Junk Economics and the middle class: Where we went wrong

I'm not so arrogant as to believe that I know the perfect solution to our economic problems. Anyone that tells you they know is either a fool or a liar.

However, that doesn't mean we can't discover where we went wrong once you apply a little logic and data to the situation.
For instance, if you realize you have taken a wrong turn, it makes more sense to turn around and go back to the corner where the mistake was made, than it does to drive in a general direction and hope you can find your way home.

When it comes to the economy, its pretty easy to discover when the wrong turn was made - 1972.

1972 was a mildly interesting year. We had the Watergate break-in, the end of American involvement in the Vietnam War, Bloody Sunday in Northern Ireland, The Godfather came out in theaters, and the Rolling Stones released Exile on Main Street.

In contrast, 1972 was a paradigm shift in the world of economics.
September 1972 was the high-water mark for Real Weekly Earnings for the American worker. American paychecks would shrink from then on.
Wealth inequality in America was still near historic lows. Now it's worse than countries like Kenya and Philippines.

The year also marked the first full year of trade and current account deficits in memory. This trend would accelerate in coming decades and become the source of global financial imbalances.

The seismic shifts came from two sources: the end of the Bretton Woods global financial system, and the downfall of the American School of economics.

Bretton Woods

"The economic health of every country is a proper matter of concern to all its neighbors, near and far."
- FDR at the opening of Bretton Woods, 1944

The Bretton Woods system, set up in 1944 for the purpose of preventing the economic chaos of the 1930's that led to World War II, had been in trouble since the London Gold Pool was established in 1961. The collapse of the Gold Pool in 1968 meant that Bretton-Woods was on borrowed time.
On August 15, 1971, Nixon closed the gold window, thus dealing a mortal blow to all fixed rate currencies in the world. The dollar was devalued and other temporary international agreements were made, but 1972 saw one nation after another leave the currency regime. In February 1973, the Bretton Woods currency exchange markets closed.
The downfall of Bretton Woods opened the window to currency speculation, which meant new financial products - derivatives.

Before 1972 there were futures and options, mostly for commodities, but Currency Swap derivatives and Interest Rate Swap derivatives were completely unheard of. Now they are the two dominant flavors in the OTC derivatives market.
Under the Bretton Woods system currencies were stable and predictable, therefore there was almost no market for currency speculation. Price inflation was relatively low because monetary inflation was relatively low. The reason was because Bretton Woods had built-in adjustment mechanisms.

In the world of floating currencies, hedge funds and investment banks make huge profits by launching coordinated attacks (using derivatives as their weapons) against small nations in order to crash their currencies and send their economies into recession.
To protect against these attacks, exporting nations artificially suppress their currencies in order to build up massive cash reserves that could have been better spent helping out their citizens. These huge cash reserve and manipulated currencies serve as global destabilizing forces.
In the post-Bretton Woods world, nations are free to print as much money as they want. This leads to bubbles and busts, that often serve as mechanisms that transfer wealth from the poor to the rich.

Bretton Woods was far from perfect. For instance, unlike the gold standard which had the price specie flow mechanism, Bretton Woods didn't impose equal restraint on all its members. Thus, because of the costs of the Vietnam War, the United States spent the Bretton Woods system into bankruptcy.
That wasn't the only thing wrong with the Bretton Woods system, but it was the reason why it died.

Does that mean we should go back to exactly the gold-dollar standard of Bretton Woods with the pegged currencies? Probably not. But you can't overlook 1) the Bretton Woods era saw one of the greatest global economic expansions in human history, 2) some of the worst abuses by large investment banks and hedge funds would vanish if a new Bretton Woods system was implemented, and 3) the increasingly savage boom-and-bust cycles around the world would be tamed under a new Bretton Woods system.

Regulating casino capitalism

"As for those who persist in usury, they incur Hell, wherein they abide forever."
- Al-Baqarah 2:275

Bretton Woods didn't collapse overnight. It took more than a decade for all of its defects to undermine it. The financial industry didn't immediately transform into the blood-sucking, parasitic monster it has become today. The end of Bretton Woods merely opened up that window. Deregulation was still required.
That deregulation didn't happen in one quick act. It happened in three separate parts that took place over the course of 20 years.

