The laws of free trade are not immutable after all

from Jim Stanford

For years, we’ve been told the dictates of globalization, and the intrusive and prescriptive terms of free trade agreements in particular, are immutable, natural, and unquestionable.  When workers were displaced by the migration of multinational capital toward more profitable jurisdictions, we were told there’s nothing we can do about it except join the race to the bottom in a desperate attempt to hang onto our jobs.  When investment and employment were undermined by lopsided trade and capital flows, and employers and financiers utilized the leverage afforded them by unrestrained international mobility to ratchet the distributional structure of the economy ever-more-blatantly in their own favour, we were informed this was just the logic of markets.  And anyone who questioned that logic, or pointed out that it didn’t work in the real world like it is described in the economic textbooks, was labelled either economically illiterate or protectors of vested interests.

Now, suddenly, on the strength of a few tweets from a President who hasn’t even taken office yet, it seems that those rules are not so immutable, permanent, or natural after all.  Now, global corporations will move billions of dollars of investment, and thousands of good jobs, just because a President-elect wants them to.  If there is one crucial lesson from the extraordinary developments this month in the North American auto industry (including Trump’s threats against Ford, GM, and Toyota, and Ford’s stunning decision to completely cancel its new assembly plant in Mexico), it’s that politics matter.  Nothing about the economy is ever natural or permanent — and the immense resources invested in convincing us they are, are actually trying to disempower and silence the potential power of those being hurt by the current system of globalization. We’ve now seen that when it suits powerful forces, global rules can be rewritten in an instant; decisions of global megacorps overturned swiftly and effectively; provisions of trade deals simply ignored.  

Denying globalization’s downside won’t stop right-wing populism

from Jim Stanford

I was somewhat surprised to see Stephen Poloz recently urging economists to do more work identifying and disseminating research on the supposed benefits of free trade.  That’s slightly beyond his job description (perhaps more fitting with his last position as head of Export Development Canada).  But like economic leaders elsewhere in the world, Mr. Poloz is obviously concerned with the disintegration of popular support for neoliberal free trade deals.  That disintegration will have tectonic economic and political consequences.

True believers may think that merely educating citizens about how trade deals reallyare good for everyone (á la David Ricardo’s textiles and port parable) will save the day for globalization.  But I think there’s a much deeper problem.  The reality is that trade liberalization, as currently practiced (with an emphasis on corporate power and capital mobility, and absent effective demand-management and imbalance-correcting tools), has harmed many millions of people — in both developed and developing countries — and is now repressing growth, not stimulating it.  All the comparative advantage pontificating and CGE modeling in the world won’t magically convince people to deny their own lived reality: namely, that globalization is one reason (among others) why their economic prospects have visibly diminished over the last generation.

Posted below is my recent column in the Globe and Mail.  I argue that the first step in confronting the dangerous allure of Donald Trump, Nigel Farage, and Marine Le Pen must be to acknowledge that there has been a significant and lasting downside to globalization — and it’s much more than a matter of “transitional adjustment problems.”  Then policy can start serious work on how to support the segments of society that have been harmed by globalization, and develop tools that can manage and ameliorate those downsides.  To my mind that would be a much more productive direction for future economic research than merely stepping up a “sales job” for trade liberalization that has been both intellectually dishonest and economically damaging. 

Denying globalization’s downside won’t stop right-wing populism

from Jim Stanford

I was somewhat surprised to see Stephen Poloz recently urging economists to do more work identifying and disseminating research on the supposed benefits of free trade.  That’s slightly beyond his job description (perhaps more fitting with his last position as head of Export Development Canada).  But like economic leaders elsewhere in the world, Mr. Poloz is obviously concerned with the disintegration of popular support for neoliberal free trade deals.  That disintegration will have tectonic economic and political consequences.

True believers may think that merely educating citizens about how trade deals reallyare good for everyone (á la David Ricardo’s textiles and port parable) will save the day for globalization.  But I think there’s a much deeper problem.  The reality is that trade liberalization, as currently practiced (with an emphasis on corporate power and capital mobility, and absent effective demand-management and imbalance-correcting tools), has harmed many millions of people — in both developed and developing countries — and is now repressing growth, not stimulating it.  All the comparative advantage pontificating and CGE modeling in the world won’t magically convince people to deny their own lived reality: namely, that globalization is one reason (among others) why their economic prospects have visibly diminished over the last generation. 

Trans-Pacific Partnership: Renegotiating NAFTA by the Back Door

For years, trade and justice activists from across North America have proposed renegotiating the North American Free Trade Agreement to address some of the deal’s most damaging features. Top priorities would include removing the anti-democratic investor-state dispute settlement (ISDS) provisions of Chapter 11, linking trade benefits to genuine protections for human and labour rights (crucial given the deteriorating democratic situation in Mexico, with mass disappearances and regular suppression of journalists and organizers), and establishing a continent-wide strategy to fairly allocate investment and production in key industries like auto manufacturing (thus curtailing the race-to-the-bottom the that currently shapes those patterns).

