The Middle Class, the Recession, and the Hoax II

In the next year or so, a hard fact will confront us. The declining income of the middle class will mire the country in a deep, protracted recession. Too many middle-class jobs have disappeared through the exportation of manufacturing and through numerous mergers, and neither monetary policy nor fiscal policy will get us out. We will need policies that break with present-day economic thinking.

One policy would be setting up tariffs, preferably with stipulated reductions over time, that will help US businesses recover or start up. Such policies will come up against formidable ideological opposition. But even a glimpse into economic history will reveal that the GOP – today’s priesthood of free trade – was offering gracious benediction to protective barriers in the nineteenth century and incanting solemn anathemas upon the free-trade Democrats. This should inform us that we are not dealing with timeless truths, only transient business conditions and attendant ideologies. Another objection from the priesthood is that tariffs worsened the Depression as countries retaliated with their own tariffs. Perhaps so, but today the US is practicing what has been mordantly called “unilateral free trade,” while our trading partners all but prohibit the import of many US goods, especially agricultural ones. Accordingly, free trade has been lucrative to some, but a disastrous to working- and middle-class Americans.

A second policy would be new, hard-nosed international currency policies. Many countries with which we have immense trade deficits peg their currencies to the dollar. That is, their currencies do not rise and fall against the dollar in accordance with market forces. This prevents the prices of their products to rise as currency exchange rates rise with trade surpluses. Pegging currencies to the dollar thwarts the equilibrating mechanism upon which free-trade ideology rests.

A third policy is subsidization of sectors of the economy. The use of government funds to stimulate the manufacturing might be more useful than pumping funds into poorly managed, moribund enterprises with more political influence than business acumen. Such an undertaking amid a deep and perhaps open-ended recession might be useless without changes in tariff and currency policies. Furthermore, it is likely to be plagued by the meddling of powerful politicians whose economic knowledge is paltry at best.

A fourth policy is the enforcement of antitrust legislation. Such laws have been on the books for over a hundred years but have been for the most part kept in a dark chamber of the Justice Department – by both parties – over the last several decades. This has led to the rapid concentration of power in the hands of a few enterprises. This has had two regrettable consequences: the destruction of a huge number of middle-management positions, and the rise of a handful of badly managed companies whose response to competition is to buy it out and whose answer to their ruinous blunders is to tell us they are too big to let fail. Breaking up a sector such as investment banking – extremely if not ominously concentrated now because of the demise of several large firms – would lead to more middle-class jobs, greater competition, and less danger of corporate control over more of American life.

All this goes against the economic wisdom that has prevailed over much of the public and over both political parties during the last several decades. And of course it would require reworking or reneging upon numerous trade agreements that those who benefit from free trade have locked us into. But we are witnessing the death of the middle class and attention must be paid – our economic system and political stability depend upon it. Though few in the priesthood would know it, free trade was championed in the early nineteenth century by David Ricardo, who argued that the economies of both Britain and Portugal would benefit immensely from abolishing tariffs, but who did not live to see Portugal develop apace with Britain. No one has. Free trade and concomitant ideologies are moving us in the direction of Portugal.

~ ©2008 Brian M. Downing
Brian M. Downing is the author of several works of political and military history, including The Military Revolution and Political Change and The Paths of Glory: War and Social Change in America from the Great War to Vietnam. He can be reached at brianmdowning@gmail.com.

Brian Downing December 9, 2008 - 10:04am

Brian Downing's diary | printer friendly version |

( categories: Miscellany | Economics: USA | Globalization )

Just to point out the obvious

In a country where over half of the population is OK with destroying some of the last native manufacturing your plan won't happen. It's not bad enough yet.

Tim December 9, 2008 - 10:35am

Selective deflation

Isn't what is occurring best termed "selective deflation", where certain sectors are having both wages and prices reduced but others aren't?

Aren't the sectors being deflated things that represent "gravy" -- consumer electronics, toys, cars, housewares, etc., -- while the non-deflated sectors are the "meat and potatoes" -- health care, education, housing, and government?

In other words, a lot of people will have to settle for less health care, education, housing, and government services so that the rest of us can have somewhat cheaper toys, housewares, cars, and consumer electronics. And a bunch of people who are playing the arbitrage are getting really, really rich in the process.

Am I wrong?

If I'm not wrong, then why can't the American people be made aware of this in very simple terms? "Your wages are being cut so that the cost of discretionary goods will fall, but the cost of your necessities are rising so you are poorer even though you can buy more cheap crap".

NoPolitician December 9, 2008 - 11:05am

Housing is deflating

Although maybe you mean interest rates to get mortgages.

Jeff Wegerson December 9, 2008 - 12:11pm

Think of the relationship

between deflation and inflation as an island sinking beneath the water. As the low ground of discretionary spending becomes progressively less valuable, the high ground of necessities become more valuable.

A significant problem with a tariff solution is that it isolates countries and their people from one another, thus making it far easier to blame "others" for problems largely caused by shortsighted policies and otherwise bad management. The end result is that it makes it much easier to go to war.

