Free Trade - The New Economy II (Continued -5)

The central theme of this series of posts is what I believe to be the negative effects of globalization on the American economy. It may be a subtle point (and one difficult to make), but I am not against the long range goals of globalization - as I understand them - but only the means by which we are transitioning to this goal.

For one thing, globalization has for all practical purposes already occurred, although I would reverse some aspects. For another, given today's technology and future trends, globalization is pretty much inevitable. That inevitability is like the old, classic story about what do buggy whip manufacturers do with the coming of the automobile? Transportation, communications, global consumer trends, education, etc., etc. are all among the various forces driving globalization, in terms of a common global society.

This trend is neither unique or necessarily harmful over the long run. Prior to the Civil War, the United States was essentially one government with two regional economies. It was only following that War, in the late eighteen hundreds, chiefly through technological advances, that a national economy came together. The J.P. Morgan's, the Rockefeller"s, the Carnegie's, may retrospectively have been "robber barons," but they were also entrepreneurs, who sensed the commercial advantages in moving a politically re-united nation, through technology, to a national economy.

Most of these "advances," (and some would argue the Civil War itself) may be traced back to the beginnings of the industrial revolution in the early 1800s and the general movement in the western world from agriculturally based economies to "materialism." Materially, the world has moved further and faster in the last 200 years than in the approximate 9,800 years of human civilization that came before it.

Environmental concerns, the use of natural resources, and population growth, have added a tremendous impetus to globalization. Our collective advances in human knowledge - primarily science - have had an equal impact. But, this new awareness of global interdependency doesn't spread easily to the human consciousness. Just as regional oil producers were among John D. Rockefeller's foremost critics (and contributed to massing public opinion against Standard Oil), we have today many who find it difficult adjusting to new realities.

The enormous growth of scientific knowledge (both pure and applied) made the industrial revolution possible, just as it has made globalization and a post-industrial society possible.

In this process of what is really an exponential growth in human knowledge, science knows no religion; no national boundaries and, in a great sense, makes both obsolete, in terms of human organization.

It is this belief that causes me to conclude that "globalization," of virtually all aspects of human life, is a postive development for the progress of mankind. Ultimately, the alternative is sort of a Mad Max world, back to a point in human history in which life was "short and brutish."

In earlier posts I have tried to explain how the greatest challenge to global economics today is how to organize fast enough to incorporate the approximately 3 billion people added to the global labor market due to the fall of communism, without having these people face starvation and the resulting digression of their societies back into wars and revolutions.

So, I basically agree with President Bush that global democratic-capitalism is the best means of providing global peace and stability [although I have serious disagreements on how that is defined and how we get there]. Actually, initially, this was the same goal as communism. "From each, according to their abilties, to each according to their needs." In a moment, I'll try and show this is a position not too far different than the underlying principles of free trade, but first a few more words on the really Big Picture.

There are distinct differences between science and religion, but these differences are essentially in methodology and not in "truth." In both realms, "truth" changes with time and position. Generally, religious truth claims to be eternal, but if we look at the details in the history of religions, even they change in perception over time. These changes usually occur as the original teachings are passed on from one generation to the next and religious hierarchies evolve from their starting points. Hierarchies produce "experts" at interpretation, who differ slightly from the last generation of experts, and so forth and so on. The overall message may remain approximately the same, but as they say: "the devil is in the detail." And, it is in these detailed interpretations, changing in space and time, that produce events such as the Christian Crusades or present day Al Qaeda.

Unlike religion, science does not even pretend to offer eternal truth. The "truth" of science lies in proving functionality - i.e. what works - based on today. And science offers a temporary explanation of temporary truth, based on present knowledge. As that knowledge expands, essentially through our ability to "see" things differently through advances in measurement, the old "truths" are changed. The process of change is not usually easy, but probably a great deal easier than in religion because scientists as a group generally follow the same "religion" - the scientific method.

Perhaps, one of the foremost "shifts" in scientific truth lies in Newtonian physics versus the physics of Albert Einstein. And, not being a physicist, here is a layman's explanation.

Newtonian physics is essentially a three dimensional world: length, width, depth. Sort on physics based on Euclidian Geometry. And, if one isn't too precise about measuring, it works...here on earth...or "locally." But, you can't get to the Moon and back using Newton alone, for that task you need Einstein and the principles of "curved space" and time.

Before I get in too deep for my own good, let me say, the point is that science incorporated Einstein's thoughts into its "body of work" and we did get to the moon and back. If Newton had expressed eternal truths, true for all time, everywhere, we wouldn't have made it.

The two major attributes of science are, in my mind, its flexibility and its functionality. This is why, in attempting to look ahead, or to predict the future, I tend to place it ahead of religious belief. While both science and religion are capable of "change," the thrust of direction in religion is generally oriented toward the past, while science's is toward the future.

Change is biologically a tough proposition for human beings, as it is for all living organisms. One of the keys to our success as a species (to date at least...don't know about tomorrow) is "adaptability." This says, that while we may not like change, we'll accept it if it means our survival.

That is a long, roundabout way of explaining why I believe that globalization is inevitable. The global environmental problems we are facing today, some of which may be traced to the industrial revolution and our material success, cannot be resolved without global cooperation. Example: Solving pollution problems within the United States will not help us unless China, India, etc. also resolve their pollution problems. And, there are many other examples, the Amazon Rain Forest, Global Warming, etc.

