Death By Globalism: Economists haven’t a Clue
by Dr. Paul Craig Roberts
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.” Is
the Obama fiscal stimulus helping the economy or hindering it?
Princeton
economics professor and New York Times columnist Paul Krugman and
Moody’s Analytics chief economist Mark Zandi 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,” 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 agri-business. 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 bloc.
Where
do the two schools stand on inflation vs. deflation? We don’t have to
worry. Martin Feldstein, one of America’s pre-eminent economist 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.
Dr. Roberts
was educated at Georgia Tech, the University of Virginia, the
University of California, Berkeley, and Oxford University where he was a
member of Merton College. He is the author or coauthor of 9 books and
has published many articles in journals of scholarship. He served in the
Congressional staff and was Assistant Secretary of the U.S. Treasury.
He was awarded the Treasury’s Silver Medal for “outstanding
contributions to the formulation of U.S. economic policy.” In 1987 the
President of France recognized him as “the artisan of a renewal of
economic science and policy” and awarded him the Legion of Honor.
Roberts
was associate editor of the Wall Street Journal and columnist for
Business Week, Scripps Howard News Service, and Creators Syndicate. He
was Senior Research Fellow at the Hoover Institution, Stanford
University, and William E. Simon Chair of Political Economy, Center for
Strategic and International Studies, Georgetown University. He has been a
columnist for French, German, and Italian newspapers. Today he is
followed worldwide over the Internet.
Paul Craig Roberts is a frequent contributor to Global Research. Global Research Articles by Paul Craig Roberts
http://globalresearch.ca/index.php?context=va&aid=20854