Did Free Trade Cause the Recession?
For many years the world has suffered under a "free trade" regime that eliminates good paying jobs in every country, sending the work to countries that keep wages low and restrict workers' ability to organize for a better life. The profits went to an already-wealthy few and the inequities increased, wealth concentrating massively at the very top.
And now consumers around the world have run out of money. This is not a surprise.
Did these "free" trade policies cause the recession?
Imagine a company in South Carolina that makes 20,000 pairs of shoes a week and distributes them to stores. Now, imagine that the company closes its South Carolina plant, opens a plant in a low-wage country, ships all the machines and raw materials there, ships back 20,000 pairs of shoes each week and distributes them to the same stores. Is that "trade?" Are the raw materials sent out of the country an "export?" Are the shoes brought back into the country an "import?"
The only thing that has been "traded" in this scenario is American jobs traded for huge executive bonuses. The workers in the low-wage country are not paid enough to buy any remaining American-made products. And, as the economic collapses as a result of shenanigans like this, American workers are no longer able to buy shoes so the executives won't be getting bonuses next year.
I submit that nothing in this example is "traded" except that our standard of living has been traded away. And this exchange brings little benefit to the workers in the low-wage country. This is exploitative trade, not free trade, and we need to protect our workers, the workers in other countries and the world's economy by demanding that our trade partners provide living wages and benefits. We can enforce this demand by attaching import tariffs at a level that makes our own goods competitive. This removes the advantage gained by exploiting workers - and the revenue reduces our own tax burden to maintain our competitive infrastructure. It is an incentive to pay their workers enough so they can reciprocate and buy the things we make here. Instead of the race to the bottom that led to this recession such tariffs create an incentive to raise standards of living around the world.
Let's have national policies that prevent exploitation of workers and the environment and that share prosperity. This is a choice between lifting each other up or continuing a spiral to the bottom.
Follow Dave Johnson on Twitter: www.twitter.com/dcjohnson
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These so-called "free" trade policies are a form of T-rex capitalism, the devastatingly rapacious economic system practiced in the United States and supported by the policies of a ruinously corrupt government.
China , Japan and Europe applies a VAT tax to imports, refundable on domestic goods, do we? No, because we only look out for the speculators welfare, not our citizens. Here, there's no problem until Wall St has one.
they also rebate the vats to exporters encouraging exports and discouraging imports
do we? nope
Of course we don't, because that would be an international economic policy that might make sense!
Free trade Illegal imigrants and deficit spending
Is it the hot stove top that burned my hand??
No ... no it's the thought of the stove being hot that burned your hand. That odd smell of singed flesh is just your imagination.
I also have a huge problem with saying that we need more "federal" regulation. Federal regulation creates rules that can be circumvented by any banker, lawyer, and accountant who want to get really creative. When they get creative, they load up on massive debt, and then they stick the taxpayers with the bill, either indirectly through Federal Reserve inflation or directly through the Treasury. It has been this way ever since 1933. As the regulatory structure has increased its control over the financial markets, the financial markets have found ways of beating the system. But they all depend on one assumption: the United States government will intervene in a crisis and load up on massive debt in the name of the People in order to bail out financial institutions that say they are going bankrupt. The entire system depends on the fact that the government will take over the obligations of big-time losers. Can you say "moral hazard!" The phrase is not recent. It is over 150 years old.
Now the politicians are going to flex their muscles. They stand in front of the cameras and tell the voters next time it will be different. Next time, we will impose restrictions on these greedy capitalists. "We will make certain that they don't get lots of profits." It is all a charade. Yes, they will pass legislation. This legislation will create careers for high-paid Wall Street lawyers and well-paid government agency lawyers.
so absent regulation what is your solution to reign in the excesses of wall street?
Had the market been allowed to work before the collapse, there would have been no housing bubble and no crisis in the first place. Had the market been allowed to work when the crisis hit, recovery would have been swift – as it was in 1920–21, when an even worse depression came to a rapid end without any open-market operations by the Fed, and without any fiscal stimulus. (In fact, the federal budget was cut in half from 1920 to 1922.) Companies and banks need to fail (regardless of size) and liquidate losses to free up capital to be used by the more productive aspects of the economy. People need to stop listening to Helicopter Ben Bernanke when he says that intervention was needed and then shamelessly points to Lehman Brothers failing as the catalyst for the market to crash, etc. These are the same clowns that NEVER saw it coming.