Did you know that Bank of America, J.P. Morgan Chase, and Wells Fargo are currently in violation of federal banking law, but the government won't enforce that law?
The law in question is the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994, passed by a Democratic Congress and signed by a Democratic President.

Prior to passage of this act, banks were restricted from operating widespread, multi-state branching networks. Plus, many states had their own restrictions on banks. These restrictions dated all the way back to the National Bank Act of 1864. The result was a nation full of relatively small banks. The idea was that competitive equality was good for the industry. Local banks invested their money locally, while large banks drained funds from rural areas and directed them to large cities.

The Riegle-Neal Act deregulated this limitation on the financial industry. Now banks could go national almost without restriction. The result has been a dramatic decrease in the number of small banks in the country.
However, there was one caveat built into the bill - no single bank could have more than 10% of all the deposits in the country.

The 10% limit remained in effect for a little over a decade. When the crisis struck in 2008, the Treasury and Fed encouraged the consolidation of the banking industry between the weak and the strong. The 10 percent cap became the victim of the crisis in the same way that laws against torture were also ignored.

One of the primary means for Wall Street banks to bring in revenue these days is charging fees for pretty much everything. They will haul in 38 Billion dollars on overdraft fees this year, with a median APR of 4,547%. That's enough to make a loan shark blush. They will rake in another $48 Billion from credit card swipe fees.
The best example of predation by the banks is in the form of payday loans. The major banks have always been silent owners behind this loan shark filth that suck the life blood out of the poorest, but lately they have come out into the open.

A few of the nation's largest banks -- including Minneapolis-based U.S. Bancorp, Wells Fargo & Co. of San Francisco, and Fifth Third Bancorp of Cincinnati -- are now marketing payday loan-type products, with triple-digit interest rates, to their checking account customers.

Would it surprise you that as recently as 1979 this sort of usury was regulated and illegal? Would it also surprise you that it was a Democratic Congress and a Democratic President that revoked those laws?

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The law in question was the Depository Institution Deregulation and Monetary Control Act of 1980. William Greider explained in his book Secrets of the Temple, "Passage of the Monetary Control Act had very little to do with how effectively the Federal Reserve could control the supply of money. It's purpose was to protect the Federal Reserve's political base."
The law did a lot of things such as requiring banks to operate under the Federal Reserve umbrella (commercial banks were leaving the Fed at the time), gave banks more opportunities to merge and consolidate, raised deposit insurance levels, and, oh yeah, allowed S&L's to speculate in commercial real estate. But it also did one other thing that seems very relevant today.

Eliminates State mortgage usury ceilings and restrictions on discount points, finance charges and other charges...

The most important part of the Glass-Steagall regulation of the New Deal was Regulation Q. This law regulated the amount of interest and fees that banks could charge for over 47 years.
The Monetary Control Act gutted Regulation Q, and all state usury laws were unilaterally suspended. The law was a political trade-off. The Federal Reserve became stronger at the banks expense, but the banks endorsed the law because they got the most prized gift of all - a free pass to prey on the most vulnerable in American society, and they got a multi-billion dollar tax cut to boot.
It seems rather ironic that the give-aways to the wealthy that Reagan and the Republicans of the 1980's were famous for started entirely with the Democrats.

"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010. I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness."
- - Senator Byron L. Dorgan, Democrat of North Dakota, 1999

Much ink has been spilled over the demise of Glass-Steagall in 1999. While that was an important moment in the deregulation of the financial industry, it was hardly the most significant.
If we rolled financial deregulation back to 1972 it would force the break-up of the Too-Big-Too-Fail banks, thus eliminating the need for future taxpayer bailouts and the corrupting influence that Wall Street holds over Washington.

Just as important, we would no longer need the new credit card regulation that has gotten the banks so upset, because we would have Regulation Q again, which would immediately ban the loan shark practices that Wall Street can still get away with.

