Wall Street and the New Economy

I’m going to throw out 2 numbers and ask you to keep them in mind: 2 Trillion; and 3.7.

When I first studied economics more than 30 years ago, the textbooks said that businesses and economic activity were comprised of 3 basic ingredients: land, labor and capital.  Land, what folks like Paul Hawken now call “natural capital”, represented the raw materials needed to make things.  This work of making things was presumably done by people, that is, labor.  And capital, the third component was understood to be the machines, equipment, and technology which increased the productivity of both land and labor, along with the financial investment which sustained it.  Thirty years ago, most economists were certainly not friends of land or labor, but they did at least understand that both were essential to a healthy economy.

But all of that has changed.  First, we shifted from an economy based primarily on manufacturing goods to one based on providing services.  Now this is not altogether bad, as many services are useful, even essential to a healthy world.  But this transition to a service economy, particularly in an increasingly globalized world, accelerated our estrangement from the land, both its wonders and its limits.  Of course we all still used stuff – food, wood, oil, steel, computers, appliances – in fact, more than ever.  It’s just that we weren’t growing or making those things ourselves anymore, preferring to outsource and offshore these functions.  With those basic, life-sustaining things now largely taken for granted, we could focus more on the services and amenities that seemed to make life more convenient, more comfortable.

The service economy soon gave way to the so-called information or “knowledge” economy.  This is the notion that economies based on things, or even tangible services have been replaced by an economy based on ideas.  So strong was – and is – this belief in a “knowledge” economy, that the old notions of land and labor, even capital in the tangible sense, became passé. George Gilder, a frequent writer and cheerleader for this new economy said “We have seen the overthrow of the tyranny of matter… our ability to create wealth is not bound by physical limits, but by our ability to come up with new ideas.  In other words it’s unlimited.”

But ideas of course are abstractions. You can’t eat them or heat your home with them. They don’t filter the impurities out of water, or sequester carbon.  To believe in a “no limits” economy, is to believe that we can live from abstraction, what James Howard Kunstler calls the “fictitious economy.”  It shouldn’t surprise us then, that the final stage of this economic paradigm is the global financial services sector, where “wealth” became completely estranged from, even antagonistic to productive activity; where liabilities – things like risky mortgages, or the energy speculations of Enron, or even bets as to when sick people will die – could be “repackaged”, and, voila, stock values sore.  In such an economy, sickness and predation become more valuable than health and self-reliance.

And that brings me back to my numbers.

In 2008, Wall Street lost $2 Trillion in just a few weeks.  That’s nearly $20,000 for every household in this country.  If there really was that much wealth to go around, we’d all be doing pretty well.  But it isn’t real. And because that wealth was fictitious, we are still struggling to recover from the economic bust of six years past.

What is real is the 3.7 acres of productive land per person that remains on our planet.  A century ago we had 14 acres per person.  Now it’s 3.7. That land, including the soils, grasslands and prairies, wetlands and forests, is the true foundation of our wealth.  Whether our job comes from farming or manufacturing, the service sector, or banking and finance, we all depend upon a productive landscape to meet our most essential needs.  If accelerating climate change and the Wall Street debacle have taught us anything it should be that we’d better target our capital and use our labor to restore this shrinking base of land and build communities of modest, but real wealth.

*Originally published at BottomUpEconomy.org

Is there an Alternative to Trickle Down Economics?

There are at least four key components of what I’m calling a “bottom up economy”:   Focusing on the assets and strengths of your community; developing infrastructure to support and build upon these assets; fostering local ownership of businesses and capital; and building entrepreneurial networks that increase the competitiveness and impact of local businesses.    Before we examine how public policy can help communities develop each of these elements of a bottom up economy, it is fair to ask, “Why bother?  What is wrong with traditional, top down economic strategies?”

Most of our economic policy and practices over the past thirty years have been top down, or “trickle down” in nature, based upon this belief:  If we free up a small group of job creators at the top – wealthy investors and large corporations – they will create wealth which will trickle down to the rest of us.  This has been the driver of our economic, fiscal and labor policy since Ronald Reagan was president.  Trickle down economics did create wealth, but there were two problems with it:  First, much of it has been based upon financial speculation, rather than real wealth.  As stock market “bubbles” and so-called derivatives both demonstrate, Wall Street can create a lot of “wealth” that has little real value or base of productive assets.   We’re talking here about the difference between the house that someone owns – a tangible asset – and the value of the debt on their home, repackaged with the debt and risk of thousands of other aspiring home owners as a tradeable commodity, known as a derivative.  One is real, providing shelter, warmth, pleasure (usually…).  The other exists purely in the mind and can rise or fall in value dramatically, overnight.  And that is exactly what happened to trillions of dollars of Wall Street “wealth” in 2007 and 2008.

