Hughesair (Inflection Point)

Retired physician and air taxi operator, science writer and part time assistant professor, these editorials cover a wide range of topics. Mostly non political, mostly true, I write more from experience than from research and more from science than convention. Subjects cover medicine, Alaska aviation, economics, technology and an occasional book review. The Floatplane book is out there. I am currently working on Hippocrates a History of Medicine and Globalism. Enjoy!

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Friday, July 16, 2021

Capital Divergence — 6

 An end to US trade deficits? That’s not something trade policy can or should deliver.[i]

—Paul Krugman


Beyond lost manufacturing and jobs and beyond imported poverty, the middle class all but disappeared with a transfer of the near limitless wealth from the American consumer to the trade deficit, foreign entities, the investment banks, and to multinationals.

Economists point to the accounting reality that trade deficits are in US dollars, creating investment worldwide, creating growth far greater than the loss with much of the money reinvested back into the US. They point to the Sectoral Balances equation by Godley and Cripps, a formula taught in first-year economics where S = domestic savings; m = imports; x = exports; I = investments; g = government spending and t = treasury revenue:


S + (m-x) = I + (g-t)[ii]


The formula economists refer to shows a balanced accounting, wherein money lost from trade deficits and consumer savings goes to investments, government spending, or treasury. The formula does not quantify whose investment, whose government, or whose treasury. If you think about it, the equation more exactly reflects the flow of liquidity from the left side of the equation to the right, a flow of money and wealth out of circulation, out of the hands of most American people and into supply-side profit, much of it foreign, and to sequestered assets. The capital lost in the trade deficit goes to foreign profit, foreign government, and a little of it returns as foreign direct investment in US bonds, equities, businesses, and property: assets built on the lost liquidity and wealth of the American people.

Globalization thus led to the worst outcome of all, capital divergence. We are left with an extreme sequestration of wealth in the hands of a small plutocracy of investment bankers, executives of multinational corporations, politicians, overpaid media, overpaid athletes, and a few professionals, at the expense of—and the exploitation of the rest of the population. Globalization brings us a new form of pillage and plunder, not only exploiting foreign labor in many of the poorer countries that were supposed to benefit from globalization, but also our own labor force and citizens in what has been called the virtual disappearance of our middle class.

The fact that capital (wealth) grows four to six times faster than income over time creates a problem for both capitalism and democracy.[iii] Capital accumulation over time builds at the expense of the purchasing power of the consumer market, leading to depression—arguably the basis for long-term economic cycles. The extreme accumulation of wealth among fewer and fewer people threatens democracy with oligarchy—now a global problem. Intriguingly, this extreme concentration of wealth correlates not just with depressions but with wars, famines, and pandemics.

The problems with unbalanced trade were evident from the start—some that predated globalization and some that globalization made worse. The preponderance of Japanese imports, especially automobiles, had prompted debates between those pointing out the trade deficit as unsustainable and economists who insisted that the overall equation remained balanced and in the long run the efficiencies of free trade would benefit all trading partners. The economists won the debates, insisting that foreign profits resulting from the trade deficit came back to the US as investments, thus returning wealth and employment.

Economists’ models identified the displacement of workers, but assumed adaptation, retraining, cheaper imports, and government support would minimize the downside. However, liquidity drain on the consumer side of the US domestic market amounted to $12.256 trillion lost in trade since 1975[iv]. This loss had accrued from the trade deficit alone and represented a loss of wealth from the consumer side of the market. Economists excuse this loss as a balanced gain to others, which, of course, it was.

Far more than the calculated loss in economic models, the loss in wealth added to the reduced income from the outsourcing of jobs and manufacturing. Outsourcing of US jobs led to massive displacement, unemployment, depression, and poverty. Furthermore, the loss of income bled further the loss of liquidity from the consumer side of the market. The loss of wealth had resulted in a loss of the middle class (reminiscent of the loss of middle-class freehold yeomen farmers during the Industrial Revolution) [v]. Both Adam Smith and Arnold Toynbee cautioned that the benefits from unrestricted free trade did not apply in all cases.9 Our gratuitous promotion of unbalanced trade to discourage bad behavior and promote trade had taken a heavier-than-anticipated toll on our own workers and consumer market liquidity.

After World War II, the Marshall Plan rebuilt Germany and much of Europe, as well as Japan. The US was an economic juggernaut. We could afford it back then, but that extreme industrial and consumer wealth had been long gone as we promoted deficit trade agreements in the new century. The question: Did these trade agreements reduce bad behavior by totalitarian regimes or merely finance further expansionism?

