America Will Keep Losing Its Middle Class as Long as “The Free Market” Dominates the Economic Debate

By Marshall Auerback, a market analyst and commentator. produced by Economy for All, a project of the Independent Media Institute

National industrial policy was once something you might read about in today’s equivalent of a friend’s Facebook post, as hard as that might sound to believe. It was in newspapers; it was on the radio. Taxi drivers had opinions about it. That all changed in the last 35 years, when the rise and fall of the stock market and a shallow conversation about unemployment rates took over. Industrial policy became an inside-baseball conversation, and to the extent that it was discussed, it was through the prism of whether it imperiled the golden gospel and great economic distraction of our time, “the free market.”

The decades of free-market propaganda we’ve been exposed to are basically an exercise in distracting the public from the meaningful choices that are now made behind closed doors. The two big political parties that outwardly represent symbolic issues like gun rights and school prayer spend the bulk of their time and political energy on complex industrial and regulatory questions.

But much like Nero fiddling while Rome burned, they’d better start considering the question of a national industrial policy before there’s no industry left to manage. Manufacturing is now at its smallest share of the U.S. economy in 72 years, reports Bloomberg. Multinational supply chains undermine the negotiating power of workers, thereby exacerbating inequality.

Are there ways to bring back manufacturing, or should we just capitulate to a mindset that argues that these jobs are gone for good, that software retention is good enough, even as we shift what’s left of our manufacturing sector overseas to sweatshop economies? That seems short-sighted. After all, it’s pretty easy to steal IP; it’s not so easy to steal an auto manufacturing facility. The real question is: In the absence of some sort of national industrial strategy, how do Western societies retain a viable middle class?

Decades of American middle-class exposure to favor China and other Asian countries’ industrial capacity have foisted it right back from elite circles into our politics and the ballot box, in spectacular fashion, through the unlikely Donald Trump, who, in his typically blunderbuss fashion, has called attention to some serious deficiencies in our current globalized system, and the competitive threat posed by China to which we have remained oblivious for all too long.

Not that Trump’s 19th-century protectionism represents the right policy response, but his concerns about Beijing make sense when you compare how much China invests in its own industrial base relative to the U.S.: Robert D. Atkinson and Caleb Foote of the Information Technology and Innovation Foundation write that a recent Harvard Business School “studyestimated that the Chinese governments (national, provincial, and local) paid for a whopping 22.2 percent of business R&D in 2015, with 95 percent of Chinese firms in 6 industries receiving government cash—petrochemicals, electronics, metals and materials, machinery and equipment, pharmaceuticals and biotechnology, and information technology.”

In addition to the direct government grants on R&D, Atkinson and Foote estimate that “the Chinese R&D tax credit is between 3 and 4.6 times more generous than the U.S. credit. To match China’s R&D tax credit generosity, the U.S. rate for the Alternative Simplified Credit would have to be increased from 14 percent to between 35 and 40 percent.” Atkinson and Foote also note that “97 percent of American federal government funding went to just three sectors: transportation equipment, which includes such as fighter jets, missiles, and the like ($14 billion); professional, scientific, and technical services ($5 billion); and computer and electronic products ($4 billion).”

Taken in aggregate, Atkinson and Foote calculate that “nearly 25 percent of all R&D expenditures in China come in the form of government subsidies to firms.” That’s the sort of thing that must enter the calculations of antitrust advocates when they call for breaking up big tech, without considering the ramifications to research and development, especially relative to their Chinese counterparts. (Statistically, as Anne Marie Knott and Carl Vieregger find in a 2016 paper “Reconciling the Firm Size and Innovation Puzzle,” there are ample studies illustrating that R&D spending and R&D productivity increase with scale.)

Why does this matter? Robert Kuttner, writing at the Huffington Post at the inception of Barack Obama’s presidency, made a compelling argument that many of America’s great industrial enterprises did not simply spring up spontaneously via the magic of the “free market”:

American commercial leadership in aerospace is no naturally occurring phenomenon. It reflects trillions of dollars of subsidy from the Pentagon and from NASA. Likewise, U.S. dominance in pharmaceuticals is the result of government subsidy of basic research, favorable patent treatment, and the fact that the American consumer of prescription drugs is made to overpay, giving the industry exorbitant profits to plow back into research. Throwing $700 billion at America’s wounded banks is also an industrial policy.

So if we can have implicit industrial policies for these industries, why not explicit policies to rebuild our auto industry, our steel industry, our machine tool industry, and the industries of the next century, such as green energy and high-speed rail? And why not devise some clear standards for which industries deserve help, and why, and what they owe America in return?”

