The Global Trade Slowdown is Both True and Non-trivial

Jerri-Lynn here: This short post by Jack Gao of the Institute for New International Thinking (INET) highlights a pressing problem afflicting the world economy: the slowdown of international trade. As the post summarises, there’s no consensus among economists on the causes for that slowdown.

One major quibble with the post. Gal’s passing statement below, “The desire of those hurt by globalization to shield themselves from foreign competition via protectionist or retaliatory policies is a growing influence in the political life of a number of countries, including the world’s most advanced democracies,” seems to fail to grasp the true basis for widespread opposition to pending so-called “trade agreements”. Opposition movements are not necessarily motivated by opposition to trade per se, but by concerns over transparency, how the gains from these agreements have and will be distributed, and limitations on sovereignty and regulation imposed by procedures such as the Investor-State Dispute Settlement mechanism. And the responses to such concerns under discussion are not what I would describe as traditionally protectionist or retaliatory, but instead combine calls for greater transparency, attention to distributional issues, and a halt– or at minimum, profound rethink– of measures that constrain sovereignty or stymie effective regulation (e.g., threats to the European Union’s precautionary principle). To be fair, these issues are peripheral to Gao’s major aim in the piece, which is to account for the slowdown in international trade.

I should also remind readers who’re only familiar with Paul Krugman through his New York Times column that his initial academic work concerned international trade.

By Jack Gao, who is a Program Economist at the Institute for New Economic Thinking (INET), with interests in international economics and finance, energy policy, economic development, and the Chinese economy. He previously worked in financial product and data departments in Bloomberg Singapore, and reported on Asian financial markets in Bloomberg News from Shanghai. Jack holds a MPA in International Development from Harvard Kennedy School, and a B.S. in Economics from Singapore Management University. Originally published at the Institute for New Economic Thinking Website.

Challenged by mathematician Stanislaw Ulam to name one idea in economics that was both true and non-trivial, Nobel economics laureate Paul Samuelson famously nominated comparative advantage — the notion that even a country less productive in producing everything, could still benefit from international trade by specializing in the commodity it faces the least disadvantages in producing. But comparative advantage fails to explain why international trade, which has underpinned the global economy for much its modern history, is showing signs of a slowdown.

Originally attributed to the English classical economist David Ricardo and later formalized by generations of economists including Samuelson, trade theories rooted in comparative advantage hold that free trade should raise the overall welfare of all nations that engage in it. Wages of Chinese workers should rise, as would income levels of American capital owners, if the two countries open up to trade. And any negative impact domestically could be ameliorated by making the necessary transfers to compensate those hurt by trade. The remarkable rise in the living standards of citizens in Japan, the four “Asian Tiger” economies, and most notably China, are testaments to free trade working its magic.

However, many find the marked slowdown in global trade since the 2008 financial crisis as puzzling as the tepid GDP growth that has accompanied the recovery.

First, some facts. In the heyday of its economic expansion, China’s current account surplus stood at more than 10% of its GDP; that figure was a mere 2% for the first half of this year. The IMF has documented a 3% annual expansion of global trade since 2012, less than half of its annual growth rate in the previous three decade. This trend holds within developed countries, as well as between developed and developing countries.

Experts are debating the underlying causes of the trade slowdown. The most obvious explanation may be to point to the disruption caused by the 2008 financial crisis, and the prolonged weakness in subsequent economic activities. With the collapse of the western financial system, world economic growth dipped into negative territory for the first time in recent history — from its pre-crisis level of around 4% — and global trade decline ensued. Since then, however, trade, which has historically grown at twice the rate of GDP growth, has grown more or less in tandem with the sluggish output recovery. Clearly, something else is causing the breakdown.

Another explanation frequently offered has been the restructuring in China. The world’s second largest economy, which in recent decades powered the world’s economic activities, had been an even more important driver of growth in world trade. But after 2008, Beijing put more emphasis on domestic economic concerns instead of promoting foreign trade. This rebalancing, however, represents a response to the fall in external demand rather than a deliberate strategy to turn away from trade, and thus is unlikely to be causing the global trade decline.

The WTO warned that these trends could damage an already weak world economy. The desire of those hurt by globalization to shield themselves from foreign competition via protectionist or retaliatory policies is a growing influence in the political life of a number of countries, including the world’s most advanced democracies. But while they may pose serious threats to the future of globalization, protectionist policies have not been implemented on a time frame that could have caused the trade slowdown. Nor is the decline in trade restricted to commerce between countries where populist influence is strongest.

Economist Paul Krugman sees the answer lying in the relative speed of technological progress in transportation and the rest of the economy. Real transport costs could rise, according to Krugman, if the technological advances in transportation are slower than the economy-wide technological changes. Economists in the IMF believebelieve changes in the pace of international vertical specialization, the decision to use domestic versus imported inputs, are causing the lackluster expansion of trade. All of these explanations, however, seem unlikely in the context of a world of such great differences in cost and technology — precisely the conditions under which, through the logic of comparative advantage, free trade promised such universal benefits.

If the causes of a slowdown in global trade remain a matter of ongoing debate, its impact and implications for the global economy are unmistakably real and increasingly urgent.

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64 comments

  1. Foppe

    Really? They still think of the “2008” crisis as a cause, rather than as a symptom? Sigh.
    Shame, too, that Gao has so little to say towards an alternative explanation (which mentions demand, purchasing power, etc.). Towards that end, I would suggest watching this well-crafted compilation of two talks given by David Harvey, interspersed with other material that serves to underscore the issues he raises: Limits to Growth, Limits to Gentrification.

    1. uncle tungsten

      Thank you Foppe, those talks are excellent. So refreshing to get that depth of information in one engrossing video.

