Politics, et Cetera

A publication from The Political Forum, LLC

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Tuesday, January 24, 2017

They Said It:

Critics of capitalism typically identify it with its worst possibilities: ruthless competition, exploitation, greed, crude commercialism, social atomism, etc.  These are said to be of the very essence of a free economy.  In reality, the prominence of such phenomena is a sign that capitalism is operating within a society in which people lack ethical, aesthetical, and other inhibitions and strong communal ties, a society in which institutional structures do not embody civilized purposes and in which neither supply nor demand recognizes any higher standards.  Critics of democracy similarly identify democracy with its worst potentialities: unchecked majoritarianism, political irresponsibility, demagoguery, rule by pandering to the lowest common denominator, etc.  Here, too, the alleged essence of the phenomenon in question is how it performs in a society where civilized restraints are weak.  Both points of view are unhistorical and reductionistic.  In reality, capitalism and democracy have no single definition or ‘essence.’  They exist only in particular historical manifestations.  These can be sharply different depending on the ethical and cultural health of the particular societies in which they operate.  They can be compatible with the ends of the good society, in which case their institutions and practices are integral to the structures and practices of civilization.  But they can also be destructive of higher values, in which case they manifest the structures and practices of the deteriorating society.

Claes Ryn, The New Jacobinism: Can Democracy Survive? 1991.

 

TRUMP, DAY 1:  POPULIST OR CAPITALIST?

Five days in, and already there’s too much to write about President Donald Trump, his opposition, and their likely cumulative effect on the country.  We would love to spend our time and yours this week speaking of the ongoing disgrace of the political establishment and its energizing effect on the Trump administration; about the media, the Left, and the practical and philosophical implications of their newfound affinity for “the truth;” or about the women’s march on Washington, its potential to serve as a catalyst for a Left-wing grass-roots groundswell, and the impact that such a groundswell would have on the Democratic Party and the partisan divide.  But to our mind, there’s a far more important story this week – especially from the perspective of the markets.  And that story started last November.

In the days after the election, the President-elect began reaching out to people in Washington – the ruling class – in order to inform them of his intentions, his plans, and his willingness to listen to their input.  One such attempt at outreach took place in the week after the election and involved one of our – and your – favorite Washingtonians.  The Hill’s Jonathan Swan provides the details:

Donald Trump’s economic adviser Stephen Moore told a group of top Republicans last week that they now belong to a fundamentally different political party.  Moore surprised some of the Republican lawmakers assembled at their closed-door whip meeting last Tuesday when he told them they should no longer think of themselves as belonging to the conservative party of Ronald Reagan.  They now belong to Trump’s populist working-class party, he said . . . .

A source briefed on the House GOP whip meeting  —  which Moore attended as a guest of Majority Whip Steve Scalise  —  said several lawmakers told him they were taken aback by the economist’s comments.  “For God’s sake, it’s Stephen Moore!” the source said, explaining some of the lawmakers’ reactions to Moore’s statement.  “He’s the guy who started Club for Growth.  He’s Mr. Supply Side economics.”. . . Asked about his comments to the GOP lawmakers, Moore told The Hill he was giving them a dose of reality….

Moore has spent much of his career advocating for huge tax and spending cuts and free trade.  He’s been as close to a purist ideological conservative as they come, but he says the experience of traveling around Rust Belt states to support Trump has altered his politics.  “It turned me more into a populist,” he said, expressing frustration with the way some in the Beltway media dismissed the economic concerns of voters in states like Ohio, Pennsylvania and Michigan.

“Having spent the last three or four months on the campaign trail, it opens your eyes to the everyday anxieties and financial stress people are facing,” Moore added.  “I’m pro-immigration and pro-trade, but we better make sure as we pursue these policies we’re not creating economic undertow in these areas.”

Now, far be it from us to tell our friend Steve what he really thinks.  And far be it from us to pretend that we know more about conservative economics than he does.  We don’t.  Not even close.  Still, we think that Steve’s apparent conversion is less dramatic than it may appear.  Moreover, we actually think that it explains a great deal about what has gone wrong with the otherwise admirable and necessary project of “globalization.”

