Death By Globalism—Economists Haven’t A Clue

The President is kicking off another new jobs creation campaign this week.  He has just proposed spending more than $50 billion on infrastructure over the next six years and $300 billion in business tax cuts and credits for the future.  The White House says the plan will not add to the record U.S. deficit.  The Obama Administration plans to work with Congress to get it done.  Congress, by the way,  is enjoying a sub 10% approval rating these days.    The Guest Writer today is Paul Craig Roberts.  He was Assistant Treasury Secretary in the Reagan Administration, so he knows something about money and stimulus plans like the President is pushing.   Roberts lays out why stimulus plans will not work for the American economy as it stands today.  –Greg Hunter— 

Death By Globalism—Economists Haven’t A Clue

By Paul Craig Roberts

Guest Writer for Greg Hunter’s USAWatchdog.com 

Have economists made themselves irrelevant?  If you have any doubts, have a look at the current issue of the magazine, International Economy,a slick endorsed by former Federal Reserve chairmen Paul Volcker and Alan Greenspan, by Jean-Claude Trichet, president of the European Central Bank, by former Secretary of State George Shultz, and by the New York Times and Washington Post, both of which declare the magazine to be “ahead of the curve.”

The main feature of the current issue is “The Great Stimulus Debate” [PDF] Is the Obama fiscal stimulus helping the economy or hindering it?

Princeton economics professor and New York Timescolumnist Paul Krugman [Email him] and Moody’s Analytics chief economistMark Zandi [Email him] represent the Keynesian view that government deficit spending is needed to lift the economy out of recession. Zandi declares that thanks to the fiscal stimulus, “The economy has made enormous progress since early 2009″[PDF],an opinion shared by the President’s Council of Economic Advisors and the Congressional Budget Office.

The opposite view, associated with Harvard economics professor Robert Barro and with European  economists, such as Francesco Giavazzi and Marco Pagano and the European Central Bank, is that government budget surpluses achieved by cutting government spending spur the economy by reducing the ratio of debt to Gross Domestic Product.

This is the “let them eat cake” school of economics.

Barro says that fiscal stimulus has no effect, because people anticipate the future tax increases implied by government deficits and increase their personal savings to offset the added government debt. Giavazzi and Pagano reason that, since fiscal stimulus does not expand the economy, fiscal austerity consisting of higher taxes and reduced government spending could be the cure for unemployment.

If one overlooks the real world and the need of life for sustenance, one can become engrossed in this debate. However, the minute one looks out the window upon the world, one realizes that cutting Social Security, Medicare, Medicaid, food stamps, and housing subsidies when 15 million Americans have lost jobs, medical coverage, and homes is a certain path to death by starvation, curable diseases, and exposure, and the loss of the productive labor inputs from 15 million people. Although some proponents of this anti-Keynesian policy deny that it results in social upheaval, Gerald Celente’s observation is closer to the mark: “When people have nothing left to lose, they lose it.”

The Krugman Keynesian school is just as deluded.  Neither side in “The Great Stimulus Debate” has a clue that the problem for the U.S. is that a large chunk of U.S. GDP and the jobs, incomes, and careers associated with it, have been moved offshore and given to Chinese, Indians, and others with low wage rates. Profits have soared on Wall Street, while job prospects for the middle class have been eliminated.

The offshoring of American jobs resulted from (1) Wall Street pressures for “higher shareholder returns”, that is, for more profits, and from (2) no-think economists, such as the ones engaged in the debate over fiscal stimulus, who mistakenly associated globalism with free trade instead of with its antithesis—the pursuit of lowest factor cost abroad or absolute advantage, the opposite of comparative advantage, which is the basis for free trade theory. Even Krugman, who has some credentials as a trade theorist, has fallen for the equation of globalism with free trade.

As economists assume, incorrectly according to the latest trade theory by Ralph Gomory and William Baumol,that free trade is always mutually beneficial, economists have failed to examine the devastatingly harmful effects of offshoring. The more intelligent among them who point it out are dismissed as “protectionists.”

The reason fiscal stimulus cannot rescue the U.S. economy has nothing to do with the difference between Barro and Krugman. It has to do with the fact that a large percentage of high-productivity, high-value-added jobs and the middle class incomes and careers associated with them have been given to foreigners. What used to be U.S. GDP is now Chinese, Indian, and other country GDP.

When the jobs have been shipped overseas, fiscal stimulus does not call workers back to work in order to meet the rising consumer demand. If fiscal stimulus has any effect, it stimulates employment in China and India.