In fact, Kuttner describes a problem that well preceded Barack Obama. America’s belief in national industrial planning has been undermined to the extent that the U.S. began to adhere to a doctrine of shareholder capitalism in the 1980s and beyond, a philosophy that minimized the role of the state, and gave primacy to short-term profitability, as well as production growth through efficiency (i.e., downsizing) and mergers. Corporate prioritization of maximizing shareholders’ value and the ways American corporations have minimized long-term R&D expenditures and capital investment, all of which have resulted in the “unproductive disgorging of corporate cash profits—through massive dividend payouts and unprecedented spending on stock repurchases—over productive investment in innovation,” write Professors Servaas Storm and C.W.M. Naastepad.

Although European companies have not gone quite as far down that route, their “stakeholder capitalism” culture has been somewhat subverted to the same short-term goals as their American counterparts, as evidenced via Volkswagen’s emissions scandal and the erosion of workers’ rights via the Hartz labor “reforms” (which actually undermined the unions’ stakeholder status in the companies, thereby freeing up management to adopt many of the less attractive American shareholder capitalism practices). The European Union too is now belatedly recognizing the competitive threat posed by China. There’s no doubt that the European political classes are also becoming mindful that there are votes to be won here as well, as Trump correctly calculated in 2016.

In the U.S., industrial policy is increasingly finding advocates on both the left (Elizabeth Warren’s policy director, Ganesh Sitaraman) and the right (Professor Michael Lind), via the convenient marriage of national security considerations and with international investment and trade. If trade policy is ultimately subordinated to national security concerns, it is conceivable that industrial policy could be “bi-partisanized,” thereby giving primacy to homegrown strategic industries necessary to sustain viable national defense and security.

But this approach is not without risks: it is unclear whether the “national security-fication” of the industrial policy renaissance will actually enhance or hinder creativity and risk-taking, or merely cause these firms to decline altogether as viable civilian competitors vis a vis Beijing. The current travails of Boeing provide a salutary illustration of the risks of going too far down the Pentagon rat hole.

And there are a number of recent studies illustrating that the case for “dual-use” (i.e., civilian and military) manufacturing does not substantially enhance civilian industrialization and, indeed, may retard overall economic growth. On the other hand, as the venture capitalist William Janeway highlights in his seminal work, Doing Capitalism in the Innovation Economy, there are advantages at times to being “[d]ecoupled from any direct concern with economic return… [It allowed] the Defense Department… [to] fund numerous alternative research agendas, underwriting the ‘wasteful’ search for solutions that inevitably accompanies any effort to push back the frontiers of knowledge.” So there’s a balance to be struck here. But, as Janeway notes, “the strategic state interventions that have shaped the market economy over generations have depended on grander themes—national development, national security, social justice, liberation from disease—that transcend the calculus of welfare economics and the logic of market failure.”

Furthermore, to the extent that national security considerations retard offshoring and global labor arbitrage, it can enhance the prospects for a viable form of “national developmentalism,” given that both mean tighter labor markets and higher wages, which in turn will likely push firms toward upgrading R&D spending in order to upgrade on the high end of the technology curve (as Seymour Melman argued years ago), as well as enhancing productivity gains. As author Ted Fertik observes:

Higher productivity makes possible more generous welfare states, and helps national industries compete to supply the world with high-tech products. If technological leadership and a prosperous, patriotic citizenry are the surest guarantees of military preponderance, such an economic policy represents the best military strategy in an era of great power competition.

Both the left and the right are beginning to recognize that it makes no sense to make war on wage-earners while claiming to protect the same wage earners from Chinese competition. But governments need to do more than act as a neutral umpire, whose role never extends beyond fixing market failures. As Janeway has illustrated, governments have historically promoted the basic research that fueled innovation and nurtured the talent and skills that “became the foundation of the Innovation Economy”; “the central research laboratories of the great corporations were first supplemented and then supplanted by direct state funding of research.” But in spite of providing the foundational research for a number of leading commercial products (e.g., Apple’s iPhone), the government has proved reticent in considering alternative forms of ownership structure (e.g., a “government golden share,” which gives veto rights on key strategic issues, such as relocation, offshoring, special voting rights, etc.), or retaining intellectual property rights and corresponding royalty streams to reflect the magnitude of their own R&D efforts, as Professor Mariana Mazzucato has proposed in the past. At the very least, we need to consider these alternative ownership structures that focus entrepreneurial development on value creation, as opposed to capitulating to the depredations of rentier capitalism on the spurious grounds that this is a neutral byproduct of the market’s efficient allocation of resources.