Over the weekend, after the Trump team announced that its first order of business this week would be to withdraw the United States, formally and permanently, from the Trans-Pacific Partnership (TPP), a great many conservatives despaired.  Despite the fact that TPP was dead on arrival in the Senate last year, and despite the fact that Trump had made his opposition to the deal a cornerstone of his campaign, some people on the right still held onto hope that everything would work out and that President Trump would be more circumspect than was candidate Trump.  Needless to say, it didn’t happen.  And many of those conservatives found themselves in bed with strange fellows, citing, tweeting, or retweeting the words of Fareed Zakaria, the otherwise much despised Left-center columnist whose view generally reflect the consensus of the Washington insiders.  On Friday, Zakaria made one last pitch for the status quo and counted up the costs of what he calls “protectionism.”

Obviously globalization has large effects on national economies and societies, and it produces some significant problems.  What complex phenomenon does not?  But it also generates opportunities, innovation and wealth for nations that they can then use to address these problems through good national strategies.  The solutions are easy to state in theory — education, skills-based training and retraining, infrastructure.  But they are extremely expensive and hard to execute well.

It is much easier to rail against foreigners and promise to fight them with tariffs and fines.  But the cost of addressing these problems at the global level is massive.  The Economist reports, in a survey on globalization, that in 2009 the Obama administration punished China with a tariff on their tires.  Two years later, the cost to American consumers was $1.1 billion, or $900,000 for every job “saved.”  The impact of such tariffs is usually felt disproportionately by the poor and middle class because they spend a larger share of their income on imported goods — like food and clothing.  That same Economist survey points to a study that calculated that, across 40 countries, if transnational trade ended, the wealthiest consumers would lose 28 percent of their purchasing power but the poorest one-tenth would lose a staggering 63 percent.

For the record, we like free trade.  We like it a great deal.  But we’re always a little skeptical of studies like the one cited here by Zakaria.  Yes, you can pretty easily quantify the costs of a tariff.  It’s a little more difficult, but you can also, more or less, quantify the benefits.  And if the costs are greater than the benefits, then that means that the tariff is a bad deal.  It’s simple, yes?  Well . . . no.

In order to calculate the true cost or benefit of a tariff, for example, one must also figure the costs and the benefits of the alternative, in this case, of NOT enacting the tariff.  And that’s where things can get tricky.

Again, one side of the equation is easy.  In Zakaria’s example, the “benefit” attained by not enacting the tariff is $1.1 billion.  Simple enough.  But what might have been the costs?  Without the tariff, 1,200 people would have lost their jobs.  You have to calculate lost wages, lost taxes generated and collected by the various governments, unemployment payouts, retraining and job placement costs, etc.  But you also have to calculate the un-quantifiable human costs:  divorce, depression, drug addiction, extended childhood poverty, and so on.  How do we know any of these human costs will play a role?  Because we’ve seen it – in Ohio, in Kentucky, in Pennsylvania, in West Virginia.  Because that’s the story of the white working class.  This isn’t a hypothetical we’re talking about.  This is real.  We KNOW these costs exist.  But we have no way of calculating them.

More importantly, countless other costs exist that we not only don’t know about but can’t possibly imagine.  These costs to the “free” trade regime that dominates the global status quo are not just the elephant in the room that no one talks about, they’re the invisible elephant in the room.  No one talks about them because no one can see them and no one dares to go looking for them.  But they will crush us all eventually.

For more than twenty years now, we have been writing about the risks posed to the global economic order by corruption. Ironically enough, for a great many of those twenty years, we wrote about corruption for two Wall Street firms with less than stellar reputations for ethics.  At Prudential, our constant harping on the geopolitical risks of corruption – including, for example, the patent depravity of post-Cold War Russia and the modern-day slavery ties of Chinese petroleum companies – brought us into direct conflict with the firm’s executives and, occasionally, their investment strategies.  At Lehman, our first piece, the piece in which we introduced ourselves the firm and its clients, focused on the risks to the markets from global corruption, especially in China.  Unsurprisingly, no one objected too strenuously when we decided to leave a couple of years later, several years before the firm’s own shortcomings precipitated the market collapse and the Great Recession.