    2. H. Alexander Ivey

      Foppe

      I reply to you since you seem to be most on point here.

      Really? Damn right. How about explaining the collapse in demand why don’t you economists? Jeez my knees, what a bunch of goofs. Within their own house, it is always ‘supply and demand, supply and demand, supply and demand’, but when things go wrong and their rice bowl looks suspect, it is supply baby, supply.

      The global slowdown is not due to trade restrictions (supply), it is due to a drop in demand. Jack Gao totally misses this cause.

        1. Barni11

          The toxic debt is first and foremost the burden of developed economies consumers which itself is a symptom of declining wages, and GOOD PAYING jobs for new entrants to the jobs markets – except of course on the falling minimum wage side; and more minimum wage workers will never raise demand, on the contrary it will naturally cause demand to stagnate and then precipitously fall. Governments should like to reverse this dangerous decline in demand and worker wages but via the IMF/World Bank/Wall Street/Fed Reserve et al financial/economic mafia creating false economic thinking the intellectual insight necessary to right this problem of falling consumer demand (Private for profit central banks which have displaced government owned central banks which means that governments cannot spend debt and interest free money into economies to create jobs and raise consumer demand and create enough money in an economy to pay all debt and interest. In the G20 only Canada owns its own central bank and thanks to the intellectual stranglehold of right agenda {fascist} ideology Canada hasn’t used its central bank to fund debt and interest free job creating projects since 1974). { The problem with governments having to borrow their own money to spend into the economy is that when the debt money is created the interest money is NOT created & therefore there is an increasing overhang of unpayable interest which is forced onto consumers and governments creating bankruptcies and the 1% picking up assets at pennies on the dollar!?!} This problem on the consumer side can only be righted by governments creating their own debt free money and spending it into the economy (Eliminate the Fed and free the Treasury department!!!). The other half of the equation is the removal of excess money in the economy which causes inflation which now is done through 1% enriching and economic depression creating higher interest rates but which needs to be done through taxation – the only legitimate use of taxation by sovereign governments is to remove inflation causing excess money in the economy – sovereign governments never need to tax or borrow their own currency to spend job creating money into the economy – ever!!!

  2. PlutoniumKun

    One issue not mentioned is that global trade has actually partially achieved one of the supposed aims – to flatten out differences – at least between China and the rest of the world. Because of constraints in skilled labour, China is not a cheap manufacturing base for many products anymore. I can’t find the link right now, but I believe that Airbus has said that its actually cheaper now to make aircraft in France than China. I suspect that the next wave of manufacturing countries such as India and Vietnam don’t yet have the skills required for some more complex products (or to be precise, they are not yet trusted by purchasers).

    But I think the biggest reason might be the oil price spike a few years ago. I think there are plenty of anecdotal stories out there that manufacturers have deliberately shortened their supply chains for fear of it happening again. In the US that means looking at Central/South America, in Europe, cheaper Eastern European countries. It may also be that in an increasingly unstable world, companies are deciding that short supply chain arê more secure.

    1. Jim Haygood

      Makes sense. If China’s comparative advantage in labour cost is steadily eroding toward an asymptote of zero advantage, then a decline in trade volume would be expected by classical theory.

      When I was an active importer from Japan in the first five years of this century, trans-Pacific ocean freight from Asia to L.A./Long Beach was dirt cheap … a few hundred dollars to ship tons and tons of material halfway round the earth. So was inland freight within North America.

      Now I get sticker shock every time I ship something. So even Kurgman may have a point, for once (his “stopped watch twice a day” moment — don’t blink or you’ll miss it).

      In any case, declining global trade is the tell that central banksters’ quantitative easing is a modesty screen over a global economy that didn’t really recover to full health after 2008. U.S. unemployment hovers near 5 percent, comparable to previous expansions — but only by virtue of excluding millions of “discouraged workers” who don’t generate much global trade.

    2. Cry Shop

      Even Chinese labour is too expensive for consumer goods companies

      An entrepreneur explained why his company achieved a 36 percent jump in profit last year. Though revenue expanded only by 7 percent, profit surged after the company fired 6,000 of its workers.

      In Shanghai, Shandong and other parts of China, robots are gradually replacing humans on various production lines.

      Materials (process manufacturing for the most part)can be completely on-shored for supply security. However for electronics and anything with IC cards/chips etc, the genie won’t be put back in the bottle for a long time, probably never. Even the US DOD is having a hell of a time getting Chinese chip assemblies out of their supply chain. On-shoring is mostly about market driven logistics, iand not just because China labour isn’t that cheep. It is in no small part because China isn’t opening it’s critical markets, and even non-critical markets mostly require jv partners who shove their partners out after the learning curve is passed. China’s domestic consumption is going to continue to go up for some time, but it’s increasingly clear little of it is going to go to non-Chinese players.

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      Interestingly enough, it’s been the luxury goods market, manufactured in Europe, that has probably done best, and in the case of Italian goods, often using Chinese illegal immigrants to manufacture the goods. One of the biggest hits to Apple cell phones sales in China has been China’s consumers growing awareness that it’s basically a Chinese product, and thus it’s luxury status is being downgraded.

      1. PlutoniumKun

        Yeah, Lenin’s dictum that capitalists will sell you the rope they use to hang them certainly applies to China trade. From the very beginning they were open about their nakedly mercantilist approach (which they learned off the Japanese who learned off 19th Century American history). Even when it was obvious that the Chinese were only buying things to learn how to make them companies still fell over themselves for the profits. Even the Japanese fell into the trap (Chinese High Speed Trains are basically stolen Japanese technology – the French were the only ones who held back their secrets). And its not just hardware – the Shanghai subway was initially started in the 1990’s with US company Bechtel as project managers – they were fired as soon as the Chinese worked out their techniques and never bothered again importing project managers or engineers.

