How Globalization Set the Stage for the 2008 Economic Collapse

The extent of the 2008 economic collapse surprised and shocked the conventional wisdom in Washington and on Wall Street. But in hindsight, a good case can be made that the massive globalization of labor and financial markets, coupled with "free markets uber alles" policies, formed a toxic mixture that made the collapse inevitable. Here's why:

1). The globalization of labor markets -- and especially the outsourcing of once high paying jobs to low-wage economies - drove down incomes in the United States and western Europe. That effect might have been tempered by the growth of unions and by trade agreements that protected labor rights. But the right wing assault on unions in the United States--and the passage of trade deals that protected the rights of capital and did nothing to protect the incomes of average workers--allowed real incomes for most Americans to drop, especially in the last eight years. In fact, all of the economic growth of the last eight years went to the wealthiest 2% of the population.

Stagnating incomes led the Central Banks in Europe and the U.S. to encourage massive increases in consumer credit to fuel the economy. Without all that new consumer debt, the economy would have tanked years ago. Long-term economic growth requires that there are more and more people who have more and more money to buy products and services. Otherwise, businesses won't invest in new plants and equipment and hire new workers, since no one will have the money to buy their products.

The terrible consequences of shrinking incomes were also staved off by rising home prices. This allowed average people to borrow more and more against the rising equity of their homes.

But all of this new consumer and home equity debt created a giant "house of cards." It masked the underlying sickness of the economy for a while. As long as the economy continued to grow enough to create a net increase in jobs - and as long as housing prices rose - things were rickety but continued to hang together. But as soon as the economy began to contract, and housing prices fell, the whole construction came tumbling down in a heap.

By themselves, stagnant average incomes lead to stagnant economic growth. But stagnant average incomes, coupled with large amounts of consumer and home equity debt, lead to precipitous collapse. Homeowners went into foreclosure, lenders failed, credit markets seized and the massive bubble in asset values burst.

2) The globalization of financial markets removed most sources of capital and credit from the regulated national environment and placed them into the deregulated international environment.

One lesson of the Great Depression was the need to assure that banks were no longer free to make investments so risky that they threatened the savings of average investors and the stability of the financial system. Banks were required to buy insurance from the FDIC that protected depositors, and they were subjected to oversight and regulation to assure their solvency.

The stock market was regulated - with margin requirements and strict disclosures.

Back then, banks were the major sources of capital and credit. The stock market was mainly domestic. Nowadays, most capital and credit is provided through investment banks and hedge funds that are barely regulated in U.S. and operate in international markets with virtually no regulation at all.

It was inevitable that in that context, the "market" would once again repeat the mistakes of the 1930's. Hedge funds became heavily overleveraged. Some were simply Ponzi schemes. Risk was sliced and diced into "derivatives" over and over so that investors no longer had a clue about the underlying value of their assets. International currency speculators operated with no oversight.

Central banks and regulators encouraged these trends as "financial innovation."

The bottom line was simple. Globalization created a context where market forces had more and more freedom to call the economic shots. They were free of "non market" forces like unions and the government regulation that been created precisely to control the natural tendency of private markets to self-destruct. Modern economic history - capped by the Great Depression - had made one thing clear: if left to their own devices, financial institutions and companies act in their own short term economic interest - but not necessarily in the interest of the whole economy. Financial institutions take more and more risk, and take on more and more debt, to make more and more money - even if doing so creates speculative bubbles that will one day burst. Individual companies continually seek cheaper sources of labor, even if cumulatively they end up choking off the very consumer demand they all need to sell their products.

Barack Obama has proposed a jobs and economic recovery program that is desperately needed. Right now, government investment is the only source of demand available to jumpstart the economy.

But we need much more to address the fundamental problems created by globalization:

* Stronger unions. Congress must pass the Employee Free Choice Act (EFCA) that will dramatically increase the percentage of the workforce with union representation. Wages and benefits are 30% higher for union jobs than non-union jobs. To generate long-term consumer demand in our economy, average people have to make good wages.

* Rewrite trade deals. NAFTA and the WTO must be revised to protect labor rights and assure that the world economy is integrated by bringing the bottom up - not the top down. Economic integration in Europe proved that you can maintain high wages in the most prosperous countries while you simultaneously increase standards of living in poorer countries. That is not what's happening the in the world today.

* The U.S. must support the rights of unions to organize around the world. The unionization of workers worldwide is critical to the protection of American wages.

* Re-regulate credit markets. That requires tougher regulation in the U.S. and new regulatory structures on the international scale. The U.S. needs to lead in the creation of a new international system to regulate credit and financial markets - one that applies the lessons of the New Deal to the new reality of a global economy.

