The credit bubble, which exploded in September 2008, exposed the fact that the U.S. economy has been devastated by globalism.  Unemployment numbers—effectively close to 20 percent, about 25 million out of a workforce of 120 million—are near Depression levels.  The figures have not moved despite the Bush and Obama administrations’ policy of borrowing and printing money to defeat deflation.

The Federal Reserve, led by Ben Bernanke, views the economy in abstract terms.  Bernanke entitled his 2002 speech to the National Economists Club “Deflation: Making Sure ‘It’ Doesn’t Happen Here.”  Deflation, or falling prices, Bernanke found, “can be highly destructive to a modern economy and should be strongly resisted.”  The cause of deflation, he continued, is not a mystery—it is a collapse of aggregate demand, a drop in spending so severe that producers must cut prices to find buyers.  The U.S. price level fell ten percent each year from 1930 to 1933.  The two main troubles with deflation, according to Bernanke, are that it discourages borrowing, since the borrower must repay in more valuable dollars than those he borrowed, raising the real interest rate by the amount of deflation; and that existing debtors have to repay their debts in more valuable dollars.

Should the government encourage borrowing and debtor relief?  An alternative approach would be to say that a little deflation now and then is necessary to maintain price stability over time.  Prices were stable from the American Revolution until President Nixon took the country off its last tie to the gold standard in 1971.  Prices have ballooned at least ten times since then—a 75-cent shrimp cocktail costs $10; a $100,000 townhouse costs at least $1 million; a $20,000 house sells today for $200,000; a person earning $16,000 then probably earns $160,000 today, if he has stayed even.  Of course, the only reason for creating the Federal Reserve in 1913 was to insulate the control of money from politicians.  Politicians, it was reasonably argued, would print money to absorb any bump in the road.  (The German inflation of 1923 is a good example.)  But the past 40 years make clear that the discipline of the gold standard was more effective than that imposed by the supposedly independent Fed.

Did the United States face a deflationary threat in 2002?  Bernanke said it was “remote” and reassured us that a “variety of policy responses are available should deflation appear.”  What are they?  What is Bernanke’s game plan?

The Federal Reserve, he said, will first reduce short-term interest rates to zero—punishing saving and encouraging borrowing and spending.  If prices keep falling, Bernanke said, the government will just print money.  Paper money has value only to the extent that supply is strictly limited.  “But the US government has a technology, called a printing press (or today, its electronic equivalent) that allows it to produce as many US dollars as it wishes at essentially no cost.”  Bernanke concludes,

Indeed, under a fiat (that is paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

The Federal Reserve has been at it for a year and a half; they have lent two trillion dollars to our major financial institutions at zero or near-zero rates.  Unemployment remains very high.

In his fascinating book, How the Economy Was Lost, Paul Craig Roberts, an assistant secretary of the Treasury under President Reagan, explains why financial manipulation will not help: There is no economy to revive.  Mr. Roberts notes former Fed Chairman Alan Greenspan’s unconcern with America’s loss of manufacturing; Greenspan said there was a beneficial shift from “old” manufacturing (steel, cars, textiles) to “new” manufacturing (computers and telecommunications).  But computer and telecommunications manufacturing was also quickly outsourced.  Not only did the old manufacturing jobs—those that provided a decent middle-class living—disappear; so did the engineering and research that supported them.  The “new economy” never showed up.  America’s college graduates today compete for the “new” service jobs—bartending and waitressing.  Roberts disputes the “new economy” talk: “Corporations offshore their production, because they can more cheaply produce abroad what they sell to Americans.”  Shorn of industry, the United States will soon be a Third World country: Outsourcing, he argues, is a greater threat than terrorism.

“Free trade” and “globalization” are “the guises behind which class war is being conducted against the middle class by both political parties.”  Pat Buchanan “put it well,” Roberts writes,

when he wrote that NAFTA and the various so-called trade agreements were never trade deals, they were enabling acts that enabled U.S. corporations to dump their American workers, avoid Social Security taxes, healthcare, and pensions and move their manufacturer offshore.

Globalism benefits capital at the expense of American workers.  The middle-class standard of living has not increased since the 1970’s.  Median income for males in their prime earning years more than doubled from 1947 to 1973—from $22,606 to $50,553.  We have seen a sharp drop since 1998—from $52,727 to $45,540 in 2008.

Since 1970, private-industry wages and salaries as a share of income have dropped from 50 percent to 42.4 percent, the lowest in history.  Government benefits over the same period have risen from 10 percent to 17.2 percent, the highest in history.

Disparity of income has greatly increased.  Adjusted for inflation, household income for the bottom 60 percent of the population—those earning under $50,000—has not moved since 1967.  At the same time, the top five percent have doubled their income from $150,000 to $300,000.  America’s middle class is fading.

Roberts summarizes our present position in dire terms:

A country that gives away its productive capability and becomes dependent on foreign creditors to finance its budget and trade deficits is a country that has problems beyond the reach of monetary and fiscal policies. . . . The U.S. has been financing its trade and budget deficits by turning over the ownership of existing U.S. assets and their income streams to foreigners and by foreigners recycling their trade surplus dollars into the purchase of new U.S. Treasury debt.  This dependence on foreign creditors now constrains U.S. monetary and fiscal policy.

British imperial policy, which prohibited the colonies from manufacturing, was a major cause of the American Revolution.  The British intended to keep the colonies as suppliers of raw material for British manufacturing.  Jefferson addressed his Summary View of the Rights of British America to George III.  Parliament’s acts, he pointed out to the king, “prohibit us from manufacturing for our own use the articles we raise on our own lands with our own labor.”  The American

is forbidden to make a hat for himself of the fur which he has taken perhaps on his own soil.  An instance of despotism to which no parallel can be produced in the most arbitrary ages of British history.

Another act of Parliament forbade the manufacture of iron and “heavy as that article is, and necessary in every branch of husbandry, besides commission and insurance, we are to pay freight for it to Great Britain, and freight for it back again, for the purpose of supporting not men, but machines, in the island of Great Britain.”  Jefferson admonished the king, “Let not the name of George the third be a blot in the page of the history.”  The king failed to take Jefferson’s advice.

Once we got rid of the king, how could we get the economy going?  We had no manufacturing, and the European countries pursued mercantilist policies that would not give U.S. producers a break.  Alexander Hamilton came up with the solution: temporary protection for America’s manufacturers.  He begins his Report on Manufactures (1791) by laying out the Jeffersonian arguments against his position.  The Jeffersonians objected to using government to encourage manufacturing; it should not interfere with the “natural current of industry.”  It “can hardly ever be wise in a government to attempt to give a direction to the industry of its citizens.”  And, of course, tariffs taxed consumers and handed monopoly profits to producers.

Hamilton recognized the power of these arguments, but he disagreed for two reasons: The country could ill afford to be caught shorthanded in arms in case of war, and the “net produce of capital engaged in manufacturing enterprise is greater” than that employed in agriculture.

Hamilton’s reasons still hold.  We need, for a time, to create an artificial market by use of tariffs and limits on exporting capital.  We have to end what Paul Craig Roberts rightly calls the “class war” of capital against the American middle class.  A Third World country—with terrible inequalities of income—is not the experiment in self-rule the founders fought for.


[How the Economy Was Lost: The War of the Worlds, by Paul Craig Roberts (Oakland, CA: AK Press) 288 pp., $15.95]