The New Economy - Part II (Continued - 6)

Before returning to the central theme of this series, which gets back to the rise of laissez-faire capitalism in the eighties, Ronald Reagan and "share holder value," a few notes on other topics.

After massive intervention by the federal government in response to the housing meltdown, this morning markets appear to be calming somewhat. The market (as of the moment) is up, the price of oil and gold down from their recent highs and the dollar strengthening. I suspect we may be entering the "eye of the hurricane," and there will be increasing market volatility as we settle into recession. I am still waiting for the other shoe in the credit crunch - credit card defaults, which may make the housing foreclosures look mild.

Senator Obama has come out in favor of tapping into the strategic oil reserve to bring the price of gas at the pump down. Mistake. The reserve is held for national defense emergencies, not market adjustments. I am afraid this smacks of old time Democratic economics and doesn't measure up to the "change," he has been promising. So far, it isn't enough to change my vote, but stay tuned.

The argument herein is that the country under at least two Presidential administrations (Clinton and Bush) have pursued short-term economic policies that have long-tern negative effects, largely due to the failure to move to an effective New Economy (a service/idea-based economy), while departing from the Old Economy (a manufacturing based economy). The short-term problems lie primarily in the creation of a "credit economy" under Clinton and Bush, by which the failures of this movement from Old to New were masked or hidden. In other words, the major problem is "debt." Debt at the individual level, the state level, and in financial markets. Another way of describing over-indebtedness is to say we're over-leveraged, which in turn is another way to say, we're getting ahead of ourselves, and in a position where commitments have come to exceed resources.

And, the conclusion, I am slowly developing, is that the country will not be on sound economic footing until this is recognized and fixed. Use of the strategic oil reserve, aside from its national defense implications, is basically like the fed throwing money into the system to cover bad investment banking decisions - i.e. it's creating more debt; debt in oil, not dollars.

The thesis herein is that we need a new economic policy for a self-sustaining national economy, without giving up the "goal" of moving toward (or continuing in) a globalized economy. This will not be an easy task and will require some additional government intervention in the economy and government willingness to use the economic tools they have at their disposal: taxation, tariffs, interest rates, regulation and oversight, etc.).

The time for such a change is opportune; it is an election year and candidates and politicians always seem to be more responsive to populist arguments in such years. We have also just had a prime example of "investor error," within the context of the most laissez-faire environment since the late 19th century, in regard to the housing crisis.

Let's now turn back for a few more words on free trade in this context.

I am presently finishing a book titled: "The Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism." It's not as revolutionary as its title might suggest and based on considerable fact, as opposed to myth. It was written by Ha-Joon Chang, a Cambridge University professor of economics, with a Korean background.

There is a major debate among economists over the economic direction of countries with developing economies. Generally, economists representing the developing countries complain that international organizations such as the World Bank, the International Monetary Fund (IMF), and the World Trade Organization (WTO) are dominated by developed western countries seeking to impose economic hegemony. [The opposite argument, generally by western economists is that we've given up too much authority to these same organizations.] They also complain that the very economic ideas the west atteempts to force on the developing countries are largely "myths," which had nothing to do with the economic success of the developed countries in their own histories.

Most of Chang's book focuses on these topics, from the developing countries perspective. One passage, however, caught my attention:

"When economic prospects in a developing country are considered good, too much foreign capital may enter. This can temporarily raise asset prices (e.g. prices of stocks, real estate prices) beyond their real value, creating asset bubbles. When things get bad, often because of the bursting of the very same asset bubbles, foreign capital tends to leave all at the same time, making the economic downturn even worse."

Economic terms are relative and generally descriptive of multiple causation - ie. multivate analysis, wherein cause and effect holds true, but there are multiple causes leading to multiple effects, making analysis difficult. It strikes me that Chang's observation in the above regarding a problem within developing countries is equally true of developed countries in economic transition. The key is not "developing" or "developed," it is the degree and pace of economic transition.

Chang's observation may hold true equally for the United States, which although "classified" by economists as a "developed country," is in fact developing from the Old Economy to the New.

You may ask, so what? The significance of this perspective returns us to the two exceptions to free trade, generally recognized by economists as useful: protection of national defense industries and protection of new/infant industries. In other words, limited, selective tariffs (related to either foreign investment or goods and services) regarding both our defense industry and our high tech industries may be beneficial in helping to restore a sound American economy, through the creation of additional well paying American jobs.

Again, free trade, like globalization is a positive "goal," provided that development toward both is done in such a manner and pace that the pursuit of these goals do not destroy our national economy. But, the reckless pursuit of these goals is something akin to a policy of "pre-emptive war," wherein the risks of unanticipated consequences outweigh the tangible gains.

The point is that, without abandoning free trade goals, we must come to see selective tariffs as a tool of government to ensure the protection of both national defense and the elements of the new economy, upon which we expect to base our future economic success. In this, a selective tariff policy also is a tool by which to adjust the pace of globalization to protect our own internal economy (i.e. additional, better paying jobs for our citizens).

In the absence of the use of such tools, the cost of labor will seek an equilibium - i.e. developing countries wages will rise and developed countries wages will fall at "market rates." In a democratic society, the dramactic shift in such a fall can be sustained only by loose credit and the devaluation of currency.

More next time.