In the end, if we want our kids to have more prosperous and fulfilling lives, we have to abandon the right-wing economic conventional wisdom of the last thirty years. We must create a high-wage economy where the fruits of increased productivity are widely shared and everyday people have money to buy goods and services. That won't happen without stronger financial regulation and a growing labor movement.

Robert Creamer is a long-time political organizer and strategist and author of the recent book: Stand Up Straight: How Progressives Can Win, available on Amazon.com.

Comments

[joedel]

If the scientific community is to be believed the last thing we need is economic growth defined in the traditional way. Producing more stuff and conning people into buying more stuff could be disastrous to the planet's health. We need a different kind of economic plan. It would probably be better and cheaper to simply pay people not to work. At least until someone can figure out how to employ everyone that needs a paycheck without ecological offense. Let's face it - everyone needs a cash cow of one sort or another!

[aofh]

I seems to me that you are arguing that wealth is created at the lower levels of the economy. I agree, but I also think we need to give some serious thought about what an ecomony is for and what it is. I think that over the past 35 years the underlying assumption about what an economy is for has been the maximization of wealth. To that end, producing things wasn't really important. Indeed, the less you spent producing things the better. That meant creating cost centers and cutting cost. You speak of the loss to labor, but your implication is the loss to direct labor. "Labor" was hurt in other ways as well. Companies didn't just move jobs off-shore: they also squeezed their suppliers and vendors by passing cost to them and eliminated positions altogether--their own, their supplier's, their vendor's, their competition's. And whatever happened to all of the money that was saved? Certainly it wasn't all re-invested especially when investing was a means of saving even more money. What's the point of maximizing wealth?

[IdentityPolitics]

Robert Creamer just spent 5 months in jail...should that be added to his bio?

[Articulator]

Finally some one has made the link to globalization. Globalization, as it is currently implemented, is a way to get around the labor laws that grew out of the labor movements after the industrial revolution. Before the labor movement, there were horrific working environments where only a very few held all the money and workers were kept dirt poor. All the "free market worship" arguments of today were made back then about how businesses would die if workers were paid more. America grew to a superpower after the labor movement helped create a strong middle class. We see now what the affect on the country is when consumers, who account for 2/3 of all economic activity in the US are unable to consume. The free trade agreements need labor laws. The modern countries should ban together and only allow imports from countries who are willing to abide by labor laws, with inspection and cooperation, and who allow their currency to float on the market. The "trickle down" argument is outdated. Anyone can invest in companies online. We do not need great sums of wealth held by a few people for new companies to spring up. Make it easier for the average person to invest in IPO's! Together, in a bounded market, money can be distributed more evenly via natural market forces and new businesses can sprout.

[paixa3]

When you wrote about the credit market, I think you missed a few key points:

Get the money back from Wall Street and the banks, every cent. Use this to be distributed to families in a rattional manner that includes the payment of mortgages.

Pass usary laws to be 10% interest, MAXIMUM, forever.

Re-write ALL mortages by law to be fixed interest rates and fixed terms. Interest rates to be 2 points above prime. ALWAYS. Eliminate all unscrupulous fees (the usuary law above will handle much of this).

[ThePeacemakers]

One thing missing again: The prices for homes was a FRAUD in many instances.

[Craig]

I'm not so sure there was real economic growth the last the last 8 years. Consider that the GDP grew by about $4 trillion over that period and the National Debt grew by about $4 rillion+. Was there any benefit at all to the economy, or was the new debt just hiding the inevitable? It's probably easier to borrow from the future generations than to do some hard work to resolve some sructural issues.

[Overd0g]

Seems Clinton signed NAFTA. Was he a Republican?

"But the right wing assault on unions in the United States--and the passage of trade deals that protected the rights of capital and did nothing to protect the incomes of average workers"

[priscianusjr]

Not exactly. He was DLC -- Republican Lite. He betrayed his labor base, and don't think they didn't notice it at the time, or that they forgot it.

[therealredstateblues]

Indeed, dems haven't enjoyed the support of labor they once did ever since the sell out

[OldHeathen]

"globalism' makes most of us poorer. It makes a few rich. Remember when Bush and his side kick McCain said 'the economy is fundamentally sound' ? They did not fool me a working stiff from New Jersey. But enough people did buy all the bs and now we all are paying the piper. Stop exporting our wealth , our know how our means of production and source of good blue collar jobs. Punish those who are disloyal to America and Americans. The Global economy only works for the richest of this world and will turn the rest of us into wage slaves. Do markets serve the people or do people serve the markets??
Are we working to live or living to work??

[Overd0g]

No, it lifts millions of foreigners out of poverty that they had been trapped in for centuries. Of course who cares about them?