The American System

"Two systems are before the world;... One looks to increasing the necessity of commerce; the other to increasing the power to maintain it. One looks to underworking the Hindoo, and sinking the rest of the world to his level; the other to raising the standard of man throughout the world to our level. One looks to pauperism, ignorance, depopulation, and barbarism; the other to increasing wealth, comfort, intelligence, combination of action, and civilization. One looks towards universal war; the other towards universal peace. One is the English system; the other we may be proud to call the American system, for it is the only one ever devised the tendency of which was that of elevating while equalizing the condition of man throughout the world."
- Henry C. Carey, The Harmony of Interests

Most Americans aren't aware that America once had a national economic plan, and it existed from the days of President Lincoln to President Nixon in one form or another. During that 112 year period America grew from an agrarian, frontier nation, to the most mighty economic power the world had ever seen.
Obviously there had to be something good in that economic plan.

The roots of the American School of Economics go back to Alexander Hamilton, Friedrich List, and Henry Clay of the Whig Party.
The American School of Economics was far different from the dominant economic thought of today.

The key components of the American School directly confront, deny and refute the economic imperialism that the so-called "Free Trade" school championed then by England and imposed by means mostly foul upon Europe over the years. It rejects free trade by imposing a system of duties, tariffs and other measures designed to defend the nation against economic threats by foreign predators. It uses government-directed spending projects meant to provide the infrastructure necessary for individuals to develop into the highly-educated and highly-trained people capable of being the ambitious and enterprising productive people we are famous for being. It chartered a national bank, owned wholly by the government, that administered the lines of credit necessary to get all of this done and otherwise oversaw the monetary policy of the state- and thus remained utterly accountable to the people by way of Congress and the Presidency.

The American School of Economics also involved government support for the development of science and a public school system. Through this economic philosophy America set the standard in manufacturing, higher education, scientific research and development, finance, and general standard of living.

So what happened? Under President Nixon the decision was made to remove protective trade barrier and go to a Free Trade model in 1973.
According to The Myth of Free Trade by Dr. Ravi Batra:

"Unlike most of its trading partners, real wages in the United States have been tumbling since 1973, the first year of the country's switch to laissez-faire...Before 1973, the U.S. economy was more or less closed and self-reliant, so that efficiency gains in industry generated only a modest price fall, and real earnings soared for all Americans....Moreover, it turns out that 1973 was the first year in its entire history when the United States became an open economy with free trade.
"Since 1973 and free trade, the link between real wages and productivity was severed, where its commitment to free trade soared faster than domestic economic activity. Real wages for 80% of the labor force have been steadily shrinking in spite of rising productivity. Free trade skews the real value of manufactured goods, through cheaper foreign labor or weaker foreign currencies in relative prices, despite increased productivity and innovation, in turn creating a shrinking consumer base."

Trade barriers had been dropped a great deal under FDR, but they still existed for important industries all through the 1950's and 1960's. Also, where tariffs were dropped, a system of subsidies were put in place, while infrastructure spending was accelerated. This hybrid version of the American System ended with President Nixon.

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"[They say] if you had not had the Protective Tariff things would be a little cheaper. Well, whether a thing is cheap or dear depends upon what we can earn by our daily labor. Free trade cheapens the product by cheapening the producer. Protection cheapens the product by elevating the producer. Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man."
- President William McKinley

Besides adopting a free trade model, America has turned away from the other tenants of the American School of Economics. Specifically, it has neglected public infrastructure projects in the hope that privatization of public assets would do a more capable and efficient job. This strategy has also failed miserably.

The third leg of the American School of Economics was to create a financial infrastructure that would "use of sovereign powers for the regulation of credit to encourage the development of the economy, and to deter speculation."
In a trifecta, this too has been an utter failure.

The Allied victory led to the dominance of Anglo-American banking practice based on loans against property or income streams already in place. Because of this, today’s bank credit has become decoupled from capital formation, taking the form mainly of mortgage credit (80%), and loans secured by corporate stock (for mergers, acquisitions and corporate raids) as well as for speculation. The effect is to spur asset-price inflation on credit, in ways that benefit the few at the expense of the economy at large.

As we stand here today, the British System that Henry Carey warned about more than a century ago has become the dominant economic system in America and the world, and the results are exactly as he predicted.
The world has changed since 1972 and we can't go back to that point. However, ignoring and denying the mistakes that have been made in the last three decades is an even bigger crime. Instead of trying to modify and fix this failed system we are using today, we should instead try to modify and improve the successful system that we ditched for no good reason 38 years ago.