        Anecdotally, there are only three things the Chinese want to import:

        1. European luxury goods (even Apple is losing its lustre to domestic brands).
        2. German and Japanese machine plant.
        3. Food and cosmetics (they don’t trust domestic products for a very good reason). My Chinese friends always return home with suitcases full of cheese, meat and baby formula.

        As for Italian goods, there is a great Italian film called Gomorrah, the name of which escapes me right now, based on an investigative journalists book into the mafia’s role in the rag trade. It depicted huge sweatshops in Naples owned by HK businessmen, entirely employing Chinese seamstresses under the direction of a single Italian craftman, churning out ‘Made in Italy’ haute couture for the Milan Fashion season. Why import goods when you can import the entire factory, workers and all?

        1. Ivy

          It remains a mystery why so many people willingly ascribe, or project, Western motivations and desired outcomes to Chinese actions. The 5,000 year history of a country doing its own thing, and keeping its own counsel, is not likely to be turned around anytime soon. Nixon’s trip to China may go down in US history as one of the signal blunders (“but, but, we won over the ChiComs after losing them in the 1940s, and that defeated the Rooskies”), compounded by the willingness of US politicians and business people to hand over what was not being stolen. The short-term winners in the US are mainly associated with Bentonville, Arkansas. The short and long term losers include the rest of the US.

        2. visitor

          Historically (from Antiquity till today), there are only five classes of products that are traded intensely, in large quantities, over long periods of time, and over all kinds of distances:

          1. Food: think grain from Egypt and North Africa to Greek cities and the Roman empire, olive oil back, salted fish in Europe from Renaissance onwards, rice in Eastern Asia, salt and cattle in Africa.

          2. Energy: today gas and oil, yesterday coal, before that wood, in older times slaves. Which major good was traded back on the silk road to China? Horses. Chinese bought all horses they could lay their hands on — the Persian empire and Central Asian kingdoms made fortunes breeding horses and selling them to China.

          3. Luxury products. High value, generally small, easy to transport, just like today. In the past included perfumes, medicine, jewelry, rugs, etc.

          4. Weapons.

          5. Textiles: silk, cotton, wool, linen.

          A very large part of what is being traded nowadays does not make much sense in historical terms (toys? furniture? consumer electronics? shoes? cutlery?) and is only possible because transport costs are abnormally low.

          1. animalogic

            Imagine ! The Chinese people prioritising Chinese interests over such religious dogma as “comparative advantage”. Mad !

          2. Altandmain

            A case cone made that some consumer electronics may make sense. Computer chips don’t weigh much at all and are quite valuable relative to their mass.

            Of course, we could just have our semiconductor fabs located here in North America.

    3. cnchal

      . . .Because of constraints in skilled labour, China is not a cheap manufacturing base for many products anymore.

      You are kidding, right?

      When the slaves assembling CrApple’s phones start making $20 per hour instead of one, you might have a point. Also, were they paid that much, there would be no advantage to getting stuff made in China.

      These economists always feign stupidity when it comes to something they claim to not understand. Why should “trade” always expand? Why isn’t it expanding as fast as before? We don’t know, and further study (the economist’s full employment program at six figure salaries) is needed. The little people can rot.

      Never once do they look at wealth concentration as a potential reason. The Forbes 400 wealthiest combined have a few trillion dollars between themselves, corporations such as Apple and Wal Mart have a few trillion stashed ‘offshore’, never to touch a peasant again and when you start adding up all those trillions, a lot of potential spending power has vanished.

      We have cemented in place a system whereby raw materials from all over the world are shipped to China and processed into finished goods in the most ecologically destructive way possible. The China price excludes that factor.

      1. Cry Shop

        Skilled labour. Unskilled labour is available by the bucket loads, just as it is in the USA, but even for unskilled labour thanks to farm reform, most can now make more money back home than in the sweatshops. It’s now pretty exclusively young women who get low end factory assembly jobs, and they are in short supply.

        In 2010 China issued a 2 year moratorium on licensing the building of new nuclear power stations that gradually extended into nearly 4 years, not because it lacked capital or raw material, but it lacked the skill pools of technicians necessary to build, operate and maintain them safely. This decision had already been made prior Fukushima. Still China is in better shape than the USA. Westinghouse can no longer build the major pressure vessels for the AP800/1000 reactors, but depends on firms in China and Korea for their construction. It’s not just money, but a complete loss of the ability to do the actual casting other metal work.

        While the finally assembly of iPhones or laptop computers, etc is unskilled labour, the set up, operation, maintenance of the process lines and robotics that produce circuit boards, Gorilla Glass touch screens, lithium batteries(all constructed without the touch of human hands) requires skilled technical labour. China simply can’t create these skill sets fast enough.

        Most of those skills have disappeared or are in extremely tight supply in the USA. Hence the inability to re-shore these industries without a huge expenditure from the US Government, and neither party of the oligarchy is likely to spend it, when the primary beneficiary would be the middle class.

        1. joey

          Don’t forget environmental regulations as reasons for ‘made in china.’ Cell phones and lithium batteries involve some messy dregs.