Within the U.S., national industrial policy also suits green advocates, such as Senator Bernie Sanders, whose Green New Deal plan, while failing to address domestic/local content, or manufacturing in the broadest possible sense, at least begins to move the needle with regard to the federal government building and owning a national renewable grid.

Likewise in Europe, German Economy Minister Peter Altmaier recently published a “National Industrial Strategy 2030,” which, according to Dalia Marin of Bruegel think tank in Brussels, “aims to protect German firms against state-subsidized Chinese competitors. The strategy identifies key industrial sectors that will receive special government support, calls for establishing production of electric-car batteries in Europe, and advocates mergers to achieve economies of scale.” It is striking that EU policymakers, such as Lars Feld of the German Council of Economic Experts, still apparently think it is a protectionist step too far to consider coordinating with the car companies (where there is already a high degree of trans-European policy coordination and international consolidation), and other sectors, to help them all at the same time—as Beijing is now doing. Of course, it would help to embed this in a manufacturing-based Green New Deal, but it represents a healthy corrective to offshoring advocates who continue to advocate that their car industry should migrate to China, on the short-term grounds of cost consideration alone.

Essentially, the goal should be to protect the industries that policymakers think will be strategically important from outsiders, and to further integrate with allies and partners to achieve efficiencies and production scale. (Parenthetically, it seems particularly perverse right at this juncture for the UK to break away from all this continental European integration, and to try to go it alone via Brexit.) The aim should not be to protect private rent-seeking and increasing private monopolization under the guise of industrial policy, which, as Dalia Marin notes, is why EU Competition Commissioner Margrethe Vestager blocked the proposed merger between France’s Alstom and Germany’s Siemens. The two companies “rarely compete with CRRC in third countries, because the Chinese company mainly focuses on its home market.” Hence, the grounds for creating “heavyweight champions” was really a cover for developing an oligopoly instead.

Much of the focus of negotiation in the seemingly endless trade negotiations between the U.S. and China has been on American efforts to dismantle the wave of subsidies and industrial support that Beijing furnishes to its domestic industries. This seems both unrealistic as well as being the exact opposite of what the U.S. should be doing if it hopes to level, or at least carve up, the playing field.

Likewise, the problem in both the EU and the U.S. is not the size of these companies generated by national developmentalism, but a size-neutral form of national regulation that precludes these companies from stifling competition. The goal of a truly successful and workable industrial policy should be to create an environment that supports and sustains value creation and that socializes the benefits of the R&D for society as a whole, rather than simply licensing it or selling it on to private companies so that it just becomes a vehicle that sustains rent extraction for private profits alone.

We are slowly but surely starting to move away from market fundamentalism, but we still have yet to make the full conceptual leap toward a sustainable industrial policy that creates an economy for all. At least this is now becoming a fit discussion as far as policy making goes, as many of the neoliberal shibboleths of the past 40 years are gradually being reconsidered and abandoned. That is a start.

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  1. Ignacio

    Another way –and more precise in my opinion because it identifies the core problem– to frame the issue, would be this:

    Why Trade Wars Are Inevitable

    Repressed consumption in a few countries with sustained huge current account surpluses naturally drives manufacturing outside the US (and other deficit countries). Interestingly, Pettis says that those imbalances manifest today, not as a conflict between surplus/deficit countries, but between economic sectors: bankers and owners in surplus/deficit countries vs. the rest. According to Pettis this can be addressed internally in the US by tackling income inequality: Tax transfers, reduced health care & educational costs, raising minimum wages and giving negotiating power to unions. BUT BEFORE DOING THAT, THE US SHOULD IMPOSE CONTROLS ON FOREIGN CAPITAL INFLOWS (by taxing those) INSTEAD ON TARIFFS ON FOREIGN PRODUCTS. From the article:

    It would have the additional benefit of forcing the cost of adjustment onto banks and financial speculators, unlike tariffs, which force the cost onto businesses and consumers.

    If the US ever does this, other deficit countries, say the UK, France or Spain for instance, should do exactly the same, and even more abruptly if these don’t want to be awash with foreign capital inflows and see inequality spiking even further.

    1. Winston

      It is financialization which is causing this. Please read Michael Hudson. As he has pointed out it is financialization that is key. There is a reason his book was titled “Killing the Host”. Boeing’s decline is also because of financialization.
      How Hedge Fund Activists Prey on Companies

      Private equity and hedge are responsible for US manufacturing decline since the 1980s, along with desire not to innovate-example why Deming’s advice ignored by US automakers and absorbed by the Japanese-who then clobbered the US automakers.

      Hudson also knows that rising expenses for homeowners reduced their consumption capacity. A main cause is rise in housing costs, education, and health.