I would add

the myths of non-accelerating inflation rate of unemployment (NAIRU) and natural rate of unemployment, over-emphasis of monetary policy and inflation didn't help.

IMO, controlling inflation through monetary policy leads to unnecessarily high unemployment (jobless recoveries ring a bell).

RebelCapitalist.com - Financial Information for the Rest of Us.

the focus on wages as an "inflation control"

Hell yeah, that was the start on the attack of the middle class. How many times does it have to be shown that labor costs so often are not the main costs of corporations, esp. in advanced manufacturing. But no problem squeezing the middle class to control inflation by these guys. How about squeezing demand or squeezing corporate profits or squeezing raw commodities and so on?

Hell yeah, again

Wage growth was seen as too inflationary. So what happens, attacks on unions - unfettered globalization.

We are left with the consequences of these policies - Great Recession and more and more debt.

RebelCapitalist.com - Financial Information for the Rest of Us.

payday loans

Due to the "credit card reform" bill, to replace their lost overdraft fees, now banks are getting into payday loans.

Amazing payday loans were not outright banned in legislation.

I've got a great Sunday Morning Comics skit which shows how great loan sharks are by comparison to this.

I have some more "policies" that destroyed America. Around that time bad trade deals started forming as well. The free movement of capital around the globe was starting. And the PR campaign against labor organization also started. Nixon went to China, in party, because the U.S. corporations wanted into that mythical 1.3 billion person consumer market.

I am but a simple caveman, but...

The notion that we should get back to a Bretton Woods style system is all good and well, but the problem is that the ruling class that benefits from the current system will never let that happen. In order for such reforms to have a snowball's chance in hell, Joe Six Pack is going to have to understand all this stuff. (Hell, the average person has a pretty good idea of what's wrong with the healthcare system and prefers a rational solution, and we can't even get that.) A massive grassroots educational movement would be required to get average citizens to understand half as much about monetary and financial policy as they do about the intricacies and strategery of college and professional sports or tabloid court cases.

To further the goal of educating the dumb masses, can someone here enlighten a simple caveman like myself: What is the mechanism by which we get from ending Bretton Woods to the decoupling of wages from productivity and our current race to the bottom for workers? Is it just the currency speculation? If we still had substantial tariffs, wouldn't that keep jobs here and keep wages from falling? Excuse my ignorance, but I really would like to understand this stuff. There are just a few pieces that I'm missing.


The Tea Party Counterfeit

"...but the problem is that the ruling class that benefits from the current system will never let that happen..."

And that assertion is almost certainly true as long as the ruling class is allowed to remain the ruling class. In my view, one best grasps the economic problem as an outcropping of a pre-existing political problem. If there were not first whores there would not follow johns, eh?

Our system is irremediable as a consequence of the ongoing symbiotic relationship between special interest lobbies and
the trollop politicians dependent upon them for their livelihood. All the big sis, Elizabeth Warrens in the world do nothing more than inspire the illusion that reform is actually possible. The remedy in such circumstances as it always has been is to be seen in recourse to massive demonstrations and economy paralysing strikes. The Polish example of the 1980s is instructive here. So corrupted are our structures that one need only kick in the door and the whole rotten edifice would come tumbling down. Imagine for a moment the personal courage of a botoxed, teeth whitened Joe Biden or Nancy Pelosi looking out upon a sea of angry faces as distant as the horizon. Such a "peoples' moment" is not without possibility, particularly so as our unemployment continues to intensify. It will be critical, however, to distinguish this "peoples' moment" from the brownshirt Tea Party counterfeit serving presently to funnel public discontent into the black hole of deficit hating, starvation inducing libertarianism. We need root and branch change, not a return of the Confederacy or membership in the Flat Earth Society.

There a few different mechanisms for the transfer

of wealth. The one you usually hear about from liberals and progressives is the "tax cuts for the rich." Conservatives retort that hardly anybody with less than 25,000 or so in income pay taxes. That's only true in so far as federal income taxes. When you look at the variety of other taxes, from FICA at the federal level down to state and local property and retail taxes, the tax structure in the U.S. is actually highly regressive.