Library shelves are filled with books on this subject: post-industrial society. In sum, however, the direction of science points in the direction of global interdependency. It won't help things if THIS society makes the transition to a post-industrial society; interdependency demands we move in the same direction - as a species.

The great question, however, coming back to economics, is what is the best means for achieving this transition? And, this question brings me back to the global economy, free trade and, fundamentally, the loss of American jobs.

There are two driving assumptions behind our present approach to globalization: lower cost labor and free trade. In my last post, I tried to explain that lower cost labor involved a "bet" that in the long run, "ideas" would be more valuable than "things." Thus, long-run wise, we "swap" a North Carolina textile worker for a computer programmer. It's brain power (New Economy) substituted for manual labor (Old Economy). That's not a bad cure, if the medicine doesn't kill you, and my point has been, the medicine is killing us.

The basic problem is that we can't train computer programmers for the New Economy fast enough to replace Old Economy workers. The result is alot of displaced people who must be "kept" through cheap credit and low cost imports; the means of which have been achieved largely through low interest rates, devalued currency and (now I'll add a third, coming to the topic) free trade.

Economics 101 on free trade. The underlying theory of free trade is economic efficiency. Global free trade, i.e. one that doesn't try to "balance" through tariffs/taxes, allows each country to do what they do best ("From each according to their abilities, to each according to their needs," providing they can pay the going market price.) By specializing in what they do best, they acquire greater efficiencies of production and bring the best product to the global market, at the lowest price. Without tariffs, these products find their "true value" in a free market. Until recently, the vast majority of free trade economists, qualified this general "rule" with two exceptions: 1) new, infant industries, which require temporary government help and protection to get started and 2) national defense industries, under the theory that no one knows what the future will bring and it is safer for a country to maintain a defense capability within its own borders, even if it isn't efficient to do so.

Most discussion of tariffs today revolve around 1) above. The exception of 2) above has generally been ignored for the past twenty years or so. A recent bi-partisan national committee on just this subject concluded that defense mobilization planning has virtually disappeared. In time of a serious war this neglect could be disasterous for the country, but even short of such a war, it probably severely handicaps our foreign policy options. [Note: We have essentially placed economic efficiency and globalization ahead of national security. This is a topic that gets virtually zero coverage in the media. I suspect the lack of attention is due primarily to the fact that neither major party wants to discuss it, because they both hold the same position.]

The United States, from its inception to WWII, grew economically through tariffs. Although there were ups and downs, particulaly in regard to specific industries, we were as a nation, "pro-tariff. " This isn't surprising, because generally net importers tend to be pro-tariff (i.e. they want to import goods, but at a competitive price to their own products), while net exporters tend to be free traders (i.e. they don't want the prices of their products driven up in foreign markets).

Our national position on tariffs pretty much follows the above rule. While we imported more than we exported, we were pro-tariff. We began becoming "free traders" following WWII, when we were producing approximately 50% of the world's manufacturing products and became net exporters. When we ceased to be net-exporters (e.g. when the trade balance in goods and services went negative) we should have given this position another look, but given the "bet" of the New Economy and the anticipated increase in the valuation of "ideas," we've remained free traders. There are occasional exceptions, such as steel, aluminum, auto, but they are usually short term and temporary responses to overwhelming lobbying pressures.

[Note: Many Republicans like to refer to the Smoot-Hartley tariffs of the nineteen thirties as leading to the Depression and WWII. Although, I need to do additional research, Smoot-Hartley may have played a part in the Japanese attack on Pearl Harbor, insomuch it was related to Japanese expansion in China and SE Asia and the availability and price of U.S. oil, but the act had nothing to do with the Great Depression, which started in 1929, before the tariffs.]

All else being equal, free trade is a positive goal in a global economy. The catch is in the first phrase, "all else being equal," which is not the case at the moment. The trade deficit is proof. If free trade was working for the United States, the trade in goods and services would be either far lower, balanced, or even a surplus. Today, we are giving away more than were getting and because of the "bet," this will not change under present economic policy until the "idea" products start selling. [Note: There are off-setting trade accounts that mediate the imbalance in goods and services, such as foreign investment. Until recently, the United States "invested" more abroad than foreigners invested here. That has changed, but is to some degree off-set again by improvements in the trade of goods and services through a weak dollar. Remember, that whereas a weaker dollar helps the trade deficit in goods and services, it also makes our foreign investment more expensive, in that it takes more dollars to buy foreign assets. I would suggest that "overall" over, say, a year, it won't get better and the total deficit will continue to rise.]

Free trade also, through the principle of each country doing what it does better than anyone else, assumes, at the macro - or Big Picture - level, a global division of labor. This division of labor, in turn, is based on the principle of the evolution of a skilled work force that results in a superior and low cost product based on economic efficiency, which competes on a more or less level playing field. Today, in China's case, this is not the situation. Cheap Chinese imported goods are based on an enormous surplus of Chinese labor, not subject to the same type of quality controls found in the United States and Europe, and controlled by a communist/socialized government. In the United States a CEO may fail and walk away from the company with tens of millions of dollars; in China, they are often simply shot. Perhaps, in our next round of trade negotiations, we could get the Chinese to institute better quality controls for products we are importing in return for our agreement to start executing errant U.S. executives?

The point is, that today "free trade" occurs between societies so different, it can scarcely be called "free trade." I would repeat: Free trade, in its totality is a positive attribute for a global economy, but when it becomes little more than a search for cheap labor it falls apart, with devestating consequences.

More in the next post.