        2. Praedor

          Myth. There are plenty of electrical and mechanical engineers in the USA, EDUCATED in the USA, that are more than capable of designing and building any/all fancy-schmancy electrical gizmos and systems. They are IGNORED and sidelined by corporations that instead seek H1B Visas of the VERY same skillset from off-shore because they can pay them less, provide shitty or no benefits. That is the entirety of the “shortage of technical expertise” in the USA domestically. Of course, this is a self-sustaining cycle. Ignore/blow off the domestic engineers and technicians (“too pricey and demanding”) so they just don’t get the jobs because they are going to imported (or off-shored) Indians, Chinese engineers instead. Since there’s no jobs to be had in that area (merely because CEOs want bonuses and to “maximize shareholder value”) fewer will choose those areas of study in college. Those fewer that do still get suckered into that area STILL cannot get jobs, so the cycle continues.

          First: virtually (I say VIRTUALLY) eliminate the H1B program. FORCE corporations to suck it up and hire DOMESTIC experts AND PAY THEM.
          Second (necessarily comes out of the first): CUT CEO pay and bonuses, quit focusing exclusively on “shareholder value”. This also requires a simple change to the laws around incorporation to make it explicit: your PRIME focus is NOT simply maximize profit and maximize shareholder value. You actually have to provide a benefit for OUR society and its people (that means good jobs with good wages and benefits).

          Fixed. Demand naturally increases to drive the economy because REAL people (those who aren’t rich or self-worshiping paper shufflers on Wall St) have the money again, like they did in the 50s and 60s, to fire up EVERYTHING. ALL economies are driven from below, NEVER from above. THAT is what the swine in corporate Amerika and finance don’t get. That is what the 1% will NEVER get. THEY aren’t shit. They cannot ever make an economy take off, only demand from below can do that or has EVER done that.

          1. Cry Shop

            I think we’re in agreement with what should be done, but won’t.

            I was referring to skilled labour vs. engineering. Many graduate engineers, particularly in the US system, lack the journeyman skills to install or build the very equipment they design, particularly in heavy engineering.

          2. animalogic

            Absolutely. Yes, keep H1B, but energetically enforce an industry specific minimum wage. A soft ware designer (whether Indian or American) has a minimum wage (based on skill, relative demand etc). An electrical engineer — same thing. Etc, etc.
            It is MONSTROUS that labour can be traded PURELY for the benefit of its buyers.

        3. cnchal

          . . .Unskilled labour is available by the bucket loads. . .It’s now pretty exclusively young women who get low end factory assembly jobs, and they are in short supply.

          How can there be unskilled labor by the bucket loads, and low end factory assembly workers in short supply at the same time?

          Are they getting raises? Can they afford to move out of the dorm room chicken cages and buy their own house and car? I digress, by projecting onto these exploited young women what used to be a middle class living electronics assembly job here.

          What if our economist’s jawbs were being outsourced to cheap Chinese economists? Would they then still agree that ‘free trade’ is a good thing? They sure think that destroying the middle class here is a good thing, because they have been sitting on their policy table throne advocating for policies that are doing just that.

          The world is being run like Wells Fargo. Looters at the top, whether in China or the US. Economists are the looter’s assistants.

          From the post:
          Originally attributed to the English classical economist David Ricardo and later formalized by generations of economists including Samuelson, trade theories rooted in comparative advantage hold that free trade should raise the overall welfare of all nations that engage in it. Wages of Chinese workers should rise, as would income levels of American capital owners, if the two countries open up to trade. And any negative impact domestically could be ameliorated by making the necessary transfers to compensate those hurt by trade. The remarkable rise in the living standards of citizens in Japan, the four “Asian Tiger” economies, and most notably China, are testaments to free trade working its magic.

          Woulda coulda shoulda. Left unsaid, the wages of those here that lost their jobs to China went to zero. The transfers to compensate those hurt by trade was and is zero as well.

          As evidence, consider the trillions of dollars held by the elite, stolen from labor.

          1. Cry Shop

            Because unskilled labour does not want, nor need to travel to where the factory’s are located to live in the conditions they impose. Enough food is available in the country side that they can afford to be idle much of the year if they don’t have excessive expectations, and the same for shelter, thanks to the 1st generation of workers who returned home to build housing for their extending family. Now many villages open factories to service the domestic market rather than export, and they have no trouble getting labour.

            As to the rest, are economist performing a job?

      2. zapster

        Precisely. And because of the power conferred on capitalists by comparative advantage, the “necessary transfers” have not happened. It’s the demand, always, in the final analysis.

  3. Alex

    Maybe the whole goal of globalization was to make comparative advantage trivial for everyone but the elite? In any case, I’m not particularly worried if the rate of growth of the rate of trade of useless trinkets around the world declines.

    Some things should be traded internationally, if they add real value to society in other countries (I know Germany runs a ridiculous trade surplus, but their machine tools are on another level of quality), but some should not – monoculture commodities like corn, wheat and soybeans being classic examples. The article in Links yesterday on wheat in India making this point beautifully.

  4. Robert Hahl

    In practice comparative advantage = monoculture; eventually even loosing the ability to feed themselves without imports, people are getting less enthusiastic about trade.

    1. Praedor

      That is part of a larger security issue that should be required to be considered in all discussions of trade. ALL countries that can produce X domestically SHOULD. Food in particular. ALL countries that are capable of feeding their own people entirely from domestically produced food SHOULD. When (not if, WHEN) some big event comes along that wrecks international trade, be it natural disaster or war, instead of mass avoidable deaths due to localized famine, all the countries that CAN feed their people will still be able to. Same goes for some critical basics like machining, foundries, etc. It is beyond insane that the USA or any other nation should REQUIRE international trade to simply provide the basic equipment needed to maintain their defensive forces and society as a whole. The US should not REQUIRE electronic parts from China, a potential enemy, in order to sustain our basic society and its military. All that’s required to kill the US military is to shut down exports of basic electronics. BOOM. The entire thing crumbles.