We were always told that renegotiating NAFTA was a pipe dream: it would not be possible to open the text and get all three countries on board with reforms, no matter how legitimate the concerns. So imagine our collective surprise to see that the entire NAFTA is suddenly now being renegotiated on a wholesale basis – but through a back-door method. The Trans-Pacific Partnership talks, as usual behind closed doors, have jumped right into the deep end, opening up the entire text of NAFTA to wholesale reform and renegotiation.

Canada’s Experience Warns of Dangers of Investor-State Dispute Settlement Systems

The more troubled the global economy becomes, the more insistent do neoclassical economists get with their arguments for still more free trade and globalization — and the more rose-coloured are the gains they predict from the next free trade deal.  Never mind that existing trade liberalization (under neoliberal terms) has produced imbalance, a tendency to stagnation, and a socially destructive race to the bottom in the interests of competitiveness.  The promised gains from trade are always just around the corner, to be unlocked by new twists in trade negotiations (and proselytized with the help of new twists in neoclassical economic modeling).

More Proof: Employment Protection Does Not Affect Employment

The OECD has just released its 2013 Employment Outlook.  In addition to its usual overview of labour market developments, Chapter 2 of this year’s report reports on a thorough revision and updating of the OECD’s quantitative index of employment protection legislation (EPL). The chapter contains a useful summary of the mainstream literature regarding EPL costs and benefits – although this would have benefited from inclusion of the important heterodox voices who have written about on the employment effects of labour market institutions (such as Baker, Glyn, Howell, and Schmitt).  Chapter 2 also contains a detailed review of the revised methodology behind the OECD index.

The actual country scores for the index do not seem to be reported in the chapter, but they are available through the OECD’s online employment database.

The key findings of Chapter 2 include:

Canadian Central Bankers and Canadian Banking Regulations

Britain’s Chancellor of the Exchequer made the surprising announcement this week that the next Governor of the Bank of England (replacing the retiring Mervyn King) will be Mark Carney, currently serving as head of the Bank of Canada.

The fact that Canada’s banking system survived the global meltdown in relatively better shape than many other industrialized countries was certainly a factor in Mr. Carney’s selection.  However, as I argue below, if the goal is Canadian-style financial stability, then Britons (and others) need to learn closely from Canadian financial regulations, not just recruit a talented Canadian financial regulator.  A version of this commentary appeared in the Financial Times.  

Why natural disasters are good for capitalism

from Jim Stanford

It’s been amusing  to listen to the pundits discuss the economic implications of Hurricane Sandy. Of course, we all know it closed the financial markets in NYC for two days. (That should lead to a sudden spike in productivity, by my reckoning, since millions of people stop looking at pointless charts and do something useful for a change.) Financial analysts worry about the impact on insurance companies. Their shares will surely plunge when the markets reopen. One trader interviewed on Toronto radio put it bluntly: “Shoot first, ask questions later.” In other words, sell them all off, and then buy back any that you later find out may not have been hit so badly by Sandy’s fallout. [Rarely do you get such an honest glimpse into the base mindset of financial brokers!]

The bigger irony, however, is that natural disasters usually lead to a subsequent improvement in the real economy.

Inflation Targeting and the Crisis

from Jim Stanford

Many long-held tenets of neoclassical orthodoxy have fallen by the wayside in the past 3 years, but perhaps one of the biggest dominos that is at least teetering precariously (if not fully tipped over) is the consensus that inflation targeting should be the exclusive focus of monetary policy.

The policy was closely associated with the so-called “New Consensus in Macroeconomics” — the premature and presumptuous claim that rational-expectations-augmented analysis had produced the “end of history” in macroeconomics (analogous to Francis Fukuyama’s preposterous claim about global politics).  The idea was that by anchoring inflation expectations at the target, the central bank minimizes the extent to which monetary conditions interfere with the normal efficient operations of the real economy, thus promoting in the long-run stronger real behaviour (including intertemporal behaviour, like savings and investment), which might be affected by fluctuating or inaccurate expectations of future prices.

What do Banks Actually DO? Teach-In for Occupy Toronto

What do banks actually DO?  Create credit out of thin air.

Were Canadian banks bailed-out?  Absolutely, to the tune of $200 billion.  And they are still protected and subsidized more than any other sector of the economy.

What must be done with these banks?  Tax them, control them, and ultimately take them back.

Those are the “take-aways” from a short talk on the banking system that I was honoured to give as part of an Occupy Toronto rally last weekend at the corner of King and Bay in downtown Toronto.

Who’s bailing whom? Challenging the private credit system

from Jim Stanford

The time since 2008 has been a crucial historical moment for progressive economists to pull back the green curtain that surrounds the operation of the for-profit banking system, and expose that system for what it is: a government-protected, government-subsidized license to print money.

The problem is, as soon as you start saying things like that, people conclude you are some kind of wacked-out conpiracy theorist nut-bar.  It sounds insane to claim that private banks have a license to create money out of thin air.  As John Kenneth Galbraith put it, “The process by which banks create money is so simple that the mind is repelled.”