The other fundamental problem with trickle down economics is that the promised prosperity never trickled down.  In fact, it has been quite the opposite, as income and wealth have moved up, not down, from working folks and the middle class to the rich.  From the end of World War II until the mid 1970’s, the benefits of economic growth were widely distributed, with Americans in the bottom and middle of the economic spectrum seeing more gains than those at the top.  However from 1980 on, we’ve seen those gains stagnate or decline, as the vast majority of new income and wealth has gone to people at the very top.  Rather than widely shared prosperity, we’ve become the most unequal country of all the advanced nations of the world.  The most unequal.

The problem with this inequality, this concentration of wealth goes beyond the question of fairness or justice.  In fact it is quite costly to our nation, as Joseph Stigletz (The Price of Inequality, WW Norton, 2012) and Richard Wilkinson (The Spirit Level:  Why Greater Equality Makes Societies Stronger, Bloomsbury Press, 2010)point out in separate books.  Stigletz demonstrates that economic inequality leads to lower overall economic output and less productivity, not more.  Wilkinson looks at a host of quality of life indicators, including life expectancy, obesity and health, educational attainment, teen pregnancy, substance abuse, crime rates and others.  He finds that the more unequal the society, the worse they do in nearly every one of these areas.   This mirrors a study, done by Thomas Lyson of Cornell University, of 200 rural counties across the country which found that those with one or two large companies dominating their economy were worse off in terms of health, economic and social indicators than the counties with a broad base of small to mid-sized businesses.

Every one of these problems is costly, both in terms of taxpayer dollars and the well- being of people.  Trickle down economic strategies haven’t solved these problems; they have made them worse.  It is time for fresh thinking about how to create jobs, to broaden the base of wealth, to lift people out of poverty and to increase the resilience of households and communities.  Fresh thinking based on successful, real world examples emerging across this nation.

What Bad Trade Policy Looks Like

Our so-called “free trade” policies are, quite simply, not about freeing up trade among people and businesses across national boundaries.   Instead, they are about freeing transnational corporations to increase their reach and profitability, and to reduce any risk that large companies and investors might face.  This is particularly true of the Trans Pacific Partnership (TPP) and the Trans Atlantic Trade and Investment Partnership (TTIP), both of which have now entered the final stages of negotiation.    Based on this, I’ve summarized in several categories below why I believe the TPP to be a very bad proposal.  Some of these issues relate to specific provisions in this proposal (as best as we can know, given the secrecy), while others pertain to the results of other trade deals, results which are likely to be repeated and exacerbated, given the extraordinarily overwhelming influence of major multi-national corporations in the current negotiations.

Deficits

• In 1993, before the signing of NAFTA, the US trade deficit with Canada and Mexico totaled $27 billion. By 2012, our deficit with these NAFTA partners had increased almost seven-fold to $181 billion.
• More recently, we signed a trade agreement with South Korea, called KORUS, an agreement said to be one of the models on which the TPP agreement is being based. In just two years, our trade deficit with South Korea has grown by $8.7 billion while our exports to them have fallen by $3 billion.

Jobs

• In the 2 years since implementation of KORUS, Robert Scott (Economic Policy Institute) estimates that 60,000 US jobs, mostly in manufacturing, have been lost due to the increased trade deficit and reduced US exports.
• Between 2001 and 2011, EPI estimates that 3.3 million US jobs were lost as a result of ballooning trade deficits with China, whereas only 1/6 of that number, 538,000 new jobs were created. Six times as many jobs lost as new jobs created.
• David Autor, in a paper in the American Economic Review, estimated that between 1990 and 2007, growing imports from China (and rising trade deficits) accounted for fully ¼ of all manufacturing jobs lost in the US, as well as lowering wage rates.

Wages

• Between 2009 and 2012, of US workers who lost their jobs due to offshoring of manufacturing but who found new jobs, two thirds had to take a pay cut, most at 20% or lower wages. Of course, hundreds of thousands of displaced workers have not found new employment.
• Nine of the eleven nations in the TPP have significantly lower average wages than the US, making further downward pressure on American wages highly likely.