      If there’s an EMP, for instance, be it natural (from a solar mass ejection) or man made (high altitude nuclear detonations over the continental USA) the US is TOTALLY fucked. The entire electrical grid would go down for the long haul. THE major transformers that are absolutely required near the source of generation to feed the entire US grid are exclusively made in China. They USED to be made domestically. There’s no large stockpile either. They take a while to make, are costly, and expensive. So, BOOM, EMP. US grid goes down for months or even years nationwide (or even over just a large portion of the nation is good enough) and that’s it. We’re done. Getting new ones from China, assuming they had nothing to do with generating the EMP in the first place, would itself take a long time. Long enough that the US as a world power is finished. Hell, it would likely be finished as a coherent, united nation. THAT is a bad idea. All parts of our infrastructure that are truly critical should be able to be manufactured entirely domestically.

      International trade and the dependencies it creates makes society very fragile, not stronger. If you are so dependent on trade to get by that the collapse/failure of a supplier country X is all it takes to wreck havoc, then you have devised a very stupid system and deserve to burn down with it.

      ALL countries should strive to be able to be as self-sufficient as possible FIRST, then worry about international trade.

  5. dcrane

    The remarkable rise in the living standards of citizens in … most notably China, are testaments to free trade working its magic.

    I do have to wonder how remarkable that rise would have been if most of the competition from China had had to arise endogenously and succeed against established manufacturers operating in the US, in selling to the common market. What seems to have happened instead is the wholesale transplantation of those American manufacturers (along with all of their skills and know-how) from the USA into China, to use China’s inexpensive labor and loose regulatory environment to then sell stuff back to mostly Americans at even greater profit.

    Is this really the process that’s being modeled when the “magic” of “free trade” is examined by economists? (I’m not an economist obviously.)

  6. jabawocky

    In the end trade growth has to be linked to productivity growth, and if the latter is slowing trade will slow. Trade has to be conducted by people, either more trade by the same number of poeple, or by more people.

  7. Sound of the Suburbs

    Where do most of the problems come from?
    Milton Freidman

    After the Second World War Keynesian capitalism delivered the Golden Age of the 1950s and 1960s with the lowest levels of inequality within recorded history within the developed world.

    So far, so good.

    Keynesian capitalism started to go wrong in the 1970s with stagflation.

    Milton Freidman and others had been waiting for just such an opportunity to bring in their much harsher form of capitalism and Margaret Thatcher was ready to bring it to the West.

    Inequality immediately started to rise but the economy did start to do very well.

    In hindsight, we might question how much of the success was due to North Sea oil coming on line and the housing boom that was taking place. The new debt of housing booms floods the economy with new money.

    Ronald Regan bought the same ideas to the US and the economy did almost nothing until Bill Clinton came in and deregulated finance, flooding the economy with new money from new debt causing the US economy to boom.

    Milton Freidman’s ideas had already been tried in South America where they were good for the economy, a few became very rich and the majority became very poor.

    The evidence wasn’t exactly overwhelming for the positive effects of the new ideas.

    With the Washington Consensus it was decided that these new ideas should form the basis of the globalised world and be rolled out everywhere.

    The ideas were very new; untested over the longer term and the wisdom of rolling of them out globally was questionable to say the least.

    Later on all the problems of the new ideas and its questionable economics would come home to roost.

    Unfortunately, the wealthy were doing so well from the new ideas that they really didn’t want to let them go.

    Warren Buffett commented:

    “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”
    Populist opposition gradually began to rise in the face of this class war.

    Once it reached a stage where the wealthy and powerful could no longer ignore it, some of them began to question what they had done.

    The world is full of pent up demand and ready for more growth but the wealthy always hate giving anything to those lower down the scale.

    They fight relentlessly against any ideas that might get things going again, e.g. helicopter money, redistribution through taxation and fiscal stimulus. The only thing they like is monetary policy that makes them richer.

    Capitalism is an old system and like all social systems since the dawn of civilisation it is designed to maintain a Leisure Class at the top who are maintained in luxury and leisure through the economically productive, hard work of the middle and lower classes.

    The lower class does the manual work; the middle class does the administrative and managerial work and the upper class lives a life of luxury and leisure.

    The UK Aristocracy saw the transition from feudalism to capitalism and barely noticed the difference as their life of luxury and leisure continued as before.

    Those at the top see the natural equilibrium of the human race as a few, like them, living in luxury and leisure at the top with the vast majority living a bare subsistence existence and doing all the work.

    Can we ever get them to change their ways?
    It’s been ingrained for 5,000 years.

    1. Sound of the Suburbs

      Thorstein Veblen wrote “The Theory of the Leisure Class” back in 1899 and it would make a good read today, they haven’t changed much (Wikipedia gives a good insight).

      He noted how they engaged in conspicuous leisure and conspicuous consumption to flaunt their wealth.

      Sir Philip Green needs three luxury yachts so when someone says:

      “I have a luxury yacht”

      Sir Philip can say “I have three”, this sort of thing is very important to them.

      Thorstein Veblen noted how they lived in over sized homes.

      Tamara Ecclestone has recently revealed she lives in four of the fifty-seven rooms in her London residence, they don’t change. The UK landscape is dotted with the status symbols of the old leisure class, the stately home. Royalty have palaces so they can say “Mine’s bigger than yours”, it is important to them.

      A love of fine art adds an air of sophistication to their flaunting of wealth. They have to get art experts in to tell them if a work of art is genuine or not, they can’t tell the difference. It is the value of the art that is most important when flaunting wealth.

      They compete against each other to raise the price of fine art and classic cars so they can brag about how much they spent on fine art and classic cars.

      They are never able to see the absurdity of their own behaviour.

      1. Sound of the Suburbs

        Sticking complex maths on top of flawed assumptions is not science.
        Milton you fool.