The “let them eat cake school” is equally off the mark. As investment, research, development, etc., have been moved offshore, cutting entitlements simply drives the domestic population deeper in the ground. Americans cannot pay their mortgages, car payments, tuition, utility bills, or for that matter, any bill, based on Chinese and Indian pay scales. Therefore, Americans are priced out of the labor market and become dependencies of the federal budget. “Fiscal  consolidation” means writing off large numbers of humans.

During the Great Depression, many wage and salary earners were new members of the labor force arriving from family farms, where many parents and grandparents still supported themselves. When their city jobs disappeared, many could return to the farm.

Today farming is in the hands of agribusiness. There are no farms to which the unemployed can return.

The “let them eat cake school” never mentions the one point in its favor.  The U.S., with all its huffed up power and importance, depends on the U.S. dollar as reserve currency. It is this role of the dollar that allows America to pay for its imports in its own currency.

For a country whose trade is as unbalanced as America’s, this privilege is what keeps the country afloat.

The threats to the dollar’s role are the budget and trade deficits. Both are so large and have accumulated for so long that the prospect of making good on them has evaporated. As I have written for a number of years, the U.S. is so dependent on the dollar as reserve currency that it must have as its main policy goal to preserve that role.

Otherwise, the U.S., an import-dependent country, will be unable to pay for its excess of imports over its exports.

“Fiscal consolidation,” the new term for austerity, could save the dollar. However, unless starvation, homelessness and social upheaval are the goals, the austerity must fall on the military budget.

America cannot afford its multi-trillion dollar wars that serve only to enrich those invested in the armaments industries. The U.S. cannot afford the neoconservative dream of world hegemony and a conquered Middle East open to Israeli colonization.

Is anyone surprised that not a single proponent of the “let them eat cake school” mentions cutting military spending?  Entitlements, despite the fact that they are paid for by earmarked taxes and have been in surplus since the Reagan administration, are always what economists put on the chopping block.

Where do the two schools stand on inflation vs. deflation? We don’t have to worry. Martin Feldstein, [Email him] one of America’s pre-eminent economists, says: “The good news…is that investors should worry about neither.” His explanation epitomizes the insouciance of American economists.

Feldstein says that there cannot be inflation because of the high rate of unemployment and the low rate of capacity utilization. Thus, “there is little upward pressure on wages and prices in the United States.” Moreover, “the recent rise in the value of the dollar relative to the euro and British pound helps by reducing import costs.”

As for deflation, no risk there either. The huge deficits prevent deflation, “so the good news is that the possibility of significant inflation or deflation during the next few years is low on the list of economic risks faced by the U.S. economy and by financial investors.”

What we have in front of us is an unaware economics profession. There may be some initial period of deflation as stock and housing prices decline with the economy, which is headed down and not up.  The deflation will be short lived, because as the government’s deficit rises with the declining economy, the prospect of financing a $2 trillion annual deficit evaporates once individual investors have completed their flight from the stock market into “safe” government bonds, once the hyped Greek, Spanish, and Irish crises have driven investors out of Euros into dollars, and once the banks’ excess reserves created by the bailout have been used up in the purchase of Treasuries.

Then what finances the deficit? Don’t look for an answer from either side of The Great Stimulus Debate. They haven’t a clue—despite the fact that the answer is obvious.

The Federal Reserve will monetize the federal government deficit. The result will be high inflation, possibly hyper-inflation and high unemployment simultaneously.

The no-think economics establishment has no policy response for economic Armageddon, assuming they are even capable of recognizing it.

Economists who have spent their professional lives rationalizing “globalism” as good for America have no idea of the disaster that they have wrought.

———————————–

Paul Craig Roberts was an Associate Editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury during President Reagan’s first term.  His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press.  He can be reached at: PaulCraigRoberts@yahoo.com

Comments
  1. Jimbo

    Dr Roberts writes:

    As for deflation, no risk there either. The huge deficits prevent deflation, “so the good news is that the possibility of significant inflation or deflation during the next few years is low on the list of economic risks faced by the U.S. economy and by financial investors.”

    If this is the case, then that means that the government of “We the People” are doomed to NEVER STOP deficit spending and bailouts because the instant they do, the deficit-spending inflation-pressure will give way to the very pressing deflationary pressure that is the prevalent economic pressure source.