      Before manufacturing went to cheaper foreign shores, it went to the no union South. Has that made its workers better off? If so how come South didn’t develop like Singapore? For a clue please read Ed Week article about what Singapore did and South failed to do.
      The Low-Wage Strategy in the South: Is It the Future for Your State?

      Melman’s main message is that focus on national security destroyed civilian sector. Today most of US Govt R&D spending still in defense sector, while R&D disappearing in private sector because of financialization.

      Industrial strategy is useless for US unless housing costs come down, unless robots are used. Hudson has already pointed out US cannot compete with Germany because of housing cost differences. As Carl Benedikt Frey who focusses on tech has pointed out Midwest revolt was because most automation was there.
      “Frey argues that automation, or what he calls the third industrial revolution, is not only putting jobs at risk, but is the principal source of growing inequality within the American economy.”

      ” there are more robots in Michigan alone than in the entire American west. Where manufacturing jobs have disappeared is also where US dissatisfaction is the greatest”
      Automation and its enemies
      Carl Benedikt Frey, Ebrahim Rahbari 04 November 2019

      1. Winston

        Major industrialized countries are also heavy users of automation. Forget idea that industrial policy will lead to jobs at scale used to.:
        10 Most Automated Countries in the World
        Robots: Japan delivers 52 percent of global supply
        Japan is the world´s predominant industrial robot manufacturer
        Japan’s farming industry poised for automation revolution

        1. Altandmain

          Robots are an income distribution problem. Who owns the robots? A few rich people or are the profits shared in a more egalitarian way?

          Second, they are pretty overhyped. Working in manufacturing myself, I see that firsthand. Yes they do improve productivity, but they also have their limitations. Multi-factor productivity growth has been really slow since 2008.

  2. John Merryman.

    I don’t know that it’s so much”free markets,” as the financialization of the economy, where money has mutated free a medium of exchange and necessary tool, to the end goal of creating as much notational wealth, as the purpose of markets.
    Money largely functions as a contract, where the asset is ultimately backed by a debt. So in order to create the asset, similar amounts of debt have to be generated.
    For one thing, it creates a centripedial effect, as positive feedback draws the asset to the center of the community, while negative feedback pushes the debt to the edges. Since finance functions the value circulation mechanism of society, this is like the heart telling the hands and feet they don’t need so much blood and should work harder for what they do get. The Ancients used debt nubiles to reset this process, but we lack the long term perspective.
    The other consequence is the government has been manipulated into being debtor of last resort. Where would those trillions go otherwise and could Wall Street function without the government soaking up so much excess money. The real elephant in the room is the degree public debt backs private wealth.

    1. John Merryman.

      Further note; Since this borrowed money cannot be used to compete with the private sector for what is a finite amount of profitable investments, it is used to blow up whatever other countries incur the wrath of our despots.
      As Deep Throat explained, if you want to know what’s going on, follow the money.

    2. OpenThePodBayDoorsHAL

      Whenever I see the term “free markets” bandied about I know it’s a framing that fits an ideology but in no way fits the actual facts.

      Just like we now have two criminal justice systems, we now have two market systems: crony capitalism, and actual capitalism.

      Crony capitalism is for Exxon Mobil; Verizon; Amazon; Raytheon; JP Morgan. Actual capitalism is reserved for the plebes, who get “creative destruction”. Mom slipped and fell; the hospital bill arrived and there wasn’t enough cash; so they took the house.

      It’s the obverse of the “socialism” argument. We have socialism across the length and breadth of the economy: more Federal dollars are spent subsidizing fossil fuels than are spent educating children. But heaven forbid Bernie should utter the “S” word, because he’s talking about the kind of socialism for you and me.

      1. John Merryman

        The problem is avoiding that us versus them polarity and show why what is going on is BS. That the markets NEED government debt to function and then waste that collective value. Not that government is some old nanny, trying to quell the ‘animal spirits” of the market.
        Maintaining infrastructure just isn’t as glamorous as guns and bombs. Probably doesn’t threaten to kill you, if you don’t give it the money, either.
        It should be obvious to most that simply pouring more vodka into the punch bowl does not create a healthy economy, just a bunch of vultures picking at the carcass.
        Finance does function as the circulation mechanism of the body of the community, just as government, as its executive and regulatory function, is the central nervous system. We had private government before, called monarchy. Now finance is having its ‘let them eat cake’ moment.
        As a medium, money is a public utility, like that other medium of roads. You can have the most expensive car out there, but you still don’t own the road.
        It’s not that society should be either private, or public, but an intelligent mix of both.