        Fancy a laugh?

        Have a look at the IMF forecast for Greek recovery with austerity.

        The IMF predicted Greek GDP would have recovered by 2015.
        By 2015 it was down 27% and still falling.

        https://www.youtube.com/watch?v=8YTyJzmiHGk

        At 54 mins. you can see the IMF projection for Greek recovery with austerity and see the horrifying reality.

        Today’s economics, it’s a joke.

  8. Merf56

    Sometimes a more simple view is the most accurate.
    And that would be that :
    people in the first world ( yes I still use that term as it has a universal understanding attached to it!),
    simply are NOT spending their money on material goods – period. That includes luxury goods which are in precipitous decline as well( well off people in aspiring to first world nations are still buying of course but not enough to keep the overexpanded lines going).
    People in the high income countries are instead are spending on better home food, activities and meals out( even though restaurant spending was suddenly down recently). More time spent with families and friends doing things rather than out buying….
    It seems people are getting over “shopping” rather quickly and in large numbers. Perhaps the era of “more” and “he/she who dies with the most toys wins” is in its death throes…?
    While most people in the general finance/commerce/trade world are looking solely at numbers what has changed are people. Not just from personal financial constraints from the sluggish economy but in their personal values and the priorities attached to them…..

    1. Sound of the Suburbs

      You probably need to widen your social circle.

      Those at the top are sated with consumer goods.

      The middle class are disappearing.

      Those at the bottom have maxed. out on debt.

      Inequality is the problem.

      1. Merf56

        Did you think for some inexplicable reason think I was speaking anecdotally? I was not.
        I postulate perhaps that it it YOU who might need to broaden your information sources. Bloomberg, WSJ and its affiliate Marketwatch, The Atlantic, Aeon, Motherboard and quite a few others have all in the last weeks had articles detailing exactly what I wrote about….

        1. Sound of the Suburbs

          I read something recently on Greek people not being able to afford bread.

          The supply side mainstream would never highlight inequality.

          They will endeavour to place the blame anywhere else they can.

          When many in the world still earn less than a dollar a day there is a lot of pent up demand out there.

          https://en.wikipedia.org/wiki/Poverty_threshold#/media/File:Percentage_population_living_on_less_than_$1.25_per_day_2009.svg

          Just imagine if we let Warren Buffett keep 1 billion and redistributed the other 72 billion, demand would go through the roof.

    2. cojo

      Well said, people in the first world are no longer spending the same. The causes of this can be changes in attitude or changes in means due to wage stagnation. Until the “third world” increases consumption, we will have a glut in global trade.

    3. Praedor

      Heh. The reduction in buying “stuff” is, in and of itself, a GOOD thing. Less consumerism is necessarily good for society and, most importantly, the environment. The REASON for much less consumption wasn’t due to some mass decision to be less greedy and less consumptive. It was entirely driven by loss of ability to buy much of anything due to loss of jobs, due to a crash in pay for jobs remaining, and losses suffered from 2008. The virtue of less consumption was forced upon the mass of people due to the greed of the unredeemable useless eaters at the top. The self-worshiping leisure class and “movers and shakers” that feed each other’s one-upmanship and greed for more more more are entirely why the rest HAD to give up consuming what they wanted.

  9. Sound of the Suburbs

    Let’s consult the real experts.

    Twelve people were officially recognised by Bezemer in 2009 as having seen 2008 coming, announcing it publicly beforehand and having good reasoning behind their predictions.

    He identifies four common aspects of their work:

    1) Concern with financial assets as distinct from real-sector assets
    2) With the credit flows that finance both forms of wealth
    3) With the debt growth accompanying growth in financial wealth
    4) With the accounting relation between the financial and real economy

    In brief:

    There is too much debt in the system and the repayments are sucking money out of the economy preventing normal growth.

    The Central Banks are trying to use more debt to solve a debt problem – clueless.

    The Central Bank’s use today’s mainstream, neoclassical economics, so they don’t stand a chance.

    Two of the twelve have written books pointing out the flaws in this mainstream economics:
    Steve Keen – “Debunking Economics”
    Michael Hudson – “J is for Junk Economics” (coming out soon).

    1. Sound of the Suburbs

      Let’s form a global economy guided by ideas of economic liberalism where we put the economy first over the interests of people.

      Pre-2008 – boom
      2008 – bust
      Post-2008 – stagnation

      Unfortunately, no one really understood how the economy worked.

      2008 – “How did that happen?”

      What more evidence do we need?

      What is wrong with economics when science can successfully send space craft to the outer edges of the solar system?

      Science has been allowed to develop successfully as it cannot be modified to suit certain vested interests to make them richer.

      Economics is not like this.

      There is something wrong with economics that was first spotted at the end of the 19th century and pretending it is a real science today is little more than wishful thinking.

      Thorstein Veblen wrote an essay in 1898 “Why is economics not an evolutionary science?”.

      Real sciences are evolutionary and old theory is replaced as new theory comes along and proves the old ideas wrong.

      Economics jumps about like a cat on a hot tin roof and is not evolutionary, in the late 1970s Keynesian ideas were ditched for the ideas of Milton Freidman. We threw out the old Keynesian economics and bought in something new and untested just as we are about to embark on globalisation, it was asking for trouble.

      Milton Freidman hadn’t realised real science is evolutionary.

      Looking back we can see other problems.

      Malthus came up with an economics that worked for the vested interests of the land owning class.
      Ricardo came up with an economics that worked for the vested interests of the financial class.
      Marx came up with an economics that worked for the ideology he was trying to put forward.

      It’s complex, quite fuzzy and can be easily biased to suit vested interests.