[paixa3]

....while lowering wages in nearly all so called advanced countries. Consumers HAVE NOT benefited from lower prices, profits increased. Additionally, Wages in the USA have been stagnant while productivity in the USA increased dramatically since 1980. Again, common folks have not received any of the rewards of hard work.

I say have a very steep for ALL USA COMPANIES that outsourced overseas. For example, if a company moved 1000 jobs, they they are taxed at some amount times 1000 per year. I do not know the amount (yet), but it will penalise the companies significantly.

[therealredstateblues]

All at the expense of the US middle and working class

And that third world workers have been pulled out of poverty is very debateable

Mexicans still live in shanty towns and illegal immagration is hihger post nafta than pre

china still exploits its workers and pays the equivalent of 49 cents and hour

for the rising tide to lift the boats you have to have a boat in the first place

no one with any sense ever believed that third world countriesd would be buying US goods and services in any meaningful way

[Articulator]

Those millions are lifted to the edge of poverty, to the world of working poor. With decent labor laws, they would benefit more, all would - except a very few who now control huge sums of wealth.

[Chavez08]

I forgot to mention that your analysis was excellent!

Thank you!

[Chavez08]

Legitimate economists gave these warnings in the 70s when it became aware the bankers were working to trash the Keynes system (although it worked for most people for 60 years) in favor of Neoliberalism (re-packaged neo-classic model delivered by half-wit B-movie star.) Leo Strauss and the so-called "Conservative Movement" initiated all-out slavery on Americans and we just slept through it or denied the facts even when hit in the face with them.

Now that the banker oligarchs have pillaged the country to near 3rd world status and transferred all of our wealth to Dubai, Hong Kong they tell us: "You can have America back now!"

Obama along with the new culture in Washington may give us a second chance but I'm **begging** my fellow Americans to *please* join me in not being stupid anymore.

[Overd0g]

Define "worked".

[Articulator]

Many of the people that I know that retired around 10 years ago had great pensions and paid retiree medical benefits. "Worked" for them I guess. We will never see those benefits. We will die working on the job if there are any jobs left.

[beaupritchard]

People throw this word "credit" around like its confedi ... credit is something purchased now based on future earnings. When an individual does it he's basing a purchase now based on things getting better tomorrow. When a whole society does it it is doing the same.

Now what if every society does it. What if every society is borrowing from the future based on the premise that things are going to get better.

Don't you start to wonder who it is is selling this lie.

[Overd0g]

Let the buyer beware. I'm pretty sure everybody knows they are supposed to pay back debt.

[ThePeacemakers]

The sellers of this lie:
Follow the money. The people who benefit from sky interest rates and fees for shuffling money around?
WALL STREET & BIG BANKS

[kenstremsky]

Congress should have learned from the Savings and Loans Crisis. Congress should have required down payments on homes and fixed rate mortgages. Allowing mortgage backed securities to be sold based on no money down mortgages was nuts.

Congress should eliminate the Federal Reserve or veto many of its decisions.

Congress and not the President is supposed to be negotiating trade agreements according to Article 1, Section 8 of the Constitution.

We need secret ballots. People should not be coerced into joining unions.

Unions (union members) should buy the majority of stock in many small companies and startups so that they are able to make the decisions and benefit from capital gains and dividends.

Congress needs to significantly increase the power of shareholders. Shareholders need to be better able to reduce executive pay and eliminate bonuses. Shareholders need to be better able to increase their dividends. Shareholders need to be better able to fire executives and boards of directors. Shareholders need to be better able to get back executive pay and benefits already paid out when they were not based on accurate numbers.

The federal government should stop taxing interest from savings accounts, dividends, capital gains, and estates. Middle class people, union members, and government employees who have mutual funds would benefit from capital gains and dividends not being taxed. Dividends may be far more important to the middle class in the future than capital gains. Businesses would have an easier time obtaining loans and investments.

Sincerely,

Ken Stremsky

[aofh]

I think you are confusing shareholders with owners who have more than a fiduciary interest in a company. You're forgetting that some of the biggest shareholders were the executives the shareholders were suppose to discipline.

Consider, instead, stakeholders: all those who have an interest in the health of a company including the shareholders, rank and file employees, customers, suppliers, communities.

[OhgReaTone]

Free Trade seems to have many definitions. Is it fair to expect us to compete with Chinese Sweat Labor? No, it is not. Sow we need tariffs to level the playing field. ............

http://thefiresidepost.com/2009/01/02/walmart-sweat-labor-the-case-for-tariffs/

[paixa3]

No, penalise USA companies using China to the extent that they need to bring the jobs back.

[zaneblue]

Everything you say is true, and should be done.