No one should be shocked by the fact that a great many of our pieces on corruption featured Bill and then Hillary Clinton.  But our overarching concern with the subject went far beyond the two of them.  Corruption, we argued, was a danger to the very global order, and especially to global trade.  Corruption could and would, in time, destroy the values that created that order and made international trade possible.  In 1997, Thomas Duesterberg, a friend of a former colleague of ours and then a senior fellow at the Hudson Institute, penned a piece for the Wall Street Journal that explained just how perilous and fragile the global commercial order is.  He wrote:

Out of the ashes of World War II, the U.S. and its allies erected a new economic order that has produced the broadest and most sustained period of prosperity in world history (emphasis added).  Its basis is a system of rules to govern, facilitate and promote commerce.  The U.S. and its allies assisted many nations, starting with Japan and Germany, in building domestic commercial and legal codes that assure property rights, promote the free exchange of goods and services and facilitate enforcement of contracts.  International trade was fostered by a parallel system of rules covering the exchange of goods and (later) services embodied first in the General Agreement on Tariffs and Trade and its successor, the World Trade Organization (WTO).

Starting with a core group of like-minded nations, the WTO has grown, in terms both of the commerce covered by its agreements and of the proportion of the world’s population voluntarily abiding by its rules. The U.S. has remained an acknowledged champion of that system, despite domestic political pressures to stray.

The entire point of trade agreements like the TPP is to bring other nations into this global order, on OUR terms, not theirs.  We want them to behave like us, to abide by our rules, to be open, transparent, and respectful.  As the Wall Street Journal noted in its editorial response to President Trump’s executive order withdrawing the nation from the trade deal, “TPP would have spread the better Western model of a rules-based trading system.”  Sounds great – the only thing the editors of the Journal forgot are the two words, “in theory.”

The simple fact of the matter is that China is NOT a nation that respects the values of a free and open society.  It does not fully embrace property rights.  It does not promote the free exchange of goods and services.  It does not believe that contracts necessarily need to be enforced.  It may say it does; its leaders may pay lip service to such values, but that’s all it is, lip service.  As we noted back in the ‘90s, when the U.S. Congress was again debating “Most Favored Nation” (MFN) trading status for China:  the Chinese do not play by our rules; they never will; and yet we’re inviting them into our sandbox, pretending that they’re just like everybody else.

We know that China has made a big production of trying to clean up its economic and political corruption.  But we also know that this is more “production” than reality and, in any case, that China has a long way to go to be a “normal” global state.  Indeed, the November 2016 update to the China Corruption report produced by the Business Anti-Corruption Portal, a project created and funded by the European Commission, suggests that corruption is still a major consideration for anyone doing business with the PRC:

Corruption in China presents business operating or planning to invest in the country with high risks.  The Chinese government, led by President Xi Jinping, is in the midst of a sweeping anti-corruption campaign that has led to thousands of arrests, nonetheless, corruption continues to negatively influence the business environment.  Companies are likely to experience bribery, political interference or facilitation payments when acquiring public services and dealing with the judicial system.  The common practice of guanxi is a custom for building connections and relationships based on gifts, banqueting, or small favors. Guanxi-related gifts can be considered bribery by foreign companies and by national and international anti-corruption laws. Companies are advised to carefully consider the type and value of gifts, the occasion, and the nature of the business relation…. Anti-corruption laws are inconsistently and selectively enforced.

We note here – only for the purpose of confirming the enduring nature of Chinese economic corruption – that the term mentioned by the BACP, guanxi, is a problem of which we have been aware and on which we have been focused for a long, long time.  Indeed, our first citation of the Duesterberg/WSJ piece above appeared in an article we wrote called “Guanxi, Schmanxi” which doesn’t appear in our archives because we wrote it so long ago that the word-processing software we used is not compatible with Microsoft Word.