The other mechanism hardly anyone talks about is the burden of usury, speculation, and economic rent seeking behavior imposed by the financial system. The $25 billion Goldman Sachs dispensed in bonuses has to come from somewhere. This year, of course, it came directly from the taxpayer in the form of bailouts. But in previous years, this money would come out of the hide of the rest of the population whose incomes and benefits were held down in order to "meet Wall Street expectations." This mechanism is discussed from the perspective of the investor class by Warren Buffet in his little story about the Gotrocks family and what they pay for financial advice. But the more correct perspective is breathtakingly captured in the Frontline May 2006 story Can You Afford to Retire?, in the segment about the bankruptcy of United Airlines. While the employees of United lost almost all their pension, "The banks, with their superpriority, got back every penny­ plus interest, plus tens of millions of dollars in fees." You have to watch the video to get the full impact of former J.P. Morgan executive Repko has he smiles smugly and admits that, yes, JP Morgan got every penny it asked for. 

Similarly, wealth is transferred by the fees and profit margins generated by the enormous amount of financial trading. Two years ago, I created the Wikipedia page on financialization with a table showing financial turnover compared to gross domestic product. This is work I first did in the early 1990s. In the 1960s, it took all financial markets about nine months to trade the dollar volume equivelent to one year of GDP. Today, it takes about three days.

How much does it cost our economy to move around this much financial paper each and every day? Let us assume that the fees, commissions, and so on paid to the financial system for all this frenetic activity amount to one percent. (An October 2003 study conducted by John P. Hussman, President of Hussman Investment Trust, found that the costs to the funds he manages actually amounted to approximately 1.87%; scroll down to the bottom.)

So, one percent of three trillion a day is $30 billion in commissions / fees / bonuses, etc., paid to the financial system for all that paper being shoved around. That's the amount that is going to all those people like the guys in the Chicago futures pits standing behind CNBC's Rick Santelli you saw last month.

$30 billion a day is the equivalent of 600,000 (six hundred thousand) jobs paying $50,000 a year.

That is, the cost to the economy of allowing the financial system to operate as it has been, trading $3 trillion a day, is equivalent to 600,000 good, middle class jobs. Each and every day. This is how the financial system sucks the life blood out of the economy.

One of Stirling Newberry’s best zingers was that

The more conservative thinkers are appalled at the idea that the monetary order that emerged post-collapse of Bretton Woods might be attacked, because living off of dipping a small cup in the Niagra Falls of finance is the only world they have ever known. . .

As for returning to Bretton Woods, understand that the system was not all that great. And we certainly do not want to return to a system of gold reserves, which severely constrains money creation, which must, in a sane policy regime, expand at pretty much the same rate as an economy's productive potential (not production, but productive potential) expands. In fact, there is a not insubstantial argument to be made that the Great Depression and both World Wars resulted from the City of London's attempts to restore itself as the center of restored international gold reserve systems.

Former AFL-CIO economist Thomas Palley suggested a scheme of crawling band target zones to replace the complete, unregulated chaos we have today in foreign exchange markets, in The Fallacy of the Revised Bretton Woods Hypothesis: Why Today’s System is Unsustainable and Suggestions for a Replacement.

Such a system involves choice of a number of parameters that would need to be negotiated by participants. First, there is choice of the target exchange rate. Second, there is the choice of size of the band in which the exchange rate could fluctuate. Third, there is a choice whether the band would be hard or soft. A hard band is automatically and decisively defended; a soft band is one that allows for marginal temporary deviations outside the band, while retaining a commitment to bring the exchange rate back within the band when market conditions are most conducive. Fourth, there is the choice of the rate of crawl. This involves determining the rules governing the adjustment of the target and band. Issues here concern the periodicity of adjustment, and the rule governing adjustment of the nominal exchange rate. . . .