New Video Deconstructs CGE Trade Models

from Jim Stanford

Every time the globalizers come along with a new NAFTA-style free trade agreement, they invoke the findings of yet another high-falutin’ computerized general equilibrium (CGE) model of the projected (and inevitably mutually positive) impacts of the deal.

We’ve seen this time and time again: a numerical simulation model (not based on econometric analysis, but constructed purely by attaching illustrative parameters to a Walrasian general equilibrium framework of simultaneous equations describing market-clearing in all markets) is solved, before and after some sypothesized trade policy liberalization, and the change in outcome is interpreted as the “predicted” impact of freer trade.  As we know, the positive outcome depends on sustained full employment, a lack of international capital mobility (and hence no change in aggregate trade balances), the sharing of gains (or compensation) within each participating country, a lack of cumulative causation in increasing returns industries, and a whole host of other assumptions that are necessary for the model to solve — but which have nothing to do with the real-world economy in which we live.

Excess Corporate Saving and Excess Corporate Tax Cuts

In the recent Canadian federal election, further reductions in the corporate income tax rate proposed by the minority Conservative government became a major campaign issue.  The federal CIT rate had already been deeply cut in recent years (from 29.2% in 2000 to just 16.5% at present).  The Conservatives wanted to take it to 15%, despite also emphasizing the need for fiscal prudence (ie. spending cuts) to address the large Canadian deficit.  [Note: provincial governments in Canada also levy CITs, which average about 10%, making the combined rate about 26.5% at present — below the weighted OECD average.]

Unions in the Land of Equilibria

from Jim Stanford

The post-crisis assault on public services and collective bargaining rights (in America and elsewhere) has been justified with a storyline that blames unions (rather than speculators and the recession they caused) for the red ink currently dominating public finance.  This storyline assumes that everything would be fine if only public-sector unions weren’t extorting taxpayers to pay for their supposedly cushy jobs; it exploits the envy of private-sector workers who (on average) are treated even worse.  This fable is told and re-told like a fairy tale: one in which unions kill the goose that laid the golden egg, until taxpaying denizens (starting in Wisconsin) throw off the oppressive yoke imposed on them by overpaid garbage collectors and teachers.

Mercantilism Works?

from Jim Stanford

I have gathered some interesting comparative information on the recent economic performance of the G7 economies.  My immediate goal was to try to puncture the national “triumphalism” which Canada’s ruling Conservative government has been (wrongly) wielding in an effort to deflect any criticism around Canada’s still-dismal labour market and macroeconomic circumstances. 

NAFTA’s Chapter 11: The Latest Giveaway

from Jim Stanford

Canada’s federal government made an important announcement this week.  It was kept deliberately quiet: with a news release issued at 4:45 pm on a calm Tuesday in the middle of the late-summer news “dead zone.”  But it should set alarm bells ringing for anyone concerned with the anti-democratic direction of global trade law.  

Toronto G-20 Meetings, Robin Hood taxes on banks and Canada

from Jim Stanford

            One of the most controversial topics that will be addressed at this month’s G-20 meetings in Toronto, Canada will be the proposal for new taxes on banks and other financial institutions.  Unfortunately, the host to the summit, Canada’s strongly neoliberal Conservative government, has already expressed strident opposition to any new tax on banks – whether a Robin Hood-style tax as proposed by Oxfam and other progressive groups, or the milder measures being studied by the IMF.

            While the host government certainly does not have any veto power at these summits, Canada’s vocal opposition to any new taxes (or restrictions of any kind) on private banks certainly throws up another roadblock to get something done.  Indeed, with President Obama adopting (for the time being, anyway) a more populist, finance-bashing tone (symbolized by the lawsuit against Goldman Sachs), Canada’s government – led by Finance Minister Jim Flaherty – has become the leading international voice against new bank taxes. 

Why Deleveraging Hurts So Much

from Jim  Stanford

Last Friday I had the honour of sharing the podium (and a good supper afterward) with Steve Keen, the awesome Australian economist who was recently named the winner of the “Revere Award” for most accurately forewarning of the global financial crisis.  In fact, that award was announced the same day we spoke together to the Politics in the Pub speaker’s series in Sydney.  Here is a link to a report and film clips (by Steve, on his Debtwatch blog site) of the night’s activities:

http://www.debtdeflation.com/blogs/2010/05/15/stanford-and-keen-double-bill/

In his closing remarks to the group, Steve Keen walked through a very interesting arithmetic exercise to reveal the importance of new credit creation to overall aggregate demand conditions (and hence, in a demand-constrained real world, to growth and employment).  The simulation was largely lost on the crowd (which had imbibed heartily throughout the proceedings – that being the whole point of “Politics in the Pub”).  But it did spark my interest in following up.  (For Steve’s original math, check his Debtwatch bulletin #43, at the same blog site noted above.)

Here I recreate, with full credit and thanks to Steve Keen, the logic of his argument, utilizing Canadian data.