trade for essentially liberal (in the modern sense) reasons. Free trade was supposedly good for workers and represented 'progress'.

As mentioned above, the U.S. adopted and relentlessly pursued 'protectionist' policies as recently as the 1980s. Clinton was able to avoid confronting these issues (and passing NAFTA) because the U.S. was enjoying  a vast boom / bubble. Bush conjured up the housing bubble to create the illusion that 'free trade' and prosperity might be compatible. Obama is in a tighter box. His only bubble is Federal debt. A few off-the-deep-end Democrats are trying sell the notion that trillions of dollars in deficit spending are (almost) "free". I quote from Krugman:

"Let me start with the budget arithmetic, borrowing an approach from Brad DeLong. Consider the long-run budget implications for the United States of spending $1 trillion on stimulus at a time when the economy is suffering from severe unemployment.

That sounds like a lot of money. But the US Treasury can currently issue long-term inflation-protected securities at an interest rate of 1.75%. So the long-term cost of servicing an extra trillion dollars of borrowing is $17.5 billion, or around 0.13 percent of GDP. "

Will Obama break from 'free' trade? More broadly which party will turn against trade first? My guess is that it will be the Democrats because of their labor ties. However, it won't be easy for the Dems. The Dems are dominated by cosmopolitans who regard any hint of protectionism as an anathema. Obama did run against NAFTA in the primaries. However, that was clearly just a pretext for bashing Hillary (ironically, Hillary apparently opposed NAFTA when Bill was in office). Indeed, his economic advisers actually told the Canadians that this was all for show (a memo that was meant to remain secret leaked). Of course, Obama is the ultimate cosmopolitan at many levels.

The administration has promised to "double exports" and focus on manufacturing. So far, this is just mindless lip service devoid of any actual policies. Andy Grove advocates the kinds of things that might actually work. However, an administration comfortable with Timothy Geithner as the Secretary of the Treasury isn't going to cause any hard feelings in Beijing.

This could be a great opportunity for the Reps. However, a combination of corporate connivance, free market idolatry, and anti-government animus makes it almost impossible for the Reps to exploit this political opportunity. A related point it that a focus on domestic manufacturing (and production generally) would be a great opportunity for the Reps to broaden their base. The notion that Republicans can out-La Raza the Democrats is crazy. However, aggressive trade policies have vast potential for appealing to minorities as Americans. Notably, it worked 100 years ago in the era of McKinley and Teddy Roosevelt.

My guess is that the U.S. will languish for some number of years until 'something' forces a real shift in policy. What 'something' will be I do not know.

P.S. An associate sent me a copy of an essay asserting that Obama is a Marxist. I replied that describing Obama as a Marxist is factually wrong and likely to detract from any critique of Obama's policies. I pointed out that technically, Obama is a neoliberal. However, 'neoliberal' doesn't set off any alarm bells in the U.S. By contrast, 'cosmopolitan elitist' is a stab wound that hits home.

My published articles are archived at iSteve.com -- Steve Sailer