    Atlas is said to have supported the weight of the world on his back. Now, deficit spending supports the economic world on its weakening shoulders!

    • Greg

      Jimbo,
      The endgame is beginning to unfold. Thank you for the comment.
      Greg

  2. Mark Ybarra

    How can someone who has never held a job, create a job?

    • Greg

      Mark,
      Thank you for the comment.
      Greg

    • BRIAN

      HAHAHHAHAHAH!!! HAHAHHAHAHAHAHAHAHAH!!! NICE!!

  3. Spider

    “If fiscal stimulus has any effect, it stimulates employment in China and India.”

    A very good point and evident in many articles all over the news – one of many examples below:

    http://www.voanews.com/english/news/China-Orders-More-Food-Production-to-Counter-Inflation-102145119.html

    I’m surprised foreign governments dont see that their inflation problems stem from large trade imbalances with the US. And the US doesnt see that most of our stimulus is being sent straight to our trade partners.

    I agree 100% with the article – our problem isnt a lack of stimulus but a fundamental problem with the way our economy is structured!

    So what happens from here on forward.. i’m not exactly sure but all I know is I better load up on gold, silver, and other real assets because the one thing I do know is that this situation WILL NOT last forever and the dollar will be devalued to some extent.

    • Greg

      Spider,
      Thank you for the comment and link!
      Greg

    • George

      Spider,
      China is in a pickle. The Chinese Government need to keep their people employed to retain power. American CEO’s were kind enough to outsource most of their manufacturing to China for the sake of the all mighty quarterly profit. And the American people helped by shopping at Wal-Mart. Anyone remember the “Buy American” campaign? And some of this was driven by the greedy corrupt labor unions holding businesses hostage demanding silly work rules and higher wages when the economic realities did not support it. Think GM. Ross Perot as a board member was bought out after bringing up how inefficient they were. 1985/1986, I think.
      The Chinese are keeping their currency low by forcing businesses to invest a high percentage of their profits in Chinese government bonds which they in turn use the proceeds to buy US Treasuries. As you can imagine, there is a natural equilibrium being disrupted and pressure builds. The Yuan will rise and it will make America more competitive; that is if we are making anything here when it happens.
      I had an argument in Macroeconomic around comparable advantage. America became great with its manufacturing based economy and then we moved to a “knowledge” based economy. These economists don’t seem to understand that manufacturing keeps “your” people employed. It creates wealth. America is on a downward slide. Our children will have a lesser standard of living than their parents. Most will have less education than their parents; another first.
      We need to cut spending to the bone, make stuff here and buy American.

  4. Pat

    Greg,

    You must be credited for bringing true awareness & focussing on real issues to the general public. Excellent guest author who has really focussed on the problem of globalization which is literally eating away at the U.S. and also Europe. It is amazing to review over the last 20-25 years the vast globalization, as part of phase one, that has taken place with main focus on “transfer of real wealth” from the U.S. to overseas. Some of the populus in the U.S. are very slowly realizing that, as part of phase two, “reverse colonization” has already started wherein the very same countries which benefitted from offshoring are starting to acquire hard physical assets in the U.S. with the same wealth that originated from the U.S. over the last 20-25 years in the form of U.S. foreign direct investment and jobs to these countries. It all comes down to a “reverse colonization” plan which is already in play; one has to just visit, see for themselves and ask those offshoring country’s central planners.

    • Greg

      Pat,
      You are very kind. Thank you.
      greg

  5. MarkM

    Hey Greg,

    On offshoring of jobs: I keep reading that the U.S. still has the largest manufacturing base in the world. The U.S. still manufactures more than any other country.

    Are we supposed to manufacture everything in the world?

    Keynesian economics worked one time. It was after Germany, Japan, United Kingdom, and Russia destroyed the means of production for the entire world. Except for the U.S. We were the only country that could manufacture consumer goods.

    Maybe we should allow Iran to build nukes so that they can start the process to destroy the manufacturing bases of the world. I hope our “star wars” system works well. Please don’t mind the nuclear winter. This will ensure that Keynes’ Neo-Marxist theory works again. ha-ha!

    Cut gubmint jobs. Decrease defecits. Keep taxes at current levels. Roll-back bureaucratic regulation to 2008. Get the gubmint out of lending. No new regulation for two years.

    Kennedy was right, by growing the pie, gubmint recieves more revenue; it is the only way to increase revenue. For Stage One Thinkers, static analysis is the method of choice. Dynamic analysis is critical for estimating revenue to gubmint coffers. Human nature rules!