Finally, rules of intervention to protect the target exchange rate need to be agreed upon. Historically, the onus of defending the exchange rate has fallen on the country whose exchange rate is weakening. This requires the country to sell foreign exchange reserves to protect the exchange rate. Such a system is fundamentally flawed because countries have limited reserves, and the market knows it. This gives speculators an incentive to try and “break the bank” by shorting the weak currency, and they have a good shot at success given the scale of low cost leverage that financial markets can muster. Recognizing this, the onus of exchange rate intervention needs to be reversed so that the strong currency country (the central bank whose exchange rate is appreciating) is responsible for preventing appreciation, rather than the weak currency country being responsible for preventing depreciation. Since the strong currency bank has unlimited amounts of its own currency for sale, it can never be beaten by the market. Consequently, once this rule of intervention is credibly adopted, speculators will back off, making the target exchange rate viable. Such a procedure recognizes and addresses the fundamental asymmetry between defending weak and strong currencies.

Thanks for your informative response!

The last part of your comment raises the question of whether simply outlawing "shorting" might go a long way in minimizing a lot of these harmful shenanigans. Does shorting serve any beneficial function to society?

In general, if I am understanding this correctly, the collapse of the Bretton Woods system introduced a degree of flux to currency exchange rates that allows various gaming that can be used to manipulate the conditions of labor markets. This would explain the decoupling of wages and productivity in 1972/73. I am not sure exactly what these games are, nor the chain reaction by which they lead to the "race to the bottom" for workers. Is there some way in which the end of Bretton Woods facilitates outsourcing (by way of a more free flow of capital?)?

Also, your comment points out that a decent amount of the upward flow of wealth is attributable simply to skimming wealth by the financial industry itself. I assume financial deregulation plays into this aside from the Bretton Woods issue (or also related?) But it seems like a big part of the problem must also be due to a decrease in bargaining power of labor vs capital. This is something the specific mechanisms of which I wish I better understood. I assume corporate lobbyist written trade deals are a big factor. Are these shitty-for-worker trade deals enabled in some way by the death of Bretton Woods?


1972 also known for...

Nixon's secret trip in Feb of 1972 to China to forge relations with that previously quite isolated communist country. I posit that the opening of relations was the kick off for converting that huge labor pool from mostly farmers to today's "world's manufacturing source".

China, Nixon & Rockfeller

I can’t give the exact reference from memory, but as I recall about a week after Nixon left China and all the mega media coverage of his dinners, parties and walk on the Great Wall that were covered day and night; a small note deep in the Wall Street Journal reported “David Rockefeller president of Chase Manhattan Bank flew to China in his private Jet.” I laughed. That said it all about what Nixon’s trip was really about – the China market.
But, I was not quite correct. I thought it was about opening up China’s market for American goods. It never occurred to me that it was the other way around. At that time Sam Walton owned a couple of dime stores in the South.


I remember that Bold Stroke well -- At the time, I saw a CIA report (TS of course) with the names of every American at the Canton trade fair. The memorable quote in the financial press "If we could sell aspirin to every Chinese." Not that the Chinese lack willow bark or pharmaceutical plants, but such was our delusion at the time.
The real "scandal" at the time was the outrage in the Pentagon and the moves to undermine the Nixon administration over it. We had Americans getting killed on the ground while our leaders made nice with Mao and Brezhnev. I still remember psyop leaflets with pictures of Nixon toasting with Mao and Brezhnev dropped on North Vietnam to undermine their confidence.
But our business leaders did not see it in that framework -- here was that huge market opening up. It was finally fashionable to wear Mao badges. They forgot that the Middle Kingdom had exported rea to Emgland, but needed nothing the British could export. They wanted silver -- hard money -- for their tea. Thus, the opium wars of the 19th century "to open up China for trade." China is finally getting even with the West.
Frank T.

Frank T.

Excellent article - I just want to toot my own horn

Back around 1992 or so, when the web was relatively new, there was a professor in the Netherlands who had started a project on U.S, history using the new mark-up language of HTML. I was the person who added an article on Henry Carey, and added a series of long quotes from most of the chapters of Carey's 1851 book The Harmony of Interests: Agricultural, Manufacturing & Commercial.