    3. rtah100

      I want me some o’ them debt nubiles! They sound like fun gals / guys/ humans. No wonder you’re merry, man!

      I’d also like a policy of debt jubilees and I imagine you would too. :-)

  3. The Rev Kev

    Just winging it a bit here but perhaps it might be an idea to map out money flows to help decide how to strengthen America’s industrial health. As an example, it might be time to end some subsidies. I understand that there are deliberate tax breaks for corporations that move their manufacturing overseas. Cut them now for a start. Yeah, I know. Closing the barn door too late.
    To free up cash for R&D, turn back the clock to 1982 and make stock buybacks once more illegal. Give tax credits to companies that pay for a younger generation of machinist’s education. Have the Federal government match dollar-for-dollar money spent on R&D. If the government really wants to free up resources, bring out a law that says that it is illegal for the government to give any subsidies for any corporation with a net worth of $1 billion or more.
    But we all know that none of this will ever happen as there are far too many rice bowls involved for this to be done – until it is too late. Oh well.

    1. Leftcoastindie

      “I understand that there are deliberate tax breaks for corporations that move their manufacturing overseas. Cut them now for a start. Yeah, I know. Closing the barn door too late.”

      Better late than never!

      Personally, I think that is the only way to get a handle on this situation – Change the tax laws.

  4. rd

    Some thoughts:

    1. Designate industries as targets to retain/recreate significant manufacturing capability in the US – semiconductors, flat screens, solar panels, and pharmaceuticals come to mind. Give them preferential protection with quotas, tariffs etc. instead of just shotgun tariffs. These industries should be forward looking instead of recreating mid 20th century.

    2. Integrate this into NAFTA and maybe add Central American countries to it. If we need to use cheap labor, then do it in countries that otherwise provide illegal immigrants to us to build up their economies. Far better than sending the jobs to China, a major global competitor.

    3. Fund big science such as NASA etc. A lot of discoveries come out that can then be commercialized with manufacturing inside the US and NAFTA.

    1. Felix_47

      Obviously good ideas. How about simply annexing Central America? The only people who care about national sovereignty are their oligarchs and rent seekers.The vast majority want to come to the US and would gladly sacrifice national sovereignty for US citizenship, minimum wage and protections. Many surveys have shown this over and over. It could be done by referendum by their populations. If we think we have it bad in post industrial American think how bad the Mexicans or Hondurans have it.

  5. David J.

    It’s very refreshing to read articles of this kind. Thank you.

    I’m recently retired and my career consisted of a healthy portion of managerial and executive responsibilities as well as a long denouement of flat out proletarian, worker-drone, pseudo-Taylorized work. (Think Amazon but not at Amazon.) I’ve experienced, in some detail, what I consider to be both sides of the post WWII dynamic as it relates to technology and who controls the shop floor. Now that I have some time on my hands I’ve decided to see if I can better understand what appears to be a central contradiction of modern industrial practice and especially what I believe to be misguided efforts by non-industrial corporations to employ industrial-work-process techniques in day-to-day practice.

    I’m re-reading David F. Noble’s 1984 book, Forces of Production: A Social History of Industrial Automation, as well as Christopher Lasch’s The Revolt of the Elites and the Betrayal of Democracy, as a beginning foray into this topic.

    It does seem to me that we can do a lot better. A well developed industrial policy should include both a strategy for improving our productive capacity while simultaneously more fairly distributing the fruits of productivity more broadly throughout the population.

    This article and the comments are very helpful in pointing the way.

  6. Sam

    For those who have used up their free access to Foreign Policy there’s a non-paywalled version of the Pettis article on the Carnegie endowment website.

  7. steven

    There is so much to like in this post I am going to concentrate on the few points with which I had problems:
    1. Any time I hear an economist bemoaning policies which “may retard overall economic growth.” I am tempted to just tune out. ‘nega-growth’, a variant of Amory Lovins’ ‘Nega-Watts’ maybe. But surely not more military Keynesianism, speeded up planned obsolescence and just plain junk!
    2. Then there is “the convenient marriage of national security considerations and with international investment and trade.” If national security considerations involve insuring circuit boards for more exceptional (SIC) fighting machines like the F35 or for that matter more hydrogen bombs that might actually work, count me out. OTOH if they include, for example, insuring the country has the capability to produce its own medicines and generally any of the goods and services required for national survival, sign me up.

    (national security) Then there is ‘climate change’, brought to us by Exxon Mobile and the century-long pursuit of The Prize in the Middle Eastern deserts.

  8. lyman alpha blob

    The title hits the nail right on the head.

