Friedman and NYT confirm Free Trade was sold on false pretenses

So-called ‘free trade,’ which pits high-cost American businesses and workers against low-cost foreign producers, was sold to the American public on the promise that poor people in China and Mexico would soon become middle class consumers of American exports.

We were told that by moving industries and jobs Americans once did to cheap overseas labor markets like Mexico (through Nafta) and China (through PNTR/Permament Normal Trade Relations and WTO accession), wages and living standards in those benighted lands would rise and create One Billion Customers who would dutifully purchase products made by Americans in new enterprises that would spring up in the US to replace the “sunset industry” textile mills and auto parts plants that had moved offshore.

Apart from the fact that those new high wage jobs never materialized (old news), we now learn that Chinese consumers never materialized either.

In a recent column, Tom "Flat Earth" Friedman informs us that

China’s whole system and culture nourish saving, not spending, and changing that will require a huge “cultural and structural” shift, said Fred Hu, chairman for Greater China for Goldman Sachs.

Friedman explains why the Chinese citizen chooses to save rather than spend:

China has no real Social Security, health insurance or unemployment insurance. Without that social safety net, it’s hard to see how Chinese don’t end up saving most of their stimulus. “You open up the newspaper every day and you hear about this factory shutting down or that supplier going belly up,” said Willie Fung, whose company, Top Form International, is the world’s leading bra maker. “You can never be too careful in this financial climate.”

In its news columns, the NY Times reports why a consumer society could not emerge in China, even before the latest downturn:

Shorn of the social safety net of the old Communist state, they [Chinese workers] squirrel away money to pay for hospital visits, housing or retirement.

This may sound like a great revelation, but it’s really a fancy way of saying that workers with few benefits, minimal leisure time and no social protections do not a consumer society make.

Before someone claims hindsight is 20/20, let's remember that the perils of a lack of a social safety net in China (and Mexico) were well known – and often cited by opponents of trade deals. Critics had argued that it's disastrous for a country with a social safety net to open its markets to one without.

Businesses knew that the taxes and costs necessary to support Social Security, unemployment insurance, employee health insurance, pensions and other worker protections placed them at a significant disadvantage to foreign producers who had no such costs.

Organized labor understood that America’s enviable standard of living (read consumer society) springs from social guarantees (unemployment, Social Security etc) that labor had fought for, not just “jobs.”

Proponents of PNTR and Nafta ignored the fact that government-mandated programs (the safety net) played midwife to the birth of consumerism. Consumer society requires people who have money in their pockets - and the disposition to spend it.

Instead of creating Chinese consumers for American exports, Wall Street-biased trade with China resulted in American consumers purchasing Chinese exports - with money borrowed (against their homes) from China.

But the American consumer has reached his credit limit.

What’s the way out?

Who knows. Maybe China will invest its people’s hard-saved export earnings in American industries - in order to create a middle class (here) that has the disposable income to buy China's exports. Turnabout is fair play.

Cross posted at Talking Points Memo Cafe, http://tpmcafe.talkingpointsmemo.com/talk/blogs/curtis_ellis/2009/01/friedman-and-nyt-confirm-china.php

Krugman renounces free trade, neoliberal economics and financialization

In his Tuesday column, Paul Krugman says we must step away from so-called 'free trade' if we want a sustained economic recovery (italics added).

A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.

This, of course, is heresy in the High Church of Free Trade. According to dogma, if a good or service can be produced elsewhere more efficiently (and the wizards of finance will tell you what 'more efficiently' means), domestic employment or balance of trade must be sacrificed to the higher cause.

Krugman seems to be sanctioning something dangerously close to import substitution, an approach to economic development popular in the post-colonial era - and replaced by the neoliberal 'Washington consensus.' But he doesn't stop there.

[W]here will the capacity for a surge in exports and import-competing production come from? Despite rising trade in services, most world trade is still in goods, especially manufactured goods — and the U.S. manufacturing sector, after years of neglect in favor of real estate and the financial industry, has a lot of catching up to do.

Krugman is whacking another pillar of the church, that is, the infallibility of the post-industrial service economy. This doctrine holds that we are past making 'things,' whether its clothes and steel (dubbed 'sunset industries'), or computers and consumer electronics (mere 'commodities'), and our economic future is in services, as in say, financial services. (Funny how the post-industrialist cheerleaders were also so jazzed by China's economic miracle - though it sprang from manufacturing, not services.)

The under-appreciated Eamonn Fingleton has pointed out that policy-makers' misplaced faith in a service economy is an error of historic proportions. At any rate, Krugman brings up the often-overlooked fact that most of the world's economic activity still involves making things - and our ability to make things has been crippled by the financial sector's growth.

Kevin Phillips has written about the triumph of finance over manufacturing, and it is not pretty. Krugman is catching up. In his December 19th column, he writes:

The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole. ...

[H]ow much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else? Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

The problem is an inflated finance industry, not just inflated salaries in the industry. It has undermined and degraded our productive capacity, our ability to make the things we use in our everyday lives, leaving us dangerously dependent on uncertain sources of not just energy, but food, clothing and technology as well.

Even Tom Friedman, that archbishop of flat-earthism, is beginning to see the light. Two days before Christmas he wrote:

[W]e’ve fallen into a trend of diverting and rewarding the best of our collective I.Q. to people doing financial engineering rather than real engineering. These rocket scientists and engineers were designing complex financial instruments to make money out of money — rather than designing cars, phones, computers, teaching tools, Internet programs and medical equipment that could improve the lives and productivity of millions.

Sorry, Tom, but we didn't fall into a trend - we jumped head first into the post-industrial-financial-service-economy-is-the-future abyss, and you were standing tall at the edge of the flat world assuring us the bungee cord was secure.

In reality, research and engineering follow production. You'll find the researchers and engineers creating the next generation of technology right there where you find people making the cars, phones, computers and medical equipment we use today.