In the early 1990s, I used the Bicentennial Statistical Abstract - Colonial and Historical Statistics, to plot out steel production, railroad mileage built, and coal production, against the various tariff regimes in the 1800s to 1920s. The results were very stark: low tariffs are strongly correlated with downturns in real production, and high tariffs are strongly correlated with increased in real production. Exactly like Henry Carey, wrote in the mid-1800s. These are the charts I generated back (God, do I miss QuattroPro - trying to edit Excel graphics suck by comparison, even now, nearly two decades later)

, scanned from the clippings of my articles. Free Trade Coal v Tariff Free Trade Iron v Tariff

Carey explained that the ability to import is based on the ability to pay. The ability pay, in turn, is based on the earning power of the nation’s workforce. If the workforce has to compete against cheaper labor in other countries, then its earning power will be diminished. Carey even anticipated the situation we find ourselves in today, noting in his time that as earning power diminished, the U.S. must buy imports on credit, creating a bubble of indebtedness that must sooner or later burst. Unfortunately, the person who discussed the American System a lot back then when I was writing was Lyndon LaRouche. But, in the late 1980s, James Fallows went to Korea and Japan to write about why their economies were doing so much better than the U.S.'s. The Koreans and Japanese gave him an earful of American history, including Carey, List, and E. Peshine Smith (Smith being the economist, I believe, who introduced American System thinking to the Japanese, which formed the basis for the period unfortunately called the Meiji Restoration, when Japan began to "copy" Western industrialization. In actuality, the Japanese were implementing the nation-building programs Alexander Hamilton had elaborated as Secretary of the Treasury. Fallows laid all this out in a great series of articles in The Atlantic. I suspect, but don't know for sure, that it was Fallows' articles that were picked up up Michael Lind, who is now one of the most vocal proponents for a return to American System policies. See especially Lind's 1997 book, Hamilton's Republic: Readings in the American Democratic Nationalist Tradition

(You see, Mr. Oak, I was never able to fully grasp the mathematical side of modern economics, but I was able to pick up a lot from economic and industrial history!)

What is important to note is that the traditional opponent of the American System, the laissez faire of the British East India Co., (which was formulated almost solely to justify the moral depravity of Britain's opium trade with India and China), was repackaged by Milton Friedman and sold to Americans as "freedom to choose."

A particularly important book to read, for anyone who wants to understand more about the actual economic policies that created the United States, is The Great Challenge: The Myth of Laissez-Faire in the Early Republic, by Frank Bourgin. Interestingly, Bourgin's book is his 1940s PhD dissertation, which was rejected by the University of Chicago. Bourgin published the book in the 1980s after being encouraged hy historian Arthur Schlesinger Jr.

Great reply

If the workforce has to compete against cheaper labor in other countries, then its earning power will be diminished. Carey even anticipated the situation we find ourselves in today, noting in his time that as earning power diminished, the U.S. must buy imports on credit, creating a bubble of indebtedness that must sooner or later burst.

Minsky, Carey, etc. There are plenty of people who predicted the situation we've gotten into, but only the Chicago School of Economics is being taught. Since the Chicago School is so flawed, no one can imagine the solutions.

For instance, arguing against "Free Trade" is practically useless because it has become a religious issue rather than a scientific one. Even so-called progressives, like Bonddad and Krugman won't go against the Free Trade canon.

you might be interested in this talk, Why the World isn't Flat

It's embedded in this Friday Night Video

It's a talk by Ha-Joon Chang on what a fallacy "free trade" rhetoric really is, by history.

(second video in the list)

Not only that and it's really an Economist's in depth talk...

Chang is a SCREAM funny! I mean Professional Comedian level funny so, this isn't your typical dense, dry Academic talk.

Maybe I should do Friday Movie Night reruns? It's really good as well as backs up your graphs.

Hey man, history, statistics r us! ;)

Killing Tariffs Killed Private Sector Unions Here

I've said that many times.

At the same time tariffs were being emasculated in the 1960's the union power base was shifted from the private sector to the public sector after Kennedy signed an executive order allowing Federal employees to form and join unions. This caused many states to adopt the same policy.

So private sector unions are faced with a global economy that is killing them. At the same time we are faced with paying higher and higher costs for public sector union labor that faces no competition.

This is a direct result of government policy.


And in 1973 came the oil embargo and resultant recession, which masked all this quite nicely.

Educating voters.

The Republicans are going to take this country in exactly the wrong direction with the help of their mis-informed voters. Who is going to educate the voters that some form of the "American System" is in their best intersts? Move-on?