    An anecdote regarding this free market for everything all the time mentality –

    My small city’s council recently debated whether to pay several tens of thousands of dollars for a “branding” campaign with a PR/marketing company who in the past has dealt with Conde Nast, so read high end clientele. My better half, who is a councilor, argued that spending all that $$$ to attract more tourists wasn’t the best use of the city’s funds and that we weren’t a “brand” to begin with, but a city. We’ve already had big problems will illegal Airbnb’s removing significant amounts of housing from the market and housing costs have skyrocketed in recent years while wages, of course, have not. The city had until relatively recently been a blue collar suburb but that has changed rapidly. My wife tried to make the case that the result of this “branding” was likely to push housing costs even higher and push more long time residents right of of town. The council is pretty liberal, whatever that means these days, and I don’t believe there is a pro-business Republican among them. She was still on the losing end of a 6-1 vote in favor of the “branding”.

    Very good article, however I don’t think trying to bring manufacturing back by framing it in terms of ‘national security’ is a good idea. Although the idea itself is correct, explicitly promoting it this way would just hand more power over to the national security industry and that has not served us well at all in the last two decades.

  9. Susan the Other

    This was a great summary of rational thinking. Thank you MA. I’ve been almost depressed this last year or so by the relentless undermining of national sovereignty. Trying to replace it with everything from global supply chains to the ECB to Brexit-free-trade (even without Europe) to private property rights to you name it. Sovereignty is a very basic thing – we agree to it like we agree to our currency. And by that agreement we certainly imply an “Industrial Policy to create an economy for all.” How this wisdom got systematically gaslighted is a whole nuther story. I’m glad China didn’t get hooked.

  10. Ford Prefect

    Make America Great Again.

    Apparently, Americans don’t need flag-making jobs as they will not Make America Great. Trump campaign making banners in China – moving fast to beat tariffs deadline. Although there is the possibility that these are for domestic consumption in China to help rally Chinese hackers to the cause of supporting the Trump campaign, including voting for Trump. That would prove there is No Collusion with Russia.

  11. Jeremy Grimm

    This post started off suggesting it’s time to toss the “the free market” and I would add that it’s time to toss “free trade/globalization” too, but it shifted to discussions of R&D spending, cautions to anti-trust advocates, and considerations of industrial policy and national security.

    If R&D spending and productivity increase with scale, and many sectors of the US economy are dominated by a handful of large International Corporations does that mean that US R&D spending and productivity are close to full-scale — as are the Corporations? How does scaled-up R&D spending reconcile with “massive dividend payouts and unprecedented spending on stock repurchases” and the Corporate prioritization of “short-term profitability”? Should I read the claims about how R&D spending and productivity increase with ‘scale’ to mean the scale of the R&D spending — not the scale of the firm? If so what sort of calculations should be made by “antitrust advocates when they call for breaking up big tech” if I separate the scale of a firm from the scale of the R&D spending? Does it matter where the R&D is done? Haven’t many of the large International Corporations moved their software development and R&D offshore too? [“Software retention”? — What “software retention”?]

    “Likewise, the problem in both the EU and the U.S. is not the size of these companies generated by national developmentalism, but a size-neutral form of national regulation that precludes these companies from stifling competition.” What sort of industrial policy will compel International Cartels to play nice with domestic small and medium-sized businesses? Will that industrial policy be tied with some kind of changes to the ‘free market’ for politicians, prosecutors, courts, and regulators?

    If we sell it here, but we don’t make it here any more then what kind of industrial policy will rebuild the factories, the base of industrial capital, skills, and technical know-how? It will take more than trade disputes or currency rate of exchange tricks, or R&D spending, or targeted spending on a few DoD programs to rebuild US Industry. Shouldn’t an industrial policy address the little problem of the long distance splaying of industries across seas and nations, the narrowing and consolidation of supply chains for the parts used the products still ‘made in the usa’? If the US started protecting its ‘infant industry’ I think that might impact the way a lot of countries will run their economies. This would affect a basis for our international hegemony. And if we don’t protect our industry, which will have to be re-built and raised from the razed factory buildings scattered around this country, how would it ever reach the size and complexity needed to prosper again?

    1. cnchal

      Lots of great questions, with no real answers.

      When the government subsidize R&D here, what reason would there be for the resultant products that come from that R&D, be made here? In Canada the SRED (Scientific Research and Experimental Development) tax credits are used by companies to develop products that are then manufactured in China. No Canadian production worker will ever see an hour of labor from those subsidies. That result is baked into the R&D cake.

      As you point out, “many of the large International Corporations moved their software development and R&D offshore too”. What stops them from co-mingling the subsidies and scamming the system for their benefit, since everything done to favor big business resolves to a scam on the peasants.