Instead of saying, “An end to US trade deficits is not something trade policy can or should deliver,” economists might better say, strengthen our human factors, security and productivity, to more fairly compete and block those unwilling to play by the rules of free trade.

Despite the hope that globalization, and the American sacrifice it entailed, would end wars and bad behavior, the opposite appears to be the case. The doctrine of the New World Order, if anything, promoted more fighting, and attempts at nation building led to multicultural incompatibilities. The cost was incalculable in lives and unsustainable in the trillions of dollars.

Historically, the Civil war cost 498,332 lives; World War I cost 116,516; World War II cost 405,399; Korea 54,244; Vietnam 90,220; and since 9/11, wars have taken 6,852 lives. Since 9/11 there were 52,010 wounded in action, many of whom would have died but for our advanced battlefield medicine and evacuation. The death toll, however, does not account for traumatic brain injuries, TBI, or posttraumatic stress disorder (PTSD), and 970,000 VA disabilities. (In perspective, the Covid19 pandemic has cost over 200,000 US lives in its first 9 months). According to a Brown University study, the dollar cost since 9/11 exceeded $5.9 trillion, others say $7 trillion.[vi]

Meanwhile, China financed its own development with the proceeds of America’s unbalanced trade and our direct investment in unaudited Chinese corporations. Furthermore, the CCP aggressively orchestrated predatory trade practices with theft of trade secrets, now cyber warfare, and subtle Chinese-style bribery of US leadership right down to the local level. All threatening our national security.

While our government engages in political infighting, short-term market profit, greed, monopoly, and personal power, China makes long-term subsidized and strategic development projects in a new hybrid form of market communism. Take for example China’s Silk Road, rail, and economic development project based on strategic long-term economic-political-expansionist goals. The struggle between democratic laissez-faire capitalism and authoritarian market communism will likely continue on the Chinese-driven economic playing field of globalization and weaponized information technology if we do not respond decisively to the threat.

Congress has little or no ability to manage economic systems in its present level of gridlock, yet it remains quite successful at undermining the executive function of our government. Not just in our current political climate but going all the way back to Lincoln’s administration. The effort to thwart executive power did not end with the 22nd amendment. Limiting the president to two terms upset the separation of powers among the three branches of US government, giving the administration even less ability to manage crises outside political gridlock. Simply put, neither the judicial nor the legislative branches have the capacity to lead an economic struggle against an authoritarian communistic market-directed adversary. Such a response demands decisive leadership as written in the Constitution.

While China extends its influence and success, paid for by our own middle class, the propaganda machine of political correctness fights over the controls of our economy in the name of globalization. China has turned globalism into a new front of communismnot perhaps the initial intent, but taking full advantage of its cheap labor, the high level of advanced education we provided their students, and the ease with which they can assimilate our technology, provided almost willingly by US manufacturers outsourcing both manufacturing and labor. If Boeing manufactures a 737 in China—or even uses a cell phone, it gives the Chinese hackers access to the design characteristics, not just for the 737, but for the specifications and designs of all Boeing’s military aircraft. Whether by partnership, required technology transfer, or cyber warfare, the US underwrote China’s education, technology, manufacturing, military weapons systems, and financed it all. China now finds itself in the enviable position of dominating all levels of manufacturing, leading in artificial intelligence (AI), database mining, fifth generation mobile network (5G[vii]), logistics, cyber warfare, and a questionable accounting of wealth—with a population of 1.3 billion.[viii] (Is the CCP secretly printing money and cooking the books with unearned credit balances, aside from and unknown to the accounting of international monetary systems?)

[i] Krugman, PaulArguing with ZombiesEconomics, Politics, and the Fight for a Better Future (p. 253). W. W. Norton & Company

[ii] Macro Economics, Wayne Godley, T Francis Cripps, 1983, British economist formula for financial and sectoral balances

[iii] Piketty, Capital

[iv] US Bureau of Economic Analysis

[v] Arnold Toynbee, Lectures on the Industrial Revolution, 1884

[vi] US Is Learning That China Likes Its Own Model As China’s economy and global reach expand, it doesn’t feel the need to adapt for Western acceptance. Gerald F. Seib May 27, 2019 9:46 a.m. ET

[vii] 5G is the 5th generation mobile network. It is a new global wireless standard after 1G, 2G, 3G, and 4G networks. 5G enables a new kind of network that is designed to connect virtually everyone and everything together including machines, objects, and devices


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