    Roberts should have layed-off the weed before writing this article.

    Utopia will never exist. Nasty medicine must be taken.

    markm

    • MarkM

      Correction!!!! Edit!!!

      The U.S. was equally guilty of destroying the manufacturing base of the world during WWII.

      markm

    • Greg

      MarkM,
      I agree nasty medicine is going to swallowed by Americans like it or not. It must happen if we are ever going to get out of this mess. Thyank you for weighing in on this.
      Greg

  6. Bob

    Solution, pick a job are trade that can’t be exported, invest in local shops. Don’t support WalMart, Buy use cars, shop at the Goodwill that way the money spent will stay in the USA. These simple ideas will do more good then all these big ideas. Inflation has hit the Goodwill, what was 2 bucks a couple years ago is now 4 bucks. The green back is only strong because we still have the world BIGGEST police force. I like how are big banks were making big bucks off the drug money. Remember how Bush 2 was trying to get Colombia into the favorite trade nation , that country has mass drug cash that needs cleaning.It’s all to crazy but honest fair people that ride out this storm of insanity might be able to rebuild this country one town at a time. PEACE

    • Greg

      Bob,
      Good solution. Peace.
      Greg

  7. Mickey S

    Greg, Greenspan wrote in 1966 that the US should return to the Gold Standard, Ref:www.EconomicPolicyJournal.com/alan-greenspan-hedge-against-federal.html.Your readers will find Greenspan has come full circle & returned to his ideals from his earlier years when he was 40 yrs old! He warned of the dangers to the “US” of not returning to Full Gold Standard & it has come true.
    Jim Sinclaire has provided mllions of folks help with a Free web site that has content that is not watered down! He made a statement on his site(Sept,7,2010)that,I hope you will comment on because there are millions of Americans do not own any real Gold/Silver. Why is this true? Statist’s economist that spout debt & more wastefull spending!

    • Greg

      Micley S,
      I know this is weird. There was no one more pro gold than Greenspan in the 60’s and then he went to the “dark side.” Everyone should own silver and gold coins for protection and insurance. I constantly warn DO NOT buy an ETF in AU or AG. Thank you for your comment, and I think Mr. Sinclair is a very good man!!!!!
      Greg

  8. Rich Heinrich

    Wall Street profiting from globalization was an effect not a cause. The cost structures in the US are so much higher than the developing world that any rational person would live or send work elsewhere. Medical costs in the US are ten times higher. Taxation, fees and fines are ten times higher. Service costs are ten times higher. Until the government shrinks, and the costs can come down the nation will be in a funk until reality does its work. No one will ever qualify for a 30 year mortgage, so housing will fall to cash basis. The government has a lot of shrinking to do to reflect that, while its fannie and freddie investment continues down the toilet. Reality will do it, eventually and jobs will come back at a much lower scale (but so won’t costs)

  9. Patriot Watch

    If it were not for Drudge and USAWATCHDOG not real sure where I would go. This post mentions military spending. Don’t like the idea of reducing the “military spending”. Lets close some bases.(which is spending) I would say nothing. Quitely I would close shop around the world or in most places.

    Time and time again AMERICA jumps to the rescue. WHY? Where is Europe, China, Russia and a whole host of other countries. Can’t we lead without sacraficing American lives. TECHnology. Just watched video of a small arm being shot at Syrian Tank by robot and the result was UNREAL and out of this world.

    As a HAWK I have never felt so strongly about bringing home our troops. Obama has killed over 700 troops in Afghan in less than two years. FOR WHAT? In my opinion you would of had a better opportunity to kill Bin Laden without putting troops on the ground but who am I?

    Just got off of youtube and watched Obama give another 2012 election speech on the economy. He had NO idea what state he was in than spun the mistake. Than I had to hear how it was everyone elses fault that we are in the basement.

    Where is our American HERO? Is someone gonna save us or are we to start buttoning down the hatches? Thou I have started I have an escalation plan or plan B that I have started to warm my wife to. At some point you have to consider what is best for your family and not what is expected of you.

