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Archive for the ‘Free Trade’ Category

I’ve long thought the Republican obsession with free trade was not only bad politics but a bit of bad policy.  A recent Washington Post article asks the question whether trade–which had a lot to do with our lopsided economy, as US dollars overseas filtered back looking for a safe investment and found it in Mortgage-Backed-Securities–has been a net positive for the US economically:

A few months ago, Robert Cassidy found himself pondering whether trade actually benefited the American economy. “I couldn’t prove it,” he says. “Did it benefit U.S. multinational corporations? Yes. But I cannot prove that it benefits the economy.”

Such doubts would hardly be news if they came from an established critic of free trade. But Robert Cassidy was the chief U.S. negotiator on China’s 1999 market access agreement with the United States — the document that was the basis for Congress’s extension of permanent normalized trade relations to China, which in turn enabled China to join the World Trade Organization. During the 1990s, Cassidy was the assistant U.S. trade representative for the Asia-Pacific region, and before that he worked in the Treasury Department’s international affairs office.

Republicans did not always embrace free trade so uncritically.  In the 1980s, Reagan strong-armed the Japanese to open up their markets, for example.  In the late 1800s, the Republicans were famous for presiding over an industrial policy of protective tariffs. Conservatives have long recognized the value of the nation as an important community of interest, which follows a different logic and pursues other goods besides economic ones.

The free trade orthodoxy is so entrenched on today’s right and the  mainstream Democratic Party–in sharp contrast to the prevailing attitude even in the 1980s–that the least deviation is quickly swatted down, as if we must all become either Davos Man or Dick Gephardt with nothing in between.

I’m for a certain amount of free trade, but oppose trade that (a) hurts the American economy on net, particularly by hurting export industries without a net gain in jobs and productive capacity, (b) hurts our national defense, (c) strengthens illiberal dictatorships, or (d) does not include sufficient buffers between our economy and the various unfriendly regimes around the world whether China, Indonesia, or Iran.

I happen to like free trade with Mexico, but would have not traded a penny with the Chinese starting around 1990 or so when the Cold War ended, preferring instead to isolate them and strengthen the American manufacturing sector.  It’s good for our third world neighbor to do well, even partially at our expense. On China, though, it’s not good for a global competitor and future great power to succeed at our expense and for us to be too dependent on them.  Their cheap dollar subsidy, low cost manufacturing, and the smoke and mirrors of easy credit have distorted our economy and theirs and made us too mutually interdependent for our mutual independence and strength.

In the 1880s, Britain infamously put Egypt into receivership when it defaulted on its debts. While I don’t see anyone able to impose such a dreary condition on the US, we can soon expect foreign creditors to dictate their terms and our policies more freely.  This would not be good, needless to say, and the joys of cheap plasma televisions from China would hardly make up for our loss of independence.  We can live without cheap Chinese trinkets; we cannot live in any normal sense of that term under foreign control.  I should think an American politicians could be very popular in such a circumstance by promoting massive foreign debt repudiation, even though such a move would undeniably be very costly going forward.   We’d soon find out if Americans were more attached to their flag and their independence or, rather, easy credit and cheap trinkets imported from low wage foreign regimes.

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Treasury Secretary Henry Paulson’s proposal to consoldiate various financial regulatory agencies is uninspired and likely will prove useless.  This proposal rests on the unquestioned assumption that bad economic results should never occur, and, if they do on a large enough scale, should be bailed out by the government.  If they should be bailed out, then the federal government rightly acquires some interest in preventing them. But consolidation alone won’t do the trick, even if these flawed assumptions about the goals of economic regulation are accepted. 

Without new rules and expanded authority–which Paulson  has renounced–it’s unlikely any consolidation of the SEC, CFTC, OCC, and other regulatory agencies can yield better results than today.  This is the same logic behind joining various agencies under the Department of Homeland Security, which has accomplished little more than these agencies could in the past working seperately because of old fashioned rules on profiling and the lack of increased border infrastructure.  The case for consolidation is even less compelling in the case of finanical regulators, as poor inter-agency communication was widely reputed to be one factor in the 9/11 attacks.  By contrast, no one thinks that the current mortgage crisis is the result of some regulatory gaps or bad communication between the agencies.  Rather, investment banks, hedge funds, and other unregulated organizations now control huge amounts of the lending going on today and largely do their work off of the regulators’ radar. 

Investors know that these organizations are less regulated and more opaque than the regulated alternatives in the form of commercial banks and publicly traded companies.  The reason people still invest in these entities in spite of these demerits is a greater anticipated yield.  But everything comes at a price.  Investors of capital overseas, for instance, take the risk of other countries’ screwed up legal systems and greater degrees of corruption.  This is as it should be.  The whole point of regulation is to promote the proper pricing of risk and divert capital into safer investments at home to further American economic enterprise.  Bailing out investment banks and other holders of subprime mortgage instruments would instead reward high risk speculators, bailing them out of their risky choices, even as Paulson eschews more regulatory authority.

If the DHS is a good analogy to the proposed regulatory consoldiation, the best analogy for the Federal Reserve’s bailout of failing investment banks is the failed IMF strategy of bailing out the central banks of corrupt nations during the Asian currency crisis of the late 90s.  There, as in the US today, under-regulated high risk investments overseas attracted too much capital that underestimated the risks.  Investors seemingly forgot that the Third World is impoverished for a reason.  This led to a number of investment and monetary bubbles, which in turn burst.  Instead of allowing the devaluation to run its course, which it eventually did, the IMF at first bailed out Asian central banks and their investors leading to continued over-investment in “emerging markets.”  It would have been preferable if investors were forced to take their lumps as regimes as varied as China and Indonesia suffered the painful “correction” they deserved because of their instability and corruption. 

Our own Indonesia, the free-wheeling world of hedge funds and subprime securitized mortgages, needs to be shaken out so that in the future capital will not be invested to an irrationally high degree in high risk, underregulated investments.  Consolidating regulators and bailing out the failed investors is the worst of both worlds:   it increases public exposure without any concomitant increase in regulatory authority over the high risk institutions involved.

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