Apparently you have been asleep since Regan. The GOP have systematically created LOOPHOLES in the existing laws so that CREATIVE people as you state can use them. You really need to do some investigation because the last 29 years have been a dismantling of the laws that had protected the consumer for almost 50 years prior to Regan. Don't believe me? Then do some reading. Oh and sticking your head in the sand and removing regulations is going to do what? Since you seem to believe that loopholes allows for bad behavior what do you think no regulations will do? It's OK you do not have to answer, but you should contemplate your position, because it really makes no sense.
How can someone blame the "free market" when there is the Federal Reserve which manipulates interest rates, artificially increases the money supply, and fixes prices? Mr. Johnson you do a good job trying to place the blame on the free market but you are guilty of what our government and media heads do by ignoring the elephant in the room...the Federal Reserve! Specifically, Fed intervention in the economy – through the manipulation of interest rates and the creation of money – caused the artificial boom in mortgage lending.
The Fed has roughly tripled the amount of dollars and credit in circulation just since 1990. Housing prices have risen dramatically not because of simple supply and demand, but because the Fed literally created demand by making the cost of borrowing money artificially cheap. When credit is cheap, individuals tend to borrow too much and spend recklessly. The free market would NEVER of allowed such low interest rates!
This is not to say that all banks, lenders, and Wall Street firms are blameless. Many of them are politically connected, and benefited directly from the Fed’s easy money policies. And some lenders did make fraudulent or unethical loans. But every cent they loaned was first created by the Fed.
Well reasoned ... I too think free trade is at the bottom of our economic problems. I think economist sold the idea that productivity gains could be realized by changing trade policy without including that there would be a prohibitive disruptive social cost as a generation of workers lost jobs.
What is needed is to declare processes that take many generations to develope, like the automotive and steel industry, the intellectual property of the people(workers) who developed those processes so they could get the same patent protections that any corporation would for processes and products they developed.
In essence tariffs are protection against another country not incurring the development cost of a process or product and just taking those processes developed by other countries then selling it back at a lower cost.
that along with intellectual property protection and enforcement
the way to more evenly distribute the benefitis of a technology is not only to develop it, but to produce it as well
that is why all the growing economies are investing so much in their mfg bases
once these countries develop their own bases they also develop their means of innovation and no longer need the first world
the first world is then left without a creative and a productive sector
Thanks dave for once telling the truth on this web site
What do you mean "ONCE"?? He's one of the best posters here!
Haven't been on this site long,first time I've seen him,one one the few times this site was pro American labor
LeftRight; I would guess you didn't catch what I meant on that comment
Isn't it interesting how money motivates us and how it has motivated companies to literally erode the ability of consumers to buy those products. In the end it's not free or fair trade that did us in, it's inequality, where the wealth is distributed to the top 10% while the 90% below struggle to survive. Capitolism has caused us to do great things--to build great buildings and products that make life easier. But without a safety net of socialistic policies that distribute necessary products and services, capitolism ultimately kills itself. It's time for an economy based realistically on resources and upon fundamental human needs--not just measured in dollars, or rather, dollars ideally cannot be based on nothing, backed by nothing, representing no resources at all except debt unless we want more of the same.
I think that it was the wreckless allocation of funny-money into subprime mortgage backed securities that was the wave that crested only to be punctured by the "twin-towers like" demise of Bear that caused the mega economy and then the contraction. Free trade per se had little to do with all of that domestic crazi-ness.
We all learned about domestic national economics. The lessons we learned have little to do with global complexities. Ricardo had to do with coparative advantage an analysis that stands to this date. What Ricardo did not embrace or quantify (in the original) is that comparative advantage today is "wage-price arbitrage" with currency manipulation by third world countries that violate the earstwhile rules of the free trade game. (and this is tolerated by the governments for the benefits of the well off)
Comparative advantage is just something you can draw on a chalkboard. Even if it's the case that moving production from one region to a more "efficient" one will lead to cheaper production, that doesn't mean ordinary workers will benefit from doing so.
thats right, comparative advantage was about trade among equals, that all other things being somewhat level you then trade on technology or other resources to the benefit of each other
todays model is simply all about labor arbitrage, currency manipulation and other mercantilist policy
who ever really believed that consumers in these third world countries would be buying US made goods and services in any meaningful way?
I love the point about how nothing has really been traded!