I still think a possible productive outcome to the current crisis is to recognize money is no longer commodity based, but tax based and this makes it a public utility, not private property. This would remove the logical and moral argument for vast reservoirs of encrusted wealth that are essentially fat deposits within the economic process and cause reduced circulation of wealth. The engine of the economy are the borrowers, while the lenders are the fuel tank. As it is, the borrowers have been squeezed for the benefit of the lenders.
Money is effectively no different from a public road system and should be regulated as such.

brodix December 9, 2008 - 1:37pm

Lobbyists

Furthermore, it is likely to be plagued by the meddling of powerful politicians whose economic knowledge is paltry at best.

Politicians and their corporate lobbyists to be exact.
Until we can overcome the influence of big money in politics most economic policies will be driven by the immediate concerns of those who can pay the most.
If that can be overcome, tariffs might make sense.
And that would be tariffs imposed as a result of international negotiation and cooperation rather than "beggar thy neighbor" tariff policies that get wars started.

JT December 9, 2008 - 11:59am

Pooling of Interests

"Pooling of Interests" is the legal/taxation term for "a big company buys a little company and does not have to expense the cost". This concept in itself is a major enabler of mergers&buyouts.

Can we repeal it?

“The Playboy reader invites a female acquaintance in for a quiet discussion of Picasso, Nietzsche, jazz, sex.” - Hugh Hefner

Tonsure Wimple December 9, 2008 - 1:45pm

Brian, I Can Hear Them Now -

- the Neo-Whatevers, screaming "Smoot-Hawley" at you! According to the late Milton Friedman and the Chicago Boyz, the raising of tariffs was a major cause of the Great Depression (along, of course, with the Fed's raising of interest rates in 1931). According to Neo Con/Liberal argument, Smoot-Hawley resulted in retaliation by the Europeans, and doomed our export industries. What these so-called "Free-Market" types don't say is that exports were a very small part of the overall economy in the early 30s (2.5-3%), and the decline of exports probably took place in spite of Smoot-Hawley, and not because of it.

I admire your sheer gumption and courage here. "Free Trade" has become an Article of Faith with the Neo-whatevers. The monies from the richest American individuals and corporations have hijacked think tanks, universities and foundations into unquestioned acceptance of this concept. There is precious little honest debate or analysis. The elites have greatly gained, while the middle class is being enviscerated. Free Trade may be the ultimate oxymoron!

jbaspen December 9, 2008 - 1:54pm

Dear Leftie Politruck

I already gave here a harsh treatment for a writing
http://agonist.org/stirling_newberry/20081202/captain_carnage_bombs_the_markets which was somewhat economic fiction.

I suggest devaluation and internal actions, which you suggested too. Additionally I suggest tailoring the educational politics to support more export oriented economy - this was not on your list. Maybe Sean-Paul wrote something about this, or not, I haven't read it.

Republicans tried the devaluation and failed in negotiations with China. I don't see why the negotiations were any easier for democrats. Well, the US can try a bilateral trade agreement with China, what is as difficult as anything else. China is definitely the stronger party in these negotiations.

Well, the US could tax gasoline and oil products like rest of the world, but your oil barons in Texas and Alaska wouldn't like that. Thus this might be politically inapplicable. Your problem.

The US needs the exports to pay its debts. Not paying the debts would lead to a collapse of the economy some day, what would lead to trade surplus in a brutal way.

If this bailout economy effort fails, the collapse will be in the USA soon, and as bad as the economic entertainment writers have described. The risk with bailouts is that more debt will be layered on top of the earlier debts. Isn't a bailout the same as subsidization?

Subsidization and tariffs are mostly illegal in trade agreements. China and the EU have been able to enforce the trade agreements when necessary.

What comes those "too big to fail", cutting them in pieces would take care of the moral hazard of corporate social-democracy, and would make some of the pieces more dynamic. Some of the pieces would bankrupt, but most of the subcontractors etc. would survive.

I recommend taking a look at the antitrust legislation. It has been mostly applied in the EU by the requests of US corporations - LOL.

Is this participation or only an illusion of it?

-- Storm brings only richness with it

Singular December 9, 2008 - 3:45pm

All in the name of economic efficiency

If you really want to beat them at their own game, make the point that hoarding wealth reduces the efficient circulation of value throughout the economy and is destructive to general prosperity.
They are having to nationalize the banking system and the car companies because those at the top profited from short term manipulation of the money. Greed is not a healthy economic philosophy.

brodix December 9, 2008 - 7:07pm

The Problem with Tariffs

The problem with tariffs is that it shuts down trade. If US trade with the rest of the world is reduced, it will isolate the US from the rest of the world. (Argentina tried that during the 20th century - read your history book to see the consequences). If the rest of the world cannot get US dollars, the US dollar will as a consequence lose its status as the reserve currency and oil and other commodities will no longer be priced in US dollars.
Albert

Albertde December 9, 2008 - 8:50pm

This goes to taxation

Consumption taxation means all suppliers to the market are taxed equally to all products.

Corporate, payroll, social secuirity, and income taxes are applied unequally to domestically produced and imported products.

And no, I'm not for a "flat tax" (which is a VAT), it's too regressive. And at 23% (probably too low) would result in a almost instantaneous "cash" ecomony for people to avoid the tax.

Synoia December 9, 2008 - 10:52pm

Re: This goes to taxation

The experience of New Zealand, Australia and Canada contradict what you say. In any case, you can do what Canada did and exempt unprepared food and pay credits to people with low income to compensate them for the tax they pay.
Albert

Albertde December 10, 2008 - 11:38pm

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