      Early on it became very apparent to the wealthy and powerful that economics needed to be biased in the right direction for their interests.

      As Classical Economics reached its zenith in the 19th Century it had come to some unfortunate conclusions powerful, vested interests didn’t like so they backed a new, neoclassical economics that missed out the undesirable conclusions from Classical Economics like the differentiation of “earned” and “unearned” income.

      Most of the UK now dreams of giving up work and living off the “unearned” income from a BTL portfolio, extracting the “earned” income of generation rent.

      The UK dream is to be like the idle rich, rentier, living off “unearned” income and doing nothing productive.

      This distinction between “earned” and “unearned” income has been buried ever since.

      Neoclassical economics led to the Wall Street Crash of 1929 and the Great Depression, where its ideas just made things worse.

      Keynes came up with some new ideas that were incorporated into the “New Deal” and the recovery began in the US.

      Keynes ideas had some unpleasant conclusions as well and so economists moulded some of Keynes ideas into neoclassical economics ready to use after the Second World War. Keynes had said that capitalism was inherently unstable and recognised the dangers from financial asset investing, not the sort of ideas that were desirable.

      The Golden Age of the 1950s and 1960s followed.

      The new hybrid Keynesian ideas went wrong in the 1970s and its ideas did not lead to recovery.

      The powerful vested interests sought an opportunity to bring back their really biased pure neoclassical economics and use it as the basis for a global economy.

      It was improved, but still had all the old problems:

      1920s/2000s – high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase

      1929/2008 – Wall Street crash

      1930s/2010s – Global recession, currency wars, rising nationalism and extremism

      Left to their own devices, powerful vested interests will develop an economics that is so biased the economic system will collapse due to the polarisation of wealth at the personal and national level (like now).

      Lots of other inconvenient stuff is missing too, which has lead to many of the recent mistakes, including 2008 and its aftermath:

      1) The true nature of money and how it is created and destroyed on bank balance sheets.

      2) The work of Irving Fischer, Hyman Minsky and Steve Keen on debt inflated asset bubbles. Their inflation, bursting and the debt deflation that follows.

      3) Richard Koo on balance sheet recessions.

      You can bias economics to suit vested interests but you can’t make that biased economics work.

      Economics needs to be rebuilt form the bottom up in an evolutionary, scientific, manner not missing out the bits that are inconvenient for wealthy and powerful vested interests.

      1. Sound of the Suburbs

        Sticking complex maths on top of flawed assumptions is not science.
        Milton you fool.

        Fancy a laugh?

        Have a look at the IMF forecast for Greek recovery with austerity.

        The IMF predicted Greek GDP would have recovered by 2015.
        By 2015 it was down 27% and still falling.

        https://www.youtube.com/watch?v=8YTyJzmiHGk

        At 54 mins. you can see the IMF projection for Greek recovery with austerity and see the horrifying reality.

        Today’s economics, it’s a joke.

        1. The Pale Scot

          Economics

          The science of explaining tomorrow why the predictions you made yesterday didn’t come true today.

      2. cnchal

        Economics needs to be rebuilt form the bottom up in an evolutionary, scientific, manner not missing out the bits that are inconvenient for wealthy and powerful vested interests.

        Now you’re talking politics

  10. agkaiser

    The Glorious Free Market Capitalization

    What could go wrong with an economic system in which more and more profit is made by lending and investment in the production by others and less by the material producers themselves due to the additional costs imposed by the former?

    But wait! Our geniuses of Wall St. have figured it out. The actual producers of goods and material services can simply charge more for their products to cover the additional overhead costs of finance and trade profits. And the FIRE sector can loan consumers the money at a profit to cover their additional costs introduced by that inflation. And Wall St. wealth and profits can continue to grow at the exponential rate of compound interest and everybody wins. And this snake can live by eating its tail forever and ever. Amen!

  11. Minnie Mouse

    The “comparative advantage” principle if operating as expected by it’s proponents would tend to exacerbate specialization by country, geographic and monopoly concentration of risk, dependency on long and tightly coupled supply chains, international capital flows, trade imbalance, “too big to fail” banks; in other words all of the very worst “systemic risk” factors. The 2008 financial meltdown simply exposed the architecture flaws that kinda maybe should have been obvious. A localized economy is safer, more stable, and more resource efficient.

  12. Roger C

    Maybe trade is plateauing because it has reached its optimum level, an equilibrium. Were we expecting trade to increase to 50%, 100%, or 150% of world GDP. In the words of Herb Stein, “If something cannot go on forever, it will stop.”

  13. TedWa

    It’s low wages. America was the largest buyer of imports – but if Americans no longer have money, then capital loses too. Why are they so obtuse on this, because their Nobel laureate economists don’t consider people having money in the equation?

    1. Merf56

      Another person completely ignoring the generational differences occuring right now in spending patterns regardless of wage issues.

  14. Oregoncharles

    “Comparative Advantage:”
    As the environmental economist Herman Daly reminded us a decade or more ago, comparative advantage explicitly depends on a crucial “assumption” (dangerous term; I’ll return to it): that capital and labor do not move readily between countries. If they do, “comparative advantage” reverts to a “race to the bottom.” That “assumption” made sense in Ricardo’s day; it does not today.

    Despite this, mainstream economists use “comparative advantage” as a slogan to support, especially, free movement of capital, and sometimes of labor, as well. In any case, we know that people move pretty freely today. That means those economists (don’t know about Gao) are either dishonest, incompetent, or of course both. In reality, “comparative advantage” is a very weak reed to build an economy on.

