How Have Free Markets Gone Wrong?

           Keith's article entitled "Lost Jobs, Stagnant Wages" raises a critical issue on which rational political debate has given way to a dysfunctional mix of stale ideas and demagoguery. And if Keith is right that the Republicans have emphasized jobs and compensation issue more than the Democrats, it's only in the sense they have demagogued it more aggressively, not that they've focused on it constructively as problem-solvers. Ritualistic China-bashing is not economic policy formulation. 
           Free-trade theory is simply liberal market theory, in the traditional sense, extrapolated internationally. And it is axiomatic that markets and trade, both domestic and international,  represent the source of all economic wealth and provide the foundation for everybody's livelihood. "Trickle Down" is a dismissive and dangerously misleading characterization of what is in fact a powerful democratizing force. The economic gain, or "profit", that results from rational trade provides both the incentive for hiring workers and the financial raw material for capital re-investment. It thus constitutes the driving force for economic growth, innovation, and job creation. Furthermore, by increasing the abundance and diversity of available goods and services, and by driving down their prices, trade increases everybody's standard of living, even when nominal wages appear "stagnant". The aggregate mass of employee compensation, plus the money applied to necessary re-investment, greatly exceeds the money allowed to "trickle up" towards the self-indulgence of capitalists.  Thus the bête noire of traditional leftist outrage remains a bit of a red herring, as it always has been.
           That being said, however, something has indeed gone wrong with free trade, and wrong with capitalism itself. The "populists" of both parties, currently hammering away at many of the same nails, are reflecting too much common experience to be lightly dismissed. Keith summarizes the issue as stagnant wages and lost jobs, capturing its essence well enough I suppose, even though there are more dimensions to it, and he ticks off several cogent ideas for addressing it. However, like most of us with our debating hats on, he is approaching the problem from the perspective of the macro-economist, who believes the right mix of macro policy tweaks can always be found to fix any problem. Even when economic logic is sound, macro-tinkering generally fails because of unintended consequences and bad timing. It's my judgment that the economic dysfunction we're experiencing currently has deeper roots anyway, and cannot be addressed so simply.
           The fundamental problem, in my view, lies with money itself, and the manner  in which the world's central banks, who create it, are using it to control financial markets. Led by the American Fed, central banks, no longer bound by a gold standard or any other basis for the money they create, have learned reflexively to pour liquidity onto every crisis and to use perpetually accommodative monetary policy to sustain financial asset values that are already too high and supposed to go on rising steadily. This chronically sloppy policy is characterized by zero or near-zero short-term interest rates, and it's one of the few policy options that tends anymore to enjoy universal support across our warring political factions. Maybe that in itself should be viewed as a red flag. It's its impact, however, while largely hidden,  is devastating because it:
  • Makes capital cheap relative to labor, causing unemployment and downward pressure on wages
  • Leads to over-leveraging in the economy, since debt is cheap
  • Incentivizes managers to favor stock buy-backs and uneconomic mergers over productive capital investment
  • Leads to financial instability as markets cut loose from their moorings in the real economy
  • Devalues hard work and entrepreneurship relative to the easy-money pursuits of financial engineering
  • Aggravates wealth disparities in society as easy wealth compounds easily
  • Increases political pressure for bigger and more intrusive government as the deus-ex-machina necessary to fix all of the above, exposing us all to a horrible Catch-22 dynamic.
I myself have no practical solutions to offer for the above. The ideas Keith has put forward are not necessarily bad ideas, but like most macro-policy prescriptions are probably as likely to do harm as good. If central bank policy is indeed the root of much of what's wrong, I have no ideas about how to reform it.  It's above my pay grade at this stage of life. A return to some form gold standard is tempting, but it seems utterly impractical and any crude attempt to impose one at this point would trigger a devastating depression, along with all the chaotic consequences implied. Other than that, I can't imagine what should be done.

          I guess we'll just have to wait and see what happens.

1 comment:

  1. I agree with much that Mark says. He forgets, however, that the central bankers in the US and Europe resorted to ultra-low interest rates because the political refusal to use fiscal powers to overcome the 2008 depression left monetary policy the only way to stop a Depression. I think economists agree that when consumer demand falls, as it did in 2008, the only solution is for the one entity that can still spend money to do so. That was how Roosevelt began to cure the 1933 Depression (only to stop prematurely), and how Obama tried to cure the 2008 mess up to where the Republicans blocked him. The Europeans couldn't do it because Germany refused for parochial reasons. Japan had tried to do it in the '90s, but apart from its export sector Japan has a Third World economy, and couldn't make it work.

    Despite the evils of excessive money that Mark enumerates (some of which are mitigated by facts that Paul Krugman repeatedly cites), I think a far greater evil would have been to let a new Depression run its course.

    As to Mark's encomium to free trade, I must partly demur. Of course free trade has been beneficial, as I noted. But not until recently did free trade create an international market in labor, and THAT has been the cause of the malaise we see throughout the developed world. We need measures not to protect developed world labor forever, but to ease the transition from now to the time when labor rates in China et al become more similar to our own. Without such measures, free trade has become just a means of robbing Peter (employees) to pay Paul (owners and bosses).