We need more than policy. We consumers need to work hard to avoid such products and the companies that drive their production. WalMart is first on that list. They harass their suppliers to squeeze out all costs, and often forcing them to send jobs overseas. If they don't supply to WalMart they will lose like half their business, if not more. If they do they are forced out of business eventually by their unreasonable demands on price. I won't pretend the suppliers would do the right thing if given the chance, but WalMart doesn't help.
We need to start shopping elsewhere, building up ethical business that support local jobs. Also, WalMart replaces other retail jobs with lower paying positions, and they consistently fail to support their employees with health care. Also, all the money WalMart makes only goes to Benton Arkansas, not the locations of the stores. When WalMart replaces a local retail store, they eliminate business that goes to local trucking companies, banks, and suppliers.
If Americans really want to combat these harms of "free trade" they need to work hard to stop supporting unethical business. I realize during hard times some people can only afford shopping at WalMart, but many people don't realize WalMart is not always the cheapest price. Ipods cost the same everywhere, etc. However, avoiding certain products helps, like buying products made in the US, and avoiding their generic brands like equate.
See Dave Johnson's Profile
I agree with your comment except I differ here: "If Americans really want to combat these harms of "free trade" they need to work hard to stop supporting unethical business."
I think a business is just a thing, a legal construct. They can't be "ethical" any more than a chair can be. It is people who are ethical or not. And we have to understand that a few people run these corporations. They do what WE allow them to do. They act up to the limits where we stop them, jail them, fine them, etc.
So when we understand that We, the People have power to regulate companies, and define the rules under which they operate, that is when we get our power back. All we have to do is make the rules. That is OUR job and We, the People have not been doing that. We have let the wool be pulled over our eyes with all this "free market" nonsense for decades now. And all around us we see the results. A very few wealthy people have ALL the money and power now.
Look, there is just one group to blame: the politicians who took bribes to pass laws that permitted the selling of our country. Had we implemented public funding of campaigns decades ago, we would not be in this mess today. How long do you think a corporation is going to last if its board of directors is taking cash from people who want in the shareholder's pockets? Are politicians any better?
Jack Lohman
http://moneyedpoliticians.net
I think that in a great many ways we fell-down when we fell in love with "money for money's own sake." Wall Street stopped being finance, banks stopped being banks, insurance became worthless insurance, and oh yes, "profits were being made" but it was just like a farmer eating-up all of his seed crop. Or wiring a resistor across both poles of a battery and marveling at this new-found source of heat! Good while it lasted.
Greed is a fundamental part of human nature. We cannot get rid of it but we ought to understand its perils by now. It's pretty deplorable that our "trading partners" are the ones who are turning our backs on us.
"Did Free Trade Cause the Recession..?"
YES...!
Among other things..
Just one of the many pieces of the puzzle. Deregulation, oil increase, transportation costs, increasing food prices and all other goods transported by trucks, currency weakness, hedge funds and then because of reduced middle class income from free trade, higher prices, foreclosures, easy credit down came the bank followed by the economy.
Most of what you listed didn't cause the recession. The recession was caused by over-consumption and consumers taking on too much debt, as well as by financial institutions taking on too much risk with mortgage backed securities and by being over-leveraged. High food and oil prices really didn't affect consumer behavior until 2008. Middle class incomes had nothing to do with it. Foreclosures were the result of consumers taking on mortgages they couldn't afford and mortgage lenders having lax lending standards. Free trade had little to do with it outside creating distortions within the economy too quickly and too dramatically for the economy to adequately adjust; and by adequately, I mostly mean the creation of jobs outside residential home construction, building trades, and mortgage lending.
Ok Dugan; lets do a gedanken (a thought experiment). Let’s say you have a company that builds computers, but you’re not satisfied with the profit you’re making. So you decide to move your factory to Ireland where you can actually make them for less by paying lower wages and then sell them back in America for the same price as before. How many other companies have to do this before you lose your consumer base? Lose your consumer base? Sure, you threw your employees under the bus when you moved your factory, remember? These folks aren’t going to buy them from you; you left them with no income. Didn’t you take that into consideration in your business plan? On top of that, you don’t pay your Irish workers enough to allow them to buy your computers either. Let’s call this the Henry Ford principle, or rather its antithesis.
You’ve heard it, monkey see monkey do, so now everyone’s doing the same thing, they’re throwing their American workers out into the street and moving to where the work can be done for much less, adding to their profit! How long do you think that can go on without severely eroding the consumer base? This took a good 10 to 15 years, but the consumer is broke! The companies that did this are going belly up and so are some that didn’t. What we had was business planning by dummies.
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