    Progressives are quitely “changing” us into a socialist country. Republicans have ZERO to say. ZERO ideas. I don’t even know who is in the Republican Party or what their ideas are and I am on it. I DO NOT UNDERSTAND

    • Greg

      Thank you Patriot. I feel your frustration. I do not think most Americans really know how much trouble we are in. I know you do. I just had a friend of mine say if we keep going the way we are going pretty soon we will not have a country. He was dead serious. I can shed some light on Afghanistan. I just heard Scooter Libby (Cheney’s former Chief of Staff) say last night we are in that country because we are afraid that the Taliban will get control of Pakistani nukes. If that happens, the U.S. will go in. (I have been warning about this dire problem for a year.) I appreciate your passion. Please do not let your frustration alter it. Finally, thank you for your kind words. It is what keeps me going.
      Greg

  10. Wolf

    I had to double check to make sure this wasn’t written by Lou Dobbs. When I did, I saw it was somebody from the Treasury. The only way to establish less credibility on economic matters would be to be a former Chairman of the Fed. Seriously, this is like getting moral value instruction from Paris Hilton.

    Anyone that works outside of academia or the government and has actually had to work with folks in vastly different cultures like those in India and China would know that this article is nonsense. Between all the cultural headaches, language barriers, constant turnover, time zone delays, etc., it can be a complete nightmare to work with partners overseas.

    Sure, if it involves a screwing widget A into widget B, then yeah, outsourcing makes sense unless we want the company to go under. If you have skills that are in demand and you are tops at what you do, you need not lose any sleep at night.

    Instead of referring to “anti-keynsians”, I think the author should be looking to the Austrian school for the answers to what is causing the problem. Of course, I would not expect a bureaucrat to subscribe to something that points out GOVERNMENT is the problem. Write law A, then Law B to fix A, then Law C to fix B… it goes on forever until so many unintended consequences pile up that the economy chokes.

    I love my country, but the government is broken. Self interest & special interest always trumps doing what is right. Left and right are both guilty of this. I would love to see another legit party based on actually following what is written in the Constitution.

    • George

      Well said!

  11. George

    “Otherwise, the U.S., an import-dependent country, will be unable to pay for its excess of imports over its exports.” Gee whiz! Does this mean we will create jobs as we will have to start making things here again?
    Sir, you point out the folly of these opposing viewpoints but your solution is only cut military spending. Everything needs to be cut.
    “The U.S. cannot afford the neoconservative dream of world hegemony and a conquered Middle East open to Israeli colonization.” Mr Roberts, you had me until you went off the deep end. Pointing to a one sided blog (vdare.com) and a book written by a political hack can hardly be considered as proof supporting the above statement. While I make statements in posts on this site reflecting my thoughts and beliefs are sometimes outlandish; your biased comments stated as researched fact are beyond the pale.

  12. John T. from the Banning Bunker.

    I haven’t read of a credible policy to enable manufacturing rebirth in America, with attendant new jobs. Here’s my thinking on what should work.

    Problem with lack of Jobs is that [after we exported our industry] our domestic small companies don’t see markets here in the USA where they won’t be undercut by pegging in the currency markets.
    Tax policy only works if there are profits in an industry to be taxed.
    And, consumer and business consumption of goods from US producers keeps the $US here to be recycled, not exported.

    Policy: Build it here to sell it here – America First. It’s OK for foreign companies to build plants here to sell here and take the profits home, but the jobs stay here.
    Only method that occurs to me to make this happen is that we return to “a flat tariff” on all imports based only on the inappropriate pegging by foreign governments in the currency markets. For example, China devalued its currency by 40% when they pegged 8 Yuan = 1$US [Clinton says thank you for the $$ contribution]. So, we look at the current appropriate undervaluation and, for example, add a 40% tariff to all goods manufactured in China. USGov keeps the tariff revenue.
    Protectionism of course, but we base it only on aggressive foreign currency pegging, not by industry, on currency.

    Result: Small US companies see will markets for all types of essential products that they can manufacture and profit if the currency costs are leveled. They will expand to fill the market and in doing so, hire new workers and buy new “American High Tech Tooling”.

    At some point it’s America First. Tariffs can be used or abused. Use to level the economic-cost playing field is a fair use of tariff tool, gives the Feds a revenue stream, and American industry a market into which they can expand.

    Another thought …. If we use the “Flat Tariff” method then we don’t have to resort to “Devaluing the Dollar” to attempt to gain manufacturing advantage. We could actually save the Dollar as our currency. [Reduce Gov’t spending by sending the big social programs back to the states, and implementing America First manufacturing policy with tariffs, with Gov’t receiving the income from the tariffs. Save the American Dollar as a currency. Insanity!! ]

    ps. I went to Home Depot to get some copper pipe fittings: guess where they were made – China. Egads!

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