Currency manipulation

• Even though many members of Congress have asked the US Trade Representative to make currency manipulation a key part of the TPP negotiations, and even though he has acknowledged that it is critical reason why US exports lag in relation to imports, as recently as April of this year he was still telling members of Congress that they have not included it even in the discussions taking place.

Patent Law

• Patent Law, which already favors big, “incumbent” companies over smaller businesses and individual inventors and entrepreneurs, is likely to further extend both the scope and duration of patentsfor major multi-national corporations through the TPP.   This is true in terms of pharmaceuticals, internet and information companies, and others.  This has at least three negative impacts:
  • First, inventors, innovators and entrepreneurs, who generate 16 times as many new patent innovations than do large corporations (per dollar of revenue) will now face more legal and bureaucratic hurdles as a result of these trade deals;
  • Second, much of what now continues to be in the “public sphere” – particularly in the realm of creativity, the arts and the exchange of ideas across the internet – will likely face pressures of privatization and control by large providers;
  • Third, pharmaceutical companies will make critical, sometimes life-saving drugs, much less available and affordable, by maintaining patents for longer periods, precluding the availability of lower cost “generics”. This will almost surely cost lives, probably tens of thousands of lives.  If you think that the big drug companies must do this to cover the high cost of research and development, consider that they spend more on promotion and marketing than they do on R & D, and that they are already among the most profitable companies in the world.

Secret Negotiations

• The intense public secrecy and the extreme restrictions even on elected officials in being able to view the proposals is absurd, unjustifiable and really, quite an offense to citizens and the public interest. Even the Bush administration, for goodness sake, provided more information on pending trade deals.  President Obama, to my knowledge, has never explained the need for such secrecy and for the great access granted to corporate representatives in the negotiations.

Investor State Dispute Settlement agreement – ISDS

• Existing ISDS agreements in NAFTA, the WTO and other trade agreements is already very bad, but the TPP’s setting up of “independent” panels, to whom only corporations and investors can bring a claim (not citizens, unions, or local/state governments) makes a very unfair system far worse. The use of ISDS by corporations to bring suit against communities has grown dramatically over the last ten years, now averaging about 60 such suits annually.  Here’s a very short sampling of some of those suits:
  • Phillip Morris has brought suit against both Australia and Uruguay for their efforts to reduce smoking, especially among young people, through stronger mandatory health warnings and smoker cessation campaigns.

    The Renco Group filed an $800 million suit against Peru for closing the company’s Zinc smelter, which they had refused to adequately clean up. Even though the WHO found that 99% of children living nearby had lead levels 3x greater than safe levels, and eventhough Time Magazine cited the community, LaOroya as one of the “world’s most polluted places”, Uruguay was forced to reopen the smelter as a result of the lawsuit.

  • After Ontario adopted its “Green Energy and Green Economy” plan in 2009, the growth of businesses, jobs and revenues in renewable energy grew dramatically in the province. In part this was due to the law’s requirement that a minimum of 40% of materials in the solar industry be sourced from within the province.  That generated a great deal of investment in solar manufacturing, including a state-of-the-art Italian facility, Silfab, to produce super efficient PV panels.  Japan and the EU brought suit, investment dried up, and the Silfab company and others are stuck in limbo, unlikely to ever open.

I think that all of these examples, and countless more, point to the fact that what we’ve been pursuing through these treaties is not “free trade” but “corporate trade”.  When corporations are invited into all of the negotiations, for several years running, but the US public is kept completely in the dark, and our elected representatives have only very limited access to see portions of the proposed agreement, what else can we call it?  When the US has steadily shed jobs, especially better paying jobs by the millions, while its trade deficit has grown, how is this good for workers, our communities, our nation?  When major multi-nationals are able to sue governments for working to protect their citizens from deadly pollutants, for discouraging smoking, or for building a home-grown, job-creating solar industry, how does this square in any way with the well-being of people, or with the development of more resilient, healthy and bottom up economies?  Cleary it does not.

It is time to take a stand against the TPP and the TTIP.  Beyond that, it is time for a completely new approach to international trade agreements, an approach that puts people, their communities and their environment at the top of the agenda, not ever-increasing corporate profits and ever-expanding corporate control.  Trade could be about the fertile exchange of ideas and innovations across borders, about filling the critical gaps in what a nation needs, and that other countries can produce better.  Current trade policy has nothing to do with these goals.  It must change, dramatically.

*Originally published at BottomUpEconomy.org