    2. Susan the Other

      Adversaries. If we want a peaceful global world we need to stop being adversarial. Go with policies that are inclusive and prevent inequality. If we want competition for profit it will have to be tamed. So that it too does not cause inequalities. Our stopgap with NIRP and ZIRP isn’t working for the old economics because it doesn’t drive growth. So we have to make decisions about policy going forward. No? If, on the other hand, we cannot think of a way to get ourselves out of the economic doldrums we are in (I think it’s the natural consequence of excess capital with nowhere to go – good commercial ideas don’t come around everyday.) we can go back to more tried and true methods like a renewal of the MIC. Bring strategic manufacturing home and rebuild specific industries to maintain our deadly secret technologies. From that first step there could be spinoffs. Possibly green ones. I’d welcome a Green Industrial Complex. It could happen. And the rationale is undeniable – disruptions to the environment are the biggest threat to national security. I wonder if the big investment banks aren’t stockpiling money (via the complicit Fed) to do something just like this.

  12. Sound of the Suburbs

    Neoclassical economics is America’s secret weapon.
    They have taken their economy out with it twice.

    1929 and 2008 look so similar because they are; it’s the same economics and thinking.
    The Americans test their secret weapon on themselves and it’s really good.
    1929 and 2008 are financial and economic disasters par excellence.

    America rolled this doomsday economics out globally.
    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
    What Japan does in the 1980s; the US, the UK and Euro-zone do leading up to 2008 and China has done more recently.
    Global Japanification.

    The warhead is the debt blind nature of this economics.
    The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.

    The FED never really stood a chance with debt blind economics.
    Greenspan and Bernanke can’t see the problems building before 2008.
    1929 and 2008 look so similar, because they are.
    No one can work out what caused 2008, and afterwards and they attribute it to a “black swan”.
    Janet Yellen is not going to be looking at that debt overhang after 2008 and so she can’t work out why inflation isn’t coming back.
    It’s called a balance sheet recession Janet, you know, like Japan since the 1990s.
    Jerome Powell is not looking at the debt overhang after 2008 and so thinks the US economy is fixed and raises interest rates. Raising interest rates with all that debt in the economy will soon cause a downturn and there is no way he will get anywhere near normalising rates.

    Neoclassical economics incorporates stealth technology.
    In 2008 the Queen visited the revered economists of the LSE and said “If these things were so large, how come everyone missed it?”
    It’s that neoclassical economics they use Ma’am, it doesn’t consider debt.
    It wasn’t even hard, but they never saw it coming.

    Reinhart and Rogoff did an amazing job of collecting so much data in, “This Time is Different”, their study of 2008.
    They did collect a lot of data, but not the one data set they really needed.
    This stealth technology is amazing.

    The Mont Pelerin society developed the parallel universe of neoliberalism from neoclassical economics.

    1. Sound of the Suburbs

      Neoclassical economics is free market economics and that’s why you can’t put debt in.
      If you put debt in, markets don’t reach stable equilibriums.

      “Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
      This 1920’s neoclassical economist that believed in free markets knew this was a stable equilibrium. He became a laughing stock.
      Better shelve this for a few decades until everyone has forgotten.
      Now everyone has forgotten we can use it for globalisation.

      Why did Irving Fisher get it wrong?
      The bankers had pumped up the stock market with margin lending.
      1929 – Inflating the US stock market with debt (margin lending)
      2008 – Inflating the US real estate market with debt (mortgage lending)
      Bankers inflating asset prices with the money they create from loans.

      1. Sound of the Suburbs

        The Americans test their secret weapon on themselves and it’s really good.
        They are doing another test.

        What lifted US stocks to 1929 levels in 1929?
        Margin lending and share buybacks.
        What lifted US stocks to 1929 levels in 2019?
        Margin lending and share buybacks.
        As long as US companies keep doing share buybacks things should be OK, otherwise it’s all going to fall off the edge of a cliff.
        A former US congressman has been looking at the data.

        The Americans test their secret weapon on themselves and it’s really good.
        Their first test was a bit half hearted, but they were just getting started.

        Watch this video of the S&L crisis to refresh your memory.
        By 2008, they would be leveraging up a real estate boom to take out the global economy.
        “It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world” All the Presidents Bankers, Nomi Prins.

  13. Sound of the Suburbs

    Neoclassical economics is free market economics and that’s why you can’t put debt in.
    If you put debt in, markets don’t reach stable equilibriums.
    “Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
    This 1920’s neoclassical economist that believed in free markets knew this was a stable equilibrium. He became a laughing stock.
    Better shelve this for a few decades until everyone has forgotten.
    Now everyone has forgotten we can use it for globalisation.