    “Assumptions:” economists habitually use this term to mean “requirements.” It’s half legitimate: “assuming that capital does not move freely…” makes sense. But typically they use it to conceal that certain conditions are REQUIRED for their theory to be true, and often leads them into absurdities, like “assumptions” about people that everyone knows are not true, or an “assumption” that transaction costs don’t matter. Or leaving finance (a massive transaction cost) out of their theories.

    Daly thought they were historically dishonest: that back at the beginning, economists chose sides between the merchants and landowners, and consequently have been spouting propaganda ever since. That’s also the reason basic economics ignores natural resources or hides them under “capital,” which properly means stuff people have created. Marx perpetuated the, ummm, error, with disastrous environmental consequences in the Communist countries.

    1. visitor

      I want to stress further the fundamental importance of those assumptions for the principle of comparative advantage to have any validity.

      Besides the crucial constraint of immobility of capital and labour, there are several other conditions — such as the seamless reallocation of capital and labour between different industries. One must be able to re-employ mechanical engineers and hydraulic presses from the automobile industry in the bio-engineering field, without friction. And without leaving any capital or labour capacity unused (yet another condition for comparative advantage)…

      Furthermore, when people link costs with comparative advantage, like a commenter above — China’s comparative advantage in labour cost — they are making a fundamental error. Comparative advantage has to do with relative productivities, not with costs. When considering costs, we are really talking about competitive advantages, whose ultimate form is absolute (not comparative) advantage.

      Ergo: the concept of comparative advantage is in practice irrelevant in today’s economic world.

    2. I Have Strange Dreams

      Thank you for saving me a rant, Charles. The continued misuse of the zombie economics, weasely term, comparative advantage makes me want to smash stuff in frustration. Why oh why, dear Lord, must we still suffer its diabolical idiocy?

  15. rjs

    i was involved in a debate about shrinking US trade earlier this week over at Economist’s View…it started with a hangringing article by Appelbaum at the NYT, and then Krugman wonkishly piled in pretending to explain why…i objected that real imports and exports were not not down at all, that it was just the price of oil and ores and grains which was down, leading to reports of lower trade in dollars…finally Dean Baker explained it better than i could:

     Trends in Trade, the Story Is Not so Simple – Dean Baker – The NYT had an interesting article arguing that trade has stopped growing in the last couple of years. The piece notes data showing that combined U.S. exports and imports fell in the 2015 compared to 2014 and seem likely to fall again in 2016. It then raises the concern that this will lead to slower growth going forward. There are a couple of points that complicate this issue. The first is that the drop in the dollar value of trade is the result of lower prices, not a smaller volume of goods and services being imported and exported. While the nominal value of exports fell by $111.0 billion from 2014 to 2015, the real value actually rose by $2.3 billion. On the import side, the nominal value fell by $97.8 billion while the real value rose by $116.5 billion. In other words, the actual amount of goods and services crossing U.S. borders in 2015 was in fact higher in 2015 than in 2014, we were just paying less for what we imported and foreigners were paying less for what we exported to them.

    i’m not that familiar with global trade numbers, but i’d suspect you’d find the same factor at work there too..

  16. RBHoughton

    Protectionalism is highly attractive these days. We all know it was the route taken by first UK then USA and every other successful country (read Japan or South Korea) to get a disproportionate share of the world’s wealth. You export like crazy and tie up imports with red tape. Its a no brainer.

    Taking that thought a little further leads to an expectation that the biz with the most growth potential tomorrow will be smuggling and its really quite easy.

    There’s so much trade crossing borders these days its impossible to check more than a tiny part of it and that assumes the customs officers are keen to do so whereas we all know that most smuggling has historically occurred at the customs house.

    Welcome to the world of government by merchants.

  17. DanielDeParis

    It looks as, even on NC, one of the best liberal-inclined economist-minded blog, some forget an obvious pattern, China is getting older, definitely so

    Getting older, what do mean? Some pretty obvious fact! China is literally getting older, with younger generations certainly replacing their parent ones.

    What would not be a decisive factor in an advanced economy such as Japan, Germany, Korea and others, is more than a hiccup or a challenge! China has transformed itself into the Ruhr-Gebiet for the whole world and it will just meet the challenge.

    Whoever has worked in its younger age – or just now – in manufacturing will know it. On top of sucking, as literally as the “getting-older” factor I mentioned above, industry does consumes youth.

    The insane policy decisions made in 2009 to push the manufacturing envelope including a massive relocation of heavy manufacturing into the heartland to save the on-going miracle was a step too far in view of this stumbling stone.

    Think again. India that has the demographic growth that would allow for manufacturing does concentrate on software and services… Whilst China that will run out of gas in terms of shop-floor resources just made the wrong bets.

    Now the numbers in terms of global human resources. Yep you are the HR manager for a while. All this is more than enough to explain the current situation!e

    By the way, I belong to the few who expected this happen at the very time the wrong decisions were made. As many I was just very wrong at the timing of this crash. Chanos was much better at it. This is just the beginning IMHO.

    When you bring that factor on top of a few others including the growing cost of fossil energy (and the related manufacturing-adverse cost of renewable energy), all this is more than enough to explain why a reduce growth may in the loop for a while until growing populations in South-East Asia, Africa or even South America are able to build some real growth on their own. No need to call for Ricardo factors on this although they partly make sense as well for sure.

    Can we expect this most improbable “Renaissance Africaine” (yep it even may be partly French-language) to happen in the short run? Of course not. The so-gennante “global growth” is indeed possibly stalled for a while. History does show it has happened more than once.

  18. I Have Strange Dreams

    This article reminds me why economics is a filthy roach and plague-infested ghetto that should be burned to the ground. Run away very fast, while checking your wallet, from anyone who uses the term comparative advantage. They are likely to be a dangerous lunatic.

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