Sadly, the problem of endemic corruption and the role it plays in global commerce are not just limited to China.  Again, almost twenty years ago, we began focusing on the narco-corruption that rendered many of our nation’s global trading partners less than honorable.  Among other informed sources, we cited a report from the Paris-based “Geopolitical Observatory of Drugs,” which described itself as the only truly independent organization that monitors the worldwide narcotics trade.  The Observatory is now defunct, but these excerpts from its 1998 annual report provide more than a taste of the massive problems associated with narco-corruption:

Several major countries, like Russia (and many former Soviet Republics), Turkey, Mexico, etc., are now at the center of an increasingly conspicuous alliance between organized criminal structures and high levels of the state itself.  In Japan, organized crime (yakuza) is behind 30% of the bad debt which has provoked the current financial crisis.  In less developed countries, particularly on the African continent, the privatization of state-owned companies is now the main vehicle for recycling drug money thanks to corruption.  In this way a new and distorted “development” model is emerging which, while enriching the elite classes, also encourages chaos.  This ‘criminalization of politics” is beginning to act as a brake on development as mafia activities produce much larger and especially quicker profits than legitimate activities do.

When legitimate businesses survive, it is often as “fronts” for criminal activities.  In many countries of the South, the same operators frequently control, or even monopolize, the most lucrative activities whether formal or informal, legal or illegal.  Legitimate and criminal interests have become so intertwined in some parts of the world that the frontier between the two has become purely theoretical.  The result is that whole sectors of the legitimate economy and millions of jobs depend on the continuation of illegal dealings, including the most lucrative of all, drug trafficking.  Informality, which is the main form of economic activity in the majority of less developed countries, has also penetrated whole sectors of the economy in developed countries.  It is thus becoming the forerunner of drug trafficking and the laundering of its profits . . .

The crash of the Mexican economy in 1995 (and again in 1998) and similar problems experienced in Russia and Japan since late summer 1998 probably constitute the first major financial crises in the history of contemporary society, whose principal catalyst is a mafia-like management of the economy.  The problems are no longer of a quantitative nature, such as the percentage of profits stemming from criminal activities (and more specifically from drug trafficking) and redistributed within state institutions or laundered through the economy.  The problems are much more fundamental now and revolve around the major barrier presented to rational economic development and democratic institutions as a whole.

Like in Russia, mafia-like practices characterize the management of two large economies linked to the world’s two leading economic powers: Mexico (linked to the United States through NAFTA) and Turkey (linked to Europe via trade agreements).  Corruption, which has long been endemic south of the Rio Bravo and on the shores of the Bosporus, has changed in nature during the last few years.  On this fertile ground, the debt crisis, structural adjustment imposing market reforms without fundamental political change and local conflicts have resulted in alliances being forged between governments, political parties, the financial sector, and mafia entities, or even the transformation of political parties into criminal organizations.

In the nearly two decades since this report was penned, we can tell you that neither Mexico nor Russia has become any more “ethical” in the way it behaves either internally or externally.  About Mexico, the BACP writes that:

Corruption is a significant risk for companies operating in Mexico.  Bribery is widespread in the country’s judiciary and police, and business registration processes, including getting construction permits and licenses, are negatively influenced by corruption.  Organized crime continues to be a very problematic factor for business, imposing large costs on companies.  Collusion between the police, judges and criminal groups is extensive, leading to widespread crime, theft, impunity and weak law enforcement.

Of Russia, it says:

Corruption significantly impedes business in Russia, and petty corruption is common.  Corruption is especially prevalent in the judicial system and public procurement.  The business environment suffers from inconsistent application of laws and a lack of transparency and accountability in the public administration.

What does all of this tell us?  Well, for starters, it tells us that we’re not all playing by the same rules.  China, Russia, Mexico, Turkey, Pakistan, Argentina, and so on, are all members of the WTO, which is to say that they’re all playing in our trading sandbox.  And they all do so without any regard for the standards and norms that made construction of the sandbox possible.  Worse still, they know it and we know it and we all keep playing, as if nothing’s wrong.

Until now.