    Why did Irving Fisher get it wrong?
    The bankers had pumped up the stock market with margin lending.
    1929 – Inflating the US stock market with debt (margin lending)
    2008 – Inflating the US real estate market with debt (mortgage lending)
    Bankers inflating asset prices with the money they create from loans.

  14. Felix_47

    The discussion focuses on finance. Thank you for posting this. The comments are enlightening. I think the Bloomberg estimate of US manufacturing includes a lot of items that are not moveable to the third world. Consider electricity production, mining, oil production, meat packing,, defense products. I suspect based on what I see at work the amount of true US manufacture in the sense of something being made world wide competitively is vanishingly small. A lot of the companies I work with tend to assemble products made in the third world with largely cheap migrant labor and they call it American made. An example is New Balance. Employers tell me they will not hire domestics no matter what the wage because they litigate, talk back and don”t work.. Other than law, medical care, or government jobs I see none of our kids aspiring to a middle class life finding anything. Interesting that we can outsource all sorts of labor but we cant seem to outsource elective surgery or law. We have protectionism but it is for selected occupations like law and medicine. There is no reason we could not outsource much of medical care to India just as we outsource to Wipro or Infosys. What is the difference between an Indian doctor doing a surgery in Calcutta for 100 dollars and the same Indian doctor doing the same surgery in the US for 2500? And it may be legal protectionism that keeps finance in the US. When companies want to sue they establish jurisdiction in US Courts and sue here…..not in their third world country. Finance is intimately tied to the legal system and US lawyers. And of course the major powers in the Democratic party are lawyers which is why M4A is window dressing except in the case of Sanders. Because without tort reform M4A cannot function any better than all the other failed ideas.

  15. Sound of the Suburbs

    Mariner Eccles, FED chair 1934 – 48, saw what the capital accumulation of neoclassical economics did to the US economy in the 1920s.

    “a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped”

    Wealth concentrates until the system collapses.

    2017 – World’s eight richest people have same wealth as poorest 50%
    The wealth sure has concentrated.
    What happens next?

    You need to understand the monetary system to see why this happens.

    There was a spurious notion that if we made the pie bigger, everyone could get a bigger slice.
    The monetary pie always has zero size, there are just positives and negatives.

    Money and debt come into existence together and disappear together like matter and anti-matter. Bank loans create money and bank repayments destroy money.

    A few very big positives require lots negatives elsewhere.
    A rising tide doesn’t lift all boats.
    When one person is going positive, the corresponding negatives exist elsewhere.

    For the private sector to go nett postive, the negatives have to exist elsewhere.
    This could be a trade surplus or Government deficit.

    Look at the zero sum picture of the US economy.
    This is the US (46.30 mins.)
    The private sector going negative is the problem as you can see in the chart. This is when the financial crises occur.
    As the Government goes positive, into Bill Clinton’s surplus, the private sector is going negative causing a financial crisis.

    This is Japan, and a Government surplus occurs when they have a financial crisis.
    Richard Koo shows the graph central bankers use and it’s the flow of funds within the economy, which sums to zero (32-34 mins.).
    Richard Koo’s graph of the flow of funds shows the Japanese Government ran a surplus as the Japanese economy blew up.
    The terms sum to zero so, as one is going positive, another is going negative.
    The Government was going positive as the corporate sector was going negative.
    A government surplus is sucking money out of the economy.
    A government deficit is pushing money into the economy.

    Government surpluses often accompany financial crises and the US Government was in surplus from 1927 – 1930.
    Where are the negatives?
    A financial crisis occurred in 1929, so the private sector must have been going negative.

    A lot of this comes from the MMT video above.
    I had the data for Japan, and saw their theory about Government surpluses and financial crises was true in Japan.
    Warren Mosler actually seems to be almost there.
    For the private sector to go nett postive, the negatives have to exist elsewhere.
    This could be a trade surplus or Government deficit.

    Look at the chart for the US again
    This is the US (46.30 mins.)

    The private sector isn’t nett positive like it used to be, so it’s summing to zero.
    (Ignoring the QE effects later, which seem to reside almost entirely within the banks and financial system)

    A few very wealthy individuals have all the positives and the negatives have to be elsewhere.
    The US polarises through the monetary system.

    1. Sound of the Suburbs

      The private sector isn’t nett positive like it used to be, so it’s summing to zero.
      Should be:
      The private sector isn’t nett positive like it used to be, so it’s summing to zero or a negative value.

  16. Generalfeldmarschall von Hindenburg

    Thanks for all the cool links, people. NC is an embarassment of riches.

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