We don’t want to give anyone the impression that Donald Trump is a pure capitalist or a commendable free trader.  He is neither.  And he never will be.  Nevertheless, when he says, as he did in his inauguration address, that we must protect the country and its citizens from “the ravages of other countries making our products, stealing our companies, and destroying our jobs,” he has a point.  Just as it is impossible to quantify the costs of NOT imposing a tariff on tires, it impossible to quantify the costs of corruption to the global economy, to the national economy, to the national jobs picture, or to the lives of people who depend on manufacturing to make a living.

During the 1990s, when Bill Clinton and his Commerce Department were taking endless trips – “trade missions,” they called them – to places like China, we warned that government corruption was a major risk.  How, we wondered, could investors know which companies would get the government contracts, which companies would prosper from government assistance, if they didn’t know the nature or scope of the backroom deals cut between American trade reps. and Chinese government thugs and their business cronies?   What did it matter, for example, if Boeing made a better plane for less money, if Airbus had better covert connections?   All of which is to say that when Donald Trump complains that “for too long, a small group in our nation’s Capital has reaped the rewards of government while the people have borne the cost,” he again has a point.

The worst part of all of this is that we have no idea – and never will have any idea – about the kind or the magnitude of the costs associated with corruption in places like Mexico, China, and Russia.  Fareed Zakaria can cite all the studies he wants on the benefit of open and unrestricted trade with China, but none of those studies will ever come close to quantifying the disruptions, the misallocations, or the opportunities lost to corruption.  And pointing this out, noting the inherent risks of trade with nations that don’t play by the same rules we do does not make one a protectionist, a populist, or an economic nationalist.  Rather, it makes one a classical capitalist.

So has Steve Moore abandoned his capitalist roots and turned into a state-loving populist?  Has he abandoned free trade and become a protectionist?  Has he sold out his principles to become a Trumpian?  No, no, and no.  Steve has merely done what many of rest of us “free-trading capitalists” have done, namely acknowledge the fact that from the very start, capitalism was intended to function in a “moral” environment and that it cannot function at all in the absence of morality.

Adam Smith – the godfather of the commercial economy – wrote repeatedly and throughout both of his major works that commercial society simply cannot thrive in a climate of moral decay. In The Theory of Moral Sentiments, he noted that “upon the tolerable Observance” of such duties as politeness, justice, trust, chastity and fidelity, “depends the very existence of human society, which would crumble into nothing if mankind were not generally impressed with a reverence for these important rules of conduct.”  Smith maintained that social order was not spontaneous or automatic, but was founded on institutions that promote self-control, prudence, deferral of gratification, respect for the lives and property of others, and even concern for the common good.

More recently, Wilhelm Ropke the German economist and student of Ludwig von Mises, made very much the same point.  He put it this way in his 1971 book A Humane Economy:

Self-discipline, a sense of justice, honesty, fairness, chivalry, moderation, public spirit, respect for human dignity, firm ethical norms – all of these are things which people must posses before they go to market and compete with each other. These are the indispensable supports which preserve both market and competition from degeneration. Family, church, genuine communities, and tradition are their sources. It is also necessary that people should grow up in conditions which favor such moral convictions, conditions of a natural order, conditions promoting cooperation, respecting tradition, and giving moral support to the individual . . . It is the foundation upon which the ethics of the market economy must rest. It is an order which fosters individual independence and responsibility as much as the public spirit which connects the individual with the community and limits his greed.

We will note that Trump has not promised to end global trade or to withdraw from existing trade deals.  He has, rather, promised to “renegotiate” them, taking into account the ravages unleashed upon the nation by trade with corrupt governments.  Good for him, we say.  It’s about time someone did.

 

Copyright 2017. The Political Forum. 3350 Longview Ct., Lincoln NE  68506, tel. 402-261-3175, fax 402-261-3175. All rights reserved. Information contained herein is based on data obtained from recognized services, issuer reports or communications, or other sources believed to be reliable. However, such information has not been verified by us, and we do not make any representations as to its accuracy or completeness, and we are not responsible for typographical errors. Any statements nonfactual in nature constitute only current opinions which are subject to change without notice.